Essay on The Analysis and Use of Financial Statements, 3rd Edition, Gerald I. White, Ashwinpaul C. Sondhi, Dov Fried

Words: 1988
Pages: 8

Chapter 1 - Solutions
Overview: Problem Length {S} [M] 1.{S}(i) Problem #s 1 to 23 24

Short-term lenders are concerned primarily with liquidity. Accounting standards would focus primarily on near-term cash flows and might include cash flow forecasting. Performance reporting would likely emphasize cash-based measures.

(ii) Long-term equity investors are primarily concerned with the earning power of the firm. Income measurement would be the focus of standards for such users. (iii)Tax authorities are concerned with the generation of tax revenue. Accounting standards might limit the ability of firms to shift income from one period to another and place strict controls on the recognition and timing (accrual) of both revenues and
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12.{S} Comprehensive income includes all changes in equity other than transactions with stockholders. It encompasses operating earnings, "non-recurring" items, valuation adjustments, and the cumulative effect of accounting changes. As it includes all changes in stockholders' equity (excluding transactions with owners), comprehensive income is more complete than "income from continuing operations" (most useful for earnings forecasting).


13.{S}Recurring income refers to income from continuing operations, the best measure of the operating profits of the firm for that time period, and therefore the best base for forecasting and valuation. Non-recurring items are unusual and/or infrequent in nature, and usually result from non-operating factors. 14.{S}The classification of cash flows into three categories highlights their differing natures. Cash from operations reports the cash generated or used by the firm's operating activities. Cash for investment measures the outflow for investments in capacity, for acquisitions, or for long-term investments. Cash from financing indicates the source (debt or equity) of any financing required by the firm as well as distributions to preferred and common stockholders. These classifications should be viewed over time as indicators of the firm's liquidity and solvency. The relationship among these classifications is especially important. 15.{S}Footnotes are an integral part of the financial statements and are audited. They