In a short essay, discuss how the practices of one time charges and cookie jar accounting enable managers to manipulate financial statements or manage earnings.
What will be an ideal response?
a. One time charges—Sometimes companies take expenses in one year that they know will not necessarily be recurring yearly. Investors will discount the impact of one-time charges when they evaluate a firm’s financial performance because it is a nonrecurring event. This means that firms include the amounts as separate and sometimes as extraordinary charges on the income statement. Although they may be legitimate, these special charges are being used to cover up some other expenditure or to help the company’s earnings look better. This may include restructuring charges, which companies can take when times are going bad to artificially improve their net income.
b. Cookie Jar Accounting—Management can manipulate the financial results of a company by adding or taking away reserves (cookies) from a “jar” depending on the circumstances. Management will build up financial reserves in profitable years. When the firm has unprofitable years, the reserves are released into the financial statements so it appears that the firm was much more profitable than reality so smoothing peaks and troughs of its financial performance. Income smoothing means companies will be understate earnings in good years and overstate earnings in bad years.
You might also like to view...
Borrowers who retire long-term liabilities debit the liability account for its current book value, credit Cash, and recognizes any difference on the retirement of the debt as a
a. gain when book value exceeds cash disbursement (credit). b. gain when cash disbursement exceeds book value (credit). c. loss when book value exceeds cash disbursement (debit). d. a financing loss (debit). e. cannot be determined from the above information.
Inputs to a production system that do not have market prices are those held in the ________
Fill in the blanks with correct word
These are problems in which some, but not all, the decision variables must have integer solutions:
A) mixed IP problems B) pure IP problems C) pure binary problems D) mixed binary IP problems E) goal programming problems
Federal laws often provide more sweeping and significant protections for the consumer than state laws.
Answer the following statement true (T) or false (F)