6CA - Intermediate Accounting (Kieso)

Question

(Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the continu fallout from the financial crisis of 2008. An overheated real estate market, fueled by home purchase incentives, poor lend practices, and securitization through high-risk, mortgage-backed securities, led to a near collapse of global capital markets. a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-bac: investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulator the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers. 

Instructions 

Explain how reported accounting numbers might affect an individual's perceptions and actions. Cite two examples.

Step-by-Step Solution

Answer

The individual’s perception and action depend upon the accounting numbers because these numbers are used to make better investment decisions.

Step 1: Meaning of Financial Statements Meaning

The financial statement can be defined as a summary report that depicts the information in respect of financial position, cash flows, and also the financial results of the company. The financial statement consists of the accounting numbers as a result of its business operations for an accounting period.

Step 2: Examples of How accounting numbers Affect Decisions and Perception

The reported accounting number affects the individual’s perception and actions. The investors use the financial statement of the company before making an investment decision and the financial statement comprises the accounting numbers. The individual upon analysis of the financial statement determines whether the company has good growth opportunities or it does not provide good returns and capital appreciation. 

For example, the company reports EPS and the individuals use this EPS when an investment decision is taken if upon evaluation the EPS is considered good then investment in the company may be made. 

For example, a bank may evaluate the cash flow position of a business by evaluating whether operations generate enough cash flows and the company will be able to pay