Question

Identify conditions that would lead an analyst to expect that management might attempt to manage earnings upward. Provide a specific example that illustrates this scenario. Do not use items already addressed by your peers. In replies to peers, provide additional supporting examples for this scenario.

Answer 1

Step:1 Definitions of Earningh Management

It is an accounting technique to make financial statement which can present positve view of Companie's activities and financial position. Earning management takes advantage of how accounting rules are applied and produce financial statement as upward earnings.

Earning management is uesd by the companies for present the consistant profits and Smooth their fluctuations in financial statements as compare to last year financial statements.

Earning management is used by the companies for manipulation of financial record in order to create higer short term profits.

Step:2 Lets take a suitable example to better understanding

Capitalisation of expense is one of the suitable example to make you understand suppose
company wants to change its policy that more cost are capitalised rather than expense immediately this can facilitalte the management that delays in the  recognition of expenses and increases profit in short term.

Assume company policy that every asset purchases under $15000 is immediately expensed and over and above that amount should be capitalized as asset. If the company change its policy and starts capitalising all item over and above $7000, than it will lead to decrease in expenses in the short term and also increase profit in short term.

Step: 3 Necessory Disclosure

Accounting policy should be consistant and stable (as per the accountig principal) if any change made in policy by the management should be disclosed to public disclousure is the part of financial statement so that credibility of finiancial statement of company is enhenced.

financial statements are consistant but thier is change in policy than it should be disclosed.

It allow the financial statement user to easily identify the variation from last year companies positions.

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