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32 Cards in this Set
- Front
- Back
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4 forms of accounting reports
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- Annual report
- SEC 10-k -SEC 10-q -IPO prospectus |
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Why produce accounting information?
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- Required in many cases
- Users demand info |
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Who uses the info?
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shareholders, lenders, customers, suppliers, employees, gov't
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2 main uses of accy info
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- Help with info asymmetry
- Make contracts more efficient |
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Advantages of GAAP reporting
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- Independently audited
- Standard set of rules - Comparability across time and companies |
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How does disclosure reduce cost of capital?
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Lower interest rate from equity valuation
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Costs of disclosure (4)
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- Info collecting
- Comp. disadvantage - Litigation - Political costs |
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"How happy is a baby"
Phenomenon |
Baby
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"How happy is a baby"
Attribute |
Happiness
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Porter's definition of strategy
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Creating a fit among the org's activities to realize a goal
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Def. operational effectiveness
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performing similar tasks better than rivals
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What limits operational effectiveness?
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- Can be imitated
- Convergence - differentiation becomes more difficult |
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Why talk strategy in accy?
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Helps identify what companies should measure
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4 levels of measurement:
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Nominal - Numbers
Ordinal - Rank Interval - Same intervals Ratio - 0 has meaning |
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5 relational characteristics:
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Temporal - A then B
Associational - As A, B Intermediary - As A, B, if C Causal - B when A Probabilistic - Assigned probability |
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Why use accruals?
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Modify cash receipts when related revenue and expenses are to be recognized in a different period
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Def. recognize revenue
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Record in financia statements
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Criteria for recognizing revenue
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Realized/realizable, earned
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When can revenue be recognized prior to delivery?
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Active market for the product, long-term contracts
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Def. matching principle
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Expense should be recorded in the same period as the revenue
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Two types of costs
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Product - matched
Period - time |
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Def. transitory income
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unlikely to be sustained or repeated
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Types of transitory incomes
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- Special or unusual items
- Discontinued operations - Extraordinary items - unusual/infrequent |
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Advantages of accrual
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More relevant and reliable
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Def. materiality
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Amount or nature of item is significant enough to affect the decision of the user
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Book value =
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Net of assets and liabilities
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Market value =
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shares x price
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What assets can be recorded?
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Future economic benefit
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Def. contingent liabilities
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potential liabilities whose existence/amount depends on outcome of future event
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Def. book value
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Value recorded on the financial statements
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3 important footnotes
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- Summary of significant accounting policies
- Disclosure of important subsequent events - Related-party transactions |
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Benefit of Lundholm's proposal
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Make it more likely to accurately record soft assets like R&D, making MV more like BV. Investors would reward accurate investors
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