Real and Accrual Based Earnings Management

In accounting there is much to be learned, about the financial aspects of a business. In the past five weeks I have learned the importance of financial reports and how they relate to the success of an establishment. These reports may include balance sheets and income statements, which help accountants and the public grasp the overall financial condition of a company. The information in these reports is really significant to, managers, owners, employees, and investors. Managers of a business can take and deduce financial

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

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.

The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that

In this research paper the authors want to express their thoughts by stating that how to them earnings reporting pertains to the discovery of information that has not been disclosed by either people or other types of sources and focus towards the negative in this study. In my opinion, the title of the paper itself could have had a different title only because throughout the paper it analyzes negative or bad news rather than really paying attention to both perspectives. Also the paper captures the information or news that occurs by using a three day window in which Quarterly Earnings Announcement (QEA) take place and compares it to a period where it does not take place. Furthermore, in this paper there are three hypotheses that arise

Companies often try to keep accounting earnings growing at a relatively steady pace in an effort to avoid large swings in earnings from period to period. They also try to manage earnings targets. Reflect on these practices and discuss the following in your discussion post.

Closing entries is the last part to closing accounts for any type of business. This will allow a company to ready itself for its next fiscal year. When doing so, a business must transfer balances in revenues and expenses to an income summary to the retained earnings account. This will reset all temporary accounts to zero permitting new transactions to occur for the next fiscal year. This lets businesses to compare balances from year to year; in return, they can make necessary adjustments in their business decisions. (Editorial Board, 2012, p. 52-53)

SEC Chairman Arthur Levitt decried what he termed "accounting hocus-pocus" and called for coordinated efforts to uncover it. He targeted the practice by some companies of improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transaction involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent auditors ' awareness of problems associated with these practices.

used in allocating the amounts paid for recorded balance sheet accounts that are different than their fair values.

Before the promulgation of IAS 37, there was some misuse of provisions, such as income smoothing it is minimising volatility in earnings, and also ‘Big bath Accounting’. Obviously, these against to the principle of prudence then IAS 37 effectively banned these.

Accrual accounting is an accounting method that is utilized to size the performance and of a company by recognizing circumstances regardless of when cash transactions occur. They are documented by matching revenues to expenses at the time in which the transaction occurs rather than when a payment is processed. This method allows the current cash credits and debits to be combined with future expected cash flows to give a more accurate picture of a company 's current financial state. It is ideal to use this method of accounting if an organization has a revenue of more than five million per year. While the accrual method shows the flow of business income and debts more accurately, the downside to this method of accounting is that financial advisers may be blindsided as to what cash reserves are available, which could ultimately result in some serious cash flow obstacles. A common example that I have seen used which helps me understand is when your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven 't paid you yet. Cash Basis accounting is when revenues are documented when cash is received and expenses are recognized when paid. The cash basis of accounting is usually utilized by small companies with a revenue of less than one million annually. The cash method provides a more accurate picture of how much actual cash your business has. Cash basis accounting is allowed for tax purposes only for smaller

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

By using these accounting tricks and changing the debits from “rent expenses” to “prepaid rent”. Ahmed affected the net income of the company. Income means an increasing in the economic benefits during the accounting period in the form of increasing of assets or decreasing of liabilities that results in increasing the equity.So, when Ahmed changed the entries, he decreased the expesnses and increased the assets as “prepaid rent” is considered an asset. As the relationship between expenses and Net income is expressed by a mathematical rule which is net income= revenues-expenses , when the expenses decreased the net inome increased as net income means that the total revenues are greater than the total expenses. Then the change would affect the income statement and the balance sheet.

Canibao, Garcia-Ayuso and Rueda (1999) examined accounting data taken from Spanish companies, showing that the joint explanatory power of earnings and book values has not declined in the latest decades. However, their results demonstrated a slight decline in the marginal explanatory power of book values in relation to earnings. The usefulness of accounting data in business evaluation was, also, evidenced by Ou and Penman (1989), Ohlson (1989, 1995) and Penman (1996). They explained a company 's internal value by using accounting parameters and concluded that they can be used to identify stocks that have not been properly evaluated. Τhey, also, expressed the view that the book value and earnings form the primary accounting variables which are used to interpret stock prices. Their findings are, also, supported by the empirical studies conducted by Lev (1996) and Francis and Schipper (1996), who examined data from the US market during the latest decades. They have, also, found that the explanatory power of accounting variables has declined. On the other hand, Collins, Maydew and Weiss (1997) have expressed the opinion that the combined relevance of earnings and book values is progressively increasing over time. On the contrary, the relevance of extraordinary

In finance, the proposed objective of the firm is the maximisation of economic profit. This ‘maximising’ objective is expressed in terms of the market value of the firm’s shares. These notions should not be confused with accounting profit which usually attempts to match periodic revenues and expenses as well as other concepts. As a result, accounting profit is somewhat arbitrary and fails to take account of all factors which affect shareholders’ wealth.