The Relationship Between The Quality Of Financial Reporting And The Cost Of Accounting

The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.

This memo highlights segmented reporting and the variable approach to preparing income statements. Segmental reporting is necessary since there is a need to understand the cost data for each section. Proper cost allocation is critical to preparing the income statements, while it is also easier to identify the costs that are common and not attributable to any specific segment. Typically, the management analyzes the cost behavior by making the assumption that the total costs change occur because of change in level of a single activity (Slideshare, n.d.). The variable costing

This paper examines the quality of earnings for major corporations. The quality of earnings is an ongoing operation of corporations and other business alike, because the value of a business is the current and future earnings of the firm (Schroeder et al, 2011). These earnings are usually updated quarterly by a firm’s financial analyst, which provide this for investors and other users of financial information to make decisions about a firm’s financial position in the market. However, there are some differences in the quality of earnings throughout various industries, countries and by competitors. This paper evaluates the quality of earnings for one major corporation for an assessment of its current and future earnings.

Abstract. The article reviewed was Director Overlap, Ethical Financial Reporting, and Improvements in Disclosure Quality. The key of the abstract is to emphasize the positive influence of independent audit committee on the ethical financial reporting, corporate disclosure, and company ethical environment overall (p. 183).

1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity?

The quality and transparency of a company’s financial statement concerns a broad range of interested parties, including analyst, shareholders, investors, regulators, and so forth. Generally, the analysis of quality and transparency includes the examination of the accounting assumptions, strategies, risk tolerance, consistency of on- or off- balance-sheet transactions. The notes and management’s discussion in the annual report are of great importance to achieve the assessment of quality (Stickney, Brown and Wahlen, 2007). The financial statement of quality is expected to disclose important information about the company’s liquidity, inherent risk subjectivity, use of historical cost or fair value measurement methods, accounting estimates and assumptions, possibilities of impairment, use of off-balance-sheet arrangements and quality of internal control (Deloitte Inc., 2015). The report takes Apple Inc. as the case to perform a quality assessment about its annual report of 2015.

Financial information is seen to be relevant is it has ‘confirmatory value, predictive value, or both’ (Maynard, 2013, pp14). There are also four enhancing characteristics, which improve the usefulness of financial information. One of these characteristics is understandability which means that the information in an annual report should be ‘classified, characterised and presented clearly and concisely in order to make it understandable’ (Maynard, 2013, pp16). Other characteristics include comparability, verifiability and timeliness (Appendix 1). As there are many characteristics to satisfy in order to meet the demands of the users, the annual report is said to obscure important information and include ‘clutter (which) undermines the usefulness of annual reports and accounts’ (Financial Reporting Council, 2011). This then gives an unclear understanding of the issues a company actually faces, and raises the question as to whether these characteristics are right, as relevant information becomes more difficult for users to analyse a company’s progress.

It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work.

1.Money measurement: Only those transactions which can be expressed in terms of money such as purchase of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts are known as money measurement. Besides that, all other transactions which cannot be expressed in monetary terms are not recorded in the books of accounts and the records of the transactions are to be kept not in the physical units but in the monetary unit. Since these assets are expressed in different units, so any meaningful information about the total worth of business should be included. Hence for accounting purpose, these are to be shown in money terms and not in physical terms. Limitations are not excluded from money measurement assumptions. The value of money does not remain the same over a period of time due to inflation because when we add different assets bought at different points of time, we are in fact adding diverse values in the balance sheet. The accounting data does not reflect the true and fair value of the company when the inflation is not accounted in the book of accounts. (http://www.letslearnfinance.com/)

Historical cost can be defined as the original cost of an asset during transaction and recorded in an organization’s accounting record. Generally Accepted Accounting Principles stated that assets and liabilities must be recorded in balance sheet with original cost which is the purchasing cost during that time. The historical cost accounting often used in the condition where prices are constant or change slowly and yet, it does not affect the purchasing power of an item. There is no doubt on balance sheet amount because of the historical cost represented how many amount has been paid or received during the actual transactions. The advantages and disadvantages of historical cost accounting are discussed as below:

This essay examines sources of bias in financial reports and therefore considers a range of principles and theories. Users of financial statements need the information contained in financial reports to be free from bias. Users would prefer that financial statements present a balanced view of a company's affairs, one that attempts to convey information as neutrally as possible. This preference occurs because more information equates to less uncertainty. The more information is available, and the better the quality of that information, the better the capital market is able to allocate resources efficiently. Less uncertainty results in less risk and in lower risk premiums (Foster, n.d.).

Private and public accounting have long been discussed and disputed in regards to financial reporting. Since the Financial Accounting Standards Board (FASB) was created in 1973, accountants have called for different accounting regulations for private and public accounting sectors, as private companies do not have the resources to meet the complex requirements of public companies. Private companies currently are not required by law to issue annual or quarterly financial statements. Private companies do, however, have the option to apply the U.S. Generally Accepted Accounting Principles (GAAP), cash basis, or accrual accounting to their financial statements (James, 2012).

Financial reporting (earnings) quality has been considered positively associated with the following:  High persistence of earnings and cash flows  High predictive ability of earnings and cash flows  High earnings response coefficient  Low level of earnings management  More voluntarily disclosure  Strong corporate governance

As described in the FASB Statement of Financial Accounting Concepts No. 1, financial reporting should “…provide information that is useful to present and potential investors in making rational investment decisions…” (par. 34) and “…provide information to help present and potential investors in assessing the amounts, timing, and uncertainty of prospective cash receipts...” (par. 37). Further, expected cash flows is a key input to firm capital budgeting, which is particularly important in the context of this paper which studies financial reporting implications for corporate investment. I proxy for financial reporting quality using measures of accruals quality based on the idea that accruals improve the informativeness of earnings by smoothing out transitory fluctuations in cash flows (Dechow and Dichev, 2002; McNichols, 2002). The use of accruals quality relies upon the fact that accruals are estimates of future cash flows and earnings will be more representative of future cash flows when there is lower estimation error embedded in the accruals process. I study the relation between financial reporting quality and investment efficiency on a sample of 49,543 firm-year observations during the sample period of 1980 to 2003. The analysis yields three key findings. First, the proxies for financial reporting quality are negatively associated with both firm underinvestment and

[9] Botosan, C. and Plumlee, M. (2002). A Re-examination of Disclosure Level and the Expected Cost of Equity Capital. Journal of Accounting Research, 40(1),