...Checkpoint: Accrual Method These two are very different methods, but when speaking of the accrual method of accounting and the cash basis of accounting, the one main way to differentiate between the two are how they are recorded. The transactions are recorded in different ways. The accrual method likes to record the transaction before the actual transaction has given the money. So with the money not present in hand it’s still recorded. On the other hand we have cash basis accounting where the organization records in their books when the transaction has been given the money in hand or when it leaves their system. Now, depending of course on the different organizations you are discussing or dealing with on which is more adequate for their needs, but o accrual accounting I would predict that it would be more adequate to a nonprofit organization. The statement of cash flow is of great importance to an organizations financial management. When cash comes and goes this statement is present to give an adequate breakdown of what is recorded and given. The totals are added up over a particular time period. So the term cash flow is the main term used to make all clear. When financial stability of an organizations rest on what money they make or spend every day. It’s just fact money is an issue; you have to have it in personal venue and organizational venue as well. It will always be a topic of interest. These are two large accounting methods that are both...
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...available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Accrual-based and real earnings management activities around seasoned equity offerings Daniel A. Cohen 1, Paul Zarowin à New York University, Stern School of Business, NY 10012-1118, USA a r t i c l e i n f o abstract Article history: Received 15 January 2008 Received in revised form 22 December 2009 Accepted 18 January 2010 Available online 2 February 2010 We show that SEO firms engage in real activities manipulation, and the decline in postSEO performance due to the real activities management is more severe than that due to accrual management. Our evidence is important, because it shows that post-SEO operating underperformance is driven not just by accrual reversals, but also reflects the real consequences of operational decisions made to manage earnings. We also show how firms’ choices of real versus accrual-based earnings management activities around SEOs vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. & 2010 Elsevier B.V. All rights reserved. JEL Classification: G14 G32 M4 M41 Keywords: Seasoned equity offerings Earnings management Accounting choices Accounting Accruals Real activities 1. Introduction In this paper, we examine both real and accrual-based earnings management activities around seasoned equity offerings (SEOs). Prior research has documented that SEOs...
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...Case Study: Cash Basis or Accrual Basis? Selina Sanchez Acc 497 February 11, 2016 Donald Autrey Case Study: Cash Basis or Accrual Basis? Use FARS to identify what standard-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification offered for accrual accounting? Explain. The basic goals have not been completely supported in their statements. Accrual accounting and cash basis both have a reason to be in grated. Accrual accounting is favored by FASB as it shows a more specific accounting transcript than cash basis accounting does. Bonus Question: Identify which accounting pronouncement specifically observes: “This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting.” “This statement relies on a basic premise of generally accepted accounting principles that accrued accounting provides more relevant and useful information than does cash basis” is located on the FASB pronouncement Summary of Statement No. 106 discussing the “Employers’ Accounting for Postretirement Benefits Other Than Pensions Accounting Theory Issue: When is a “cash-basis method” used within the accounting literature? Do you view such a method as complementary or preferable to accrual accounting in the settings you have identified? The cash-basis-method is only used for small...
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...Accrual and Cash Accounting Accrual and Cash Accounting Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011) “Accrual-basis accounting (p. 166) Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company’s financial statements, even if cash was not exchanged.” Accrual accounting is an accounting process that could be properly utilized by a large company. One example is a company that is turning over millions of dollars in revenue yearly. A large company that is generating that much money and turning it around yearly has to maintain large volumes of cash flow. Without the large volume of cash flow, the company would be unable to maintain high volumes. Because of the high cash flow, money is constantly coming in and going back out. One example in today’s market is Wal-Mart/Sam’s Club stores. A company this size can afford to use the accrual method because it does not have to maintain a close watch on how much actual money is in the bank at any given time. The retail company has cash flow to order inventory, make payroll, and pay other bills at any given time. The accrual-basis is a better accounting process because it accurately creates a picture of the actual profits during a given time. It can make for clear tax predictions as well as accurate projections. Averkamp, H. (2014) “The accrual basis of accounting provides a better picture of a company's profits during an accounting period...
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...use of the accruals basis 5.1 Government accounting Government accounting is the process of recording, analyzing, classifying, summarizing communicating and interpreting financial information about government in aggregate and in detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. The purposes of government accounting are: • To carry out the financial business of government in a timely, efficient and reliable manner (e.g. to make payments, settle liabilities, collect sums due, buy and sell assets etc.) subject to necessary financial controls. • To keep systematic, easily accessible accounting and documentary records as evidence of past transactions and current financial status, so that detailed transactions can be identified and traced and all aggregates can be conveniently broken down into their constituent parts. • To provide periodic financial statements, containing appropriately classified financial information, as a basis for (a) stewardship and accountability and (b) decision-making. • To maintain financial records suitable for budgetary control, internal control and the needs of auditors. • To provide means for effective management of government assets, liabilities, expenditures and revenues. In government, the producers of accounting information are rarely qualified accountants. Therefore few have experience of accrual accounting...
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...evidence and the proclamation of prosecutors, the action account department has taken was not following the GAAP. However, to the word of Richard himself, this way of accounting was not a really big deal like the WorldCom bankrupt or Enron bankrupt. And he is also very confident to continue developing his career in the future after he is released from the jail. 1. Sumarize the lessons learned by you from reading this article. The way that Computer Association records its sales has pointed out several accounting principles and concepts. According to the article, the account department recognized revenue while the contract was signed. It follows the accrual concept that revenue is recognized not only when cash transactions occur. Since the contracts were signed, the revenue could be received sooner or later. The accrual accounting helps to provide a more accurate picture of current company condition. However, Computer Association made an aggressive accounting strategy that some of the revenue of next quarter was recognized in the current quarter, which increases the revenue in the current quarter. Though the revenue of next quarter will decrease, the...
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...Difference between Cash and Accrual Accounting: The cash basis of accounting, simply as the name suggests, records financial information on the basis of the actual cash movement. Revenues to be recognized when cash received and expenses to be recognized when cash paid out. Cash basis is normally adapted by small businesses mainly traders as it is quite easy, straightforward and can easily be set up and maintained without following a lot of complex accounting rules. Care must be taken when using financial statements prepared under the cash basis as it is not completely accurate e.g cash outflows due to purchases of fixed assets would only affect the period they are recorded in though they are to be used over a certain period of time, concepts such as depreciation are used under the accrual system to overcome such disruptions. The accruals basis of accounting which is a more sophisticated method recognizes revenues when “earned” and expenses recorded when “incurred” regardless of the cash movements relating to each. For e.g. in the case of a service business providing a service will recognize its revenue once the job is completed even if the customer hasn’t cleared the dues yet. Same approach is used for the expenses, recorded when incurred not when paid. Accrual accounting method improves the reported information by presenting a more realistic and accurate view of the underlying operations primarily matching reported income with reported expenses in a specific period. When cash...
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...Brain Teaser 4: Cash Basis or Accrual Basis a) Use FARS to identify what standards-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification for accrual accounting? Explain? The FASB has stated that the accrual-basis method is superior to the cash-basis method. For example, the accrual-basis method promotes the caution and equivalent concepts, which are two of the fundamental accounting concepts. Thus, dissimilar to the cash-basis method, financial statements indicate the actual responsibilities of an organization and what resources the organization actually possesses. This means the accrual basis method offers a more precise depiction of the financial status of the reporting organization. Statement No. 106 lists the objectives proposed/used by the Financial Accounting Standards Board. http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010215 b) Identify which accounting pronouncement specifically observes: This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting. This statement is part of the Financial Accounting Standards Boards Statement of Financial Accounting Standard No. 106, which challenges Employees Accounting for Postretirement Benefits Other Than Pensions, this Statement was announced in 1990. http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010215...
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...Cash vs Accrual Under the cash basis of accounting… 1. Revenues are reported on the income statement in the period in which the cash is received from customers. 2. Expenses are reported on the income statement when the cash is paid out. Under the accrual basis of accounting… 1. Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers. 2. Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is made. The accrual basis of accounting provides a better picture of a company’s profits during an accounting period. The reason is that the income statement prepared under the accrual basis will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues. The accrual basis of accounting also provides a better picture of a company’s financial position at a moment or point in time. The reason is that all assets that were earned are reported and all liabilities that were incurred will be reported. The accrual basis of accounting is required because of the matching principle. The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is...
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...Discussion1 Is Fast Eddie required to accrue a liability as of March 31, 2011, financial statements related to the ongoing government investigation? If so, how much? Yes. Fast Eddie is required to accrue a liability of $3.7 million. Subsequent Events are Events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events: a. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events). According to ASC 855-10-25-1, an entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. An example of recognized subsequent events is that if the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled after the balance sheet date but before the financial statements are issued or are available...
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...available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Accrual-based and real earnings management activities around seasoned equity offerings Daniel A. Cohen 1, Paul Zarowin à New York University, Stern School of Business, NY 10012-1118, USA a r t i c l e i n f o abstract Article history: Received 15 January 2008 Received in revised form 22 December 2009 Accepted 18 January 2010 Available online 2 February 2010 We show that SEO firms engage in real activities manipulation, and the decline in postSEO performance due to the real activities management is more severe than that due to accrual management. Our evidence is important, because it shows that post-SEO operating underperformance is driven not just by accrual reversals, but also reflects the real consequences of operational decisions made to manage earnings. We also show how firms’ choices of real versus accrual-based earnings management activities around SEOs vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. & 2010 Elsevier B.V. All rights reserved. JEL Classification: G14 G32 M4 M41 Keywords: Seasoned equity offerings Earnings management Accounting choices Accounting Accruals Real activities 1. Introduction In this paper, we examine both real and accrual-based earnings management activities around seasoned equity offerings (SEOs). Prior research has documented that SEOs...
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...Journal of Accounting and Economics 50 (2010) 344–401 Contents lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Understanding earnings quality: A review of the proxies, their determinants and their consequences$ Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States University of Washington, Seattle, WA 98195, United States University of Pennsylvania, Philadelphia, PA 19104, United States a r t i c l e i n f o abstract Available online 4 November 2010 Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work. & 2010 Elsevier B.V. All rights reserved. JEL classification: G31 M40 M41 Keywords: Earnings quality Earnings management Review Survey 1. Introduction Statement of Financial Accounting...
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...com/What-are-the-differences-between-cash-basis-and-accrual-basis-accounting Why government used the cash basis of accounting? * Easy to learn and carry out and requires care but no special accounting skills. * Well-adapted to needs of budgetary control and payment is more ascertain. * Strict budget control can be exercised by comparing sums authorized with those actually spent * Easy to understand and verify * A statutory requirement in many countries Arguments of accruals basis Cash basis accounting does not work well for companies that have inventories and sell on credit. Accrual basis accurately reflects the company true financial position. Cash based only report revenue and expense when you receive and pay cash. * Cash accounting does not generate enough useful information for example payables and receivable. Only accrual accounting provides adequate information on the full costs of operation, thus supporting decision-making for example Full cost information (including noncash costs such as depreciation, and accrued civil service pensions) is essential for assessing the efficiency of government services and thus is * Accrual basis generate reliable information on the full range of assets and liabilities. * Generate comprehensive financial information about the government. For example a loan which is written of has no impact on a cash based statement, but under accrual accounting it diminishes net worth. Accrual Basic * Accrual basis accounting is a method of accounting...
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...Accrual and Cash Accounting ACC 290 The biggest difference between accrual and cash basis accounting is the timing in which the revenues or expenses are recognized. Cash basis accounting is used mostly by small businesses or personal finances. The cash basis method accounts for revenue only when money is received or expenses only when money is paid out. For example, when you balance your checkbook, you only enter your paycheck when it is deposited into the bank, and when you write a check to pay a bill, you subtract that sum from your account. The accrual accounting method accounts for revenue when it is earned and for expenses, goods and services when they are performed. Revenue is recognized even if no cash has been received or, in the case of an expense, that has been incurred, no cash has been paid out, and it is the most common method used by businesses today. Let’s say you sell $10,000 worth of goods, under the cash basis method the amount id not entered in to the books until the money has been collected or a check is received. With the accrual accounting method, the $10,000 is recorded as revenue as soon as the sale is made. This is the same for expenses. If you get an electric bill for $1,500, using the cach basis method, it is not entered in to the books until the bill is paid. Under the accrual accounting method, it is entered as an expense as soon as it is received. (Morah, C. 2009) Accountants use the Generally Accepted Accounting Principles (GAAP) to guide...
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...Michael Simonds HSM/260 Accrual Method The Accrual Method is a major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for). When transactions are recorded on a cash basis, they affect a company's books only once a completed exchange of value has occurred; therefore, cash basis accounting is less accurate than accrual accounting in the short term. Smaller companies that haven't formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don't have to hire a large accounting staff. If a company uses accrual accounting, it records revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when it receives the cash. That is, the company records revenue when it earns it, even if the customer hasn't paid yet. Expenses are handled in the same way. The company records any expenses when they're incurred, even if it hasn't paid for the supplies yet. By using accrual accounting, the records of the business are kept more consistently. Every period shows exactly...
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