ACTG 3000 Chapter Notes - Chapter 3: Risk-Free Interest Rate, Investor Relations, Earnings Management

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Purpose of accounting analysis: evaluate the degree to which firm"s accounting captures its underlying business reality. Evaluates appropriateness of the firms accounting policies and estimates. Assesses degree of distortions in firms accounting numbers. Adjusts firms accounting numbers using cash flow info and info from the notes to undo accounting distortions. Mechanism that limit managers ability to distort accounting data themselves add noise . Not optimal to use accounting regulation to eliminate managerial flexibility completely. Net result: info in financial reports is noisy and biased. Leave considerable room for managers to influence financial data. Accounting analysis: evaluates the degree to which firms accounting captures underlying business reality and undo"s any accounting distortions. There are 3 potential sources of noise and bias in accounting data: that introduced by rigidity in accounting rules, random forecast errors, systematic reporting choices made by corporate managers to achieve specific objectives.

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