The main objective of financial reporting is to provide users with useful information for economic decision...

Transcribed Image Text:

The main objective of financial reporting is to provide users with useful information for economic decision making. In this regard, managers or accountants have discretion to choose accounting policies that may directly maximize their self-interest or to modify the firm's financing, investment and production policies that indirectly maximize their utility (Watts and Zimmerman, 1978, 1986). Even though the managers' incentive may contradict the objectives of meeting users decision-making purposes, but the preparation of the financial reports may seem to be in compliance with the requirements of the relevant accounting standards or other relevant authoritative requirements. In this context, the opportunistic application of the accounting standards by managers is also called as creative accounting. This mostly done by managers to manage an entity's earnings patterns, in order to meet certain objectives. Hence this management of eamings through creative accounting is generally known as earnings management. Based on the above information, respond to the following. Required: a) Discuss incentives of creative accounting and earnings management. b) (10 marks) Determine if there are ways to mitigate the negative impact of creative accounting. Justify your opinion. (5 marks) Explain how the following ratios can predict a fraudulent financial reporting a) Current/quick ratio b) c) d) Account receivable turnover in days Account payable turnover ratio Inventory turnover ratio The main objective of financial reporting is to provide users with useful information for economic decision making. In this regard, managers or accountants have discretion to choose accounting policies that may directly maximize their self-interest or to modify the firm's financing, investment and production policies that indirectly maximize their utility (Watts and Zimmerman, 1978, 1986). Even though the managers' incentive may contradict the objectives of meeting users decision-making purposes, but the preparation of the financial reports may seem to be in compliance with the requirements of the relevant accounting standards or other relevant authoritative requirements. In this context, the opportunistic application of the accounting standards by managers is also called as creative accounting. This mostly done by managers to manage an entity's earnings patterns, in order to meet certain objectives. Hence this management of eamings through creative accounting is generally known as earnings management. Based on the above information, respond to the following. Required: a) Discuss incentives of creative accounting and earnings management. b) (10 marks) Determine if there are ways to mitigate the negative impact of creative accounting. Justify your opinion. (5 marks) Explain how the following ratios can predict a fraudulent financial reporting a) Current/quick ratio b) c) d) Account receivable turnover in days Account payable turnover ratio Inventory turnover ratio

Answer rating: 100% (QA)

The image contains a text snippet with three questions related to financial accounting and reporting Unfortunately the text snippet is in image form so I cant quote it directly but I will summarize an... View the full answer