Acct Theory- Mod 4 Flashcards
What is the primary concept of Module 4?
Information approach to decision usefulness
Do ideal conditions exist in the real world?
Heck no.
We use mixed cost financial statements
What is information perspective?
Accountants provide useful information for the user and the user is responsible for predicting firm performance
What is the value relevance approach?
Information can be costly to produce and present so there is a cost-benefit tradeoff to balance the interests of different users
What are the 4 basic things that happen when news that relates to the markets is released?
Expectation
Interpretation
Decision and Action
Market Response
Do markets always follow the same basic 4 steps when reacting to news?
No, sometimes stock price can move in the opposite direction of what was expected.
For example, good news could be released and then the stock price goes down.
Why may a stock not “react” when news comes out?
Investors examine news throughout the year and make a judgement on the trends they see. Essentially, the price has already been adjusted in advance.
What is Earnings Response Coefficients?
Measure the amount of abnormal market return in relation to good news or bad news.
It is an attempt to explain why the market responds more strongly for some companies than for others
Practically speaking, how is earnings quality measured?
Earnings Persistance
Accruals Quality- the more discretion that is used in accruals, the lower the earning quality
What is Earnings Persistance?
The more reliable earnings are, the more persistant they are.
A company that makes it’s money through long term contracts would have high earnings persistance.
Why are “Abnormal Items” sometimes separated out of the statements.
So that we can see the true earnings persistance without the noise from one time events
How would we define discontinued operations?
Components of a company that have been disposed of
Operations and cash flows that have been eliminated
What must something be in order to qualify for disposal?
Separate and distinct operating unit
Cash flows and financial elements must be clearly distinguisable from the rest of the company
What are some abuses that could occur during a disposal?
An oil company that is laying off workers may attempt to jam as much expense as possible into the “Termination Expense” . Some of these items might not actually be related to the disposal.
