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

Discuss how earnings management is used as a tool to reduce sensitivity to political pressure.

Which of the following best describes the potential impact of business risk on Earnings Quality? Select one: a. Business risk is mostly composed of financial risk factors and it has minimal effect on earnings quality. b. Higher earnings quality is linked with companies more insulated from business risk. While business risk is not primarily a result of management’s discretionary actions, this risk can be lowered by skillful management strategies.' c. A higher level of earnings quality can be observed in the industries with high business risk, because higher risk means higher returns d. For managing business risk, the managers almost have no discretion, therefore business risk is not directly or indirectly related to earnings quality.

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.