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Areej M.
License CPA and extensive audit experience
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Corporate Finance
TutorMe
Question:

If I could use only one financial statement to review a company, what would it be?

Areej M.
Answer:

I would select the cash flow statement. The cash flow provides information related to the net income of the company, whether the company is generating cash from its day to day operations. Further it contains information related to the company's debt obligations, equity transactions and any investments the company has made in long term assets. Most importantly, it tells us how much cash the company has at hand at year end which allows us to determine whether the company will be able to fulfill its obligations in the near future.

Finance
TutorMe
Question:

If I could use only one financial statement to review a company, what would it be?

Areej M.
Answer:

I would select the cash flow statement. The cash flow provides information related to the net income of the company, whether the company is generating cash from its day to day operations. Further it contains information related to the company's debt obligations, equity transactions and any investments the company has made in long term assets. Most importantly, it tells us how much cash the company has at hand at year end which allows us to determine whether the company will be able to fulfill its obligations in the near future.

Accounting
TutorMe
Question:

How much flexibility should be allowed in accounting rules?

Areej M.
Answer:

One’s initial reaction to this question maybe to say that there should be no flexibility so we can avoid debacles like Enron and World Com. One can also argue that to achieve true transparency and comparability, accounting rules need to be rigid so investors/creditors and other stakeholders can compare apples to apples. However, in establishing rigid rules we need to consider the following: - No two businesses are alike especially when you consider size, location, industry, etc. Therefore, how can their financial statements be standardized to the extent that there is no flexibility? If financial statements are expected to reflect the company’s health then it needs to acknowledge that each business is a unique entity. One set of rules may not depict a reliable picture for all companies given the significant differences due to size, geography, structure (corporation, partnership), etc. - Flexibility in accounting rules also gives managers the discretion to choose accounting standards that reflect the true nature of the business. - It is difficult to establish rules that can anticipate all the scenarios experienced in a continuously changing business environment we are experiencing today. Having some flexibility allows the regulators like FASB to not to have to address each unique situation. - We also need to consider whether company’s globally will adopt one set of accounting rules. If the rules are not in favor of a particular country/region, they are likely to develop their own standards, taking away from efforts made in recent years to achieve congruence through IFRS. Therefore, I would conclude that we need to have some flexibility in rules to allow relevant information to reach the readers and for businesses to reflect the true nature of their operations.

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