Quality Of Earnings For Major Corporations Essay

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Understandably, there are a variety of ways in which a company can manage their earnings, and if accomplished successfully, the results can be highly profitable. Not all techniques are fraudulent, as effective earnings management is considered good for business and shareholders. Income smoothing is a specific example of permissible earnings management that involves controlling fluctuations in net income to make earnings less variable over a given period of time (Goel & Thakor, 2003). Smoothing is acceptable as long as it adheres to the restrictions of U.S. GAAP, which maintains that all revenues and expenses are accounted for in a defined fashion. There are a lot of incentives in figuring how to effectively smooth income, as substantial value can be created through the successful arrangement of financial transactions. Management is able to make more intelligent decisions with regards to the future of the firm if the earnings are able to match the forecasts. One instance this is seen is when management is faced with the decision to smooth total income or

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

Using a sample data comprised 297 NYSE and American Stock Exchange companies for 1977 to 1980-time period, indicating twelve quarterly announcements for each of the company. MacKinlay (1997) utilised 30 companies which comprised into Dow Jones Industrial Index, as a sample to test the impact of quarterly earnings announcements to stock prices. The researcher examined totally 600 quarterly announcements, thus MacKinlay (1997) obtained stock price response separately to bad news, good news and no news cases of earnings per share (EPS) announcements.

The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.

The most important role of financial reports is to effectively communicate financial information to outsiders in a timely and credible manner (FASB, 1984). Earnings are vital in financial statements because earnings represent the company’s value. Investors and creditors always look to

Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).

The Walt Disney Company (DIS) has a history marked with ups and downs. Taking numerous risks, expanding internationally, acquiring various businesses and diversifying its operations; the company has emerged stronger than ever. Ranking #53 on the Fortune 500, DIS has experienced continuous growth for the past 5 years, with bright prospects. Detailed analysis shows the market undervaluing the stock despite its healthy performance, indicating potential future gains.

Accounting information can be useful in order to help predict future performance in the short and long term. It is important to note however that accounting information including accounting ratios show a company’s performance at a period in time. It is historical data. Trends can be identified by comparing data in sequential periods and future forecasts can be determined using historical data. There is no evidence or proof however, that these patterns will predict the future at a level of complete certainty. In my opinion, it would be hard to argue that decreasing profits over an extended period of time, or deteriorating liquid assets and increasing long term debt will have a

Discuss Measures That may be used to asses the quality of a firms reported earnings.

Ball, R / Shivakumar L. (2005): Earnings quality in UK private firms: comparative loss recognition timeliness, Journal of Accounting and Economics Vol. 39, 2005, pp. 83–128.

Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses.

Nowadays, as our economy is facing possible everyday crises, managers undergo an increasing pressure in order to keep their company 's earnings stable. Shareholders and analysts expect companies to meet forecasted goals and not to deviate from these. Especially, reliable companies are to report positive results and shall not present any 'surprises '. Managers therefore often turn to their accounting departments for help, whose job it then is to improve the bottom line by changing the information shown in financial

Accounting is used as a tools to inform investors and other stakeholders about management’s performance. However, accounting standards permits management to use judgment in financial reporting methods for some accounts as they have best knowledge of its business so it can choose accounting alternatives that suit their business. With ability to choose its preferable reporting methods, estimates and disclosure, this flexibility creates opportunity for managers to distort earnings in which they adopt accounting methods that do not truly reflect firms’ financial status (Healy and Wahlen, 1999). In addition, due to the fact that management has better access to firms’ business transactions and operations than stakeholders do and auditing and

Financial Statements basically show the historical performance or record of the company at some previous point of time. By the time when financial statements are made public, changes are many economical areas such as market conditions, currency exchange rate and inflations can change the values of assets and liabilities. In this case there often exist discrepancies between book value of assets and their market values.