Case analysis is important in accounting education. It mirrors the complexities of real-life in-context decision-making, and it encourages critical thinking and the development of judgement. It also allows students to test how deeply they know their theory and technical material. Knowledge of the CICA Handbook, various accounting methods, bookkeeping, financial statement analysis, discounting, and fair value estimation methods is important to a good accounting education. These are crucial building blocks, but, at the same time, they are only a means to an end. The real goal is to develop judgement and insight into the issues that are faced by individuals and society in relation to accounting.
FRAMEWORK
Decision-making must be done in the context of the situation at hand. We have to consider the accounting body of knowledge {CICA Handbook, accounting methods, etc.) and must do this within a specific scenario. Who is in charge of preparing the financial information? Who will be using the information (and for what purpose)? Are there any circumstances either inside the company or outside it that may lead to bias?
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Case analysis can be seen as having three main stages:
1. Assessment of the reporting environment/ framework/overview
2. Identification and analysis of the financial reporting issues
3. Recommendations
tA short version of the case primer follows. A more detailed version is available in WileyPLUS and on the Student Website <www.wiley.com/canada/kieso>accompanying Intermediate Accounting, Ninth Canadian Edition.
1. Assessment of the reporting environment/ framework/overview
a. Potential for bias (Look for sensitive numbers and/or financial statement items. Identify and articulate the bias and related key numbers.)
CLICK HERE TO ORDER THIS ESSAY!!!!i. Users and the decisions they are making. Who is using the information and for what purpose? Are there any key numbers/ratios that will be the focus of these users? Are there any contracts that refer to the financial reporting (such as debt covenants, payout ratios, etc.)?
ii. Financial statement preparers.
Consider management compensation such as bonuses that are based on net income, stock options that are based on the value of the stock (and are affected by the financial information), the need to obtain financing, etc.
iii. Business/economic reporting environment.
Is the company experiencing a decline in profitability or cash flows due to increased competition, less demand for services, internal problems, etc.? What are the key numbers/ratios that users focus on to assess the financial health of the company?
CLICK HERE TO ORDER THIS ESSAY!!!!b. GAAP constraint
If the company’s shares trade on a stock exchange, there is normally a legal requirement to follow IFRS beginning in 2011. Otherwise, the GAAP constraint would depend on what the users want from the statements. As a general rule, GAAP statements, by definition, are reliable, relevant, comparable, consistent, and understandable. Private entities may choose to follow private entity GAAP or IFRS.
This primer is a summary of the case primer document on the Student Website.
c. Overall conclusion/financial reporting objective Based on your role in the case and the above information, conclude on whether the financial reporting will be more aggressive or conservative or somewhere in between. Note that aggressive accounting tends to overstate net income/assets and present the company in the best light. Conservative accounting ensures that net income/assets are not overstated and that all pertinent information (positive or negative) is disclosed.
CLICK HERE TO ORDER THIS ESSAY!!!!2. Identification and analysis of the financial reporting issues
a. Issue identification
Read the case and look for potential financial reporting issues. To do this, you need to know the accounting principles and rules and have an understanding of the business and the business transactions. Issues are usually about deciding whether or not to recognize something (revenues, liabilities etc.), deciding how to measure financial statement elements (leave them as they are or write them down or off), or how to present/disclose these items in the financial statements (treat them as current or long-term, debt or equity, discontinued or continuing operations, etc.).
CLICK HERE TO ORDER THIS ESSAY!!!!b. Ranking issues
Focus on the more important issues. In other words, focus first on the issues that are material to the users of the information (those that are more complex and/or those that affect any of the key numbers or ratios identified above). You should identify right away what you consider to be material.
c. Analysis
The analysis should consider both qualitative and quantitative aspects. It should also look at the issue from different perspectives. For example, in a revenue recognition issue, should the revenue be recognized now or later? Consider only the relevant alternatives.
CLICK HERE TO ORDER THIS ESSAY!!!!Qualitative:
• Each perspective must be supported by making reference to GAAP and accounting theory (including the conceptual framework). For example, recognize the revenue now because… or recognize it later because…
• Make sure the analysis is case specific—i.e., that it refers to the facts of the specific case.
• Make strong arguments for both sides of the discussion. If the issue is a real issue, there is often more than one way to account for the transaction or event.
• Make sure that the analysis considers the substance of the transaction from a business and economic perspective.
Quantitative:
• Calculate the impact of the different perspectives on key financial statement numbers/ratios. Would this decision be relevant to users?
• Calculate what the numbers might look like under different accounting methods, if they are relevant.
3. Recommendations
After each issue is analyzed, conclude on how the items should be accounted for. Your conclusion should be based on your role and the financial reporting objective that you identified earlier.
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