NAME : IIS NOVIANI

NIM : C1I015001

PROBLEM FINANCIAL STATEMENT ANALYSIS CHAPTER 2

2-1 Discuss the relevance of the accounting standard-setting process to analysis of financial statement.
Answer : The standard setting process has relevance to the final product of financial statement analysis
which is related to the accounting standard (GAAP). The objective of financial accounting are provide
information that is useful to present and potential investors, creditor and other users in order to make
decisions. Related to analyst financial statement the accountant need a principle as a general guide in
accumulating and reporting the financial information of a business enterprise. Although sometimes
GAAP controversial among accountant on recognize the ultimate benefit and an acceptable accounting
principles brought to the financial reporting process.

2-2 a. Explain why neutrality is such an important quality of financial statement.

Answer : Neutrality is important because financial statement should represent the current state of a
company without any bias. The statements should be an accurate reflection the current condition of the
company which can’t be changed in order to the benefit of company and to make sure there is no parties
that is profitable include the stakeholders.
b. Identify examples of the lack of neutrality in accounting reports.
Answer : The lack of neutrality in accounting reports can occur when favoring any interested party. If
shareholders have concerns about the company’s profitability, the shareholders pressure the accountant
to make the company look more profitable. The interference of shareholders has impact to the
accounting reports that is benefit to the company or shareholders itself.

2-3 a. Describe what is meant by measurement in accounting

Answer : Measurement in accounting means the determination of the cost or net realizable value of an
asset or liability. For example, when there is any acquisition, the company need to measure in order to
compare the fair value and the carrying value (book value) of the company acquired.
b. According to this editor, what are the kinds of measurement investors want ?
Answer : Measuring investment performance to measure their past performance in order to effectively
manage their current client’s portfolios using 4 steps, benchmark selection, calculation of the portfolio’s
excess return, performance attribution and risk analysis.
c. Discuss whether the objectives of accountants and investors regarding accounting measurement
are reconciliable
Answer : Helpful to current and potential investors, creditors and others in assessing the amounts, timing
and uncertainty of future cash flow. Sometimes it has been observed that in spite of adequate profit in
business, they are unable to meet their taxes and dividends, just because of shortage of cash flow. So,
its important to keep adequate cash in hand to meet day-to-day expenditures and to invest as and when
required in business.
2-4 a. Discuss your views on the difference between “rules of conduct” and “rules of measurement.”
Answer : In accounting, the rules of measurement is set of rules that are understandable by all and must
be acceptable to a majority of those who must abide by them. This requirement gives them the character
of rules of conduct to be abided as the basis of measurement.
b. Explain how accounting standard setting is a political process. Identify arguments for and against
viewing accounting standard setting as political.
Answer : In accounting the process of acceptability must be shall involve parties to vote in alternative
considerations and considerations to be achieved fairly, without any pressure on the interests of any
party. Accounting is more of a service activity than a service governed by natural law.
The statement must be through the process of observation, experimentation, and verification based on
accounting standard as guideline. So, the financial analysis of accounting should reflect the actual
condition without any relation to the political factor or the related party.

2-5 a. Describe ways in which society has brought pressure on accountants to better serve its needs.
Answer : The society has significant pressure to accountant in order to improve their efficiency, has
impact in taxes from the economy and control economic activity. And also increase their responsibility
of their performance to make society trust.
Aspects of pressure on accountants include the increasing role of securities commissions, the growing
taxation bureaucracy to reduce the tax avoidance, corporate clients, and securities analysts. In the result,
society's made the practice of accounting and auditing increasingly demanding.
b. Describe how the accounting profession has responded to the these pressures. Could the
profession have better responded?
Answer : The accounting profession will face significant pressures as professional organizations to
make professional members, and educational institutions should respond. Standards boards as devices
to protect accountants by providing them an authority which to counter and modify the thrusts of society.
Increased regulation and the associated disclosure rules, will have the greatest impact on the profession
for the come years . For example, increased regulation is imminent because of massive tax avoidance.
The organized profession's response to congressional action establishment of a Public Oversight Board
by the AICPA, and the establishment of Peer Review as well as the institution of continuing Professional
Education.

2-6 a. What is conservatism? What are the reasons why conservatism continues to be dominant in
financial statements?
Answer : In accounting, conservatism is concept of recognizing expenses and liabilities as soon as
possible when there is uncertainty about the outcome, but also recognize revenues and assets when they
are assured of being received. The two main advantages of conservatism are that (1) it naturally offsets
the optimistic bias on the part of management to report higher income or higher net assets; and (2) it is
important for credit analysis and debt contracting because creditors prefer financial statements that
highlight downside risk.
b. Do you agree with the observation by the standard setter?
Answer : There is any standard setter opinion when conservatism violates the neutrality of accounting
and which is can reduces reliability. However neutral standards suffer from an optimistic bias because
sometimes managers propensity to overstate or net assets. By reducing the optimistic bias te
conservatism can increases neutrality in financial reporting.
c. As an analyst would you prefer conservative accounting? Does your answer depend on your
analysis objective? For example, would you prefer conservative accounting if you were an equity
analyst?
Answer : As a equity analyst may prefer a neutral accounting model, like fair value accounting to
provide the current condition of the company , because equity analysis seeks to also determine upside
potential that is not reported in conservative statements. Credit analysts, prefer conservative
presentation of financial statements because they want to know the debtor's ability to pay off his debt
and to anticipate unpaid debt.
d. Many regard conservative accounting as “high-quality” accounting. Do you agree with this
statement? Provide arguments for why you think conservative accounting increases or impedes
accounting quality.
Answer : In my opinion the conservatism can reduce accounting quality in many instances. For example,
uncollectible account receivables and losses use this principles. If a company expects to win a litigation
claim, it can’t report the gain until it meets all revenue recognition principles. However, if a litigation
claim is expected to be lost, an estimated economic impact is required in the notes to the financial
statements.
e. Academic refer to two forms of conservatism. What are they? Which form of conservatism do
you think is more useful for an analyst?
Answer : The two forms of conservatism are unconditional conservatism and conditional conservatism.
Unconditional conservatism refers to understatement of assets without regard to the underlying
economics, include immediate expensing of the costs of most internally developed intangibles such as
not capitalizing R&D.
Conditional conservatism refers to a conservative presentation of economic events by recognizing the
future effects of bad news immediately but deferring the recognition of good news. For example
lower of cost or market accounting for inventory and impairment accounting for long-lived tangible
and intangible assets.

2-7 a. Discuss this observer’s misgivings on the role of the accountant in financial reporting.
Answer : There is any misunderstanding about the function of accountant related to financial report for
example accountants are a quick fix to a company’s financial problems. The business observer's view
is certainly skeptical, bordering on cynical. And also observer’s confuse about the function of
management accounting of public accountant as a independent company its to probe and reveal.
Not only serve the general information report, the company also need to serve di disclosure statement
for competitive reason. Much additional information which analysts may view as essential need
similarly not be disclosed. But sometimes because of the function of independent public accountant is
to serve public interest, there is any influenced by management to serve well report as company desired.
Because sometimes the report will be beneficial or give disadvantage to the company.
For the reason of competition, cost and other consideration, the company provide lack of disclosure
statement and financial analyst will serve general public reports.
 b. Discuss what type of omitted information the business observer is referring to.
Answer : The omitted information which business observers is referring to is every crucial information
from financial analyst to assess the risk in business enterprise related to the rewards that company can
expected. For example the customer paying record are important information that needed management
in role of planning in the business operation. The other are such inventory composition and sales report
which related to the account cash and account receivable.
The most prevalent problem areas of financial reports lists from Financial Analysts Federation's
corporate information committee, such as
• A need for more disclosure of operating statistics already on file with regulatory agencies
• Lack of non-statement detail, such as labor costs or contracts, pension information, regulations,
etc.
• Lack of detail in production costs and marketing types of information.

2-8 Assess and critique the positions of both the skeptics and proponents of this new paradigm.
Answer : There are certain intuitively appealing aspects to arguments in the “new paradigm”. Many
company’s future earning based on assets that aren’t recognized on accounting balance sheets under
GAAP. For example, the companies invest in research and development, which is expensed. As a result,
net income and assets are quite low. Since the market is valuing the stock highly, both the price to
earnings and price to book ratios are high. However, new paradigm proponents would argue that this is
because the base is too low. The future earning potential is very high.
Opponents argue that valuations must be supported by positive earning ability and they don’t believe
that these great earnings will materialize given the competitive nature. There is some historical data that
supports the view of opponents. Future empirical researchers will provide answering which argument
was more correct.

2-9 a. Do you agree with the above statement? Explain. What a problems do you foresee in measuring
in the manner described?
Answer : No, the above argument is based on intuition and it is unworkable. We need a method of profit
determination on a periodic basis and we cannot liquidate the business every time a profit measurement
is needed. We must determine the profit on a regular basis based on accounting standard as a guide.
b. What assumptions underlie periodic measurement of income under accrual accounting? Which
income approach do you think is more reasonable? Explain
Answer : The assumption underlying accrual accounting are important to apply in accrual accounting
information because its more accurate, detailed and impartial application in accounting measurement.
For example, accrual accounting approach assumes that the company can continue as going concern
because they have the conversion of accured the amounts to cash.

2-10 a. What information would you suggest the filmmaker provide to investors to encourage them to
invest in the production of a particular movie or movies (i.e., what information is relevant to your
decision to invest in a movie)?
Answer : The film maker must providing the all information that are needed by investors. Such as a
description of the story or even make the script available, the actors or actresses, etc. The name of the
key production personnel such as producers and directors should be disclosed along with information
about past work. Key employees should also be listed including any signed cast members. Also, film
maker sholud provide reliable cost projections related to the movie production. This information would
enable potential investors to make assessments about the revenue potential of the movie and the
expected cost of production.
b. What kind of evidence can be included to support claims in the prospectus (i.e.., what can
maximize the reliability of the information released)?
Answer : The prospectus should provide information that is relevant, have ability to persuade and
enhance the credibility. For example, a complete list of the relevant past works of the producers,
directors, and cast members should be provided. The education and training history for the producers
and directors would be useful as well. Track record of the actor or actresses also needed. If available,
the amount of revenue from the past works of the producers, directors, and prominent actors and
actresses (the individuals who are most directly related to the revenue potential of the movie) should be
provided. This is some evidence to support claims that the production team is able to produce work that
produces revenues. The movie cost projections should be classified by major cost type to lend credibility
to the overall cost projections.

2-11 a. Discuss the role you believe the following parties should play in the accounting standard
promulgation process :
(1) FASB (5) Companies (CEOs)
(2) SEC (6) Accounting firms
(3) AICPA (7) Investors
(4) Congress
b. Discuss which parties likely lobbied for the change from requiring expense recognition to only
encouraging the expensing of stock options.
Answer :
a.
(1) FASB should be the most important component of the guideline promulgation process in
establishing and improving the accounting methods used to prepare financial statements. The
FASB has the authority to set and their conclusion in accounting and finance theory must be
independent from other pressure.
(2) The SEC should oversee the FASB performance to ensure that the board is successfully fulfill
its role as an independent rule-making body and oversee the involvement and operations of
organizations and individual investors.
(3) The AICPA should ensure that the FASB is comprised of highly qualified professionals and is
continuing to successfully fulfill its role as an independent rule-making body working in the
best interests of the accounting profession.
(4) Members of Congress are subject to great pressures from important constituencies. Thus,
Congress should be kept largely out of the rule-making process. However, this is difficult given
the hierarchy that empowers the SEC, the AICPA, and ultimately the FASB to make the rules.
(5) Company CEO’s should continue to diligently provide input to the FASB regarding existing
rules and regarding proposed new rules. The FASB, in turn, should value the input of the
CEO’s greatly and use this input as they finalize the rules.
 (6) Much like the executives of companies, accounting firm partners should remain active in the
rule-making process by providing the FASB valuable input on existing rules and proposed new
rules. Again, the FASB should based on the input of the accounting firms.
(7) Investors should play an active, if not the most active, role in accounting standard setting.
Investors are the ‘end-users’ of financial accounting reports, and, as such, should have the most
input into the promulgation of standards. However, investors’ knowledge to applying the
accounting standards and the cost to implement new standards.
b. Company executives diligently pressured Congress to intervene and ensure the FASB does not pass
a rule requiring the expensing of the fair value of stock options. The pressure apparently worked. In the
end, the FASB passed a compromise rule that suggests but does not require expensing the value of
options.