ACC 350 || 100% Verified Answers.
Quality of earnings :According to Dichev correct answers CFOs believe that earnings are of high
quality when they are sustainable and backed by actual cash flows
Quality of earnings: According to Needles and Power correct answers The quality of a company's
earnings refers to the substance of earnings and their sustainability into future accounting periods
Sustainable earnings correct answers Sustainable earnings are earnings that a company would
like to keep period after period after period, backed by actual cashed flows.
What has the most substantial impact on on substance of earnings? correct answers Operating
Income
Earnings management: Needles and Powers correct answers the manipulation of revenues and
expenses to achieve a specific outcome
Earnings management: M&M correct answers when managers use judgement in financial
reporting and in structuring transaction to bring about a desired level of reported earnings
or
artificially inflate (or deflate) their revenues or profits, or earnings per share (EPS) figures
Do people only manipulate earnings upward? correct answers No, there are some incentives to
deflate earnings
2 Popular ways of managing earnings in fraud-laden early 2000's correct answers 1. Using
aggressive accounting techniques, such as capitalizing costs that should be expensed.
2. Establishing or altering the components of estimates to achieve a desired goal
,Earnings management: Actual definition correct answers distortion in the applications of GAAP,
which compromises the quality of earnings.
The key issue of Earnings Managment correct answers Whether the distortion results from: 1.
Valid choices within gap, or 2. it is motivated by a conscious effort to manipulate earnings for
one's advantage (fraud)
Earnings Smoothing correct answers A subset of earnings management. Is an attempt to manage
earnings such that are steady incremental increases in earnings from period to period.
-Managed positively or negatively in order to smooth earnings
Why do companies manage earnings? correct answers 1. "Companies try to meet or beat Wall
Street expectations so that the market price of their stock and the value of management's stock
options increase. As a result, companies have incentives to manage income to meet earnings
targets or to make earnings look less risky."
2. The SEC is concerned that, "motivations to meet earnings targets may override good business
practices. This erodes the quality of earnings and the quality of financial reporting"
3. According to an SEC spokesperson, "Managing may be giving way to manipulation; integrity
may be losing out to illusion". (p. 161)
"managed earnings" can also be to used to_______ correct answers maximize bonuses for
management and insure that debt covenants are not violated.
Mintz and Morris (M&M) say when talking about accounting scandals at Enron, WorldCom,
HealthSouth, etc. correct answers "Each fraud occurred as a result of a desire to meet financial
analysts' earnings estimates or to inflate share price to make stock options worth more or to
increase bonus payments to top management."
Arthur Levitt, former SEC Chairman, in a 1998 speech entitled "The Numbers Game correct
answers "companies try to meet or beat Wall Street earnings projections in order to grow market
capitalization and increase the value of stock options."
, Robert Klima, former chief accountant in the Corporation Finance Division at the SEC said
correct answers "The vast majority of public companies engage in some form of questionable
earnings management, at least on the margin"
In a given period how many firms manage earnings? correct answers Roughly 20% according to
Dichev
Typical misrepresentation of firms is about how much of EPS? correct answers 10%
Earnings managemen: Income increasing vs Income Decreasing correct answers "60 percent of
earnings management is income-increasing, and 40 percent is income-decreasing"
The use of estimates and assumptions implies: correct answers a lack of precision in financial
reporting and the determination of net income.
Estimates and assumptions as well as choosing accounting methods require: correct answers
Professional Judgement
Allowance method correct answers Accounting method in which a provision is made for
estimated bad debts in an accounting period by setting aside a certain percentage of total sales
revenue. Any excess or shortfall of this amount (as against the actual uncollectible amount) is
adjusted in the following accounting period. It is one of the two such methods; the other is called
direct write off method. Also called allowance for bad debts.
Choosing a method to account for bad debts and estimating the amount of credit or accounts
receivable that is not expected to be collected results in an adjusting entry at the end of the period
that affects correct answers 1. The bad debt expense for the period on the income statment
2. The balance in the allowance for doubtful accounts (and net realizable value of A/R at the end
of the period on the balance sheet.
Quality of earnings :According to Dichev correct answers CFOs believe that earnings are of high
quality when they are sustainable and backed by actual cash flows
Quality of earnings: According to Needles and Power correct answers The quality of a company's
earnings refers to the substance of earnings and their sustainability into future accounting periods
Sustainable earnings correct answers Sustainable earnings are earnings that a company would
like to keep period after period after period, backed by actual cashed flows.
What has the most substantial impact on on substance of earnings? correct answers Operating
Income
Earnings management: Needles and Powers correct answers the manipulation of revenues and
expenses to achieve a specific outcome
Earnings management: M&M correct answers when managers use judgement in financial
reporting and in structuring transaction to bring about a desired level of reported earnings
or
artificially inflate (or deflate) their revenues or profits, or earnings per share (EPS) figures
Do people only manipulate earnings upward? correct answers No, there are some incentives to
deflate earnings
2 Popular ways of managing earnings in fraud-laden early 2000's correct answers 1. Using
aggressive accounting techniques, such as capitalizing costs that should be expensed.
2. Establishing or altering the components of estimates to achieve a desired goal
,Earnings management: Actual definition correct answers distortion in the applications of GAAP,
which compromises the quality of earnings.
The key issue of Earnings Managment correct answers Whether the distortion results from: 1.
Valid choices within gap, or 2. it is motivated by a conscious effort to manipulate earnings for
one's advantage (fraud)
Earnings Smoothing correct answers A subset of earnings management. Is an attempt to manage
earnings such that are steady incremental increases in earnings from period to period.
-Managed positively or negatively in order to smooth earnings
Why do companies manage earnings? correct answers 1. "Companies try to meet or beat Wall
Street expectations so that the market price of their stock and the value of management's stock
options increase. As a result, companies have incentives to manage income to meet earnings
targets or to make earnings look less risky."
2. The SEC is concerned that, "motivations to meet earnings targets may override good business
practices. This erodes the quality of earnings and the quality of financial reporting"
3. According to an SEC spokesperson, "Managing may be giving way to manipulation; integrity
may be losing out to illusion". (p. 161)
"managed earnings" can also be to used to_______ correct answers maximize bonuses for
management and insure that debt covenants are not violated.
Mintz and Morris (M&M) say when talking about accounting scandals at Enron, WorldCom,
HealthSouth, etc. correct answers "Each fraud occurred as a result of a desire to meet financial
analysts' earnings estimates or to inflate share price to make stock options worth more or to
increase bonus payments to top management."
Arthur Levitt, former SEC Chairman, in a 1998 speech entitled "The Numbers Game correct
answers "companies try to meet or beat Wall Street earnings projections in order to grow market
capitalization and increase the value of stock options."
, Robert Klima, former chief accountant in the Corporation Finance Division at the SEC said
correct answers "The vast majority of public companies engage in some form of questionable
earnings management, at least on the margin"
In a given period how many firms manage earnings? correct answers Roughly 20% according to
Dichev
Typical misrepresentation of firms is about how much of EPS? correct answers 10%
Earnings managemen: Income increasing vs Income Decreasing correct answers "60 percent of
earnings management is income-increasing, and 40 percent is income-decreasing"
The use of estimates and assumptions implies: correct answers a lack of precision in financial
reporting and the determination of net income.
Estimates and assumptions as well as choosing accounting methods require: correct answers
Professional Judgement
Allowance method correct answers Accounting method in which a provision is made for
estimated bad debts in an accounting period by setting aside a certain percentage of total sales
revenue. Any excess or shortfall of this amount (as against the actual uncollectible amount) is
adjusted in the following accounting period. It is one of the two such methods; the other is called
direct write off method. Also called allowance for bad debts.
Choosing a method to account for bad debts and estimating the amount of credit or accounts
receivable that is not expected to be collected results in an adjusting entry at the end of the period
that affects correct answers 1. The bad debt expense for the period on the income statment
2. The balance in the allowance for doubtful accounts (and net realizable value of A/R at the end
of the period on the balance sheet.
