Far 600 Case Study-Jim Essay

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Question B i. For the first Jim’s proposal which is to accelerate the production and shipment of a large order to Imperial, in my opinion Jim proposal is a good earning management because under literature, Scott 2000, state that there are two type of efficient earning management and opportunistic earning management. While for this proposal it falls under efficient earning management. This is because Jim is trying to improve earnings informativeness in communicating private information. Jim is trying to accelerate the production and shipment where the promise date was for the fifteenth of January and early shipment would acceptable to the customer. Moreover, Jim would create an overtime premium of $100,000 to accelerate the production…show more content…
Jim will appear to making less money than it actually did and therefore have to report fewer taxes. In other words, Jim is seeking for a tax saving. It can be explain by using the contracting perspective where manager will choose accounting techniques that will maximizes his or her utility at the expenses and also maximize bonuses. Furthermore, by creating LIFO inventory layer adjustment it will give lower reported earnings. If the company can avoid the inventory increase for the year and instead having a reduction, they can take a credit adjustment to cost of sale and increase their profit. Under literature Scott (2000), this proposal fall under opportunistic earning management where the management report earnings opportunistically to maximize own profit. Related study are Burgstahler and Dichev (1997) conclude that managers engage in earning management to avoid reporting losses or earning decline. Research show that there is negative relationship between unexpected discretionary accruals and stock returns around the earnings announcement date. This result indicates that the market views discretionary accruals as opportunistic. iii. For the last proposal which is prototype manufacturing equipment, in my opinion for the last Jim proposal is a good earning management. In 1997, companies were allowed to capitalize the costs of internally developed software and amortize it over the useful life, generally
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