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Chapter 1: Question 3Q (page 22)

How does accounting help the capital allocation process?

Short Answer

Expert verified

Accounting promotes capital allocation by providing the organization's past financial reports. These reports help identify the important business activities that generate revenue and activities that can be avoided. This helps in the allocation of capital accordingly.

Step by step solution

01

Understanding accounting and capital allocation.

Accounting refers to summarizing, evaluating, and thereafter reporting the business transactions. It is done to keep track of the business activities and plays an important role in management, compliance of legal formalities, auditing, etc.

02

Understanding the relation of Accounting and Capital Allocation Process

Accounting is an important criterion that needs to be studied before allocating capital. Analysis of accounting helps to understand the business activities that generate revenue and the activities that lead to major expenses for the business. This further helps in eliminating unnecessary expenses and allocating capital effectively. Hence, accounting is the basic step in the complete capital allocation process.

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Most popular questions from this chapter

If you had to explain or define “generally accepted accounting principles or standards,” What essential characteristics would you explain in your explanation?

IFRS is comprised of:

(a) International Financial Reporting Standards and FASB Financial Reporting Standards.

(b) International Financial Reporting Standards, International Accounting Standards, and International Accounting Interpretations.

(c) International Accounting Standards and International Accounting Interpretations.

(d) FASB Financial Reporting Standards and International Accounting Standards.

Briefly describe the FASB/ IASB convergence process and the principles that guide their convergence efforts.

(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company’s response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.Instructions

  1. Identify the objective of financial reporting.
  2. Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

What are the sources of pressure that change and influence the development of GAAP?
See all solutions

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