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1.1 What Are Accounts For? Overview The purpose of accounts is to reveal performance in the conduct of a business or other activity concerned with use of economic resources (e.g. a club). It is thus a matter of stewardship. Although, like economics, it is necessary in accounting to use money as a measure of performance, it is concerned with the individual organisation rather than with economic phenomena as a whole.

This chapter deals with the patterns of International Financial Reporting Standards’ accounting policy choices that have been analyzed by several authors in a country-specific context. Instead of a country-specific context, this chapter adopts a sector-specific approach in terms of the airline industry in a regional and global context in order to observe the patterns of cosmetic and non-cosmetic policy options. Cosmetic policy options are related to the presentation of financial information which is not expected to impact the comparability of financial information versus non-cosmetic policy options are considered to be policy options that are related to measurement and, therefore, if there is more than one allowable accounting treatment, the comparability of financial information weakens. In the context of the airline industry, this chapter considers the patterns of policy choices related to IAS 1 Presentation of Financial Statements, IAS 2 Inventory, IAS 7 Statement of Cash Flows, IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets, and IAS 40 Investment Property, within the framework of frequently observed policy options as well as taking depreciation methods and expected useful life into consideration in terms of industry-specific policy options in order to observe whether there is uniformity rather than diversity in the airline industry for presentation and measurement.

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet difficult to prepare; the indirect method is harder to understand but easier to prepare. Many instructors address the two methods separately, requiring students to learn two different ways for preparing the operating section of a statement of cash flows. Because of this focus on the mechanics of preparation, the result is often an emphasis on how to prepare the cash flow statement rather than on the essential information the statement provides. In this paper, the authors note that both direct and indirect methods begin at the same point, that is, the income statement, and end at the same point, that is, cash flow from operations. Then, the authors describe one process by which the income statement and the balance sheet can be analyzed to provide the information required to present operating cash flow using either the direct or the indirect method. Using this approach allows students to apply one intuitive process for computing cash flow from operations rather than memorizing two different sets of rules for direct and indirect methods.

Most undergraduate and graduate financial accounting exercises follow a “forward based” pedagogical approach where students learn how accounting events (causes) are captured in the accounting system and appear on the financial statements (effects). While these forward based approaches are necessary and effective ways to teach the fundamentals of accounting, they provide a relatively narrow procedural perspective on how to use such knowledge. The reality is that many students will be required to solve problems where the ultimate goal is to discern the causes of financial statement outcomes. To solve such problems, “backward based” procedural knowledge is required. Research in cognitive psychology indicates students need exposure to problems that require different procedural knowledge to develop the flexible problem solving schemas necessary to address problems with different end goals (Chen & Mo, 2004). We present a series of financial accounting exercises designed to help students develop skills associated with analyzing financial statement outcomes (effects) to determine the causal accounting events. The exercises also provide a comprehensive review of the primary financial accounting topics typically addressed in introductory accounting courses. This allows the exercises to be used as an ongoing end of chapter review problem or as a comprehensive course review exercise.

Part V analyzes the details of how to assess materiality. It first tackles qualitative versus quantitative criteria and the role of professional judgment. It then analyzes the selection of quantitative threshold, to expand to the choice of benchmarks. It contrasts the whole financial statements with subaggregates, line items, and components.

Specific sections contrast IASB, FASB, SEC, and other guidance on materiality applied to comparative information, interim reporting, and segment reporting.

The section on estimates mingles complex guidance coming from accounting, auditing, and internal control over financial reporting to explain how the management can improve its assessment of materiality concerning estimates.

After explaining the techniques to move from individual to cumulative misstatements, the part tackles verification ex post, and finally summarizes the intricacies of whether immaterial misstatements are permissible and their consequences.

This chapter advocates a teaching approach for the statement of cash flows (SCF) that includes introduction of the SCF early in the curriculum using the accounting equation format, which helps students visualize the cash and accrual activities. We then adapt this accounting equation format to a worksheet model that can be used later in the curriculum with more complex data sets. This approach provides several advantages: (1) it maintains a consistent, accounting equation approach throughout; (2) it can be used for both the direct and the indirect report format; (3) when used with Excel, the format is easier to explain, easier to use, and less prone to mechanical error than the worksheet approaches used in most textbooks; and (4) it is used by many professional accountants.

Recent public policy initiatives seek greater transparency in financial reporting through an honest, balanced and thorough management discussion of company performance in the annual report. Management’s discussion invariably includes key performance indicators, such as financial ratios, relevant to external stakeholders. We model the impact of accounting estimates, assumptions, choices and errors on the risk of misleading financial ratios. This framework is illustrated through good and bad examples of financial reporting practices and by simulation of financial data of public companies. We provide a structured approach to inform policymakers, auditors and other stakeholders of the incremental financial reporting risk that accompanies current regulatory efforts.

This study revisits the issue of the usefulness of the Statement of Cash Flows (SCF) by examining the perceptions of mutual fund investment analysts in India on the relative usefulness of the Income Statement, Balance Sheet, Notes to the financial statements and reports of Chairperson, Directors, and Auditors. Six testable hypotheses were developed and tested. The evidence of this study, drawn from a mail survey that achieved a high response rate, suggests that the SCF is read significantly less thoroughly, poses greater difficulty in understanding, and is perceived to be less useful than any of the other components of annual reports. The results of the study are also compared against those reported in similar studies undertaken in New Zealand and Malaysia, which show significant differences. A possible explanation for the contrasting results of the current survey is that Indian regulation allows only for an indirect format for presenting the statement of cash flows. The results of the survey suggests a pressing need for the Indian regulators to modify the format of reporting the SCF or give an option to companies accorded under IAS ‐7 (revised).