Alternative Measurement Models Present Value Net Cash Flow Original Transactions Value General Price Level Replacement Cost Market Value

TEN WAYS TO “COOK” THE BOOKS 1. Prematurely recognize income 2. Treat operating leases as sales 3. Inflate inventory by improper application of LIFO inventory costing 4. Include fictitious amounts in inventory 5. Failure to recognize losses through write-offs and allowances

TEN WAYS TO “COOK” THE BOOKS 6. Capitalize versus expense certain costs 7. Include non-recurring gains in operating income 8. Overvalue marketable securities 9. Create sham year-end transactions to boost reported earnings 10. Change accounting practices without disclosing the changes

Information for Decisions Economic (allocation) decisions Scarce Resources Unlimited Wants I Accounting information

Steps in the Decision Process Felt Need Identify the Problem Identify Alternative Evaluate Alternatives ChoiceTake Action

AUTO REPLACEMENT PROBLEM Facts: You need a new set of wheels. Cost to operate present vehicle = $.25 per milr. (includes cost of oil, gas, depreciation, etc.) Est. annual roundtrip mileage = 24,000 miles. No bus routes to intended destination. Weather rules out purchase of motorcycle. You have a limited budget. Alt. 1Alt. 2 Chevy (6 cyl.)Fiat (4 cyl.) $4,500$6,900 Estimated useful life3 yrs. Est. operating expense: Year 1 $.10/mile $.08/mile Year 2.11/mile.07/mile Cost of pre-owned car Year 3.12/mile.06/mile Decision problem: Which auto should you buy? Computations: ChevyFiat $sacrifices: $benefits:

Identifying the problem: objective function a. Specify an objective function = a statement that identifies those attributes of the alternatives that are directly related to your felt need. b. Identify decision constraints = factors which limit your ability to consider certain alternatives. c. Formulate a decision rule = a statement that helps us to choose among alternatives. What we are doing is setting up a model of investment choice that identifies what information is decision-relevant.

Identifying Alternatives Predicting expected consequences associated with each alternative course of action

ChevyFiat $costs 4,5006,900 $savings ( ) 24,000 = 3,600( ) 24,000 = 4,080 ( ) 24,000 = 3,360( ) 24,000 = 4,320 ( ) 24,000 = 3,120 10,080 ( ) 24,000 = 4,560 12,960 Total net benefits 5,580 6,060

Total net benefits 5,580/3 6,060/3 = $1,860/year = $2,020/year Chevy Fiat

Information = any item of intelligence that improves our ability to predict future events

Effective decision making involves achieving a proper balance between: a. expected outcome of a decision b. cost of making the decision

Role of Accounting in Society 1. provide information useful for decision-making 2. provide information at a reasonable cost