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Computer companies who fraudulently report higher earnings would most likely also falsify which ratios and why?

Computer companies who fraudulently report higher earnings would most likely also falsify which ratios and why?

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Expert Solution

Companies who fraudulently report higher earnings would most likely also falsify ratios that are related to higher earnings are as follows are Rerturn on Assets & Return on Equity.

Return on Assets : Net income / Average Total Assets.

ROA may be the most frequently cited measure of the success of firms. ROA can be used tto rank firms in the same industry. the higher the ratio, the greater the fir'ms sucess in making its total assets productive. As income rises and total asset stays the same, the ratio too increases, and the firm looks more successful. Hence Higher earnings would report to a increase in ROA.

ROE: Net income / Average Equity.

Net income is availble to common shareholders after deduction of all payments to bondholders and preferred shareholders. If a firm is successful, ROE should be greater than the cost of equity capital. Hence If the Net income is high, ROE would be high. Hence higher earnings would like to increase the ROE also. Higer ROE ratios suggest better returns for common stockholders.

ekkarill92 answered 1 year ago
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