Overview of Accounting Analysis - Assignment Example

no. Overview of Accounting Analysis Bill Simon says: “We should get rid of the FASB and SEC, since free market forces will make sure that companies report reliable information.” Do you agree? Why or why not?This decision may be fully sufficient or insufficient since in most cases corporate managers only disclose reliable information if they note that disclosing unreliable information may be costly to the organization and such may have long term than short term effects. However, the nature of the free market may force some companies to disclose reliable information.

On the same note, Bill argues that there is lack of information asymmetry that exist between outside investors and corporate managers; therefore, the outside investors access private company information and this may make corporate managers to relay unreliable information without being realized immediately (Palepu and Healy Pg. 52). Hence, admission of SEC and FASB standards will help in reducing corporate managers from providing unrealistic information and transaction within and outside the firm.

Therefore, elimination of FASB standards and SEC will only increase the chances of corporate managers to provide unrealistic information about the firms; hence, I disagree with Bill’s idea. 2- Many firms recognize revenues at the point of shipment. This provides an incentive to accelerate revenues by shipping goods at the end of the quarter. Consider two companies, one of which ships its product evenly throughout the quarter, and the second of which ships all its products in the last two weeks of the quarter.

Each company’s customers pay thirty days after receiving shipment. Using accounting ratios, how can you distinguish these companies?It should be noted that these two companies have no difference in their income statements; hence, they are all considered to have the same expense and revenue amounts. Nonetheless, they have different balance sheets. However, assuming that all other factors are the same, the company with even sales of products will have higher cash and receivable balance accounts at the end of the quarter compared to company that ships all its products within the last two weeks.

Nonetheless, below accounting ratios will be appropriate in differentiating the two companies (Palepu and Healy Pg. 167): a. Accounts Receivable Turnover = sales/Account Receivable With this ration, the company having even sales will automatically have higher Receivable Turnover ratio.b. Days’ Receivable = account receivable/ daily average sales In this case, the company portraying even sales will have lower days’ receivablec. Cash Ratio = Cash + Short-term Investment/ current liabilities In this case, the company having even sales will portray higher cash ratio 3- (a) ​If management reports truthfully, what economic events are likely to prompt the following accounting changes?

This will increase the estimated depreciable life of assets. In this case, the corporate managers may decide to increase the depreciable estimated life of the assets especially when they realize that their assets are likely to last in the market than was predicted initially. It may lead to a decrease in uncollectible allowances with the gross receivable percentages. The changes in the customer focus to the firm may make the managers to reduce the allowances specifically for the uncollectible receivables.

The revenues will be recognized at the delivery point other than at the payment point. In most cases, revenues are usually recognized at the point where the customer pays cash. The company may decide to evaluate the customers’ financial records, at this point, the company may realize there is improvement of revenue at the delivery point than the cash receiving point. In this case, the risk of collecting cash is insignificant. There will be higher capitalization proportion on the costs of the R$D software. 3- (b) What features of accounting, if any, would make it costly for dishonest managers to make the same changes without any corresponding economic changes?

These accounting features include third party certification, reverse effect, investors’ lawsuits, and labor market discipline. Work CitedPalepu, Krishna G, and Paul M. Healy. Business Analysis & Valuation: Using Financial Statements. Mason, OH: Thomson/South-Western, 2008. Print.