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Chapter 4: Q2CA_(a) (page 190)

Bobek Inc. has recently reported steadily increasing income. The company reported income of \(20,000 in 2014, \)25,000 in 2015, and \(30,000 in 2016. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2017, and it again appears to be a good year. However, it has not yet recorded warranty expense.

Based on prior experience, this year鈥檚 warranty expense should be around \)5,000, but some managers have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is \(43,000. Specifically, by recording a \)7,000 warranty accrual this year, Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years.

Instructions

(a) What is earnings management?

Short Answer

Expert verified

Earnings management is the planning of business administration to make the fluctuations in the earnings. This planning presents the increased income for the current years.

Step by step solution

01

Meaning of Financial reporting

Financial reporting is one of the crucial processes of business activities. Under this process, a business entity discloses its financial data in the form of financial statements tointernal and external users.

02

Earnings management

Earnings management refers to the technique used by the company鈥檚 management to present its financial statements in a positive manner. The principal purpose of earnings management is to attractpotential investorsand reflect a favorable view of the company鈥檚 financial position.

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Most popular questions from this chapter

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

Presented below is information related to Viel Company on December 31, 2017, the end of its first year of operations.

Sales revenue $310,000

Cost of goods sold 140,000

Selling and administrative expenses 50,000

Gain on sale of plant assets 30,000

Unrealized gain on non-trading equity securities 10,000

Interest expense 6,000

Loss on discontinued operations 12,000

Allocation to non-controlling interest 40,000

Dividends declared and paid 5,000

Instructions

Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance on December 31, 2017. (Ignore income taxes.)

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

Portman Corporation has retained earnings of \(675,000 at January 1, 2017. Net income during 2017 was \)1,400,000, and cash dividends declared and paid during 2017 totaled $75,000. Prepare a retained earnings statement for the year ended December 31, 2017.
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