Cascade company owns bonds that mature in 7 years; the principal from these bonds is intended for the remodeling of Cascades corporate offices. In years past, these bonds have been classified as Held-to-maturity because of Cascades strong financial liquidity and intention to use the principle for remodeling.

Cascade company has strong financial liquidity and equity funding however their current financial earnings are below analyst forecast. The CEO has recently emphasized the importance of meeting the earnings target for the year and has put considerable pressure on the accounting department to meet earnings expectations.

Answer the following questions in 1 page or less for each question.

Questions:

1. How might the accounting department manipulate the accounting treatment of the bonds to improve the financial earnings of the company?
2. Which financial statement line items or financial ratios could an investor look at to identify potential manipulations of the financial statements?