What does the term Income smoothing mean?Income smoothing is accounting way of using methods or techniques to resolve uncertainty in net income from one period to the next. It is usually done in two ways: income shifting, by accelerating or delaying revenue and expense recognition,Identify and discuss which factors you feel influence whether a manager actually violates GAAP in an effort to manage earnings?
Meet internal expectation, meet external expectation, and provide income smoothing are the factors that influence a manager to disobey GAAP in the effort to manage earnings.
A lot of companies calculate the employee's performance based on resource efficiency or sales, however, this persuasion may be the reason why managers disobey the GAAP in order to get the maximum level of bonus level. In order to meet external expectancy, managers usually purposely disobey GAAP because of debt obligations, executive bonuses, and meeting the stock analysts' expectancy. Managers dislike to report regressions, in which will affect the economic decision made by external financial users such as investors and creditors. Therefore, they cook up the numbers by devaluing the earnings in the good years to smooth the results in bad years. As a manager with authorities, it is often to be tempted to smooth the incomes by either deferring or accelerating income recognition or expense in order to make the company less volatile and make it easier for the company to obtain a loan on a favorable terms.
A manager being pressured to meet expectations in the face of a downturn in operating performance can be tempted to turn to an accounting solution and use accrual estimates and judgments to manage reported earnings. Discuss how else the manager might respond to this pressure?
While facing a downturn, managers can respond to be more efficient such as managing inventory efficiently, cut overheads and aggressively collect its outstanding account receivable. From this way, the manager could decrease any excessive costs that make the financial statement look bad and help to produce earning growth.
What type of company would be most likely to establish a cookie jar reserve? Why?
Microsoft and Dell had been alleged to begin cookie jar reserve. These types of companies do not always have steady sales; they have more seasonal sales such as back to school season or other holiday season. Hence, for these types of companies, it is essential to have reserved revenue to cover their bad seasons. However, by doing those things are not a good accounting practice.
Discuss whether or not there is anything wrong with using a different accounting estimate this year compared to last year so long as both estimates fall within a generally accepted range for your industry?
All of the companies are given the permission to choose the method of accounting that they think is the best for their business. There is nothing wrong by changing one method to another, however, full disclosure about the changing is needed, and otherwise, it would be considered as non-GAAP accounting practice.Elaborate on what do you think is the best long-run business practice? In my point of view, the best long-run business practice is to.