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Chapter 4: 7Q (page 169)

How can earnings management affect the quality of earnings?

Short Answer

Expert verified

The quality of earnings is negatively affected by earnings management. Earnings management lowers the reliability element of income.

Step by step solution

01

Meaning of Earnings Management

Earnings management is used by companies that represent the overall positive viewof the company's activities and financial statements.

02

Earnings management affecting the quality of earnings

If misleading information is provided, it will negativelyhamper the quality of earnings. Earnings management reduces the reliability of incomeas it reports biased income. Information in the financial statements must be relevant and faithfully represented to ensure the confidence of investors and other interested parties.

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Most popular questions from this chapter

IFRS4-1 Explain the difference between the “nature-of-expense” and “function-of-expense” classifications.

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.

What is the basis for distinguishing between operating and non-operating items?

How can information based on past transactions be used to predict future cash flows?

Finley Corporation had income from continuing operations of \(10,600,000 in 2017. During 2017, it disposed of its restaurant division at an after-tax loss of \)189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2017 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation). Finley had 10,000,000 shares of common stock outstanding during 2017. Prepare a partial income statement for Finley beginning with income from continuing operations.

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