Classificatory smoothing of Income with Extraordinary Items - Summary Within this paper they talk about whether extraordinary items are used to smooth ordinary or operating income over time. The role of extraordinary items was never really looked at become separately and that is what they wanted to look at. They talk about how previously the focus was on net income after extraordinary items but that it is important to look at net income before extraordinary items also
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Introduction The income smoothing literature has been the centre of attention in the accounting world for the past few decades. When companies experience economic turbulence due to a poor performance year‚ they turn to the accounting management department to resolve the bottom line. A strategy that managers can approach is changing the true information content of the company. As a result this has led managers to resort to smoothing their income. Many questions have been raised whether or not it
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Case 5-1 Income Smoothing a. Firstly‚ investors tend to invest in companies with stable earnings rather than one with volatile earnings. With stable earnings‚ there will be more likely an issuance of dividends and investors could easily predict the company’s future earnings compared to one with unstable earnings. With consistent earnings generated‚ it gives investors a secured feeling that it will again generate earnings as predicted. Confidence in the growth of rate of earnings is crucial because
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Today‚ earnings management methods‚ such as income smoothing‚ are becoming more and more ubiquitous ways of improving earnings quality and attractiveness to investors. Because investors pay such close attention to income levels and firm stability‚ such methods are coming under heavy scrutiny‚ and are receiving more attention in the way of research and studies. The scrutiny is an attempt to explain the effects‚ and whether or not‚ in the long-run‚ these methods of earnings management are‚ in fact
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accounting principles. Profits can be changed easily by using certain accounting methods or manipulating accruals. When discovered‚ this information will have a negative effect on a company ’s share price and its reputation in general. Methods of Income Smoothing In order to present a more positive result to shareholders and a more favorable view of company’s results‚ numerous methods exist that can be used by accountants. Most methods are achieved by using book entries. The Depreciation Method
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Schäffer et al.‚ 2012). There are two methods which are Income Smoothing and Big Bath. “Income Smoothing involves taking steps to reduce the good years and defer them for use during the business down-turn years” (Gin Chong‚ 2006). In comparison‚ Big Bath manipulation in the financial statistics indicates a great fluctuation. However‚ Income Smoothing is more ethical in accounting practice than Big Bath due to the reasons compared below. Income Smoothing has been applied in financial accounting because
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SMOOTHING TECHNIQUES Several techniques are available to forecast time-series data that are stationary or that include no significant trend‚ cyclical‚ or seasonal effects. These techniques are often referred to as smoothing techniques because they produce forecasts based on “smoothing out” the irregular fluctuation effects in the time-series data. Three general categories of smoothing techniques are presented here: • Naive forecasting models are simple models in which it is assumed that the
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Why is consumption smoothing? The consumption function plays a major role in GDP of macroeconomy. Hence‚ its stability is of great importance to a country’s economy. The economist Irving Fisher proposed “Intertemporal choice” is the study of the relative value people assign to two or more payoffs at different points in time. Most choices require decision-makers to trade-off costs and benefits at different points in time. (Fisher‚ 1930) According to Fisher’s model‚ economists Franco Modigliani created
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=0.50(83000) + 0.30(67000) + 0.15(64000) + 0.05(48000) = 41‚500 + 20‚100 + 9‚600 + 2‚400 = $73‚600 $73‚600 is the forecast for 2013 Q2. Using exponential smoothing with a weight of 0.6 on actual values: a) If sales are $45‚000 and $50‚000 for 2010 and 2011‚ what would you forecast for 2012? (The first forecast is equal to the actual value of the preceding year.) Actual values are 2010: $45‚000 2011: $50‚000
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Choose one of the forecasting methods and explain the rationale behind using it in real life. I would choose to use the exponential smoothing forecast method. Exponential smoothing method is an average method that reacts more strongly to recent changes in demand than to more distant past data. Using this data will show how the forecast will react more strongly to immediate changes in the data. This is good to examine when dealing with seasonal patterns and trends that may be taking place. I would
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