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.
(1) Earning Management According to Ronsner (2003), earning management is defined as a management technique that can let managers achieve their outcomes by influencing the financial statements. These actions will mislead some stakeholders’ opinion about the company’s underlying economic performance; Also, earning management can influence the contractual outcomes which come from accounting numbers (Healy and Whalen, 1999). In Worldcom case, CFO Sullivan use accounting entries to reach targeted performance, this improper earning management tried to conceal the real economic value and performance of Woldcom from the stakeholders who will use the financial statements. (2) Motivations of earning management The reason of earning management is to affect financial statements’ users’ understanding about the company’s economic performance or influence the outcomes which depend on the reported accounting numbers (Lin, Radhakrishnan & Su, 2006) Firstly, one of the most important motivations of earning management is Managers’ career concerns. Because earning management allows managers to reach their desired outcomes by influencing firm’s financial statements.
The American Institute of Certified Public Accountants (AICPA) has published guidance on various ethical issues that may possibly arise from the shift in business strategy in this firm. The following paragraphs will explain this firm’s plan for ethical and economic success. Economics and Pricing Economic issues tend to dictate many aspects of business, including the pricing of services and products. Land values, inflation, access to healthcare, the cost of living, and unemployment are examples of key issues that indirectly affect economy as a whole. Inflation and cost of living change the way consumers spend their money.
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.
Materiality is defined by the FASB as an omission that would affect a normal person by a misstatement such as using earnings management to skew the true earnings or revenue. This calls in to play the unethical behavior that earnings management places on the public (violating AICPA Code of Professional Ethics). SOX further required management and accountants to be cognizant of the material errors that financial misstatement and false reporting could have from an ethical standpoint. It holds them accountable for all financial reporting from their company. This includes criminally and financial accountability.
Managers need to make investment decisions and calculating NPV can help them to see the likelihood of investment being profitable. There are a variety of ways to estimate net present value, such as the discounted cash flow approach and the discounted payback method etc. However, there is risk, because there is no guarantee that the estimations will turn out to be correct. The net present value rule or NPV devised by Hirshleifer (1958), is the fundamental model of how firms decide whether to invest in a project, commonly known as the ‘investment decision’, or ‘capital budgeting decision’. With the assumption that a firm’s objective is to maximise shareholder wealth through maximising a company’s market value, firms allocate resources to their most productive use, therefore responding to the needs of stakeholders.
As a preparer of financial statements, management will want to produce an income statement that shows a profit (profit maximization motive). The main financial statement users are bankers, shareholders, and potential shareholders. Users will want statements that reflect the performance of management (stewardship) and predict the company’s ability to pay dividends and make loan payments (cash flow prediction). The ethics of the accountant are an issue here, as
I conclude that although the abuse of the profession by investment institutions aggravated the financial crisis, accounting cannot be said to be a root cause. Second, I look at the potential of accounting to help with the resolution of the financial crisis. I argue that by enhancing the accounting standards and acting to eliminate weaknesses therein, accounting can play a significant role in aiding the global economy to recover. Several allegations have been made against the accounting profession, accusing it of precipitating the financial crisis. Of these, I believe two in particular depict the role of accounting in the financial crisis, these being the effects of fair values and the overly complex (and thus allegedly detrimental) nature of financial reporting.
Discuss the advantages and the limitations of “ratio analysis” There are several advantages and limitations of accounting ratios, I will address some of the key ones in this section Advantages * Accounting ratios can be used by investors to make decisions on whether or not to invest in a company or sell existing shares. * Accounting ratios can be used by management to give an indication of a company’s financial health i.e. is the company profitable? Can they meet creditor obligations? Are stock levels being efficiently managed?
Guillermo Furniture - Accounting Decisions In order to Guillermo to identify to make an informed decision about the direction to take his company they need to understand the audiences, purposes and natures of financial statements and managerial reports. In addition to this, the scope of the presentation will explain the use of financial accounting information so Guillermo can make those informed and ethical business decisions. Break Even Analysis At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease.