Financial Accounting Theory, Chapter 4 Answers Essay

1146 WordsMay 21, 20135 Pages
Assignment 4-2: Week 4 Analysis Write-Up Kylie Keener ACCT715-Q1WW Financial Accounting Theory Michael Miller 13 June 2012 1. Chapter 4: Problem 8 (GM) The article “GM to Take Charge of $20.8-Billion” here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, “Accounting for Postretirement Benefits Other Than Pensions,” on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billion, reducing its shareholders’ equity from $27.8 billion to $7 billion, about a 75% reduction. Describe and explain how you would expect the efficient securities market to react to this information. SFAS 106, Accounting for Postretirement Benefits…show more content…
In applying accrual accounting to postretirement benefits, this Statement adopts three fundamental aspects of pension accounting: delayed recognition of certain events, reporting net cost, and offsetting liabilities and related assets.” (FASB, 2012) I would expect the efficient securities market to find this practice acceptable. “Accrual-based accounting is more effective than cash-based accounting. A few arguments to support this theory are: certain cash receipts and disbursements are “lumpy,” within operating cash flows receipts and payments can be lumpy, accrual-based accounting is a better predictor of a company’s long-term financial performance. Also all formal statements need to be set up using accrual-based accounting, and publicly traded companies need to use accrual-based accounting to conform to GAAP standards (Keener, 2012).” 2. Chapter 4: Problem 12 (Imax) a. To what extent can revenue growth substitute for net income as a predictor of future earning power? Explain. Use efficient securities market concepts in your answer, and consider the requirement under GAAP for immediate writeoff of research and startup costs. “Both revenue growth and net income are useful in determining the financial strength of a company, but they are not interchangeable. Net income describes how efficient a company is with its spending and operating costs and how effectively it has been controlling total costs. Revenue, on the
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