Term
| 1. management compensation payments (bonuses or stock options for earnings) 2. job security for senior management 3. create optimal lending environments 4. mitigate potential violation of debt covenants 5. influence short term stock price 6. meet analysts' forecasts 7. thwart takeovers and antitrust actions |
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Definition
| 7 motives to practice earnings management |
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Term
| 1. revenue manipulation 2. expense manipulation 3. related party transactions 4. off-balance sheet entities 5. off-balance sheet financing |
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Definition
| 5 types of managerial manipulation |
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Term
| 1. recording AR when customer isn't committed to transaction or is unable to make payments 2. channel stuffing 3. increasing sales by granting more generous terms or selling to customers of low credit quality 4. not recording a sufficient bad debt allowance (overstating AR) 5. over aggressive allocation of unearned revenue (receiving money in advance for building something and saying the project is more complete than it really is) 6. bill and hold |
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Definition
| 6 methods of revenue manipulation |
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Term
| shipping a product to a customer before they need it |
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Definition
| channel stuffing (rev manip) |
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Term
| revenue is recognized, a bill is sent, but goods haven't been shipped (customer doesn't have to pay until item is received) |
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Definition
| bill and hold (rev manip) |
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Term
| 1. capitalizing costs that should have been expensed 2. developing and producing software, GAAP requires that only costs incurred beyond the point of technological feasability be capitalized (until product works) 3. the allocation of joint costs (costs applicable to more than one item) can be manipulated by assigning more inventory costs to slow-moving products thereby leaving these costs in inventory rather than expensing through cogs 4. expenses can be manipulated by failing to write down inventory in a timely basis 5. depreciation and amortization are arbitrary (can depreciate over a longer period of time than competitors) 6. understating or ignoring warranty liability |
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Definition
| 6 methods of expense manipulation |
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Term
| engage in sham transactions (selling something to a related party and buying it back next year) |
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Definition
| related party transactions |
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Term
| create a separate legal entity not required to be consolidated and exercise influence by appointing related parties to management or by being a key financier, customer, or supplier (used to hide debt) |
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Definition
| off-balance sheet entities |
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Term
| used to finance the acquisition of resources without showing associated assets or liabilities on balance sheet. e.g., operating leases (leasing an asset, but legally don't have to show assets or liabilities), take-or-pay contracts (certain amount of inventory taken over time, if they don't take them they still must pay), sale of receivables (make it look like a sale instead of a loan) |
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Definition
| off-balance sheet financing |
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Term
| shown separately to convince readers they aren't important moving forward |
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Definition
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