AYB311 Lecture Notes - Lecture 6: Earnings Management, Legal Management, Credit Risk
Document Summary
The importance of earnings: also, known as profit, bottom line, net income, measures entity"s performance, widely reported, frequently forecast, strongly linked to share value. The examples, used by: shareholders, assess stewardship and prospects, creditors, assess risk, input to debt covenant, customers, assess earnings, long term survival, employees, assess job security. What is earnings management: healy and wahlen (1999): Methods of earnings management: accounting policy choice, most common form of earnings management, strategic choices of accounting policy, accrual accounting, allows entities to delay or accelerate recognition of income and expenses, enables entity to temporarily adjust profit figures. Accruals and earnings management: we know that earnings management often occurs via the accrual process as the cash flow component requires more effort to manipulate, accruals can be decomposed into two components, 1. Non-discretionary component: this depends on the level of sales, investment and leverage: 2.
