Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 6, Problem 7QE
90907-6-7QE
To determine
Explain the conditions that guide an analyst to anticipate that management will try to manage earnings downward.
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Identify conditions that would lead an analyst to expect that management might attempt to manage earnings upward. Provide a specific example that illustrates this scenario
Describe earnings quality and how it is impacted by management practices to alter reported earnings.
Evaluate the following statements from an ethical perspective:“Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.”“Earnings are potentially managed, because financial accounting standards still provide alternative methods.”
Chapter 6 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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- What is the difference between earnings management and earnings manipulation?arrow_forwardIs there a way to prevent managers from focusing on accounting measures as performance measures?arrow_forwardWhich of the following is true about earnings management? A. It works within the constraints of GAAP. B. It works outside the constraints of GAAP. C. It tries to improve stakeholders views of the companys financial position. D. Both B and C E. Both A and Carrow_forward
- The chapter encourages analysts to develop forecasts that are realistic, objective, and unbiased. Some firms managers tend to be optimistic. Some accounting principles tend to be conservative. Describe the different risks and incentives that managers, accountants, and analysts face. Explain how these different risks and incentives lead managers, accountants, and analysts to different biases when predicting uncertain outcomes.arrow_forwardWhy might a manager focused solely on accounting numbers miss opportunities for future benefits?arrow_forwardManagers are often faced with conditions that may cause earnings to be managed. There is a difference between managing income and manipulating earnings. Excluding the ethical and fraud issues associated with managing earnings: Identify conditions that would lead an analysist to expect that management might attempt to manage earnings upward and, Identify conditions that would lead an analysist to expect that management might attempt to manage earnings downward.arrow_forward
- Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.arrow_forwardWhat is earnings quality? What are the possible topics or areas that the reported earnings may not best represent the earnings reality or the future operating potential of a company?arrow_forwarda) Drawing on prior earnings management literature, critically appraisemanagerial incentives in manipulating reported earnings.b) Using examples, discuss three techniques used by firms to manage reportedearnings.arrow_forward
- Evaluate the following statement: Do the ends of positive organizational consequences justify the means of earnings management?arrow_forwardWhich of the following is true about earnings management? Group of answer choices A. It works outside the constraints of GAAP B. It works outside the constraints of GAAP and t tries to improve stakeholder’s views of the company’s financial position. C. It tries to improve stakeholder’s views of the company’s financial position. D. It works within the constraints of GAAP and it tries to improve stakeholder’s views of the company’s financial position.arrow_forwardDiscuss the components of business risk. Discuss how the components affect the variability of operating earnings (EBIT).arrow_forward
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