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Alternative Methods of Accounting - Article Example

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"Alternative Methods of Accounting" paper discusses the advantages and cons of using alternative methods to determine the net income of a corporation. Accounting is a challenge because many scholars and economists believe that accounting net income is not representative of actual reality…
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Alternative Methods of Accounting
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Download file to see previous pages Accounting has always been a self-regulated profession. After the 2nd half of the 20th-century changes in accounting occurred due to the influence of private organizations such as the FASB.  In the United States, accountants followed the generally accepted accounting principles (GAAP) to guide their everyday work. Accounting is a discipline that is very strict in its ways and does not welcome change well. In the aftermath of the Enron and WorldCom scandal, the government had to force change with the creation of the Sarbanes Oxley Act of 2002 due to a lack of trust in financial information. 

The efficient market hypothesis states that securities are typically in equilibrium and that they are fairly priced in the sense that the price reflects all publicly available information on each security (Besley & Brigham, 2000). Based on this theory investors look at all information to make their decision, thus the information on the financial statements is not the main source stakeholders focus on prior to making a decision. Despite the existence of this theory, the truth is that people mostly look at the financial statements in order to make decisions concerning a common stock investment. The financial statement that people placed the most emphasis on is the income statement. This implies that net income is extremely important for making decisions. From an internal point of view, the manager also places a lot of importance on net income. Stakeholders groups such as lenders, investors, business partners, and labor unions utilize net income as an important variable for decision-making purposes. One of the problems with this metric is that most of the bonuses and additional compensation executives received are correlated with the net income. This scenario creates a conflict of interest and managers are tempted to manipulate accounting numbers by performing income smoothing. ...Download file to see next pagesRead More
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