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Chapter 1: Question 3Q (page 22)

How does accounting help the capital allocation process?

Short Answer

Expert verified

Accounting promotes capital allocation by providing the organization's past financial reports. These reports help identify the important business activities that generate revenue and activities that can be avoided. This helps in the allocation of capital accordingly.

Step by step solution

01

Understanding accounting and capital allocation.

Accounting refers to summarizing, evaluating, and thereafter reporting the business transactions. It is done to keep track of the business activities and plays an important role in management, compliance of legal formalities, auditing, etc.

02

Understanding the relation of Accounting and Capital Allocation Process

Accounting is an important criterion that needs to be studied before allocating capital. Analysis of accounting helps to understand the business activities that generate revenue and the activities that lead to major expenses for the business. This further helps in eliminating unnecessary expenses and allocating capital effectively. Hence, accounting is the basic step in the complete capital allocation process.

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Most popular questions from this chapter

ETHICS (Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.

Instructions:Answer the following questions.(b) Is the financial vice president acting improperly or immorally?

GAAP stands for:

  1. governmental auditing and accounting practices.
  2. generally accepted attest principles.
  3. government audit and attest policies.
  4. generally accepted accounting principles

The expectations gap is:

  1. What financial information management provides and what users want.
  2. What the public thinks accountants do and what accountants think they can do.
  3. What the governmental agencies want form standard-setting and what the standard-setters provide.
  4. What the users of financial statements want from the government and what is provided.

The following comments were made at an Annual Conference of the Financial Executives Institutes (FEI). There is an irreversible movement toward the harmonization of financial reporting throughout the world. The international capital markets require an end to:

  1. The confusion caused by international companies announcing different results depending on the set of accounting standards applied.
  2. Companies in some countries obtaining unfair commercial advantages from the use of particular national accounting standards.
  3. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements.
  4. The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them.
  5. The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards.

Instructions

  1. What is the International Accounting Standards Board?
  2. What stakeholders might benefit from the use of International Accounting Standards?
  3. What do you believe are some of the major obstacles to convergence?

One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?
See all solutions

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