ECON 1 Lecture Notes - Lecture 2: Weighted Arithmetic Mean, Write-Off, Financial Statement
Document Summary
The analyst"s primary focus should be on those accounting estimates and methods that the firm uses to measure its key success factors and risks. If there are differences in these estimates and/or methods between firms or for the same firm over time, the analyst"s job is to assess whether they reflect differences in managerial judgment or bias and require adjustment. Accounting rules often leave some discretion to managers and auditors in deciding whether their company owns or controls an asset. While reporting discretion is necessary to benefit from managers" insider knowledge about the economic substance of their company"s transactions, it also permits managers to misrepresent transactions and satisfy their own financial reporting objectives. Asset ownership issues also arise indirectly from the application of rules for revenue recognition. Firms are permitted to recognize revenues only when their product has been shipped or their service has been provided to the customer.
