ACCT 5103 Midterm

individuals maximize their own utility

each side has different information

managers know their actions, but shareholders do not

income is the increase in net worth

no income should be recognized until capital has been retained and costs recovered

resources that are measured at a particular time

profit earned if productive capacity has increased at the end of the year

recognize earnings with an increase in net worth or net increase in asset values

easier to assess the firm, more predictive value, more relevant, increases comparability, enhances stewardship

less reliable, ignores demand for products, costs > benefits, volatility

includes all changes in equity during a period except those resulting from owners

determine income by measuring only the recorded net assets

income is the result of certain activities that took place during the period

income is the result of dealings with external entities

productive services that must be measured over some period of time

match associated efforts with accomplishments

profit earned if the financial amount of net assets are greater at the end of the period than at the beginning

reflects business reality, measured by transactions, less guesswork, matching, more reliable

less relevant, harder to predict

when in doubt choose the accounting method that will be least likely to overstate assets

humans have a limited ability to process information, people may not make the optimal decision

updates framework, reduces bias, frame of reference, more efficient communication, better standards setting

price is determined by a consensus of market participants, price fully reflects all available information and reacts immediately to new information

financial statements, notes to the F/S, supplementary schedules, parenthetical disclosures, auditor's report, interim F/S, MD&A, letter to stockholders, analyst reports

easy to calculate and reliable

may not be relevant

reflects current conditions, relevant

may be hard to find for all elements, less reliable

best fits concept of economic income, most relevant value,

least reliable, hard to predict

oriented to present production, easier to compare

helps measure opportunity cost and to evaluate liquidity

Better for valuing assets with no market value, Lots of variables, Better technique for valuation

price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants

results from a past transaction, represents a present right, future benefit

past transaction, present obligation, future transfer of benefits

residual interest

helps users assess future cash flow, provides feedback about actual cash flows, evaluates the availability of cash, helps users evaluate risk