Question No: 3 (Total 25 marks) a. How does earnings management relate to accounting quality? (4...

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Question No: 3 (Total 25 marks) a. How does earnings management relate to accounting quality? (4 marks) b. Define transaction structuring and provide an example in your explanation. (4 marks) c. 3M, Inc. reported a 3% increase in income for its first quarter of 2012, beating analysts' estimates. But it also reported a decline in revenue. Its stock price dropped in response to the report. Required: i. What explanation would you give for the drop in stock price on an earnings increase? (3 marks) ii. What is your prediction for the change in 3M's asset turnover over the quarter? (3 marks) d. The chief financial officer of a firm presented the CEO with a set of financial statements showing $2,234 million in after-tax operating income. This number yielded a return on beginning-of-period net operating assets of 9%. The CEO complained that this number was below the 12% return on net operating assets (RNOA) target they had promised and asked if any "accounting treatment" was available to meet the target. Required: i. How much must the CFO add to net operating assets to manipulate the income? (5 marks) ii. What is the likely effect of the earnings management of RNOA in the following year? (4 marks) e. Large merger charges are typically viewed with suspicion. Why? (2 marks) Question No: 3 (Total 25 marks) a. How does earnings management relate to accounting quality? (4 marks) b. Define transaction structuring and provide an example in your explanation. (4 marks) c. 3M, Inc. reported a 3% increase in income for its first quarter of 2012, beating analysts' estimates. But it also reported a decline in revenue. Its stock price dropped in response to the report. Required: i. What explanation would you give for the drop in stock price on an earnings increase? (3 marks) ii. What is your prediction for the change in 3M's asset turnover over the quarter? (3 marks) d. The chief financial officer of a firm presented the CEO with a set of financial statements showing $2,234 million in after-tax operating income. This number yielded a return on beginning-of-period net operating assets of 9%. The CEO complained that this number was below the 12% return on net operating assets (RNOA) target they had promised and asked if any "accounting treatment" was available to meet the target. Required: i. How much must the CFO add to net operating assets to manipulate the income? (5 marks) ii. What is the likely effect of the earnings management of RNOA in the following year? (4 marks) e. Large merger charges are typically viewed with suspicion. Why? (2 marks)