Week 2 Disccssion 1 - earnings to vary from year to year,...

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Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: Is earnings management always intended to produce higher income? Explain. [The solution to this case requires access to company data via the Internet.] 4-3 Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. Required: Is earnings management always intended to produce higher income? Explain. No, earnings management is not always intended to produce a higher income. In order to make a company look as if it were steadily growing managers may use earnings management practices. Companies do not want their
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Unformatted text preview: earnings to vary from year to year, this looks as if the company is not stable. To prevent this from happening managers will sometimes bank earnings by understating them in good years and using the banked earnings to polish results in bad years. There are two ways that managers generally use to manipulate earnings. The two ways are income shifting, and income statement classification. Income shifting is when a company will either speed up or slow down their recognition of income. This can be done by asking a willing distributor to purchase more goods than necessary near the end of a reporting period. Manipulating income statement classification is done by deliberately classifying income in a special category, typically restructuring costs. This allows for a substantial amount of income to be hidden and the balance sheet appears to have normal operating expenses reported....
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This note was uploaded on 08/19/2011 for the course ACC 305 ACC 305 taught by Professor Stern during the Spring '11 term at Ashford University.

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