Step 1: Understanding the question The question consists data of 20 years of the company. It also shows net income before extraordinary incomes. We need to comment upon the earnings strategies Step 2: Earnings strategy Income smoothing is a strategy adopted by management to reduce the fluctuations in earnings and to portray a company as if it has steady earnings Based on the data given, the company has applied Income Smoothing Strategy over the period to maintain record of earnings growth Step 3: Comments on earnings record The profit data shown indicate a steady business with a steady flow of income. Also capacity is increased over the period since there are also increments in profits Step 4: Good years and bad years In good years, the company records huge cost along with gauged in future misfortunes In bad years, the company records cost at lower end Step 5: Hidden reserves In years 2, 6, 11, 16, 17, 18. 19, 20, the organization made secret reserves by perceiving bigger provisions for mishaps. In these years, the extent of growth in income is significantly higher as compared to previous years
Step 1: Understanding the question The question consists data of 20 years of the company. It also shows net income before extraordinary incomes. We need to comment upon the earnings strategies Step 2: Earnings strategy Income smoothing is a strategy adopted by management to reduce the fluctuations in earnings and to portray a company as if it has steady earnings Based on the data given, the company has applied Income Smoothing Strategy over the period to maintain record of earnings growth Step 3: Comments on earnings record The profit data shown indicate a steady business with a steady flow of income. Also capacity is increased over the period since there are also increments in profits Step 4: Good years and bad years In good years, the company records huge cost along with gauged in future misfortunes In bad years, the company records cost at lower end Step 5: Hidden reserves In years 2, 6, 11, 16, 17, 18. 19, 20, the organization made secret reserves by perceiving bigger provisions for mishaps. In these years, the extent of growth in income is significantly higher as compared to previous years
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter13: Financial Statement Analysis
Section: Chapter Questions
Problem 13.4AP
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