The reason is the information support by independent documentary evidence. Historical cost accounting figures are based on actual acquisition prices, not merely possible of market values that can be revised to affect the ratio analysis which improve the performance of financial results. That is, historical costs accounting provides an objective view of an entity’s performance. Thus it consider verifiable and reduces the risk of manipulation of figures by management. In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts.
This method converts net income to net cash from operating activities. When using the indirect method a company must convert net income to net cash by gathering net income and adding or subtracting adjustments, this would give the company the Net cash, without having to go thru detail transactions. . Even though the indirect method may be easier for a company to manage their cash flow, I believe that this method may bring more work in case of an audit. (Weygandt, Kimmel, & Kieso, 2010. p 618).
The accrual method is GAAP compliant because it follows the revenue recognition principle which states that each financial transaction must be reported in the accounting period in which it occurs. On the other hand, the accrual method of accounting also has disadvantages because it does not measure cash flows as accurately as the cash method. However, because the accrual method observes GAAP, it is the more widely accepted method of accounting. As opposed to accrual basis accounting where all transactions are immediately
Ratios can tell if the business is using its assets appropriately, and if liabilities of the company are well-managed. It shows whether a business can invest in more capital, or if there is room for business growth. It shows whether a business will be able to pay off its debts or their short-term expenses or their daily expenses. It basically shows the strength and weaknesses of the business. It helps for forecasting on making certain financial decisions.
Accounting provides economic information from which users can make decisions, therefore has a clear link to financial stability. The role of accounting in the financial crisis primarily refers to the use of fair value accounting, which allows company’s to measure assets and liabilities based on “the price that would be received to sell an asset or paid to transfer a liability” between knowledgeable, willing market participants, in the revaluation of financial instruments, assets and liabilities (Laux and Leuz 2009, p.827). It has been argued that fair value accounting exacerbated the severity of the financial crisis by both “increasing bank’s leverage in the boom” and worsening banks problems in busts by leading to excessive write-downs (Laux and Leuz 2010). One argued result of fair value accounting during the financial crisis is that banks tried to boost their regulatory capital ratio by selling assets in response to fair value losses, which curtailed lending and further decreased market prices; this in turn triggered a continuous downward cycle of write-downs, capital depletion and asset selling (Badertcher, Burks and
Economic Goals of Business and Government VS Social Goals of Consumers Milton Friedman suggests that the social responsibility of a business is to increase its profits (Boardman, Sandomir and Sondak 221). While increasing profits is certainly one of the most important factors in a successful business, is it considered a social responsibility, or better yet, the only social responsibility of a corporation? Friedman seems to think so. But why is increasing profits a corporation’s social responsibility? According to Friedman, “A corporate executive is an employee of the owners of the business.
* Mini Case (p. 45) a) Why is corporate finance important to all managers? All managers are mandated with a goal to improve the businesses bottom line. Successful corporations have two main goals they must meet to stay in business. The first goal is “identifying, creating, and delivering highly valued products and services to its customers.” (Brigham) The second goal is to generate “enough cash to compensate the investors who provided the necessary capital.” Behind every managerial action, the manager must ally every action they take with meeting the above two goals. In order to evaluate the success of those decisions, managers must be able to analyze their decisions and fully understand the impact past decisions will have on the past, present, and future health of the company.
Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. There are a variety of tools used to evaluate the significance of financial statement data. Three of the commonly used tools are the ratio analysis, horizontal analysis, and vertical analysis. Ratio analysis is a method of analyzing data to determine the overall financial strength of a business. These ratios are most useful when compared to other ratios such as the comparable ratios of similar businesses or the historical trend of a single business over several business cycles.
Question 1: There are crucial differences between the US and Japanese Corporate Governance Systems, which affect the rights and influence of different stakeholders in the keiretsu system. a) Financiers: Financial institutions play a crucial role in the keiretsu system and in most cases are major shareholders in the companies. For example, in Koito 40.6% are owned by financial service providers. The banks are the main suppliers of capital and act as monitoring systems for the companies. They have the right to intervene directly and even force bankruptcy if the bank suspects that financial troubles will arise in the near future.
Cost of capital can help define the acceptability of investment opportunities. Besides, the cost of capital can scheme the corporate finance arrangement. Generally, the best way for designing the corporate finance structure is based on information of changing of the capital market. So, manager can figure out information like accounting reports and their cost of capital to market. By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company.