12 Revenue_Recognition 3 - EarningsManagement...

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Earnings Management Earnings Management Accountancy 301 Spring 2011 Flora Zhou 12
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Today Today ’s agenda ’s agenda • Earnings Management • Case discussion: Amazon.com • Midterm 1 issues
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Earnings management Earnings management • Determining when revenue has been earned  (critical event) and is realized (measurability)— the two revenue recognition conditions—often  requires judgment. • Managers can sometimes exploit the flexibility in  GAAP to manipulate reported earnings in ways  that mask the company’s underlying performance. • Some managers have even resorted to outright  financial fraud (but that’s rare).
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Motivations for earning  Motivations for earning  management management Meet internal targets  Internal earnings targets represent an important tool  in motivating manager to increase sales efforts, control  costs, and use resources more efficiently  Meet external expectations Benchmarks: analyst forecasts, zero earnings, prior  earnings  Smooth earnings The practice of carefully timing the recognition of  revenues and expenses to even out the reported earnings  from year to year .
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Evidence of earnings management: Evidence of earnings management: Avoiding a loss or earnings disappointment Avoiding a loss or earnings disappointment
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Ways to manage earnings Ways to manage earnings Since accounting info is important, managers have  incentive to  manipulate  (or manage) accounting  numbers  within   GAAP. What are the ways  managers can use to manipulate? Choice of accounting methods  – GAAP permits  multiple methods. Managers have incentives to choose  the one that makes the firm look better. Accounting estimates 
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This note was uploaded on 11/08/2011 for the course ACCY 301 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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12 Revenue_Recognition 3 - EarningsManagement...

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