How does the variance affect reported earnings

Assignment Help Financial Accounting

Reference no: EM131231182

1. Analyze the five national accounting practice systems summarized in the chapter.

Required:

a. For each of the five countries treated in the chapter, select the most important financial accounting practice or principle at variance with international norms.

b. For each selection you make, briefly state your reasons for including it on your list.

c. How does this variance affect reported earnings and the debt-to-asset ratio?

d. How likely is it that an analyst could adjust for this variance to achieve an "apples to apples" comparison with companies from other countries?

2. Refer to Exhibit 4-5.

Required: Which country's GAAP appears to be the most oriented toward equity investors? Which country's GAAP appears to be the least
oriented toward equity investors? Why do you say so?

3. The following are financial ratios used by analysts:

• Liquidity: current ratio; cash flow from operations to current liabilities
• Solvency: debt to equity; debt to assets
• Profitability: return on assets; return on equity

Required: Assume that you are comparing the financial ratios of companies from two countries discussed in this chapter. Discuss how the accounting practices identified in Exhibit 4-5 would affect your comparisons for each of the six ratios listed.

EXHIBIT 4-5 Summary of Significant Accounting Practices
	United States	Mexico	Japan	China	India
1. Business combinations: purchase or pooling	Purchase	Purchase	Purchase	Purchase	Both
2. Goodwill	Capitalize and impairments test	Capitalize and impairments test	Capitalize and amortize; and impairments test	Capitalize and impairments test	Capitalize and amortize; and impairments test
3. Associates	Equity method	Equity method	Equity method	Equity method	Equity method
4. Asset valuation	Historical cost	Historical cost^a	Historical cost	Historical cost	Historical cost and fair value
5. Depreciation charges	Economic based	Economic based	Tax influenced	Economic based	Economic based
6. LIFO inventory valuation	Permitted	Not used	Permitted^b	Not permitted	Not permitted
7. Probable losses	Accrued	Accrued	Accrued	Accrued	Accrued
8. Finance leases	Capitalized	Capitalized	Capitalized	Capitalized	Capitalized
9. Deferred taxes	Accrued	Accrued	Accrued	Accrued	Accrued
10. Reserves for smoothing income	No	No	No	No	Some

^aPrice-larl adjusted accounting is used whenever the cumulative three-year inflation rate equals or exceeds 26 parent.
^bUntil 2010.

Reference no: EM131231182

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