Effects That Accounting Choices Have On Users Of Financial Statements

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Abstract

The paper is an examination of the effects of accounting choices on users of financial statements. First of all, a historical examination in the subject matter was examined. It was found that most researches normally dwell on single characteristic effects of accounting decisions on financial statement users. Current GAAP on the matter also concurs with the latter matter.

It was therefore found that there may be a need to look at how these factors intertwine in affecting users of financial statements. Since firms may have to content with a number of effects at any one time, it is important to carry out a study on a combination of factors. Thereafter, an analysis ought to be done in order to investigate which factor is the mot important and which one takes least precedence. This can go a long way in assisting managers and other financial decisions makers about accounting choices in the future.

Introduction

There are a number of users of financial statements within any respective firm. Usually, some of the intended effects of accounting choices can become real effects. On the other hand, there are also foreseen consequences that may emanate from external or internal factors. The essay shall examine some of these issues through existing research on the matter. Suggestions will be made on problematic areas and possible courses of actions will also be laid out. The latter suggestions will be particularly useful to the public accounting body owing to the fact that some loopholes on the subject matter will be identified. (Riper, 2006)

Historical development of theory

A lot of research has been done with regard to voluntary accounting choices. This is largely because the effects of such choices are more clear cut and predictable. For instance, a number of accountants have utilized the issue of accounting discretion in order to understate their financial performances during periods of string performance and also to overstate their financial status during periods of low performance.

Research has shown that there are three major reasons why firms can choose to engage in certain income decreasing or income increasing activities. First of all, this may be motivated by the need to include the economic events that are prevailing at that time. Secondly, such accounting choices may be motivated by strategic objectives within the corporation under consideration. Lastly, engaging in such accounting choices can be motivated by a combination of both economics and company strategy. Usually, the accountant enacting these changes may be motivated in their very own expectations. (Hopwood, 2008)
Managers tend to use income increasing tactics when there are interested in enacting strategic changes.

In fact, it has been shown that most financial users tend to believe that any income increasing measure enacted by their managers is in close relation to the overall nature of these kinds of objectives. In other words, employees are less likely to be influenced by positive or income increasing accounting decisions than by income decreasing accounting decisions. When managers opt to increase their income, chances are that employees may assume that this is part of a strategy to reach an industry benchmark. Consequently, they are less likely to believe it.

On the other hand, when managers make accounting decisions to decrease their overall incomes in their financial statements, then employees are much more likely to believe the latter results than if incomes had been increased. This is largely because such employees may assume that the reflections being put out by their employers have been one in order to reflect the economic situations prevailing at that time. In other words, it may be necessary for firms to prepare for skepticism in the former case than in the latter one.

In close relation to income decreasing or income decreasing acts in financial statements is the issue of qualification in making accounting decisions. Users are likely to regard qualified income reducing acts as being more strategic in nature than unqualified income decreasing acts. This is the case because when the acts are qualified, then chances are that the users would asses the firm in a more positive light than if the financial statement had not been qualified.

There is a need to compare financial statement user reaction to income increasing and income decreasing changes in comparison to reference point. Usually, most firms do not operate in isolation. Employees are well aware of the goings on within their industries. Consequently, when accounting decisions are made to either increase or decrease incomes within corporations, employees or other users tend to resort to reference points such industry benchmarks to see how far below the mark they are or how far above it they have reached. (Proell, 2008)

Statistics indicate that users react more positively to income decreasing changes even when comparing them to industry benchmarks. This is usually because most people may treat this as being representative of occurrences within the industry under consideration and therefore leaving room for growth.
On the other hand, when incomes are perceived as being way above industry benchmarks, then users are likely to assume that those benchmarks do not represent the goings on their particular industry. This means that they may treat such a change as being deviant from the norm. Because of this, users may assume that such a firm cannot survive within its industry of operation and that the assessment of that firms performance is therefore below par in reality.

Financial statement users are likely to remain indifferent to changes made by their employees in the event that the accounting decision is an income decreasing one but a qualified one. This is largely because users are likely to attribute such changes to either strategic reason or to reflect economic conditions within a certain industry. This means that those changes may indicate the overall problems facing these groups when it comes to the process of enacting these changes.

Income increasing acts may also solicit different reactions in the vent that they have been qualified or if they are not qualified. Expert opinion suggests that financial statement users are much more likely to believe them if they are qualified.

In the agency theory, firms are treated as a point of convergence of contracts. This means that a number of users of financial statements view accounting choices as means against which firms can get incentives. The incentives are important determinants in the process of making accounting decisions largely because they can make the difference between the detriment or survival of a number of corporations.

Healthy and financial firms often find that they have to make accounting decisions. However, the forces or determinants affecting these two types of firms are dependent on the kind of arrangement being made. In certain reviews, some analysts have assumed that the type of incentives facing these two types of firms is the same. However, this may not necessarily be true because financially distressed firms may be challenged to engage in certain contracts depending on the type of benefits that they may derive from certain contract incentives. (Proell, 2008)

One of the drivers of accounting decisions in financially distressed firms is the issue of debt covenant isolation. Financial debts are a particularly pressing issue for such firms and it is likely that their accounting choices can be adversely affected by these decisions and vice versa (that the accounting choices they make can change their prevailing situations)

In other circumstances, firms facing financial distress may be motivated to make accounting decision that can subsequently affect their jobs or their firms altogether. In other words, some troubled firms may consider their situations as being temporary. This means that their greatest concerns may not be to get accounting bonuses. Instead, their focus may be on restoring the financial position of their firms and making the most of their kind of arrangements.

It has also been shown in a number of researches that new CEO tend to deflate their incomes when accompany has been recording poor financial management during the previous year. This is an aspect that has been carried forward in a number of companies that may be considered as financially troubled ones.
It should also be noted that accounting decisions in the latter category may also made in order o reduce incomes. This creates an image of a corporation that is vulnerable.

In this regard, such firms are likely to obtain concession from the government through government subsidies or they may find that labor unions offering incentives to poorly performing firms my be motivated to consider them if they record lower incomes. In other words, it can be said that such firms may make be affected positively by such decisions since they may gain favor from the government or from labor unions. On the other hand, if these income deflations are discovered, then a financially distressed firm may be required to close. (Riper, 2006)

In other circumstances, forms undergoing financial distress may be motivated to make accounting decisions in order to cope with management changes that may have occurred at the time. This is usually the case when the incumbent management finds that the new firm he or she is operating is dealing with lower performance than was the case in the previous regime. Such mangers may be interested in displaying positive light to internal and external stakeholders of the company under consideration.

In other situations, it may be possible to find that other firms are undergoing government assistance investigations. These are usually those firms that are in a position of getting incentives from the government if it found that their management principles are in order. Usually, such firms are likely to make accounting decisions that would affect them in a positive light by making them liable to receive incentives from the investigators.

In other researches, it has been found that firms facing financial difficulties may be required to deal with large accrual especially during their first year in dividend reductions. This means that a firm may be faced with more than one particular financial challenge at a time.

With regard to accounting decisions and the effect that the choices have on financial statement users; a number of researches have also been done on the user expectations. In other words, this is another factor that can affect the overall decision made by a certain corporation and how the users within that firm are affected by it. For instance, one is likely to find that within certain forms, the users under consideration have very little regard for the kind of decisions that they may be making because of the fact that there may be a match between their expectations and actual occurrences. However, in instances where financial statement user expectations are quite varied from actual occurrences, then it is likely that these issues may not affect them positively. (Belkaoui, 2007)

Risk management has also been shown as an important predictor of accounting choices and hence highly influential in determining some of the effects of these choices. This is largely because financial statements have a shocking effect on users when the information being displayed is included.

Risk management sis usually something that may be firm specific mostly because different companies are faced with different obstacles at any one time. For instance, when a company was faced with a number of security risks, then chances were that they would classify those security risks in manner that would portray them in a positive light. Additionally, benchmarks set up in accounting standards were highly influential in determining whether certain issues were considered as security risks or whether they were not. This means those weaker banks are much more likely to treat fewer securities as being lower than the accounting benchmark than vive versa.

Interest risks that come with securities are also an important factor in determining effects of such accounting decisions. This is because levels of interest risks on a certain bank portfolio can go up depending on how that particular issue had been classified by the parties involved in the preparation of the financial statements (Warfield, 2008)

Research has also shown that there are also other factors that may affect financial decisions being made by respective individuals in terms of the perceived expectations and actual occurrences.
Current GAAP

Financial statement users are adversely affected by the accounting choices made within certain firms. One such group are financial investors. Research has shown that the manner in which financial statements are presented to non processional financial statement users such as investors has a very important role to play in influencing their choice to invest in that respective firm. When a firm opts to make an accounting decisions in which there it highlights the effects of a net income on the goings on within a certain firm, then chances are that one might have to deal with these scenarios in a relatively different manner. In other words, an investor may make the choice to invest in such a firm if the information given is forthcoming in this regard.

The converse is as true, when accounting decision are made such that investors have now ay way of understanding the fair value that they have on a particular investment, then chances are that that group may be persuaded to look elsewhere for investment. Usually, information about financial statement interpretation can be done on the same document but as a note or on the margin of the financial statement. Consequently, firms that may be in unhealthy situations may be affected positively by making such an accounting choice. On the other hand, failure to make such a decision may also influence them negatively owing to the reduced level of awareness given to these kinds of approaches. (Warfield, 2008)

It should b noted that a number of financial statement users are highly affected by the accounting policies in certain firms or the level o adoption of accounting standards. This is usually the case when considering foreign investment. In other words, there are situations in which a certain investor may be dealing with the issues surrounding that particular scenario especially with regard to the kind of changes affecting a certain party.

An example of how this can be displayed is through looking at the relationship between two countries such as the US and Australia. It is likely that a US foreign investor will be more interested in making investments within countries that are US GAAP aligned. This factor is quite important in accounting decisions and hence accounting effects because only has to look at accounting policies of a number of developed nations to understand this. The US is one of the heaviest foreign investors in Australia. In order to appeal to the latter group, it was found that Australian accounting standards took a turn and began conforming to the US institutional frameworks and also to their GAAP.

There are a number of reasons identified in literature for selecting certain accounting choices and these reason include:

Improves financial statement credibility
Reduces processing costs

When accounting policies are voluntarily done in order to come up with the most influential choices on foreign ownership, then chances are that they can attract greater investments if they are aligned to the foreign investors institutional holdings or if they are also associated with the joint determinants under consideration.

The following table illustrates the example of US foreign investors interested in Australian companies

VariablesStatisticCompanies with US investmentsCompanies matched by size and industryp-value
Total assetsMean
Median
24,157
2, 8903, 924
525

Choosing Certified Financial Planner As Career

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Choosing a career is one of the most important decision for the youths. It is the most crucial period of life. It is lengthy procedure which makes one life, so if you are on the way to begin your life time achievements, certified financial planning is the best option one should follow.

A Certified Financial Planner, or CFP, basically is a financial professional who meets the requirements set up by the CFP Board of Standards. If you enjoy studying maths, economics and finance with full interest than career in certified financial planning is the best option for you.

Because of the economy and economic depression most of the people have started targeting on their finances and finding out different ways to maximize their savings and income without any major loss. Hence the demand and need of financial planners has increased, everyone or the other is seeking out financial planner experts for their guidance and help to meet the defined financial goals.

The career as a financial planner starts with certified financial planning course which is done after completing the bachelor’s degree in either finance, maths, economics, accounting or statistics. After completing graduation, you can further continue to complete several courses according to your choice and interest with future planning ahead. Several courses can be done in estate / tax / investment planning or finance law. This short term courses will be helpful to you in completing certified financial planning course.

Then in order to achieve certified financial planning course, you must met following requirements which are as follows :-

1.Complete Education Requirement :- Complete all the basic requirements to opt this course and also CFP Board Registered Education Program.
2.You will receive a transcript review, keep it safe with you.
3.After that prepare and try your best to pass CFP certification Examination.
4.Try pursuing three years of work experience for the certification.
5.After that you must be also eligible to pass the CFP Board’s Candidate Fitness Standards, which is also very important and help you in achieving certification.
6.All the certification fees must be paid on time.
7.Upon completion of all the formalities and payment, CFP certificants will receive authorization and designation as CFP
8.Continuing Education should be completed as per CFP Board.

To select certified financial planning course as your career ahead, do some Internet searches on search engines like google, yahoo, bing. Look into local yellow page directories, contact financial planner, read reviews of financial planners. Try having a word with them or set up meeting with them if you are serious about your career.

All these certifications will be required by you to continue for further academic qualifications and to maintain your probability in the financial planning field. Usually the educational program may consist of few classes annually or so, with the aim keeping in mind to update planners regarding the latest knowledge and make sure they keep their skills sharp at all times. In addition, a financial planner will need to fulfill some specific specifications and regulations besides acting upon good faith.

Financial Freedom for Professional Women – Changing Your Negative Beliefs about Money

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Have you ever stopped to really think about what your beliefs are around money? Did you know that many of our money beliefs were shaped during our childhood? Some of those beliefs were planted unintentionally by our parents or other influential people in our lives. Others rise out of our own personal experiences, especially past negative experiences. For some it can be a fear of writing checks because in the past they have bounced so many. For others, it can be a fear of success. Some beliefs serve us well and are helpful, while others hold us back.

Negative money beliefs limit us and hold us back because they block our ability to take in information that is in conflict with them. They keep us from seeing how to make meaningful changes. As long as we are being held back by negative money beliefs that don’t serve us, we go through life blindly following those negative beliefs, without conscious thought or the realization that there are other choices available to us. These negative beliefs and the negative energy that they create in our lives lead to self-sabotage.

The key is to raise your awareness of your beliefs around money. If you continue to let negative beliefs define your relationship with money, you will always feel like you are fighting with yourself.

Here are some of the most common negative money beliefs:

More money will make my life better’

Money is bad’ or (in some religious circles) -Money is the root of all evil’

Money is unimportant’

I don’t deserve money’

If you are good, God or the universe will provide for you.’ This goes hand-in-hand with -It is more blessed to give than to receive.’

Do any of these beliefs sound familiar? Have these beliefs held you back, perhaps on a subconscious level? What about your children – what money beliefs are they absorbing? You certainly don’t want them carrying on negative beliefs and habits. It’s important to free yourself, not only for yourself but so your children can experience freedom and success, too!

If you have a belief that is causing you pain, you can change it to one that will get you to where you want to be in your life. You can turn your beliefs from negative to positive. Increasing your wealth is a matter of increasing the quality of your thoughts. If you want to permanently change your financial destiny, you must consciously change your money beliefs.

Examine your beliefs about money. Decide which ones will get you to the next level and which need to be replaced with more positive ones. Recognizing that you have a belief that is holding you back is the first step to changing it. Finding a mentor or coach who has been where you are and can guide you through the maze infinitely faster will make all the difference as well.

Melissa Cappleman is a spiritual prosperity expert and the founder of Blessed & Rich. She works with spiritually-open female entrepreneurs and women in corporations who struggle with the value they bring to their work freeing them to step into their unique brilliance and live the happy, balanced life of their dreams. You can learn more at www.blessedandrich.com and sign up for her 6 week bootcamp can I Really Be Paid That Much.

Diversify Home Health, Home Care And Hospice Services To Secure Your Agencys Financial Future

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Have you ever heard the advice to not put all your eggs in one basket? Well the advice is good, especially if you are a Home Health, Home Care or Hospice agency. Putting all your eggs in one basket in the Home Health, Home Care or Hospice industry means having only one line of business. In todays environment, one line of business is a dangerous path to walk. Already we have seen repeated cuts to the Home Health reimbursement formula, and Hospice is under scrutiny and will probably see some rather dramatic cuts in the future. Some Home Care (Private Pay) agencies are seeing a decline in both clients and hours, as well. Just as the chant location, location, location is cited for a business success, diversification is the same for agencies in the Home Health, Home Care and Hospice industry.

As a Home Health or Hospice agency, you may be asking how you can diversify. You already take private insurance, much of which doesnt even cover your expenses. Where can you diversify?

Years ago, many Home Health agencies invested in private duty services. Unfortunately, many of them tried to run these agencies the same way they ran the Medicare-Certified agencies. This turned out to be a less than a financial success for them and, as a result, most of the agencies closed their Private Pay agencies or sold them. I was one of those administrators running both types of agencies. Fortunately, the corporation that owned the agency I managed understood the differences required to successfully operate these two very distinct businesses. As a result, the internal structures and systems for Private Pay were run with entirely different staff and procedures. Fortunately, the Private Pay agency was a financial success and a great partner for the Medicare business.

In todays environment, it may be wise for Medicare agencies to look again at the Private Pay industry and invest in another line of business that will not be subject to the changes of CMS. This holds true for both Medicare Home Health and the Hospice agencies. The opportunities in a Private Pay agency are endless. The services offered are as open and vast as the community served will support. By using the lessons learned from the previous attempts to diversify into Private Pay, the new line of business makes the difference between surviving and thriving.

For Private Pay (Home Care) agencies, diversification is just as important. By having only one or two lines of business, you will very likely have some down times with loss of revenues. Diversification of services helps to diminish the effects of the decline on your personal care or live-in services. There are so many opportunities in the Private Pay arena, it really is a matter of finding out what your marketplace will support and then developing it in such a manner that your customers will see value and buy.

Over the years I have seen some very creative and innovative Private Pay agency owners create truly unique services that were well received by their communities. One agency had a very viable service line in cruise companions. They had a high end senior population that were used to cruises, but because of declines in health and abilities, many of the seniors could no longer travel. The agency developed a contract with a major cruise line where they provided the personal care workers or aides that accompanied the senior on the cruise. The client paid for all the related cruise expenses as well as the daily live-in rate for the aide. Reportedly a great time was had by all.

Another agency developed a Mom and Babe program that catered to the large number of young, educated families in their geographic area. The program retained the services of an OB-GYN RN, who made the first visit to the home the day after the mother was discharged from the hospital. The aide, who was a trained doula, also accompanied the RN on the first visit. The services were bundled into either 5- or 7-day, 12 hour/day packages that included the RN visit and the 5 or 7 days of the specialty aide. The aide not only cared for the mother and baby, but tended to the home and other children, allowing the new mother and baby to have bonding time. The aide planned and cooked the meals and did the laundry and light housekeeping so that the mother could rest. The program, as mentioned, was sold as a package and made great shower gifts. The aide was available on an hourly rate to continue services beyond the package if the family wished, or her services could be bought by the family directly for however long they were needed.

As you can see, there is no limit to what your agency can provide. With appropriate due diligence and an ability to listen to what your community is seeking and willing to pay for, you can do anything. If youre ready to plan a more secure financial future for your agency, contact us today to discuss the many diverse opportunities that are awaiting you.

Ways to Save and Grow Your Money Financial Fitness for Regular People

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This little book is helping thousands of people to make more money, save more money, and get out of debt faster. It’s based on sound financial principles that are EASY to follow – anyone can do it. It is a tiny little book, written in common language for regular people like you and me. If you have a 6th grade education, you can read it and understand it. If you have four years of college, or you’re a doctor, attorney, or a successful actor or musician, don’t think that this doesn’t apply to you – There areplenty of very successful known people in plenty of financial pain. Um…Peter included.

This is financial help for doctors, financial help for attorneys, financial help for janitors, financial help for engineers, financial help for plumbers, financial help for high schoolers, financial help for college students, financial help for retirees – whatever your stage of life or present financial condition, you will learn enough to pay for this book 10 times over … Fast.

Peter wrote this book after going through terrible financial times and enduring all the misery that goes along with it. He or any Debtor knows what it’s like to have creditors calling your home over and over, all day, every day. They know that knot in the pit of your stomach when you can’t pay all the bills, and the banks call and threaten to take your home and your car, garnish your wages, maybe even threaten to take your kids! They make you feel awful. And they’re REALLY good at it.

They know the embarrassment of investing tens of thousands of dollars in a college education and hundreds of thousands of dollars in a business, then to have nothing but debt to show for it. They know the frustration of being in that pressure cooker with no way out.

But there is a way out. And you can do it.

Peter will even challenge you to count how many ways the book gives you to save and grow your money (hint: it’s a lot more than 100).

Why doesone need THIS book, when there are lots of other quality books and programs already out there? Well… If you’ll read a 2-inch thick book and go through a 13-week course, go for it. Peter can highly recommend Dave Ramsey’s Financial Peace University and he personally leads FPU groups.

There are other gurus and courses as well – the 13-week Crown Financial course, Loral Langemeier’s Millionaire Maker program, Clark Howard, SuzeOrman, Robert Kiyosaki’s Rich Dad – all of these people are knowledgeable advisors. Some, like Dave Ramsey, have even been through a lot of financial pain and can identify with yours. But where those courses teach great theory and concepts, Peter’s book drills down into the daily steps.100 Ways to save and Grow Your Money: Financial Fitness for Regular People … Is fast, good medicine for regular people. It gives you the nuts and bolts, the “how-to” for making those programs work in your daily life.

Are you busy? Most everybody is. This is a tiny book you can read in a couple of evenings. If you read slowly, taking your time and highlighting the sections that are most important to you, it might take a week. But it will be FUN! And you can put one or two ideas into motion right away. If you’ll just do that, you’ll have many times the small cost of this book in your pocket within a few weeks.

Do you have less than a high school education? If you read at a sixth grade level, you can understand this book and put it to use today.

Do you have a college degree, even an advanced degree? But none of those classes taught you how to handle the slippery fish that is money. The concepts in this book will transform your life by enabling you to keep your money and grow it Big.

Do you feel like a tiny book is beneath your education, status in life, reputation, time commitments, ego, or the brand of car that you drive (making payments)? There was a time when Peter Sorrells thought so, too. How is that working for you? Trust this little book to help you exchange debt for cash, exchange liabilities for assets, and exchange worry and stress for… Peace.

Peace inside, peace in your marriage, peace in your home.

Are you a go-getter working your way up the corporate ladder or striving for success in your own business? None of it will matter if you lose your health, your soul, or your marriage in the process. Read this little book and learn how to hold onto your money and whatever else is important to you.

As best-selling author Steve Chandler says about 100 ways to save and grow your money: “Don’t spend one more day worrying about money…get this book and see how fun and easy it is to put your life in order and be in charge of your prosperity and security once again.”

Are you currently working through Financial Peace University, Crown Financial, Loral Langemeier’s Millionaire series, Rich Dad, or any other course? You STILL need this little book. Dave Ramsey will teach you to run like a gazelle… Crown will teach you the spiritual aspects of money… Loral will teach you how to build a million…But how, exactly, in your day-to-day life, do you do that? What are the daily mechanics of saving and growing money?

Like these: Where can I save on gas? Where do I get coupons for groceries? How can I watch movies for free? What should I know & do about my credit cards? How do I change my thinking so I can really make this happen?

Enter, 100 Ways to Save and Grow Your Money. It’s a great partner to whichever program you’re using now. And if you’re not on a formal program – it will give you the tools to do this on your own.

What are others saying about this book?

-Pete Sorrells has developed a great little book that I wish everyone would read. 100 Ways to save and Grow Your Money is a resource that will continue to pay long-term dividends for anyone who seeks to improve their financial health and wellbeing.- – Dave Briggs Director – Enrich Financial Ministries, Central Christian Church of Arizona