ENG ELC 220 Lecture Notes - Lecture 4: Revenue Recognition, Matching Principle, Software License
1 Nov 2020
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Document Summary
The last chapter discussed adjusting a firm"s accounting numbers using cash flow information and the notes from the financial statements to undo accounting distortions where possible. For this, the analyst should first determine whether differences in estimates and/or methods between firm reflect legitimate business differences and therefore require no adjustment, or whether they reflect differences in material judgment or bias and require adjustment. Take into account that a company might not disclose in the notes all of the information to undo a distortion, and in that case making an approximate adjustment is needed. Distortion in asset values generally arise because there is ambiguity about whether: The firm owns or controls the economic resources in question. The economic resources can provide future economic benefits that can be measured with reasonable certainty. The fair values of assets fall below their book values. Some types of transactions make it difficult to assess who owns a resource.
