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Chapter 4: Question 6 (page 179)

What is earnings management?

Short Answer

Expert verified

Earnings management is a tool to present the company's financial statements and activities in a positive manner.

Step by step solution

01

Earnings

The term earnings refer to the amount of money left with a business entity after settling all the expenses. It is computed by taking the difference between revenues and expenses.

02

Earnings management

Earnings management is the technique used by the management of a business concern to alter its financial information.

Earnings management is often used to mislead the stakeholdersand gain personal benefit.

This tool facilitates the management to present its financial reports in a manner that may attract potential investors.

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Most popular questions from this chapter

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

Identify at least two situations in which important changes in value are not reported in the income statement.

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

Generally accepted accounting principles usually require the use of accrual accounting to “fairly present” income. If the cash receipts and disbursements method of accounting will “clearly reflect” taxable income, why does this method not usually also “fairly present” income?

Question: What are the two ways that other comprehensive income may be displayed (reported)?
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