Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Such pressure may cause some managers to alter their estimates for depreciation to artificially create desired results.Required: 1. Understand the reporting effect: Do estimates by management affect the amount of depreciation in its company’s financial statements? 2. Specify the options: To increase earnings in the initial years following the purchase of a depreciable asset, would management (a) choose straight-line or double-declining balance, (b) estimate a longer or shorter service life, and (c) estimate a higher or lower residual value? 3. Identify the impact: Are decisions of investors and creditors affected by accounting estimates? 4. Make a decision: Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Such pressure may cause some managers to alter their estimates for depreciation to artificially create desired results.
Required:
1. Understand the reporting effect: Do estimates by management affect the amount of depreciation in its company’s financial statements?
2. Specify the options: To increase earnings in the initial years following the purchase of a
(b) estimate a longer or shorter service life, and (c) estimate a higher or lower residual value?
3. Identify the impact: Are decisions of investors and creditors affected by accounting estimates?
4. Make a decision: Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?
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