ACCOUNTING POLICIES AND MARKET VALUE OF A FIRM

If accounting policies determine how past transactions are recorded and reflected in financial statements, how can the choice of policy influence the market value of a firm?

If accounting policies determine how past transactions are recorded and reflected in financial statements, how can the choice of policy influence the market value of a firm?

Introduction

The purpose of the study is to know how the choice of accounting policy affects the firm value in the market. This phenomena are based on the process that how the past transactions are recorded in the financial statements. In addition, for an organization it is essential and significant that appropriate accounting policies should be followed, the reason of this statement is that to attract the investors, it is important for a company to follow the accounting policies that show the process of recording the transactions properly and reflect the correct financial situation in the financial statements.

Discussion

Financial accounting information relating to recording the past transactions is primarily intended to help investors and creditors in making decisions on placement of investment funds. Such decisions are important for society as a whole, since they determine which businesses will receive the necessary funds, and some are not. However, the other benefiting from the financial information, managers of the company and its employees are constantly in need of such information to manage and control the daily activities of the company. For example, managers need information on the amounts in the bank accounts of the company, the types and quantities of goods in warehouses and the amount of debt to certain creditors. Financial information also used in the implementation of tax payments. In fact, this information used for many purposes; it often referred to as accounting information for general purposes (Cleverley & Cameron, 2002, pp. 42-68).

The value of a business must determine in every situation, but it is essential in certain cases as retirement income or unregistered partners in the stock values and generally in transactions of sale; the evaluation of the management of the administration; when the goal is basic owners maximize the value that the company has for them in the analysis and interpretation of business and financial situation when considering the effort to start a business company. To give value, business can use quantitative and qualitative elements, based on those measurable such as the balance sheet status of results, information on projected revenues and costs. Accounting information distinguished by the group accounts whose numbers are a combination of past, present and future, so the amount that indicates the result cannot be the market value of the company. Then, if the system of accounting policies actually does not say how much a business as can be determined? A business is worth for its ability to generate future benefits (Good-Will) further than it has at any given time that is a business is worth at its net assets plus the present value of future benefits (Husted, 2007, pp. ...