Exam 6: Earnings Management

Most companies that engage in earnings management typically do NOT go beyond which of the following activities on the earnings management continuum?

Which of the following services offered by investment firms have some states declared to be incompatible with generating forecasts of company earnings? 1)Assisting a firm in an initial public offering in determining a preliminary offering price. 2)Assisting a firm in an initial public offering in determining the number of shares to be sold. 3)Agreeing to buy the entire issue of stock in an initial public offering and reselling the stock to investors. 4)Agreeing to put forth the firm's best effort to sell the entire issue of stock in an initial public offering.

Which of the following regarding the weighted-average cost of capital is true?

Which of the following typically involves the use of non-GAAP accounting?

Internal earnings targets represent an important tool in motivating managers to increase sales efforts,control costs,and use resources more efficiently.Such internal targets also can cause managers to resort to extreme measures in order to meet goals established by upper management.Earnings management often appears in a variety of forms as a means of reaching these internal goals. Earnings management also is associated with earnings-based internal bonus plans which are also a form of internal target. Explain how earnings management is related to earnings-based internal bonus plans and how managers behave in response to such plans.

Statement of Financial Accounting Concepts No.1,"Objectives of Financial Reporting by Business Enterprises," identifies investors and creditors as the primary users of financial reporting information.Investors in public companies express their opinions about an entity's equity securities through organized exchanges such as the New York Stock Exchange.Given that investors represent one of the two primary groups to which financial reporting is directed,accountants and auditors preparing and opining on,respectively,the financial statements of public companies should be aware of the effects of the quality of financial reporting on stock prices. Required: Identify four major periods of decline in worldwide stock prices for the years 1997 through 2002 and discuss the role (if any )of financial reporting in these declines.

Net income is a key number for shareholders,creditors,and analysts alike.Indeed,analysts' projections of net income for a company are viewed as a standard a company must achieve for a period of time.Failure to achieve this standard can have devastating effects on a company's stock price and its management. The importance of net income in the eyes of analysts and others can tempt managers to take steps to ensure that the appropriate level of net income is achieved.The process of manipulated net income to achieve a desired level of earnings is referred to as earnings management. Required: List and explain the economic motivations for earnings management.