...We examined a number of normative theories of accounting. In doing so we examined conceptual framework projects which prescribe guidelines for how accounting should be done. We then examined a number of normative theories relating to how profit and the elements of our financial statements should be measured. This week we abandon our normative theories and begin looking at positive theories. In particular we examine a positive theory that we have made mention of a number of times, Positive Accounting Theory or PAT. Upon completion of this module you should have: A clear understanding of how a positive theory differs from a normative theory, The origins of Positive Accounting Theory (PAT) The perceived role of accounting in minimizing the transaction costs of an organisation You should understand: How accounting can be used to reduce the costs associated with various political processes How particular accounting-based agreements with parties such as debtholders and managers can provide incentives for managers to manipulate accounting numbers And some of the criticisms of PAT Before we begin our discussion of specific positive theories we should recap on what a positive theory is and how it differs from the normative theories we have examined in the previous two modules. You will recall from module one and the previous two modules that normative theories prescribe how a particular practice should be undertaken. As was evident in our study of current cost accounting...
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...Financial Accounting Theory Test 1: 1) Please briefly describe the essences of the following cases of accounting scandal or earnings management. (20 points) A) ENRON (8 points) * Enron created many special purpose entities (SPEs) controlled by senior Enron officers that they used in conducting off balance sheet financing * SPE’s borrowed money from banks using Enron’s stock as collateral However all of the liability was reported on the SPE’s books, not on Enron’s, even though the borrowed cash went to Enron * Thus investors had no idea of Enron’s debt because they did not consolidate the SPE’s like they were suppose to under GAAP * Enron also charged fees for management and other services supplied to their SPE’s and included appreciation of its own stock which exaggerated net income * They had to consolidate their financials resulting in a reduction of shareholder’s equity, restatement of previous 4 years earnings, loss of investor confidence, share price fell from $90 to 66 cents then 1 cent * The SEC revoked the auditing license of accounting firm they used, Arthur Anderson B) MCI WORLDCOM (8 points) * From 1999-2002 they overstated their earnings by $11 billion * $4 billion of this amount was from capitalization of network maintenance and other costs that should have been expensed * and $3.3 billion came from reductions in the allowance for doubtful accounts * WorldCom’s merger with MCI was a disaster and went bankrupt...
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...At present, financial accounting standards are established and propagated on the basis of two key conceptual structures, namely, Financial Accounting Standards Board (FASB) and International Accounting Standards Boards (IASB) (Cong 2013). This essay will discuss and justify that accounting theory played a role in setting of accounting practices but it played no significant role in setting of accounting standards. Rather, several accounting standards were set by the conceptual frameworks formulated by the accounting standards-setting groups. Several examples will be presented for supporting the arguments. There is need to analyze and justify the evolution of accounting theory to conceptual structures because accounting standards play a vital...
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...Question a. Why is corporate finance important to all managers? Corporate Finance is important to all managers because it gives them the skills necessary to identify and select the corporate strategies that could add value to the company. Question b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. |Organizational Form |Advantages |Disadvantages | |Sole Proprietorship |It is easily and inexpensively formed. |Difficult to obtain the necessary capital | | |It is subject to few Government rules and |needed for expansion and growth. | | |regulations. |Due to unlimited personal liability for the | | |Its income is not subject to corporate |business’ debts, the Proprietor may incur | | |taxation, but is taxed as part of the |losses that exceed the money invested. | | |Proprietor’s personal income. |The life of the proprietorship is limited to | | ...
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...Study Guide Financial Management: Theory & Practice Fourteenth Edition Eugene F. Brigham University of Florida Michael C. Ehrhardt University of Tennessee ________________________________________________________________________________ Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied...
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...Corporate Finance Problem Set 1 1) Calculate the indicated amounts and financial ratios for Big Apple Enterprises. Please indicate the formula that you used to calculate the amounts or ratios. It may be most efficient to transfer the problem to an Excel spreadsheet and perform the calculations there. | Big Apple Enterprises | | | (1) | ------------------------------------------------- (2) | | | | | ------------------------------------------------- Common Size the Balance Sheet and Income Statement | ------------------------------------------------- | ------------------------------------------------- 2010 | ------------------------------------------------- 2011 | | ------------------------------------------------- 2010 | ------------------------------------------------- 2011 | ------------------------------------------------- Total Assets | ------------------------------------------------- 50000 | ------------------------------------------------- 65000 | | ------------------------------------------------- 100% | ------------------------------------------------- 100% | ------------------------------------------------- Inventories | ------------------------------------------------- 6000 | ------------------------------------------------- 9000 | | ------------------------------------------------- 12.0 | ------------------------------------------------- 13.8 | ------------------------------------------------- Receivables | ------------------------------------------------- ...
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...WIL Report D Semester 1, 2015 WIL Report D Semester 1, 2015...
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...Artemenkov, The department of economic measurements, GYY artemenkov@rambler.ru Modern Portfolio theory (MPT) and Financial Economics: a theory of lesser turf?♣ “In this age, which believes that there is a short cut to everything, the greatest lesson to be learned is that the most difficult way is, in the long run the easiest.” Henry Miller “[These are colossal] disproportions that have accumulated over the last few years. This primarily concerns disproportions between the scale of financial operations and the fundamental value of assets, as well as those between the increased burden on international loans and the sources of their collateral. … In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. Let us think about it together.” From the Address of Vladimir Putin, Prime Minister of Russia, at the Davos Economic Forum (February, 2009) This Part analyzes the pre-analytical foundations and macro-economic impact of the Modern Portfolio Theory1 (MPT) tenets, on which much of the present Western investment theory and financial economics is erected. Our general inference is that while the former are tautological at their...
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...EFFICIENT MARKETS HYPOTHESIS AND OTHER THEORIES OF PRICING IN FINANCIAL MARKETS Name Course Title/Code Instructor’s Name Date Efficient Markets Hypothesis and other theories of pricing in financial markets Efficient market hypothesis (EMH) is a theory that emerged in the 1960s. It states that it is difficult to predict the market since the price has been set and reflect the current market conditions. It is a disputed and controversial theory. The theory is comparable to other theories of pricing in financial markets. Several strengths and shortcomings emerge through comparison with other theories of pricing (Blinder, et al., 2012). EMH states that no stock is a better buy when compared to others. It is the conclusion that leads to random choices. It is a vital tenet of finance theory. The EMH theory has a basis in other finance theories. It follows the classical theory of asset prices. To determine the connection, a situation where stocks are considered based on good deals. According to the EMH theory, these stocks are worth more than their relative prices. The worth of a stock is the present value of the expected dividends. In this regard, an individual will buy stocks at prices that are below this level. In essence, this is buying stocks that are undervalued assets (Kapil, 2011). Classical theory The classical theory follows the belief that the price of a stock is equal to the best estimate of the stock’s value. This equality means that the undervalued stocks are not real...
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...has focused on the characteristics of corporate executive and firm performance. This paper examines five academic and practitioner-theory focused research articles by (Baker et al, 2006; Babchuk et al, 2003; Hartzell et al, 2003; Murphy et al, 2003; and Kathleen et al, 1989) on the subject of corporate performance and compensation. The purpose of this essay is to advocate the best form of compensation for corporate executive for optimizing long –run performance based on the listed above studies. The components of CEO compensation are classified into four categories: salary, bonus, long-term incentive rewards (e.g., stock options), and benefits. In examining these components, equity based compensation and agency theory were employed and investigated as key factors of analysis. Many academic scholars advocate that the issues of CEO compensation have been a subject of debate and research, due to the agency problem. Thus, for the past three decades, issue of executive compensation was approached from the perspective of the principal-agent relationship. Agency problem, in the context of the five papers mentioned above ‘is the possibility of conflicts of interest between the shareholders and managers of a firm’. According to agency theory, each firm consists of principals (shareholders) and agents (managers). The assumptions of agency theory are that agents are motivated by self-interest, are rational actors, and are risk-averse (Kathleen et al, 1989). Thus, an agency problem...
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...Financial Theories Overview Tyrone Freeman University of Phoenix Financial Theories Overview Table 1 Financial Theories Overview |Theories |General Description |Attributes |Current Examples | | |Of the Theories |Of the Theories |Of the Theories | | | | | | |Efficiency Theory |The idea is that investors are so |Information not reflective in the |The Facebook IPO of last year is a | | |competitive in the use of |stock price provides an investor |good example of the need for | | |information regarding a firm that |with opportunity to exploit the |efficiency market theory practice. | | |their trading behaviors bid away |value of the new information until |Specifically, four major | | |firms ability use information as |all gains are competed away (Ball, |underwriters Morgan Stanley, | | |value added to returns. Thus, the |2002). |Goldman Sachs, JPMorgan, and Bank | | ...
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...Financial Theories Overview Edward E. Edgar University of Phoenix Financial Theories Overview The following is an overview of 10 different financial theories prevalent today. The overview will include a brief description of the theory, an example of the theory, and other attributes of the theory. There will also be a conclusion to sum up a general understanding of the theories and their applications. Efficiency theory Efficiency theory has been around since the 60s and, is an extension of the efficiency theory of a capitalist society. Generally the theory is that scant resources are distributed by the owner in an efficient manner. The owner choses the best outcome for his or her investment and regulates resources and products accordingly. This is extended to the stock market in the 60s and has been a prevalent theory since. The theory as applied to the stock market says that all information of the market is fully reflected in the price of the stock and efficiently assimilated (Fama, 1970). Examples Generally stock returns are compared to overall market returns. A mutual fund company will compare their returns to the general stock market return and state they are a certain percentage above or below the market standard returns. Most will try to say they have beaten the market average. This is true for most investing firms and, is used as a selling point for the company or mutual fund. Attributes If this theory was to be taken to the extreme one would have to say that...
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...Scott, Financial Accounting Theory, 6th Edition Instructor’s Manual Chapter 2 Suggested Solutions to Questions and Problems 1. P.V. Ltd. Income Statement for Year 2 Accretion of discount (10% × 286.36) $28.64 P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash $315.00 Shareholders’ Equity Opening balance Net income Capital Asset Present value 0.00 $315.00 $315.00 $286.36 28.64 Note that cash includes interest at 10% on opening cash balance of $150. 2. Suppose that P.V. Ltd. paid a dividend of $10 at the end of year 1 (any portion of year 1 net income would do). Then, its year 2 opening net assets are $276.36, and net income would be: P.V. Ltd. Income Statement For Year 2 Accretion of discount (10% × 276.36) $27.64 Copyright © 2012 Pearson Canada Inc 11 Scott, Financial Accounting Theory, 6th Edition Instructor’s Manual P.V.’s balance sheet at time 2 would be: P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash: (140 + 14 + 150) $304.00 Chapter 2 Shareholders’ Equity Opening balance: $276.36 (286.36 - 10.00 dividend) Capital Asset, at Present value 0.00 $304.00 $304.00 Net income 27.64 Thus, at time 2 the shareholders have: Cash from dividend Interest at 10% on cash dividend, for year 2 Value of firm per balance sheet $10.00 1.00 304.00 $315.00 This is the same value as that of the firm at time 2, assuming P.V. Ltd. paid no dividends (see Question 1). Consequently, the firm’s dividend policy does not matter to the shareholders...
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...Financial Theoryand Corporate Policy / ~~i~I~N THOMAS E. COPELAND Professor of Finance University of California at Los Angeles Firm Consultan!, Finance MeKinsey & Company, Ine. J. FRED WESTON Cordner Professor of Managerial Economies and Finanee University of California al Los Angeles ADDISON-WESLEY PUBLlSHING COMPANY Reading, Massachusetts ' Menlo Park, California' New York Don Mills. Ontario ' Wokingham. England . Amsterdam B0'm ' Sydney , Singapore ' Tokvo . Madrid, San Juan ------ Addison Wesley Longlnan 11 ""' .... lIOCIedad _ _ coolos_deaulor enaose. enapter I extenos me smoy 01 cnOlee mm a ffiarKel equlllDnum lrameworK, thereby c\osing the cyc\e of logic. Chapter I shows why capital markets exist and assumes that alI outcomes are known with certainty. Chapter 7 extends the theory of capital markets to inc\ude equilibrium with uncertain outcomes and, even more important, describes the appropriate concept of risk and shows how it will be priced in equilibrium, inc\uding the very general arbitrage pricing theory. Chapter 8 on the option pricing model includes a treatment of the equilibrium prices of contingent c1aim assets that depend on the outcome of another risky asset. Therefore these materials provide a framework for decision making under uncertainty that can be applied by financial managers throughout the economy. Chapter 9 introduces commodity and financial futures contracts and how they are priced in equilibrium. Chapter 10. the last chapter...
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...EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization? EBT = Net Income/ (1-T) = 2,400,000/ (1-.40) = $4,000,000 Tax = EBT * T = $4,000,000 * 40% = $1,600,000 Dep. & Amort. = Earning after Interest but before Depreciation – EBT Dep & Amort. = $6,000,000 - $4,000,000 =$2,000,000 (2-5) Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense. Net cash flow = Net income + Depreciation Net Income = $3,100,000 Depreciation = $500,000 NCF = $3,100,000 + $500,000 NCF = $3,600,000 (2-6) . In its most recent financial statements, Del-Castillo Inc. reported $70 million of net...
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