Fin361 Appendix 3a

2213 Words9 Pages
A Guide to Earnings and Financial Reporting Quality A Guide to Earnings and Financial Reporting Quality Quality of reported financial information is a critical element in evaluating financial statement data. The higher the quality of financial reporting, the more useful the information is for business decision making. 5-2 A Guide to Earnings and Financial Reporting Quality There are a number of areas on the earnings statement that provide management with opportunities for influencing the outcome of reported earnings. 5-3 1 A Guide to Earnings and Financial Reporting Quality These areas include • accounting choices, estimates, and judgments • changes in accounting methods and assumptions • discretionary expenditures •…show more content…
5-17 Sales Real versus nominal growth Sales (in millions) As reported (nominal) Adjusted (real) 2007 $178,199 $178,199 2006 $171,179 $176,019 % Change 4.10 1.24 Using base period CPI (1982-1984=100) (2007CPI/2006CPI) x 2006 Sales = Adjusted Sales (207.3/201.6) x $171,179 = $176,019 When adjusted for inflation, sales grew at a rate of 1.24%, which means that sales growth has kept pace with general inflation. 5-18 6 Cost of Goods Sold Key areas that affect earnings quality 6. 7. 8. Cost-flow assumption for inventory Base LIFO layer liquidations Loss recognitions on write-downs of inventories 5-19 Cost of Goods Sold Cost-flow assumption for inventory LIFO results in the matching of current costs with current revenues and produces higher quality earnings than either FIFO or average cost. Inventory accounting system used is described in the note that details accounting policies or the note that discusses inventory. 5-20 Cost of Goods Sold Base LIFO layer liquidation Base LIFO layer liquidation occurs when companies are shrinking rather than increasing inventories. There is an actual reduction of inventory levels, but the earnings boost stems from the cost flow assumption that the older and lower-priced products are being sold. 5-21 7 Cost of Goods Sold Base LIFO layer liquidation Effects of LIFO reductions are disclosed in the notes and can be substantial. Reduces the quality of earnings, because there is an improvement in

    More about Fin361 Appendix 3a

      Get Access