earnings management

Examples of earnings management in the following topics:

• Limitations of the Income Statement

  • One example of this is earnings management, which occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports in a way that usually involves the artificial increase (or decrease) of revenues, profits, or earnings per share figures.
  • The goal with earnings management is to influence views about the finances of the firm.
  • Aggressive earnings management is a form of fraud and differs from reporting error.
  • Managers could seek to manage earnings for a number of reasons.
  • For example, if a manager earns his or her bonus based on revenue levels at the end of December, there is an incentive to try to represent more revenues in December so as to increase the size of the bonus.

• Benefits of Repurchasing Shares

  • Share repurchases are beneficial when the stock is undervalued, management needs to meet a financial metric, or there is a takeover threat.
  • Repurchasing shares may also be a signal that the manager feels that the company's shares are undervalued.
  • If management needs to boost the EPS of the company to meet the metric, s/he has two choices: raise earnings or reduce the number of shares.
  • If earnings cannot be increased, there are a number of ways to artificially boost earnings (called earnings management), but s/he can also reduce the number of shares by repurchasing shares .
  • Strictly speaking, this is a benefit to the management and executives, not the company or the shareholders.

• Dangers Involved in Inventory Management

  • Excessive inventory means idle funds which earn no profits; inadequate inventory means lost sales.
  • Inventory management is primarily about specifying the size and placement of stocked goods.
  • The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns, and defective goods and demand forecasting.
  • Excessive inventory means the firm has idle funds which earn no profits for the firm.
  • Inventory management will be more complicated as moderate inflation and seasonality gets involved.

• Management in Different Types of Business: For-Profit, Non-Profit, and Mutual-Benefit

  • Managers must adjust their management style to fit the type of organization.
  • Management style is influenced by the goals and purpose of the organization, which are in large part established by the type of business being managed.
  • A for-profit business is an organization engaged in the trade of goods, services, or both to customers with the goal of earning profit to increase the wealth of the business's owners.
  • Managing volunteers is different than managing employees, as there is essentially no contract or agreement governing the relationship.
  • All three types require that management motivate employees.

• Financial Management Before and During Bankruptcy

  • To avoid the negative impacts of bankruptcy, individuals and companies in financial distress can implement certain financial management techniques.
  • Financial Management before and during Bankruptcy is an effective method for companies and individuals to remedy financial distress and insolvency.
  • For the option of financial management during bankruptcy to exist, a form of bankruptcy allowing reorganization, such as chapter 11, must be used.
  • Under this plan, a debtor may be able to acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings.
  • Devise a management plan when a company is in financial distress

• Price/Earnings Ratio

  • Price to earnings ratio (market price per share / annual earnings per share) is used as a guide to the relative values of companies.
  • Monthly earnings data for individual companies are not available, and usually fluctuate seasonally, so the previous four quarterly earnings reports are used, and earnings per share are updated quarterly.
  • Longer-term P/E data, such as Shiller's, use net earnings.
  • The P/E ratio of a company is a significant focus for management in many companies and industries.
  • Managers have strong incentives to increase stock prices, firstly as part of their fiduciary responsibilities to their companies and shareholders, but also because their performance based remuneration is usually paid in the form of company stock or options on their company's stock (a form of payment that is supposed to align the interests of management with the interests of other stock holders).

• What is operations management?

  • Operations management is the management of processes that transform inputs into goods and services that add value for the customer.
  • The goal of operations management is to maximize efficiency while producing goods and services that effectively fulfill customer needs.
  • For example, if an organization makes furniture, some of the operations management decisions involve the purchasing of wood and fabric, the hiring and training of workers, the location and layout of the furniture factory, and the purchase of cutting tools and other fabrication equipment.
  • If the organization makes good operations decisions, it will be able to produce affordable, functional, and attractive furniture that customers will purchase at a price that will earn profits for the company.
  • The owners in turn will be able to charge a price that earns a profit and allows the restaurant to stay in business.

• Performance per Share

  • Earnings Per Share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Price to Earnings (P/E) ratio relates market price to earnings per share.
  • P/E Ratio = Market Price Per Share / Annual Earnings Per Share .
  • The part of earnings not paid to investors is left for investment to provide for future earnings growth.
  • A higher market to book ratio implies that investors expect management to create more value from a given set of assets, all else equal.

• Income Statement Analyses

  • The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported .
  • Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
  • Price to Earnings Ratio = Market Value of Stock / Earnings per Share
  • The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.
  • The operating ratio can be used to determine the efficiency of a company's management by comparing operating expenses to net sales.

• Family and Gender Issues

  • Social expectations that women manage childcare contribute to the gender pay gap and other limitations in professional life for women.
  • The gender pay gap is measured as the ratio of female to male median yearly earnings among full-time, year-round (FTYR) workers.
  • The female-to-male earnings ratio was 0.77 in 2009, meaning that, in 2009, female FTYR workers earned 77% as much as male FTYR workers.
  • Family obligations tend to pull down on women's earnings as they proceed through the life course and have more children.
  • The demands of women having to manage work and family lives have become an obsession of American popular culture.