Question

Writing Assignment - Part I

Choose an example of a Change in Accounting principles. Write a statement paper on how this change would affect the financial statements of a company as they adopt the new principle. Prepare this written statement as if to the Board of Directors of your company.

Writing Assignment - Part II

Your CEO has inquired about the differences between the direct method and the indirect method of presenting the statement of cash flows. Prepare a memo describing the differences and the reasons one presentation may be better than the other for particular companies. Be sure to include a discussion on the non-cash activities included under the operating activities section of the indirect method

Answer 1

Assignment-1 Nearly all companies are required to prepare their financial statements as set out by the Financial Accounting Standards Board (FASB), whose standards are generally principles-based. FASB uses these principles in establishing its accounting practices and methods.1 Law requires U.S. companies to adhere to accounting standards when reporting their financial statements, but the specifics can vary depending on where a company is headquartered
[07/04, 09:17] Siddhartha Khandelwal: KEY TAKEAWAYS
Nearly all companies are required to prepare their financial statements as set out by FASB, whose standards are generally principles-based.
The rules-based Generally Accepted Accounting Principles (GAAP) system is the accounting method used in the United States.
Critics of principles-based accounting systems say they give companies too much freedom in reporting.
On the other hand, critics of rules-based methods like GAAP cite that the system can often be too complex.
[07/04, 09:17] Siddhartha Khandelwal: Understanding Principles-Based Accounting
Principles-based accounting seems to be the most popular accounting method around the globe. Most countries opt for a principles-based system, as it is often better to adjust accounting principles to a company’s transactions rather than adjusting a company’s operations to accounting rules.
[07/04, 09:18] Siddhartha Khandelwal: The international financial reporting standards (IFRS) system—the most common international accounting standard—is not a rules-based system. The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.2

Rules-Based Accounting
Rules-based accounting is a standardized process of reporting financial statements. The Generally Accepted Accounting Principles (GAAP) system is the rules-based accounting method used in the United States. Companies and their accountants must adhere to the rules when they compile their financial statements. These allow investors an easy way to compare the financial information of different companies.

There are 10 principles of the rules-based GAAP accounting system:
[07/04, 09:21] Siddhartha Khandelwal: CORPORATE FINANCE & ACCOUNTING FINANCIAL ANALYSIS
How Are Principles-Based and Rules-Based Accounting Different?
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By BARCLAY PALMER
Updated Feb 21, 2020
Nearly all companies are required to prepare their financial statements as set out by the Financial Accounting Standards Board (FASB), whose standards are generally principles-based. FASB uses these principles in establishing its accounting practices and methods.1 Law requires U.S. companies to adhere to accounting standards when reporting their financial statements, but the specifics can vary depending on where a company is headquartered.

KEY TAKEAWAYS
Nearly all companies are required to prepare their financial statements as set out by FASB, whose standards are generally principles-based.
The rules-based Generally Accepted Accounting Principles (GAAP) system is the accounting method used in the United States.
Critics of principles-based accounting systems say they give companies too much freedom in reporting.
On the other hand, critics of rules-based methods like GAAP cite that the system can often be too complex.
Understanding Principles-Based Accounting
Principles-based accounting seems to be the most popular accounting method around the globe. Most countries opt for a principles-based system, as it is often better to adjust accounting principles to a company’s transactions rather than adjusting a company’s operations to accounting rules.

The international financial reporting standards (IFRS) system—the most common international accounting standard—is not a rules-based system. The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.2

Rules-Based Accounting
Rules-based accounting is a standardized process of reporting financial statements. The Generally Accepted Accounting Principles (GAAP) system is the rules-based accounting method used in the United States. Companies and their accountants must adhere to the rules when they compile their financial statements. These allow investors an easy way to compare the financial information of different companies.

There are 10 principles of the rules-based GAAP accounting system:

1)Regularity
2) Consistency
3) Sincerity with an accurate representation of the company's financial situation
4)Permanence of methods
5) No expectation of compensation
6) Prudence with no semblance of speculation
7) Continuity
8) Dividing entries across appropriate periods of time
9) Full disclosure in all financial reporting
10)Good faith and honesty in all transactions.
The GAAP method is used when a company releases its financial statements to the public. It covers a number of things such as revenue recognition, balance sheet classification, and how outstanding shares are measured.

Companies and accountants that do not follow GAAP standards could be brought to court if their judgments and reporting of the financial statements were incorrect.

Assignment-2

Main Difference between Direct and Indirect Method of SCF
The main difference between the direct method and the indirect method of presenting the statement of cash flows (SCF) involves the cash flows from operating activities. (There are no differences in the cash flows from investing activities and/or the cash flows from financing activities.)

Under the U.S. reporting rules, a corporation has the option of using either the direct or the indirect method. However, surveys indicate that nearly all large U.S. corporations use the indirect method.

Example of the Indirect Method of SCF
When the indirect method of presenting a corporation's cash flows from operating activities is used, this section of SCF will begin with a corporation's net income. The net income is then followed by the adjustments needed to convert the accrual accounting net income to the cash flows from operating activities. A few of the typical adjustments are:

Adding back depreciation expense
Adding the decrease in accounts receivable
Deducting the increase in inventory
Deducting the decrease in accounts payable
Adding the increase in accrued expenses payable
Example of the Direct Method of SCF
When the direct method of presenting a corporation's cash flows from operating activities is used, the amount of net income is not the starting point. Instead, the direct method lists the cash amounts received and paid by the corporation. Here are a few of the more common descriptions that will be seen under the direct method:

Cash from customers
Cash paid to employees
Cash paid to suppliers
Cash paid for interest
The direct method also requires a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)

Sample Indirect Memo
Memorandum

Date: Feb. 25, 2019

To: All Employees

From: Jaspreet Kaur

Subject: Change in Operating Hours

Our call centre has been experimenting with a half-day Friday work schedule over the last year, and we’ve recently conducted an evaluation to determine how well the program is working.

When a client calls to order their diabetic supplies on Friday afternoon, our messaging system directs them to complete their order on our company website. While many customers are willing and able to do this, many do not have Internet access (hence the reason for their call in the first place). Their only other option is to wait until Monday to place the order, and if a customer is already low on supplies, this may be untenable. Customers who are calling with questions or to resolve issues with an order must also wait for Monday.

We have received positive comments, especially from our West Coast customers, about the extended hours we are open in the evening. We have determined that to continue to offer quality service, we must also re-institute Friday afternoons.

However, that does not mean that we cannot continue to offer employees some scheduling perks. In fact, the addition of later hours Monday through Thursday provides us with more leeway in scheduling employees.

We will have a staff meeting on Monday, March 4 at 8:00 a.m. to discuss new scheduling procedures. To the extend possible, we wish to accommodate employees’ preferences in scheduling, so it is important to attend this meeting to have your voice heard.

As you can see, the introduction is relevant to the subject but doesn’t directly state the bad news, which is that the popular early weekend schedule is ending. Instead, the writer lists the reasons for the change to prepare the reader mentally for it. The bad news is then clearly stated, but it’s sandwiched between two positive statements. Note that the bad news is at the end of the paragraph, since the writer doesn’t want readers to skim the memo and miss this important information. The memo then ends with action information and a forward-looking statement.