Question

1. What is the primary goal of management? What are the primary tasks of a Chief Financial Officer (CFO) and others in finance function of an organization?

2. Name and explain three tricks that management can play to manage earnings. Explain how using financial ratios can help spot these tricks.

3. Why is it important to analyze profitability, specifically focusing on return on investment? Invoke the breakdown of ROI in thinking about your response.

Answer 1

Ans 1_The most primary objective of the firm is to maximize the value of the firm for its owners, that is, to maximize shareholder wealth. Shareholder wealth is represented by the market price of a firm’s common stock.
The chief financial officer (CFO) is the officer of a company that has primary responsibility for managing the company's finances, including financial planning, management of financial risks, record-keeping, and financial reporting. In some sectors, the CFO is also responsible for analysis of data. Some CFOs have the title CFOO for chief financial and operating officer.In the United Kingdom, the typical term for a CFO is finance director (FD). The CFO typically reports to the chief executive officer (CEO) and the board of directors and may additionally have a seat on the board. The CFO supervises the finance unit and is the chief financial spokesperson for the organization. The CFO directly assists the chief operating officer (COO) on all strategic and tactical matters relating to budget management, cost–benefit analysis, forecasting needs, and securing of new funding.

Ans2_Earnings management is the use of accounting techniques to produce financial reports that present an overly positive view of a company's business activities and financial position. Many accounting rules and principles require company management to make judgments.
Earnings are the profits of a company. Investors and analysts look to earnings to determine the attractiveness of a particular stock. Companies with poor earnings prospects will typically have lower share prices than those with good prospects. Remember that a company's ability to generate profit in the future plays a very important role in determining a stock's price.

Three techniques of earning management are listed below:

1)Revenue and Expense Recognition
Earnings" is just another word for profit, and profit is simply revenue minus expenses. So the simplest way for a company to manage earnings is by changing the dates on which it enters certain revenues and expenses in its books. To increase earnings in the current period, the company can recognize future revenue prematurely -- before that revenue has been fully earned -- or delay recognizing expenses. Similarly, if it wants to shift "extra" earnings from the current period to the next, it could delay the recognition of revenue that has been earned, or recognize expenses prematurely, before they're actually incurred.

2)Cookie Jar" Accounting
Accounting rules require companies to recognize future expenses at the time they recognize the revenue associated with those expenses. For example, when a company sells an item with a warranty, it must estimate its future warranty costs and recognize that expense at the time it makes the sale. Similarly, when a company sells items to customers on credit, it must estimate the value of customer bills that will eventually go unpaid and immediately recognize that "bad debt expense." If a company overestimates these kinds of expense in the current period, it won't have to recognize as big an expense in future periods. Therefore, it shifts earnings from the current period to the future. This tactic goes by the name "cookie jar accounting."

3)Changing Accounting Methods
In many areas of business bookkeeping, accounting standards allow companies to choose the reporting method that works best for them. Examples include the system the company uses to account for the value of its inventory and the schedule it uses to depreciate its capital assets. Over the long term, different methods for doing the same thing should produce the same end result -- the same total value will go into and out of inventory, for example, or the same amount of value will get depreciated. In the short term, however, a company's choice of methods can significantly affect its earnings from one period to the next. If a company switches from one accounting method to another primarily to affect earnings, it's engaging in earnings management.

4)One-Time Charges
From time to time, companies may have to report a particularly large one-time expense -- writing off the cost of a failed project, for example, or significantly reducing the value of an asset on the balance sheet. Companies that practice earnings management may try to "save" these charges for a time when earnings are high enough to absorb the hit -- or take the charges prematurely if current earnings are high. Similarly, a company that must take a big one-time charge in the current period might use the opportunity to accelerate all kinds of other expenses to that period, too. This is called the "big bath," after the idea that if the company is going to "take a bath" -- suffer bad results in a particular period -- it might as well take a big bath and get as many future expenses out of the way as possible.

Ans3_The Use of Return on Investment (ROI) in the Performance Measurement and Evaluation of Information Systems
Performance measurement and program evaluation are essential for accountable and transparent delivery of public services to Ontarians .Evaluation of the existing information systems and making investment decisions on new acquisitions should be based on a rigorous and quantifiable analysis of the benefits and costs. Return on Investment (ROI)is arguably one of the most popular metrics, and ROI analysis (when applied correctly) is a powerful tool in making informed decisions. This presentation explores a wide variety of the approaches to calculating ROI of an information management system. Attendees will find practical answers to the questions: What is ROI? What types of ROI exist? What are the benefits of using ROI metrics? What are the limitations of the ROI approach? In this session, several concrete examples of the application of the ROI will be reviewed. Although the focus of the presentation is made on the information systems/solutions, most considerations of ROI use are generic and applicable in any field.