A fund manager states, "I refuse to buy any company that makes a voluntary accounting change, since it's certainly a case of management trying to hide bad news.". Can you think of any alternative interpretation?
One of the pitfalls in accounting analysis arises when analysts attribute all changes in a firm's accounting policies and accruals to earnings management motives. Voluntary accounting change may be due merely to a change in the firm's real economic situations. For example, unusual increases in receivables might be due to changes in a firm's sales strategy. Unusual decreases in the allowance for uncollectible receivables might be reflecting a firm's changed customer focus. A company's accounting change should be evaluated in the context of its business strategy and economic circumstances and not mechanically interpreted as earnings manipulation.
Promises that require future expenditures are liabilities even if they cannot be measured precisely. According to the definition, liabilities are economic obligations of a firm arising from benefits received in the past that are (a) required to be met with a reasonable degree of certainly and (b) at a reasonably well-defined time in the future. Airline companies have economic obligations to serve frequent flyer program passengers due to ticket sales (benefits) in the past to the frequent flyer program passengers. These obligations are (a) likely to be met (for example, American Airline's frequent flyer program totaled over 6 million free trips in 2011) and (b) fulfilled within a well-defined time in the future (for example, within 3 to 5 years after the revenue ticket sales are made).
A frequent flyer program has an impact not only on the balance sheet but also on the income statement. In principle, the costs associated with benefits that are consumed in this time period are estimated and recognized as expenses (matching concept). Note that airline companies increased revenue ticket sales (i.e., benefits) in this period by promising free-trip tickets (i.e., costs) in the future.
However, it is not easy to measure the costs associated with frequent flyer program accurately. At least the following three cost categories should be considered in the estimation:
1 . The administrative costs, such as maintaining the accounting system for the program, mailings to program members, and providing service to those who request free flights
2 . The costs related to the flight itself, including meal expenses, luggage handling costs, addition fuel expenditure, etc.
3 . The opportunity costs that airline companies may incur because the seats used by flight award passengers could have been sold to revenue paying passengers
You might also like to view...
Inventory costing methods place primary emphasis on assumptions about
A) flow of goods B) flow of costs C) flow of goods or costs depending on the method D) flow of values
While training a new hire in a law office, an experienced paralegal explains that a summons must be issued with every complaint in a lawsuit that is asking for monetary damages and that the defendant must be served according to the Rules of Civil
Procedure. That paralegal is addressing the issue of: A) procedural due process. B) equal protection. C) compliance. D) supremacy clause.
The present value of an ordinary annuity of $2,350 each year for 8 years, assuming an opportunity cost of 11 percent, is: (Round to the nearest whole dollar.)
A) $1,020 B) $27,869 C) $18,800 D) $12,093
________ float occurs when there is a delay between when a firm issues a check and when the funds are removed from the checking account balance
A) Net B) Book balance C) Disbursement D) Collection E) Electronic funds transfer (EFT)