Financial Accounting Theory Essay

The article GM to draw Charge of $20. 8-Billion here reproduced from The Globe and commit (February 2, 1993) describes the potential impact of SFAS 106, Accounting for Postretirement Benefits otherwise Than Pensions, on General Motors and Ford. For example, it appears that General Motors forget be required to record a liability of $20. 8 billion, reducing its sh atomic number 18holders virtue from $27. 8 billion to $7 billion, close a 75% reduction. Describe and justify how you would channel the efficient securities mart to match to this instruction.SFAS 106, Accounting for Postretirement Benefits Other Than Pensions This relation establishes score standards for employers be for postretirement benefits other than pensions. It ordain importantly change the prevalent current drill of history for postretirement benefits on a pay-as-you-go (cash) alkali by requiring accrual, during the years that the employee renders the necessary service, of the judge cost of providi ng those benefits to an employee and the employees beneficiaries and covered dependents.In exchange for the current services provided by the employee, the employer promises to provide, in addition to current curb and other benefits, health and other public assistance benefits after the employee retires. It follows from that view that postretirement benefits be non gratuities but are part of an employees pay for services rendered. This Statement relies on a basic premise of slackly accepted story principles that accrual accounting provides more relevant and utile teaching than does cash basis accounting.Accrual accounting goes beyond cash transactions and attempts to gain the fiscal military groups of noncash transactions and events as they occur. course credit and measurement of the accrued financial obligation to provide postretirement benefits will provide users of financial statements with the opportunity to assess the financial consequences of employers compensati on decisions. In applying accrual accounting to postretirement benefits, this Statement adopts three fundamental aspects of pension accounting delayed recognition of certain events, describe kale cost, and offsetting liabilities and related assets. (FASB, 2012) I would command the efficient securities trade to find this rule acceptable. Accrual-based accounting is more effective than cash-based accounting.A few arguments to support this theory are certain cash pass along and disbursements are lumpy, within operating cash flows receipts and payments can be lumpy, accrual-based accounting is a better predictor of a ships troupes long-term financial performance. likewise all formal statements need to be set up using accrual-based accounting, and publically traded companies need to use accrual-based accounting to correct to GAAP standards (Keener, 2012). 2. Chapter 4 Problem 12 (Imax) a. To what close can receipts gain substitute for net income as a predictor of approachin g earning power? Explain. practise efficient securities market concepts in your answer, and analyze the requirement nether GAAP for agile writeoff of research and startup costs. Both taxation growth and net income are useful in determining the financial cogency of a go with, 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. tax, on the other hand, only indicates how effective a company is at generating sales and does not take into consideration operating efficiencies which could fetch a dramatic impact on net income (Investopedia, 2012). Start-up costs are defined as those unusual one-time costs incurred in lay a in the altogether plant into operation, curtain raising a new sales outlet, initiating a new process in an animated plant, or otherwise commencing some new operation (FASB, 2012). Costs of start-up activities, including organization co sts, should be expensed as incurred (FASB, 2012). Definition of Revenue Recognition An accounting principle under largely accepted accounting principles (GAAP) that determines the specialized conditions under which income becomes realized as tax revenue. Generally, revenue is know only when a specific sarcastic event has occurred and the amount of revenue is measurable. Revenue Recognition explained For most transactiones, income is recognized as revenue whenever the company delivers or performs its output or service and receives payment for it. However, in that respect are several situations in which exceptions whitethorn apply.For example, if a companys business has a very superior commit of product returns, revenue should only be recognized after the return detail expires. Companies can sometimes play most with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it ma y choose to recognize income that has not barely been collected as revenue in order to boost its sales revenue for the year (Investopedia, 2012). b. Use the concept of relevancy to defend the revenue recognition policies adumbrate above. Relevant financial statements give training to investors near the unswervings upcoming economic prospects (Scott, 2009). c. Use the concept of reliableness to criticize the revenue recognition policies outlined above. To be reliable, information must have representational faithfulness and it must be verifiable and neutral (Scott, 2009). d. To the extent that investors are aware of the possible use of revenue recognition policies that overstate revenues (even though, for a specific wet, they may not know the extent to which that firm is using such policies), what is the effect on the operation of the capital market?Explain. Investors have antecedent beliefs about a firms future performance. These front beliefs will be based on all availa ble information. If net income is high, or higher than expected, this may be dear news. If so, investors would revise upward their beliefs about future performance. Other investors, who perhaps had overly high expectations for what current net income should be, might empathise the same net income number as bad news.Investors who have revised their beliefs about future performance upward will be inclined to buy the firms shares at their current market price, and vice versa for those who have revised their beliefs downward. We would expect to observe the volume of shares traded to increase when the firm reports its net income. Furthermore, this volume should be great the greater are the differences in investors prior beliefs and in their interpretations of the current financial information (Scott, 2009).