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ACCTNG5000 CH3 HW Q Essay examples

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CH. 3 HOMEWORK DISCUSSION QUESTION 3, 4 & 5

3.) Bill Simon says, “We should get rid of the FASB and SEC since free market forces will make sure that companies report reliable information.” Do you agree? Why or why not?
I disagree for several reasons. One, investors view profits a measure of managers’ performance, therefore giving managers an incentive to use their accounting discretion to distort reported profits by making biased assumptions. Many top managers receive bonus compensation if they exceed certain pre-specified profit targets. Furthermore, stock option awards can also entice a manager to manage earnings in their favor. Regulation and generally accepted accounting standards help deter managers’ from taking this too far.
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Each company’s customer pays 30 days after receiving shipment. Using accounting ratios, how can you distinguish these companies? In regards to the income statements, there are no differences between the two companies because both companies have the same amount of expenses and revenues. In regards to their balance sheets however, the companies are different. The company that ships all of its products in the last two weeks of the quarter will have a higher account receivable balance and lower cash than the company that ships its product evenly throughout the quarter.
Accounts Receivable Turnover [= Sales / Accounts Receivable]
The company who ships its product in the last two weeks of the quarter will have a lower accounts receivable turnover ratio compared to the company which ships its product evenly throughout the quarter.
Cash Ratio [= Cash + Short-Term Investments / Current Liabilities]
The company who ships its product in the last two weeks of the quarter will have a lower cash ratio than the company, which ships its product evenly throughout the quarter.
Day Receivable [= Accounts Receivable / Average Sales Per Day]
The company who ships its product in the last two weeks of the quarter will display a higher days’ receivable ratio than the company, which ships its product evenly throughout the quarter.

5.) a. If management reports truthfully, what economic events are likely to prompt the following accounting changes?
Increase in the estimated life of
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