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ACCT 447 - Ch 1b
Earnings Management
10
Accounting
Undergraduate 4
09/15/2009

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Cards

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
Definition
7 motives to practice earnings management
Term
1. revenue manipulation 2. expense manipulation 3. related party transactions 4. off-balance sheet entities 5. off-balance sheet financing
Definition
5 types of managerial manipulation
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
Definition
6 methods of revenue manipulation
Term
shipping a product to a customer before they need it
Definition
channel stuffing (rev manip)
Term
revenue is recognized, a bill is sent, but goods haven't been shipped (customer doesn't have to pay until item is received)
Definition
bill and hold (rev manip)
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
Definition
6 methods of expense manipulation
Term
engage in sham transactions (selling something to a related party and buying it back next year)
Definition
related party transactions
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)
Definition
off-balance sheet entities
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)
Definition
off-balance sheet financing
Term
shown separately to convince readers they aren't important moving forward
Definition
non-recurring charges
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