Financial Statement Preparation And Analysis: A Comprehensive Case Study

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Financial Statement Preparation and Analysis: A Comprehensive Case StudyBlueprint Problem: Preparing financial statementsAccounting informationShould we buy stock in a company? Should we extend a line of credit to a company? Should wecontinue with current operations or change how we do business? These are the types of questionsstakeholders ask themselves. Stakeholders require useful accounting information in order to makeaccurate financial decisions. In accordance with agenerally accepted accounting principles (GAAP),acompany's financial statement must contain accurate accounting information and is used in financialreporting.How do you know whether accounting information is useful? Review each of the accounting conceptsbelow that describe the qualitative characteristics of accounting information.The Qualitative Characteristics of Accounting InformationComparabilityConservatismConsistencyMaterialityRelevanceReliabilityUnderstandabilityIn each of the following scenarios, which accounting concept is being violated?1.A major explosion at a company's main production facilitycaused a two-month stoppage ofoperations during a busy time of year. It went unreported because the accountant said its dollar effectwas too low.ComparabilityComparability2.A completely separate company from the one with which you are concerned may not make itthrough the year. This information was included in your company's financial statements.ConservatismConservatism3.Your company has decided to change its method of accounting for depreciation of some equipmentused in the production process in the current period. This seems odd, as it was just changed last year.It is becoming difficult to compare numbers associated with depreciation from one year to theConsistencynext.Consistency4.The accountants at your company have decided to create the financial statements in Italianbecause the owner of the company came from Italy.MaterialityMateriality5.A potential investorwishes to determine whether to invest in your company or in a competitor's.On the surface, it appears that your company has less depreciation expense, yet your accountantsforgot to disclose the company's accounting policy for depreciation.RelevanceRelevance6.Your company is looking to expand through acquisition into the business of microprocessors. TheCFO claims that his mother's privately held company would be a perfect fit for the acquisition.Unfortunately, there is no paper trail of her company's performance, and it is possible that thecompany doesn't even make microprocessors.ReliabilitySelect

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