Financial Statement Analysis Study Guide

3552 Words Mar 29th, 2014 15 Pages
Financial Statement Analysis
Financial Reporting & Analysis Questions
Professor Mahoney
Spring 2013

Chapter 1: Introduction to Financial Reporting

I. Questions

2. How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied?

Consistency allows for the same accounting principle from period to period. A change in principle requires statement disclosure.

3. The president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said, “A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6%, and an appraised just told us we could easily
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(Historical cost)

g. Zero Corporation is being sued for $1 million for breach of contract. Its lawyers believe that the damages will be minimal. Zero reports the possible loss in a note. (Disclosure)

6. Zebra Company has incurred substantial financial losses in recent years. Because of its financial condition, the ability of the company to keep operating is in question. Management prepares a set of financial statements that conform to generally accepted accounting principles. Comment on the use of GAAP under these conditions.

Generally accepted accounting principles do not apply when a firm does not appear to be a going concern. In this case the liquidation values are the appropriate figures.

7. Because of assumptions and estimates that go into the preparation of financial statements, the statements are inaccurate and are, therefore, not a very meaningful tool to determine the profits or losses of an entity or the financial position of an entity. Comment.

With the time period assumption, inaccuracies of accounting for the entity, short of its complete life span, are accepted. The assumption is made that the entity can be accounted for reasonably accurately for a particular period of time. In other words, the decision is made to accept some inaccuracy because of incomplete information about the future in exchange for more timely reporting. The statements are considered to be meaningful because material inaccuracies are not acceptable.

9. Describe
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