BUS 421 Chapter Notes - Chapter 11: Earnings Management, Credit Risk, Accrual

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 421
• Professor: Irene Gordon

Document Summary

Definition: the choice by a manager of accounting policies, or read actions, affecting earnings so as to achieve some specific reported earnings objective. Important to accountants: enable an improved understanding of the usefulness of net income, assist to avoid legal and reputation consequences that arise when firms become financially distressed. Includes both accounting policy choices and real actions: accounting policy choices, policies for revenue recognition, discretionary accruals, provision for credit losses, warranty costs. Inventory values: timing and amounts of low-persistence special items, real actions, ma(cid:455) (cid:271)e (cid:272)ostl(cid:455), as it dire(cid:272)tl(cid:455) affe(cid:272)ts the fir(cid:373)"s lo(cid:374)ger-run interests, advertising, r&d, timing of purchases and disposals of capital assets. Managers may engage in a variety of earnings management patterns. Chosen by a firm due to changes in contracts, profitability, and political visibility: taking a bath, takes place during periods of organizational stress or restructuring.