Financial accounting.docx - Running head FINANCIAL...

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Running head: FINANCIAL ACCOUNTING Financial Accounting By Student Name Course: Tutor: Date:
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FINANCIAL ACCOUNTING 1 Contents Introduction ........................................................................................................................................... 2 PART A ................................................................................................................................................... 2 Incentives for managers to manipulate earnings ................................................................................... 2 How managers execute real activities manipulation and accrual-based earnings management ........... 4 Difference between real activities manipulation and accrual- based earning management ................. 6 How managers make the trade-off decisions between real activities manipulation and accrual-based earning management ............................................................................................................................ 7 Explain whether you agree or disagree with the statement “Earnings management is rife. Manipulation occurs virtually for nearly every firm in every quarter and routinely occurs in enormous amounts.” .............................................................................................................................................. 8 References ............................................................................................................................................. 9
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FINANCIAL ACCOUNTING 2 Introduction Earning management has been experiencing an increasing concern for some time. It is also a key concern in accounting research. This paper comprises of two sections, A and B. Section A provides answers to research questions on earning management and revenue recognition and section B accounting. PART A Incentives for managers to manipulate earnings Incentives on managerial compensation The remuneration package of the manager is one of the most common incentives which managers employ in management of earnings. In many firms, managers are titled to financial advantages, or share alternatives after achieving pre- set reported earnings. It is obvious for contracts to entail constraints on the basis of accounting which establish opportunities for compensation, for instance, increase in annual salary, performance analysis, and bonus in addition to attaining the set goals in contracts for compensation. Lower and upper limits in on packages of executive bonus motivate managers to create discretionary accounting accruals in a way that is strategic. Thus, compensation contracts outlining minimum profit levels for granting bonuses give incentives for increasing income or decreasing income management of earnings with respect to the real profit levels reached in a given period. Borrowing cost effects The closeness of a firm to breaking its debt agreement gives its management with an alternative incentive to involve in management of earnings. For instance, a lender may order that a given value for an accounting ratio to be kept or introduce bounds to investing plus
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FINANCIAL ACCOUNTING 3 finance activities. In case the borrower breaks the debt agreement, the lender may raise the rate of interest, necessitating extra financial security, or demanding a speedy repayment. Thus, debt agreements offer incentives for management of earning either to minimize the restrictiveness on the basis of accounting constraints in debt covenants to evade the agreement violation costs. The nearer a business is to violating it restrictions on debt agreement, the more probable it is for the managers of the business to embrace income rising accounting decisions.
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