To state : Reasons for preference of stable earnings trend by managers.

Question

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Answer 1

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Students have asked these similar questions

Why does income smoothing generally lead to a higher share value? a. It reduces the perceived risk of the companyb. It leads to higher perceived incomec. It is perceived as increasing the chance of insolvencyd. None of the above. Research into income smoothing has concluded that a. Smoothed income indicates high earnings qualityb. Smoothed income indicates low earnings qualityc. The findings are mixed with regards to earnings qualityd. There is no relationship between income smoothing and earnings quality

Why would managers misrepresent the financial results oftheir companies?

Market-based bonus schemes may be considered more appropriate from a PAT perspective in industries in which: successful strategies will not be reflected in accounting profits for a number of periods. the price/earnings ratio is commonly greater than 12. profits may be the subject of manipulation by managers. capital investment is not an important strategic decision.

Answer 2

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Answer 3

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Answer 4

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

Answer 6

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

Answer 7

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

Answer 8

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

Answer 13

b)

To determine

To state : Methods business managers might use to smooth earnings.

Answer 14

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.