Discuss the merits and shortcomings of this managerial practice.
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Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. For example, in Twitter’s initial public offering filings with the SEC, the company reported a net loss of $79.4 million, but prominently disclosed “adjusted EBITDA” of (positive) $21.2 million. Discuss the merits and shortcomings of this managerial practice.
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- Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company. Changes in consumer demand have made it hard for Ross to attract customers Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term-a current asset. On the controller’s recommendation,…1. Explain the relationship between the Cost Management System and the Financial Accounting System 2. Distinguish between IASB standards and the Conceptual Framework for Financial Reporting 3. Hardly a day goes by without an article appearing on the crises affecting many of our financial institutions. It is estimated that the financial crises 2007 - 2008 for example, caused a deep recession. Some argue that if financial institutions had been required to report their investments at fair value instead of cost, large losses would have been reported earlier, which would have signaled regulators to close these financial institutions, therefore minimizing the losses to many investors. Explain how reported accounting numbers might affect an individual's perceptions and actions. Cite two examples. 4. Explain principles based vs. rule-based accounting standards. Which one is mostly used as reference by PSAK or IFRS?The SEC is trying to get companies to notify the investment community more quickly when a "material change" will affect their forthcoming financial results. In what sense might a financial manager be seen as "more ethical" if he or she follows this directive and issues a press release indicating that sales will not be as high as previously anticipated? A manager at a "Check Into Cash" business (see Focus on Ethics box on page 192) defends his business practice as simply "charging what the market will bear." "After all," says the manager, "we don't force people to come in the door." How would you respond to this ethical defense of the payday-advance business? Bond rating agencies have invested significant sums of money in an effort to determine which quantitative and nonquantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get nonpublic information that is used in assigning the issue's bond…
- Is it an entity inherent risk for the information below? To help stimulate sales and operating efficiency, Marco Inc. recently instituted a profit- sharing bonus agreement for its employees, including top management. Management negotiated the plan because employees have gone without raises for several years. The agreement bases employee bonuses on unaudited net income for the past year because of the need to adjust employees' salaries at the beginning of each year. However, management will adjust future bonuses for any audit adjustments made after the bonuses are set based on unaudited data. The firm sets a bonus pool based on five percent of operating income, which limits the total available to pay bonuses. Management bases individual bonuses on an employee's position, length of service, and certain specific negotiated terms with individual officers. If it is an inherent risk, what is the feature of the firm that will possibly affect inherent risk and explain how and why; that is…Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile? ... O A. They do not tell how the decision affects the firm's reported profits from an accounting perspective. O B. They are not easily predicted from historical financial statements of a firm and its competitors. O C. They do not show how the firm's earnings are expected to change as the result of a particular decision. O D. These earnings are not actual cash flows.How can adjustments to the standardized financial statements be made in order to undo these distortions? Accounting distortions: Accounting distortions refer to the concept of any sort of difference between the information or evaluation made regarding the financial statement than the real-time data of the business. The most common types of accounting distortions are as follows: Data entry errors: It occurs when there are mistakes or misstatements in the data entry system of the company. For example, entering items in the wrong account, transposing numbers, leaving out or adding a digit or a decimal place, treating expenses as income, or vice versa. The error of omission: It involves an error that occurs when one fails or forgets to make any entry. For example, failure to record any notes received. The error of commission: It involves mishandling of any entry by recording it in the wrong books or with the wrong place The error of transposition: It is the error of…
- Which of the following may reduce the effectiveness of ratio analysis? a. Highly diversified companies may have activities that obscure trends that may appear more clearly in single function companies. b. Management may use window dressing at the end of the year to improve apparent performance. c. Companies in the same industry may use different accounting practices which may indicate differing levels of performance that don't really exist. d. Book values may not be comparable from company to company because of the age of the asset, inflation, etc. e. All of these can reduce the effectiveness of ratio analysis.Executives of several companies believe that non-GAAP financials portray a more accurate picture of company performance. Although not legal, the use of non-GAAP financials has been controversial for years. In fact, the SEC published guidance regarding the misleading impact of the use of non-GAAP figuresLinks to an external site. in October of 2017. In your opinion, are the use of non-GAAP financial measures ethical? Please explain.If in February, MBB DID NOT take up any opportunity that the suppliers offered for early settlement discount, how would its performance be impacted? 1. Gross profit for February will decrease 2. Other things being equal, net cash flow from operating activities will decrease a) Neither of the above is correct b) Only statement 1 is correct c) Both 1 and 2 are correct d) Only statement 2 is correct
- Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over the management of the company. Changes in consumer demand have made it hard for Ross to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s…Suppose an accountant discovers that the company holds substantial amounts of inventory that are now obsolete and worthless. Should the accountant report the truth, write off the inventory as an asset, and take a loss on obsolete inventory in earnings? Suppose the accountant also knows that the company is already in distress. Should the accountant seek ways to avoid or delay recognizing inventory losses that will cause the company to report lower earnings and thereby experience a drop in stock price and potential bankruptcy? What if the accountant knows the company is growing quickly and generating healthy profits?Which of the following statements regarding the consistency concept is not true? Select one: A. The objective of the consistency concept is to facilitate comparison between one period and another B. A selected accounting method must be used consistently every year C. A company cannot change the selected accounting method once it is used D. If inconsistency is found, the company must provide full explanation in the Statement of Profit or Loss and Other Comprehensive Income itself, or in the Statement of Financial Position, or in the notes to the accounts