Essay on Financial Accounting Theory, Chapter 4 Answers
Financial Accounting Theory
13 June 2012
1. Chapter 4: Problem 8 (GM)
The article “GM to Take Charge of $20.8-Billion” here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, “Accounting for Postretirement Benefits Other Than Pensions,” on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billion, reducing its shareholders’ equity from $27.8 billion to $7 billion, about a 75% reduction. Describe and explain how you would expect the efficient securities market to react to this information.
SFAS 106, Accounting for Postretirement Benefits …show more content…
'Revenue Recognition' explained
For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it. However, there are several situations in which exceptions may apply. For example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires.
Companies can sometimes play around with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it may choose to recognize income that has not yet been collected as revenue in order to boost its sales revenue for the year