Earning management essay

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Earning management essay

Types of Earnings Management in Accounting by Cam Merritt To someone new to the world of finance, Earning management essay phrase "earnings management" might seem innocuous -- and maybe even sound like a good thing.

In reality, earnings management is the act of manipulating a company's accounting to make its profits look better. Earnings-management techniques often aren't illegal, as they conform to the letter of accounting rules, but they can violate the spirit of those rules by presenting something other than an honest, objective picture of a company's finances.

Purpose of Earnings Management Earnings management isn't about Earning management essay figures. Earnings management is more about "moving money around," so a company's profit figures look better in one reporting period, or from one period to the next.

One common application of earnings management is "income smoothing" -- shifting earnings from one period to another so that profits look steady and consistent rather than volatile. The overall figure is still correct, but the business's profits look far more consistent than they really are.

Revenue and Expense Recognition Under standard accounting rules, a company must record revenue in its books when it earns that revenue -- not when it actually receives payment.

Similarly, it must record expenses when it incurs them -- not when it actually pays money. These rules leave room for companies to manipulate their numbers for earnings management. For example, say a company signs a deal on Dec.

"Three essays on earnings management, financial irregularities, and cap" by Raunaq Sushil Pungaliya

The company could recognize the entire expense in December, recognize the whole thing in January or split the difference. Profits have been shifted from one year to the next with an accounting trick. Cookie Jar Reserves Companies shift earnings around by creating overly large reserve accounts in good years, then drawing them down in bad years.

For example, when a company sells a product with a warranty, it must recognize the estimated expense of honoring that warranty at the same time it books the revenue.

That builds up a big warranty reserve now so that the company doesn't have to record warranty expenses in the future, thus shifting profits from one period to the other. This tactic goes by the name "cookie jar accounting," because it essentially stashes excess profits away to be used when needed.

The Big Bath There will be times when a company simply can't avoid a bad year. No matter what it does, it's going to post a loss because of a sour economy, unfavorable market conditions, legal trouble, whatever.

Some companies, though, deliberately make a bad year even worse by shifting all kinds of expenses, one-time charges and write-offs into that year and shifting revenue out of it. This allows it to inflate profits in future years.

The reasoning behind this strategy is that if the company is going to "take a bath," it might as well take a big bath. The company's stock price was going to suffer anyway, the thinking goes, and the damage probably won't be that much worse if the company inflates the loss.

Company Size Companies of all sizes practice earnings management, although their goals differ. Small companies may be more inclined to use earnings management to try to avoid reporting a net loss in a given period.

Earning management essay

Large and midsize companies, on the other hand, might be more interested in keeping earnings steady. Wall Street analysts set earnings targets for such companies, and they strive to meet or exceed those targets.

Earning management essay

They don't want to exceed them too much, though, because that could result in future targets being set even higher.Earnings Management Essay Earnings management is an accounting process whereby managers manipulate reported earnings to obtain some private gain.

As an indicator of opportunistic managerial behavior, investors and regulators are both concerned with the deliberate use of generally accepted accounting procedures to arrive at a desired level of. real earnings management affects subsequent operating performance (as measured by both earnings and cash flows), and (ii) whether market participants (investors and analysts) expect the subsequent decline in performance.

Earnings management often takes advantage of how accounting rules are adopted and creates financial statements that inflate earnings, total assets as well as revenue.

Organizations adopt earning management to smooth out fluctuations in earning and present . Managers can engage in both real earnings management and accrual earnings management at the same time, this causes negative relationship between abnormal accruals and abnormal CUFF.

We Will Write A Custom Essay Sample On Compare and contrast Accrual Earnings Management. Real-Activity Earnings Management using operating decisions: this type of earnings management is when managers make decisions that affect the real operations in the firm. This type is more dangerous both to the firm and to the managers.

Background on executive pay and earnings management The central tension in the corporate governance literature is the conflict of interest between firms’ dispersed owner-investors and the managers hired to determine firms’ investment.

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