The conservatism principle arises because of concerns about management’s incentives to overstate the firm’s performance. Joe Banks argues, “We could get rid of conservatism and make accounting numbers more useful if we delegated financial reporting to independent auditors rather than to corporate managers.” Do you agree? Why or why not?
Answer to relevant QuestionsA fund manager states, “I refuse to buy any company that makes a voluntary accounting change, since it’s certainly a case of management trying to hide bad news.” Can you think of any alternative interpretation?AMR, parent of American Airlines, provides the following footnote information on its capital and operating leases:AMR’s subsidiaries lease various types of equipment and property, primarily aircraft and airport facilities. ...Which of the following types of firms do you expect to have high or low sales margins? Why?In a period of rising prices, how would the following ratios be affected by the accounting decision to select LIFO, rather than FIFO, for inventory valuation?Explain why terminal values in accounting-based valuation are significantly lower than those for DCF valuation.
Post your question