Book: Financial accounting theory 7th edition, chapter 11 problem 6

Q1: describe 2 other ways that researchers have used to estimate discriminatory accrual?

Section 7112 plant, and equipment (JUL d. The effect will be to eliminate alternative ways of acce example, a new standard might require fair value acce equipment, rather than optional at present under IAS 5. The firms in Healy's study of earnings management (Sectie the historical cost basis of accounting. Given that accom increased use of fair value accounting for financial instru 7.4 7.5 and 7.9, would this move to fair value incres opportunistic earnings management for bonus purposes 6. The comparative balance sheet of JSA Ltd. at June 30, 2012 counting for the same counting of property LAS 16 (Section 73.4) dion 11.3) would have counting Standards struments, as described ease or decrease the pote es? Explain 30. 2013. is as follows: Loss b. Incom Provis Netic Cash June 30, 2013 June 30,2012 Assets $76 Current assets: Accounts receivable (net) Inventories Prepaid expenses 35 113 37 Capital assets (net) Long-term investments Prepaid development costs 40 $192 Liabilities and Shareholders' Equity $ 18 64 Current liabilities: Bank indebtedness Accounts payable Customer advances Current portion of long-term debt Current portion of future income taxes 13 Long-term debt Liability for future income taxes Share capital Retained earnings Savonly apter 11 SA Ltd.'s 2013 income statement is as follows: $233 $184 Sales Expenses Cost of sales Administrative and selling Research and development Depreciation and amortization Interest Loss before undernoted items Income tax recovery Provision for reorganization Net loss for the year Cash flow from operations for 2013 was $7. Iw 240 (7) (12) 5 (12) 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 discretionary 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. 7. A common tactic to manage earnings is to "stuff the channels--that is, to ship product prematurely to dealers and customers, thereby inflating sales for the period. A case in point is Bristol-Myers Squibb Co. (BMS), a multinational pharmaceutical company hear quartered in New York. In August 2004, the SEC announced a $150 million penalty levied against BMS. This was part of an agreement to settle charges by the SEC that the company had engaged in a fraudulent scheme to inflate sales and earnings in order to meet analysts' earnings forecasts. The scheme involved recognition of revenue on pharmaceutical products shinner to its wholesalers in excess of the amounts demanded by them. These shipments an d to S$15 billion during 2001-2002. lo persuade its wholesalers to accept this y to RMS agreed to cover their carrying costs, amounting to millions of dollars per DMS understated its accruals for rebater Section 7112 plant, and equipment (JUL d. The effect will be to eliminate alternative ways of acce example, a new standard might require fair value acce equipment, rather than optional at present under IAS 5. The firms in Healy's study of earnings management (Sectie the historical cost basis of accounting. Given that accom increased use of fair value accounting for financial instru 7.4 7.5 and 7.9, would this move to fair value incres opportunistic earnings management for bonus purposes 6. The comparative balance sheet of JSA Ltd. at June 30, 2012 counting for the same counting of property LAS 16 (Section 73.4) dion 11.3) would have counting Standards struments, as described ease or decrease the pote es? Explain 30. 2013. is as follows: Loss b. Incom Provis Netic Cash June 30, 2013 June 30,2012 Assets $76 Current assets: Accounts receivable (net) Inventories Prepaid expenses 35 113 37 Capital assets (net) Long-term investments Prepaid development costs 40 $192 Liabilities and Shareholders' Equity $ 18 64 Current liabilities: Bank indebtedness Accounts payable Customer advances Current portion of long-term debt Current portion of future income taxes 13 Long-term debt Liability for future income taxes Share capital Retained earnings Savonly apter 11 SA Ltd.'s 2013 income statement is as follows: $233 $184 Sales Expenses Cost of sales Administrative and selling Research and development Depreciation and amortization Interest Loss before undernoted items Income tax recovery Provision for reorganization Net loss for the year Cash flow from operations for 2013 was $7. Iw 240 (7) (12) 5 (12) 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 discretionary 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. 7. A common tactic to manage earnings is to "stuff the channels--that is, to ship product prematurely to dealers and customers, thereby inflating sales for the period. A case in point is Bristol-Myers Squibb Co. (BMS), a multinational pharmaceutical company hear quartered in New York. In August 2004, the SEC announced a $150 million penalty levied against BMS. This was part of an agreement to settle charges by the SEC that the company had engaged in a fraudulent scheme to inflate sales and earnings in order to meet analysts' earnings forecasts. The scheme involved recognition of revenue on pharmaceutical products shinner to its wholesalers in excess of the amounts demanded by them. These shipments an d to S$15 billion during 2001-2002. lo persuade its wholesalers to accept this y to RMS agreed to cover their carrying costs, amounting to millions of dollars per DMS understated its accruals for rebater