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Caterpillar’s EPS Footnote Module 5 Objective 5 * Accounting Quality Relevance Reported earnings and cash flow numbers can be used to forecast the amount and timing of future earnings and cash flows. Footnotes provide additional quantitative and qualitative information that is accurate and complete. Reliability Balance sheet numbers represent economic reality. Income statement numbers reflect economic earnings. Reported cash flows accurately portray all of the cash that flowed in and out of the company during the period. Module 5 Objective 6 * Ways in Which Accounting Quality is Diminished Unintentional errors One-time events Deliberate manager intervention Reliable numbers that are not predictive Module 5 Objective 6 * Assessing and Remediating Accounting Quality Read both reports from the external auditor and take special note of any deviation from boilerplate language. Peruse the footnote on accounting policies and compare the company’s policies to its industry peers. Examine changes in accounting policies. Compare key ratios over time. Identify nonrecurring items and separately assess their impact on company performance and position. Recast financial statements as necessary to reflect an accounting policy(ies) that is more in line with competitors or one that better reflects economically relevant numbers. Module 5 Objective 6 * Global Accounting – Revenue Recognition U.S. GAAP has specific guidance about what constitutes revenue, how revenue is measured, and the timing of its recognition. IFRS is not specific about the timing and measurement of revenue recognition and does not provide industry-specific guidance. A U.S. GAAP revenue-recognition criterion is that the sales price be fixed or determinable. IFRS considers the probability that economic benefits will flow to the seller and records such benefits as revenue if they can be reliably measured. For multiple-element contracts, both U.S. GAAP and IFRS allocate revenue based on relative fair values of the el