Question

Any time management makes an estimate, there is the risk of earnings management or fraud. Accounting for bad debts requires management to make an estimate on the future collectability of receivables. Discuss why this could be an area at risk for earnings management.  

Answer 1

.Earnungs management is the use of accounting techniques to produce financial statements that present an overly positive view of a company's business activities and financial position.

Accounting for bad sets requires the management to make an estimate on the future collectability of receivables . This is an area of risk for the earnjngs management , as it is their job to show the positive view of the company in terms of financial position while future uncertainty about collection of revenue contradicts this purpose. If there are chances of huge bad dets , it would be difficult to show a favourable position. It would also reflect the inefficiency and carelessness of the management. This poses a risk on the position that the earnings management want to reflect. The management has to find the best way to report earnings to create the most favorable possible financial position for your company, while still complying in an ethical manner and also complying fully with generally accepted accounting procedures (GAAP)