![]() The Statement became effective for annual financial statements for fiscal yearsĮnding after 1988 July 15. In November 1987, the Financial Accountingįinancial Accounting Standards No. The statement of cash flows is another major required financial statement it shows important information not shown directly in the other financial statements. In this chapter, you will learn about the statement of cash flows, which answers these questions. Such questions include: How much cash was generated by the company's operations? How can the Cash account be overdrawn when my accountant said the business was profitable? Why is such a profitable company able to pay only small dividends? How much was spent for new plant and equipment, and where did the company get the cash for the expenditures? How was the company able to pay a dividend when it incurred a net loss for the year? The income statement, statement of stockholders' equity (or statement of retained earnings), and the balance sheet do not answer all the questions raised by users of financial statements. Auditors commonly leave the auditing profession to work for one of their many clients. ![]() Auditors have expertise about the firm, its industry, and its accounting practices. Companies realize that their auditors can be a valuable part of the management team. A career in auditing also provides an excellent springboard for future opportunities. Students can work for global auditing firms or small local firms, choose to travel frequently or on a limited basis, and decide to live in any geographic area around the world. In addition to the challenges of verifying the accuracy of financial statements, a career in auditing provides a variety of options. Accrual earnings can be managed upward by recognizing earnings prematurely (or falsely) or by underestimating expenses such as depreciation expense or bad debts expense. Accrual earnings are typically easier to manipulate because they employ estimates, whereas cash earnings are tied to actual cash receipts and payments from operations. ![]() One possible indication of income manipulation occurs when accrual earnings are high relative to cash flows from operating activities, sometimes referred to as "cash earnings". It is the job of auditors to use their understanding of accounting principles and business practices to provide reasonable assurance that financial statements are free from such manipulation. If a company fails to follow GAAP, it can be delisted from the stock exchange.įor many reasons, managers have incentives to manipulate income to enhance reported performance. This independent verification was meant to restore investor confidence and provide ongoing integrity in the capital market system. The SEC requires all listed firms in each year to prepare financial statements in accordance with generally accepted accounting principles (GAAP) and to have those financial statements audited by an independent party. In response to the financial crisis, the Securities and Exchange Commission (SEC) was established in 1934 to regulate the filing requirements of firms listed on US stock exchanges. ![]() ![]() The Dow did not reach precrash levels again until 1954. This action contributed to the Great Depression of the 1930s. Investors panicked and sold stocks in a frenzy. As investors began to understand this, confidence fell. At the time, accounting practices and reporting procedures were not well-established. Stocks may have been overpriced because companies engaged in "window dressing" to enhance their reported income. Some blamed accounting for the run-up in prices and the subsequent crash. The Dow bottomed out in July 1932, after losing 89 percent of its value. In 1929 the Dow Jones Industrial Average fell 40 percent over the period fromSeptember 3rd to October 29th. ![]()
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