Chapter 13 lecture notes - Chapter 13 Quality of Earnings...

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Chapter 13 Quality of Earnings and Corporate Governance
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Earnings Managers estimate earnings and disclose those estimates to the public Financial Analysts study managements’ earnings estimates and announce their own expected earnings for the firm.
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Earnings per Share When actual earnings meet or exceed the estimated earnings per share, the stock market responds favorably. When actual earnings fall short of the estimates, the market responds unfavorably!
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Quality of Earnings Firms that choose more conservative accounting principles often have higher quality of earnings. Firms that face fewer internal and external risks often have a higher quality of earnings. Firms that recognize revenue early or postpone recognition of expenses often have lower quality earnings.
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Common Ways to Manipulate Earnings Cooking the Books Big Bath Charges Cookie Jar Reserves Revenue Recognition
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Big Bath Charges When a firm is expecting to fall short of its predicted Earnings per Share… Some managers,
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