Continuing Case: Annual Report project
C8. ConCept ▶ Using the most recent annual report of the company you have chosen to study and that you have accessed online at the company’s website, identify in the first note to the financial statements (usually labeled: Significant Accounting Policies) an accounting policy that illustrates each of the following:
Because applying accrual accounting involves making assumptions and exercising judg- ment, it can lead to earnings management, which is the manipulation of revenues and expenses to achieve a specific outcome. When the estimates involved in earnings man- agement move outside a reasonable range, financial statements become misleading. Financial statements that are intentionally misleading constitute fraudulent financial reporting.
To ensure a company’s liquidity, managers must know how to use accrual-based information to analyze cash flows. The general rule for determining the cash flow received from any revenue or paid for any expense (except depreciation) is to determine the potential cash payments or cash receipts and deduct the amount not received or not paid.