A manager increases reported earnings by $ 1,300 this year. This was done by reducing the allowance for credit losses by $ 500 below the expected amount and reducing the accrual for warranty costs expense to $ 800 below the expected amount. Explain why, other things equal, this will lower next year’s earnings by $ 1,300.
Answer to relevant QuestionsExplain why, under ideal conditions, there is no need to make estimates when calculating expected present value.P Ltd. operates under ideal conditions of certainty. It has just bought a capital asset for $ 3,100, which will generate $ 1,210 cash flow at the end of one year and $ 2,000 at the end of the second year. At that time, the ...You are a CEO operating under a bonus plan similar to the one assumed by Healy (Section 11.3). Explain whether you would react favourably or negatively to an exposure draft of a proposed change in GAAP that has the following ...Refer to Theory in Practice 11.2, concerning General Electric Co. (=GE). In particular, consider the strong negative market reaction to lower reported earnings in April 2008. Required a. Why did GE’s share price fall? b. ...Young and Yang ( 2011) examined managers’ stock repurchase decisions, under which firms buy back outstanding shares on the market, for a sample of U. K. companies during 1998– 2006. As the authors pointed out, stock ...
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