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Chapter 14 – Significance and Implications of Alternative Accounting Principles. FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition. Clyde P. Stickney and Roman L. Weil. Learning Objectives.
Chapter 14 – Significance and Implications of Alternative Accounting Principles
AN INTRODUCTION TO CONCEPTS,
METHODS, AND USES
Clyde P. Stickney and Roman L. Weil
1. Review the process through which standard-setting bodies establish acceptable accounting principles.
2. Review the generally accepted accounting principles, emphasizing the effects of alternative principles on the financial statements.
3. Consider the effects of alternative accounting principles on investment decisions and market values of firms.
4. Understand the factors that firms consider in choosing their accounting principles.
1. Establishing acceptable accounting principles.
2. Review of generally accepted accounting principles.
3. Illustration of the effects of alternative accounting principles on financial statements.
4. Assessing the effects of alternative accounting principles on investment decisions.
5. The firm’s selection of accounting principles.
Universe of Possible
a Specific Firm
1. Should the government or a private body set accounting rules?
2. Should rules be uniform for all firms?
3. Should the same principles apply to financial reporting and to tax reporting?
4. Should rules be supported by a broad theoretical framework?
a. Revenue recognition.
b. Uncollectible accounts.
d. Investment in securities -- derivatives.
e. Machinery, equipment and other depreciable assets.
f. Corporate acquisitions.
h. Employee stock options.
1. At the time it sells goods or renders services
2. At the time it collects cash (installment or cost-recovery-first methods)
3. As it engages in production or construction, or
4. Perhaps not until the customer no longer has the right to return goods for a refund.
1. performed all, or most, of the services it expects to provide, and
2. received cash or some other asset susceptible to reasonably precise measurement.
1. Acquisition cost
2. Lower of cost or market
3. Standard cost, or
4. Net realizable value (limited to precious minerals and a few other applications).
2. FIFO, or
3. Weighted average.
1. The market value method.
2. The equity method.
3. Preparing consolidated financial statements.
1. The straight-line method,
2. Declining-balance method,
3. Sum-of-the-years’-digits method, or
4. Units-of-production method.
1. Record the lease as an asset offset by a liability and amortize the liability and depreciate the asset (capital or finance lease method), or
2. Recognize only lease expense as periodic lease payments are due or with end of period adjusting entries (operating lease method).
Depreciation and interest expenses under the capital lease method generally exceed lease expense under the operating lease method for early years of the lease.
1. Disclose the cost of those grants in the footnotes,
2. Charge the cost as a expense for the period when the grant is made.
a. The scenario
b. Accounting principles used
c. Comparative income statements
d. Comparative balance sheets
e. Moral of the illustration
Two identical merchandising firms:
1. Both issue 2 million shares of $10 par stock for $20 million cash.
2. Both acquire equipment on Jan 1 for $14 million.
3. Both make identical purchases of merchandise.
4. Both sell 420,000 units at $100 each.
5. Both have selling, general and administrative expenses (excluding depreciation) of $2.7 million.
6. Both pay 35% as an income tax rate.
The two firms differ in choice of accounting rules.
Conservative High Flyer
1. Do investors accept financial statement information as presented without noticing the differences in accounting methods?
2. Or, do they somehow filter out all or most of the variances and effects of different accounting methods?
1. Most investors do not understand accounting well enough to make adjustments for differences.
2. Financial statements and notes do not provide enough information to support add adjustments.
3. Market prices of firms drop with reports of misuse of accounting methods indicating that investors were surprised by the news.
1. Capital markets adjust quickly and appropriately to new information. Sophisticated security analysts have the necessary skills and influence (or even make) the market prices.
2. Many effects are small except for rapidly growing (or shrinking) firms and tend to stabilize and even out over time.
1. Selecting accounting principles.
2. Applying accounting principles, and
3. Timing business transactions to temporarily increase (or decrease) earnings.
a. Which accounting principles should be chosen for financial reporting purposes?
b. Which for income tax reporting purposes?
1. Accurate presentation,
2. Conservative presentation,
3. Short-term profit maximization, or
4. Income smoothing.