Financial Accounting Theory, Chapter 4 Answers

Topics: Generally Accepted Accounting Principles, Revenue, Income Pages: 4 (1133 words) Published: June 5, 2013
Assignment 4-2: Week 4 Analysis Write-Up
Kylie Keener
Financial Accounting Theory
Michael Miller
13 June 2012

1. Chapter 4: Problem 8 (GM)
The article “GM to Take Charge of $20.8-Billion” here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, “Accounting for Postretirement Benefits Other Than Pensions,” on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billion, reducing its shareholders’ equity from $27.8 billion to $7 billion, about a 75% reduction. Describe and explain how you would expect the efficient securities market to react to this information. SFAS 106, Accounting for Postretirement Benefits Other Than Pensions: “This Statement establishes accounting standards for employers' accounting for postretirement benefits other than pensions. It will significantly change the prevalent current practice of accounting for postretirement benefits on a pay-as-you-go (cash) basis by requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. In exchange for the current services provided by the employee, the employer promises to provide, in addition to current wages and other benefits, health and other welfare benefits after the employee retires. It follows from that view that postretirement benefits are not gratuities but are part of an employee's compensation for services rendered. This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting. Accrual accounting goes beyond cash transactions and attempts to recognize the financial effects of noncash transactions and events as they occur. Recognition and measurement of the accrued obligation to provide...

References: Financial Accounting Standards Board. (2012). SFAS 106, Accounting for Postretirement
Benefits Other Than Pensions.
Financial Accounting Standards Board. (2012). Statement of Position 98-5 Reporting on the
Costs of Start-Up Activities.
Investopedia. (2012). Revenue Recognition.
Investopedia. (2012). What 's the difference between bottom-line and top-line growth?
Kylie Keener. (2012). Assignment 3-3: Week 3 Analysis Discussion.
Scott, W. (2009). Financial Accounting Theory, Fifth Edition. Pearson Prentice Hall.
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