Managing Earnings
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Companies often try to keep accounting earnings growing at a relatively steady pace in an effort to avoid large swings in earnings from period to period. They also try to manage earnings targets. Reflect on these practices and discuss the following in your discussion post.
Are these practices ethical?
What are two tactics that a financial manager can use to manage earnings?
What are the implications for cash flow and shareholder wealth?
Using the financial balance sheet as displayed in the text, provide an example of how purchasing an asset or issuing stocks or bonds could potentially impact earnings targets.
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Solution Summary
This solution discusses ethical practices, earnings targets, tactics for a financial manager, and asset purchases. All topics included in the question are thoroughly discussed and analyzed.
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Are these practices ethical?
It is never ethical to manage earnings. Anytime management forces the company's financial position to appear in any way other than it should, they're managing earnings. When we analyze this, we can say that managing earnings, which forces numbers, is deceitful because it creates a financial standpoint that wouldn't exist had the earning not been managed. Management often manages earnings to appease investors and other users of the financial statements, so as not to risk a loss of investors. This is never ethical because it is manipulation, even if the earnings are managed in a way that's legal.
What are two tactics that a financial manager can use to manage earnings?
(1) Management can hide expenses as liabilities, which takes the expenses off the income statement and puts them on the balance sheet. The reason for this is because the expense on the income statement would drop net income, but if the expense was moved onto the balance sheet, the net income wouldn't be affected, although the liabilities and solvency ratios would. Even though this still affects the company's financial position, management will manipulate earnings in this way to try and "hide" the expense, preventing it from dropping net income. Another method is to keep ...
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