Tively these safeguards aim to protect interests of

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tively, these safeguards aim to protect interests of companies' internal and external stake- rs. When managers abuse accounting systems, tough and swift sanctions remind others that rate malfeasance is unacceptable. Videos of police officers leading corporate executives to in handcuffs (the infamous "perp walk") send that message. RESEARCH INSIGHT Accruals: Good or Bad? earchers use accounting accruals to study the effects of earnings management on financial a:counting. Earnings management is broadly defined as the use of accounting discretion to distort "EPOrted earnings. Managers have incentives to manage earnings in many situations. For example, ";l8!lagers have tendencies to accelerate revenue recognition to increase stock prices prior to equity 'Ierings. In contrast, other research shows that managers decelerate revenue recognition to depress ock prices prior to the management buyout (where management repurchases common stock and ~ es the company "private"). Research also shows that managers use discretion when reporting special items to either meet or beat analysts' forecasts of earnings and/or to avoid reporting a loss. t all earnings management occurs for opportunistic reasons. Research shows that managers use accruals to communicate private information about future profitability to outsiders. For example, man- - ement might signal future profitability through use of income-decreasing accruals to show inves- that it can afford to apply conservative accounting. This "signaling" through accruals is found to :xecede stock splits and dividend increases. In sum, we must look at reported earnings in conjunction Nith other earnings quality signals (such as levels of disclosure, degree of corporate governance, and - ustry performance) to interpret information in accruals. AR 100 REV 100 AR 100 I REV I 100 Cash 100 AR 100 Cash 100 I AR I 100
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Constructing Financial Statements from Transactions and Adjustments' 2-27 Module 2 I Overview of Business Activities and Financial Statements L 0 4 Construct financial statements from account balances. We can prepare each of the four financial statements directly from our financial statement effects template. The balance sheet and income statement accounts, and their respective balances, can be read off the bottom row that totals the transactions and adjustments recorded during the period. The statement of cash flows and statement of stockholders' equity are represented by the cash column and the contributed and earned capital columns, respectively. Illustration: Recording Transactions, Adjusting Accounts, and Preparing Statements This section provides a comprehensive illustration that uses the financial statement effects tem- plate with a number of transactions related to Apple's 2010 financial statements shown earlier.
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