Why do accrual based accounting figures create opportunities for earnings manipulation or management? What can a...

Why do accrual based accounting figures create opportunities for earnings manipulation or management?

What can a comparison between net income and cash flow reveal?

Solutions

Expert Solution

Accrual based accounting figures create opportunities for earnings manipulation or management because of following reasons :

1. Use of Accounting estimates are based on management analysis. Hence management can show entries relating to accrual expnses, liabilities and assets as per their descrition. So that it widen the scope of manipulation by management.

2. Since accrual item based on historical record and future estimates. Hence, it should be as per best estimate of management. Hence management can as per their will record expenses to reduce the profit.

3. But in accrual based accounting, unaccrued income cannot be recorded unless it is sure to recieve that income. Hence management cannot increase profit as per their will.

comparison between net income and cash flow reveal :-

Net Income	Cash Flow
1. It derived from income statement	1. It derived from cash flow statement
2. It considered revenue item	2. It consider revenue and capital item
3.It is calculated during period of time	3.It is calculated during period of time

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

What is the difference between real earnings management technique and accrual earnings management technique?

a. Why do major companies use accrual accounting?

a. Why do major companies use accrual accounting?b. Do you think that the owner of the food stand on 45th and Fifth Avenue used accrual accounting or the other type of accounting?c. What is the other type of accounting?

Differentiate between cash basis accounting and accrual basis accounting. Why do more businesses use accrual basis?...

Differentiate between cash basis accounting and accrual basis accounting. Why do more businesses use accrual basis? What are some of the accounting principles and concepts that influence the four financial statements all business organization create each financial period?

how management can misuse accrual accounting for personal gains. You can discuss credit transactions and accounting...

how management can misuse accrual accounting for personal gains. You can discuss credit transactions and accounting estimates.

Explain a transaction-based accounting system requiring accrual accounting.

What is accrual accounting and why is it the preferred method for most organisations

Cash Basis vs. Accrual Basis Accounting Differentiate between cash-basis accounting and accrual-basis accounting. Why is accrual-basis...

Cash Basis vs. Accrual Basis Accounting Differentiate between cash-basis accounting and accrual-basis accounting. Why is accrual-basis accounting the preferred method for most businesses? The Internal Revenue Service requires all companies with sales over $5,000,000 to use the accrual-basis of accounting for income tax reporting purposes. Why?

Why do accountants use the accrual-basis method instead of the cash basis method of accounting? What...

Why do accountants use the accrual-basis method instead of the cash basis method of accounting? What are some of the benefits of using accrual accounting?

Define the earnings management in the accounting regime; based on agency theory and from the efficient...

Define the earnings management in the accounting regime; based on agency theory and from the efficient contracting approach to the decision usefulness perspective , discuss the motivations of earnings management; patterns of earnings management; and market efficiency in responding to potential earnings management;

Define the earnings management in the accounting regime; based on agency theory and from the efficient...

Define the earnings management in the accounting regime; based on agency theory and from the efficient contracting approach to the decision usefulness perspective

Subjects