My Discussion- The Quality of Financial Information

My Discussion- The Quality of Financial Information

Referencing this week’s readings and  lecture, describe the quality issues related to reporting revenue. What  is the importance of understanding various inventory valuation methods  in determining the quality of reported profits?

Respond to at least three of your classmates’ posts.

This week readings and lectures are as follows please use to reference in discussion and replys to fellow students:

 

Required Resources

Text

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from https://content.ashford.edu/

  • Chapter 5: Evaluating the Quality of Financial Reports

Recommended Resources

Articles

Miller, P. B. W. (2002, April). Quality financial reporting: Finding customer focus through the power of competition (Links to an external site.)Links to an external site.. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2002/Apr/QualityFinancialReporting.htm

Turner, L. E. (2000, March 23). Speech by SEC staff: Charting a course for high quality financial reporting (Links to an external site.)Links to an external site.. U.S. Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/speech/spch356.htm

EDWARDS DISCUSSION:

 

Relevance is one qualitive characteristic that is used when companies  report revenue which involves reporting financial stats that can inform  shareholders about future expectations. A company that has 3 million in  debt while only clearing a net income of 4 million is relevant  information to shareholders, which will likely prevent them from  investing. If not for this type of quality reporting, companies would be  able to mislead the public. A company that has equivalent debt to their  income may try to mislead the public by noting a non-relevant figure  such as discussing a dollar increase in their earnings per share.

“Faithful representation means that the information presented is  complete, neutral, and free from material error. Information is  considered complete if it includes all details necessary to make an  informed decision. A report is considered neutral if there is no bias”  (Epstein, 2014, p. 5.2). A company can be unfaithful in their  representation by exaggerating on their low income, which could can lead  to less tax liability.

It is vital to understand various inventory valuation methods in  determining quality of reported profits because it affects the cost of  goods, gross profit and net income. This means incorrect inventory will  also have incorrect stats on current assets, capital and equity.

References

Epstein, L. (2014). Financial decision making: An introduction to financial reports. Retrieved from https://content.ashford.edu/books/AUOMM622.14.1/sections/sec1.3?search=equity#w10704 (Links to an external site.)

REMMIES DISCUSSION:

 

THE QUALITY OF FINANCIAL INFORMATION

Referencing this week’s readings and lecture, describe the quality  issues related to reporting revenue. What is the importance of  understanding various inventory valuation methods in determining the  quality of reported profits?

According to this week lecture “the usefulness of financial reports  to readers depends on report quality. The conceptual framework for  financial reporting categorizes qualitative characteristics of financial  reports into two broad categories: fundamental qualitative  characteristics, which include relevance and faithful representation,  and enhancing qualitative characteristics, which make financial reports  more useful and include comparability, timeliness, verifiability, and  understandability.” (Week 5 Lecture)

The U. S. generally accepted accounting principles (GAAP) and the  International Financial Reporting Standards (IFRS) viewed the value of  inventory differently; companies filing reports under IFRS must use FIFO  (first in, first out) or the “weighted-average inventory valuation  methods” and those filling under U. S. GAAP rules uses the LIFO (last  in, first out). (Epstein, L 2014)

The way FIFO values inventory as the first item in the business is  the first item sold whilst the LIFO system the last item in will be the  first item sold. In this scenario the most expensive item will likely be  sold, and the older, cheaper items will remained on the self. When  using the LIFO method this can increase the cost of items sold and  decrease net income, making a representation of the company making less  money, thus reducing the company’s income taxes when prices are rising.  FIFO method results in a lower cost of items sold and higher net income  when prices are rising. In which the opposite is true when prices are  decreasing. (Epstein, L 2014)

It is important to understand that the two systems are total  different therefore you can’t make comparison between them, thus  determining the real cost of doing business can be difficult if not  impossible. Using one method would alleviate this setback. (Epstein, L  2014)

Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from https://content.ashford.edu/

QUENTINS DISCUSSION:

 

Valuation is the process by which managers assess how much worth  something has. “The conceptual framework for financial reporting  categorizes qualitative characteristics of financial reports into two  broad categories: fundamental qualitative characteristics, which include  relevance and faithful representation, and enhancing qualitative  characteristics, which make financial reports more useful and include  comparability, timeliness, verifiability, and understandability” (Week 5  Lecture). There are two ways assets are valued which are through IFRS  International Financial Reporting Standards) and GAAP (generally  accepted accounting principals). IFRP allows companies to revaluate  property, plant, and equipment, whereas GAAP does not allow  revaluations, with the exception of some financial means, like  marketable securities (Epstein, 2014).

Companies that report under IFRP must abide by the FIFO. The belief  is that the first item in is the first item out. GAAP must abide by the  LIFO, last in, first out. Net profit can be influenced in both ways,  however using the LIFO, the profit can decrease because the cost of  goods sold increases. On the flip side, profit can increase if the COGS  was lower (2014). It important to understand these methods to understand  how revenue will be affected overall and to see how much each line item  is and how it affects the bottom line.

 

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