The comparative balance sheet of JSA Ltd. as at June 30, 2008 is as follows:

JSA Ltd.'s 2008 income statement is as follows:

Required

a. Calculate the various accruals on an item-by-item basis. For each accrual indicate the extent to which that accrual may contain a discretionary component and briefly explain why.

b. Briefly describe two other ways that researchers have used to estimate the discretionary component of total accruals.

c. A manager, whose bonus is related to reported net income, finds that net income for the year (before bonus) is below the bogey of the incentive plan. What type of earnings management might the manager then engage in? Which of the accruals in part a would be most suitable for this purpose? Explain.

Transcribed Image Text:

Current assets: Accounts receivable (net). Inventories Prepaid expenses Capital assets (net) Long-term investments Prepaid development costs June 30, 2008 June 30, 2007 Assets $ 76 35 2 113 37 2 40 $192 39 $194 8 Liabilities and Shareholders' Equity $ 18 64 $ 4 71 Current liabilities: Bank indebtedness Accounts payable Customer advances Current portion of long-term debt Current portion of future income taxes Long-term debt Liability for future income taxes Share capital Retained earnings 13 - g| 8 2 1 86 3 0 6 71 28 $194