Take Home Assignment-Harnischfeger

• Net profit margin has been negative and no major patterns over the 9 year period on net profit since the trend of the industry is based mostly on economic factors, and whether or not they secure contracts. Due to high percentage of COGS they are only left with a net profit of $980 or

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.

The company accounts for these transactions as sales in accordance with Statement of Financial Accounting Standards No. 77, ‘’Reporting

Change in revenue criteria increased both sales and cost of sales by $ 28 Million. The profit margin was decreased from 1.55% to

This Income Statement also known as the Earnings Statements or statement of operation, is one of the four Financial Statement used by accountants, business owner’s, and investors. The Income Statement provides a detailed look into how profitable a business has been over a designated period of time.

As stated in Exhibit 3, Earnings management is the managerial use of discretion to influence reported earnings. Within the accrual accounting system, managers have significant discretion with their firms’ accounting choices. Management has the ability to make choices that can opportunistically lead to higher or lower reported earnings. Richard 's and Ira Zar’s (CFO) actions would not change if these results were the result of GAAP flexibility because he violated the rules of accounting, the conceptual framework principle of neutrality in numerous ways to report the financial results that CA did under false pretenses. It would be one thing if CA garnered these results through legitimate business decisions versus using accounting tactics like changes in accounting estimates or outright fraud as in the use of the 35 day Month. The purpose of which was solely to allow CA to meet or exceed analysts’ estimates.

* With a focus on net income, managers could be incentivized to maximize ROE at the expense of other stakeholders, particularly bondholders. For instance, managers may fuel earnings growth by over-levering the company to benefit from tax shields in order to increase the value spread.  In addition, there are many other ways in which managers can manipulate earnings, for example, by slowing down depreciation charges or selling off assets to realize extraordinary gains.

One explanation of why firms might choose to put into practice conservative accounting practices lies in efficient contracting theory, for example, conservative accounting can be used as part of a firms strategy to ease the conflicts that arise among the many claimants of a firm’s net assets. This is because conservative accounting methods place restrictions on the distribution of those net assets thereby limiting the scope for self-serving opportunistic behavior. Conservative accounting can also help in bringing into line the interests of managers and shareholders through its impact on accounting earnings measures that are regularly used in management compensation contracts (Iyengar & Zampelli, 2010).

The income smoothing literature has been the centre of attention in the accounting world for the past few decades. When companies experience economic turbulence due to a poor performance year, they turn to the accounting management department to resolve the bottom line. A strategy that managers can approach is changing the true information content of the company. As a result this has led managers to resort to smoothing their income. Many questions have been raised whether or not it is common for companies to smooth their reported income, which many have argued whether if income smoothing is appropriate or ethical.

Income smoothing is defined in Investopedia as “the use of accounting techniques to balance out net income variabilities from one period to the next (Income Smoothing, 2015). There are some organizations that will participate in this habit for the reason that some investors typically are inclined to pay a premium for stocks with steady and predictable earnings streams, as compared to stocks whose earnings are subject to turbulent fluxes. When organizations participate in smoothing earnings, they are making assumptions to eradicate the rise and fall in the net income over a period of time. It is speculated that organizations smooth earnings to in order to meet the forecasts of analysts. Furthermore, stock prices typically can be assessed severe penalties for failing to meet the expectations of analysts, even if only by a small amount.

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

Professor Messod Beneish created the Beneish M-score Model in 1999 in his research entitled The Detection of Earning Manipulation. He identified that earnings management is important for financial statement users to assess current economic performance, to predict future profitability, and to determine firm value (Jansen et al, 2012)

The case of Alston Manufacturing illustrates how damaging it can be to a company when information presented does not remain true to the conceptual framework of accounting. This paper will discuss all of the various owners, their key decisions, and how those decisions affected others. Before we discuss this in further detail, it is important to explain the difference between managerial accounting and financial accounting, as both will be used explain information relevant to Alston.