Financial accounting principles and practices

. Some important ideas to keep in mind are that historical cost can be more reliable than fair value accounting (Flegm, 2008). As Laux and Leuz (2010) note, some have argued that fair value accounting was partly responsible for the great financial crisis of 2008. Thus, it is very important that cost accounting be approached honestly in every way.

(Revise feedback for highlight area above: Historical is required by US GAAP (for inventory/fixed asset), but some investments and other assets use FV. This is just for Financial Statement purposes not cost accounting. Is the evidence to suggest cost accountants are ignoring FV?)

Revised – In addition, accounting may not accurately project the economic reality of certain business decisions. For example, investment gains and losses are now reported on the income statement and are included in Net Income calculations. This obfuscates the economic reality of how the actual business performed as investment gains and losses are included in the net income figure. Likewise, historical costs may not reflect the actual value of the asset being held. Land and real estate assets often suffer from this as their fair value may not be accurate reflected on the financial statements. As such, these nuances can often harm investors who are ignorant of the nuances behind them. In many instances, ignoring these nuances often can create severe valuation differences that can harm investors who are not aware.

2. When a company like Enron (revise highlighted yellow : How is Enron a cost accounting issue? The issue was that losses/debt/expenses were not being carried forward from the special purpose entities in the consolidation profess. Isn’t this is financial accounting issue?)

Revised – Enron, through its unethical practices, incurred significant financial accounting issue. Here, management often encouraged aggressive accounting used to obfuscate and often conceal financial accounting issues. These issues permeated throughout the organization as the company used various accounting tools to hide critical information from investors. Here, the organization leverage the use of special purpose entities as a means to hide off balance sheet debt. This ultimately helped their balance sheet appear more liquid as many of their long-term debts were hidden in the SPE’s. This ultimately lowered interest expense, improved profitability ratios, and other metrics that investors use to evaluate the business. The company also used a large number of operating leases, which at the time, were not a part of the debt calculation on the balance sheet. This again allowed the company to hide its debt and related expense from investors as they operating leases only appeared in the notes to the financial statements. In addition, the company heavily utilized related party transactions to appear more profitable than they otherwise were.

3. Corporations may try to undermine this independence or influence auditing and accounting (Reword) because they want to project to stakeholders a more robust balance sheet than they actually have.

Revised – Financial chicanery from corporations can ultimately undermine the integrity of the financial markets. Here, corporations in an attempt to appear to wall-street buy side analysts and individual investors, many looks to use aggressive assumptions to make performance look better than it otherwise should be.

4. Direct and Indirect Conflict of Influence by Corporations? (For entire paragraph: Try to cite some sources/examples. Limit the long descriptions, just more academic support for what you are trying to say