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CHAPTER 2

CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING Show Me the Earnings!
The growth of new-economy business on the Internet has led to the development of new measures of performance. When Priceline.com splashed onto the dot-com scene, it touted steady growth in a measure called “unique offers by users” to explain its heady stock price. To draw investors to its stock, Drugstore.com focused on the number of “unique customers” at its website. After all, new businesses call for new performance measures, right? Not necessarily. In fact, these indicators failed to show any consistent relationship between profits and website visits. Eventually, as the graphs below show, the profits never materialized, and stock prices fell. The lesson here: Although the new economy may require some new measures, investors need to be careful not to forget the reliable traditional ones.

PRICELINE.COM Net unique offers by users 3.0 million 2.0 1.0 0 I II III IV 1999 I II III IV 2000

DRUGSTORE.COM Unique customers 2.0 million 1.5 1.0 0.5 0 I II III IV 1999 I II III IV 2000

Stock price $120 a share 80 40 0 I II III IV 1999 I II III IV 2000 2000-IV close $2.13

Stock price $40 a share 30 20 10 0 I II III IV 1999 I II III IV 2000 2000-IV close $1.03

Source: Story and graphs adapted from Gretchen Morgenson, “How Did They Value Stocks? Count the Absurd Ways,” New York Times (March 18, 2001), section 3, p. 1.

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Copyright ©2008 John Wiley & Sons, Inc.

Preview of Chapter 2
As the opening story indicates, users of financial statements need relevant and reliable information. To help develop this type of financial information, financial accounting and reporting relies on a conceptual framework. In this chapter, we discuss the basic concepts underlying the conceptual framework, as follows.

CONCEPTUAL FRAMEWORK U N D E R LY I N G F I N A N C I A L A C C O U N T I N

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