Intermediate Accounting

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6 Earnings Management Overview In this chapter, we part ways with the calculation and financial statement intensive items that have filled the last four chapters and return to more theoretical and conceptual concepts somewhat similar to Chapter 1. If you liked the last four chapters better, have no fear as this is a temporary respite from calculations, journal entries, and financial statements. Earnings management is the process by which management can potentially manipulate the financial statements to represent what they wish to have happened during the period rather than what actually happened. Reasons why management may want to manage earnings include both internal and external pressures. Perhaps the most important section of this chapter is that of dealing with the common techniques used to manage earnings. It is through a thorough understanding of these methods that earnings management can be spotted. These strategies are important to know as an accountant, auditor, financial analyst, creditor, or investor. Healthy skepticism on the part of these various interests, and contributors, to the financial statements will further detection, and a reduction, of earnings management practices. By improving the quality of the information in financial statements, through better accounting standards and ethical behavior, the cost of doing business decreases. Not only is this true with the cost of capital, as the chapter describes, but nowhere is it more clearly seen today than with the additional costs publicly traded companies are now faced with to come into compliance with the provisions of the Sarbanes-Oxley Act. Earnings management and unethical behavior of the past is costing businesses more today. Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered.
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6-2 Chapter 6 If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook. Tips, Hints, and Things to Remember LO1 – Identify the factors that motivate earnings management. How? How will you be able to remember these factors? The first thing to recall is that there are internal and external reasons. The main internal reason is to meet targets. The targets may be there for a number of reasons. Some may just be budgeted
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This note was uploaded on 12/22/2010 for the course ACCOUNTING 564 taught by Professor Ahmadali. during the Fall '08 term at American Dubai.

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032459237X_174365 - 6 Earnings Management Overview In this...

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