jimmy is the owner of vrs. until recently jimmy was also the managing director, but he has decided to employ a manager to take over the daily operations of vrs as he transitions to retirement. the new manager, berly, agreed to a performance based contract which says that berly will be paid bonus of $200,000 should the profits exceed a target of $2 million. the contract also says that berly must prepare financial statements and have them audited. Briefly define theory. According to agency theory, what are the roles performed by jimmy and berly
jimmy is the owner of vrs. until recently jimmy was also the managing director, but he has decided to employ a manager to take over the daily operations of vrs as he transitions to retirement. the new manager, berly, agreed to a performance based contract which says that berly will be paid bonus of $200,000 should the profits exceed a target of $2 million. the contract also says that berly must prepare financial statements and have them audited. Briefly define theory. According to agency theory, what are the roles performed by jimmy and berly
Bonus Plan hypothesis is one of the three theories of Positive Accounting Theory
The bonus plan hypothesis dictates that managers will use accounting policies that are likely to shift reported earnings from future periods to the current period. This is to maximize their personal compensation as by reporting a high net income, their utility will be maximized through bonuses and incentives.
Financial Accounting Standards provide flexibility for management to select accounting policies that represents the actual condition of the company. This flexibility is sometimes used by management to manage earnings (earnings management).
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