Question

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

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

Answer 1

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