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Analyzing trends in financial ratios; ethical issues

What is the basic purpose for examining trends in a company's financial ratios and other data?

Why would managers be tempted to manage earnings?

What ethical issues, in any, arise when a company manages its earnings?

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Solution Preview

The basic reason to examine trends and ratios is for comparability. To judge where a company is going, the past history can be valuable. One type of analysis is to compare within one company: this year to last, projected next year to this year, etc. The second type of comparative data is this company to others in the industry. Without comparisons, it is difficult to judge the viability of a single company in a single year. Example: if a dog of a company got a huge and profitable contract this past year, their financial statements ...

Solution Summary

The 343 word solution presents a paragraph discussing trends and ratios for comparability. Then there are seven reasons why managers do manage earnings within reasonable, legal and justifiable means. Lastly are nine situations where managers step over the line in managing earnings.