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Accounting, Finance, SPSS
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Topic:
Risk Analysis and Accounting Quality
Essay Instructions:
1. While a firm’s sales and net income have been steady during the last three years, the firm has experienced a decrease in its accounts receivable and inventory turnovers and an increase in its accounts payable turnover. What is the likely direction of change in cash flow from operations? How would your answer be different if sales and net income were increasing?
2. The concept of accounting quality has several dimensions, but two characteristics often dominate: the accounting information should be a fair representation of performance for the reporting period and it should provide relevant information to forecast expected future earnings. Provide a specific example of poor accounting quality that would hinder the forecasting of expected future earnings.
3. Identify and explain conditions that would lead an analyst to expect that management might attempt to manage earnings upward and conditions that would lead to expectations of managing earnings downward.
Text: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw (2023). Financial Reporting, Financial
Statement Analysis and Valuation, 10th Ed. New York: Cengage. ISBN 9780357722091
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Risk Analysis And Accounting Quality
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1. Likely Direction of Change in Cash Flow from Operations
Assuming that more net income is generated in the future than in the past, it could be assumed that the flow of cash from operations will be higher in the future than in the past as well. A decline in the accounts receivable turnover ratio points to the fact that the firm is receiving its cash from receivables faster, which is an improvement in cash flow. Likewise, low inventory turnover signals that the firm is holding its inventories for a longer period, potentially decreasing cash inflows from sales; however, this has been negatively impacted by an increase in accounts payable turn that shows the firm takes a long time to make payments to its suppliers thereby bounded cash. That is, if sales and net income were rising, the effect on cash from a decreased Accounts Receivable Turnover rate and an increased Accounts Payable Turnable rate would be even more pronounced. These amounts are likely to increase the cash collections and the cash available from operations, leading to a better cash flow from operations figures (James et al., 2023).
2. Example of Poor Accounting Quality
An example of a bad account quality is when companies engage in certain material accounting policies, such as the reco...
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