Answer the following three questions as fully and completely as possible.

1. Companies listed in the stock market are required to use the accrual basis of accounting to recognize assets, liabilities, expenses, and revenues. Explain the key elements of the accrual basis of accounting and how it allows managers to manipulate reported earnings.

2. Derivative instruments have been used increasingly inside and outside the United States in recent years. Explain the meaning of the following derivative instruments:

a) European-style Options

b) American-Style Option

c) In-the-money (ITM)

d) out-of-the-money (OTM)

e) at-the money (ATM)

f) call option

g) put option

h) future contracts

i) options on futures contracts

3) Management tends to manipulate and manage reported income by applying different management earning techniques. Explain these techniques and managements motives for manipulating and smoothing earnings.