a) Discuss the effect of the change from historical cost to mark-to-market (that is, fair value) accounting on the trade-off between sensitivity and precision of net income as performance measures. To answer this question, first define sensitivity and precision. (2.5 Points)

b) Discuss the effect of earnings management on the sensitivity and precision of income as a performance measure. (2.5 Points)

c) Discuss how, by changing the proportion of different performance measures in a manager's compensation plan, it is possible to control the manager's decision horizon. Include a discussion of specific examples of short-term and long-term effort in your answer.

Answer rating: 100% (QA)

a Sensitivity and Precision with Accounting Methods Sensitivity Refers to how much net income changes in response to small changes in economic factors ... View the full answer