...Journal of Accounting and Economics 50 (2010) 344–401 Contents lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Understanding earnings quality: A review of the proxies, their determinants and their consequences$ Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States University of Washington, Seattle, WA 98195, United States University of Pennsylvania, Philadelphia, PA 19104, United States a r t i c l e i n f o abstract Available online 4 November 2010 Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work. & 2010 Elsevier B.V. All rights reserved. JEL classification: G31 M40 M41 Keywords: Earnings quality Earnings management Review Survey 1. Introduction Statement of Financial Accounting...
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...Journal of Accounting and Economics 31 (2001) 255–307 Empirical research on accounting choice$ Thomas D. Fieldsa, Thomas Z. Lysb,*, Linda Vincentb b Graduate School of Business Administration, Harvard University, Boston, MA 02163, USA Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208, USA Received 21 January 2000; received in revised form 31 January 2001 a Abstract We review research from the 1990s that examines the determinants and consequences of accounting choice, structuring our analysis around the three types of market imperfections that influence managers’ choices: agency costs, information asymmetries, and externalities affecting non-contracting parties. We conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge. We discuss opportunities for future research, recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters. r 2001 Published by Elsevier Science B.V. JEL classification: M41 accounting Keywords: Capital markets; Accounting choice; Voluntary disclosure; Accounting judgments and estimates; Earnings manipulation $ We are grateful for comments received from Ronald Dye, participants of the 2000 Journal of Accounting and Economics conference, the editors Ross Watts and Douglas...
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...form or by any means; electronic, mechanical, photocopying, recording or otherwise, without the written permission of the copyright holder. Maharshi Dayanand University ROHTAK – 124 001 Developed & Produced by EXCEL BOOKS PVT. LTD., A-45 Naraina, Phase 1, New Delhi-110028 Qklhokn 3 Contents Chapter 1 Accounting-An Intoduction Chapter 2 The History and Evolution of Accounting Thoughts 23 Chapter 3 Approaches to Accounting Theory 56 Chapter 4 Accounting Postulates, Concepts and Principles 88 Chapter 5 Income Concepts 107 Chapter 6 Revenues, Expenses, Gains and Losses 139 Chapter 7 Valuation of Assets 158 Chapter 8 Liabilities and Equity 177 Chapter 9 Depreciation Accounting and Policy 192 Chapter 10 Inventories and their Valuation 238 Chapter 11 Financial Reporting 277 Chapter 12 Specific Issues in Corporate Reporting 302 Chapter 13 Harmonization of Financial Reporting 323 Chapter 14 Accounting for Price Level Changes 339 Chapter 15 Human Resource Accounting 397 Chapter 16 Financial Engineering: A Multi-Disciplinary Approach to Risk-Return Management 421 Chapter 17 Accounting Standards 429 Chapter 18 Elementary Knowledge of Indian Accounting Standards 474 Chapter 19 Lease Accounting 512 Chapter 20 Social Accounting 542 5 4 jktuhfr foKku Accounting Theory Paper-8 Nt: oe Max. Marks...
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...Assignment Part A Prepare the case, with recommendations to be presented to the Board of Directors of ProGen. Assess the viability of the project using the NPV, IRR, and Payback methods. 2. Assignment Part B “The IRR rule is redundant as an investment criterion because the NPV rule always dominates. Discuss this statement giving examples where possible. 3. Conclusion “The IRR rule is redundant as an investment criterion because the net present value (NPV) rule always dominates it.” 4. Bibliography References Assignment Part A This report evaluates the viability for marketing and distribution of genetically engineered soya seeds developed by a biotechnology firm. The firm will supply seeds and permit ProGen to market and distribute them under a licence. The evaluation methods used for this proposal are net present value (NPV), internal rate of return (IRR), and Payback methods. Assumptions used for this analysis are summarised below • Marketing cost is assumed to be a sunk cost and therefore not included in the calculation • Cash flow will be considered over 5 years as this is the lifecycle of the product • An annual licence fee included at 1M per annum • Capital investment for vehicles £650k is an upfront payment and therefore not discounted • Year 5 will see a cash inflow of 120K assumed a realistic sum for the sale of the vehicles •...
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..."Harnischfeger Corporation" case is to expose students to the managerial motives for making major financial reporting policy changes. Generally accepted accounting principles (GAAP) allow companies wide latitude in the choice of accounting policies. After a firm chooses a set of accounting policies, current accounting rules permit changes from one alternative policy to another at the discretion of the management. Since reported accounting figures are widely used by a number of external parties, managers of firms have incentives to choose accounting policies in order to influence the behavior of these parties. A variety of managerial motives for accounting policy decisions have been identified in the accounting literature. The Harnischfeger case is designed to encourage students to explore these motives. Harnischfeger Corporation, a large New York Stock Exchange company, faced a financial crisis in 1982. New management was appointed to turn the company around. As part of its restructuring strategy, the new management team made a number of financial reporting policy changes in fiscal 1984. Together, these changes accounted for most of Harnischfeger's reported 1984 profits. More significantly, these changes represented a substantial switch from the company's earlier conservative reporting philosophy to a more aggressive one. The case describes the company's financial crisis, the turnaround strategy of the new management team, and the accounting policy changes...
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...the "Harnischfeger Corporation" case is to expose students to the managerial motives for making major financial reporting policy changes. Generally accepted accounting principles (GAAP) allow companies wide latitude in the choice of accounting policies. After a firm chooses a set of accounting policies, current accounting rules permit changes from one alternative policy to another at the discretion of the management. Since reported accounting figures are widely used by a number of external parties, managers of firms have incentives to choose accounting policies in order to influence the behavior of these parties. A variety of managerial motives for accounting policy decisions have been identified in the accounting literature. The Harnischfeger case is designed to encourage students to explore these motives. Harnischfeger Corporation, a large New York Stock Exchange company, faced a financial crisis in 1982. New management was appointed to turn the company around. As part of its restructuring strategy, the new management team made a number of financial reporting policy changes in fiscal 1984. Together, these changes accounted for most of Harnischfeger's reported 1984 profits. More significantly, these changes represented a substantial switch from the company's earlier conservative reporting philosophy to a more aggressive one. The case describes the company's financial crisis, the turnaround strategy of the new management team, and the accounting policy changes that...
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...estimated at over $140 billion (London Financial Group Ltd. 1996). The amount of leasing activity continues to grow, particularly op erating-type leases which provide a source of off-baiance sheet financing. However, a recent publication by an international group of representatives from the FASB and six other national and international accounting standard setting bodies suggests that iease accounting should require alt lease contracts to be capitalized as assets and liabilities (McGregor 1996). This suggestion has also been made by the Association for Investment Management and Research (AMIR) in a December 1993 white paper. A previous Horizons paper by Imhoff et al. (1991) illustrated how to constructively capitalize operating leases. However, this prior study focused exclusively on the balance sheet effects for a single period, and assumed the income statement effects were negligible. The current study cites evidence that suggests the income statement effects may be material, and illustrates how to estimate the impact of constructive capitalization of operating leases on both operating income (before interest expense) and net income. Understanding both the income statement and balance sheet consequences will likely become increasingly important as the sentiment that operating leases should be capitalized continues to gain favor with users and standard setters. Key Words: Operating...
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...WACC A company’s weighted average cost of capital (WACC) is usually regarded as the minimum required rate of return. It is defined as the weighted average rate of return a company must pay to its long-term creditors and shareholders for the use of their funds. When WACC is used as the discount rate, it serves as a screening device in net present value analysis. To calculate WACC we must first find the expected return on share i E(Ri), using the securities market line equation, as follows: E(Ri) = RF + βi (E(RM) - RF) = 3% + 1.2 (13% - 3%) = 15% E(Ri) = expected return on share i E(RM) = expected return on the market = (Market risk premium + the risk free rate of return) = 13% RF = risk-free rate of return = 3% βi = beta of share i =1.2 As such, WACC can be calculated using the following equation: WACC = [D/(D+E)*RD](1-T) + [E/(D+E)*RE] = [40%*6%(1-28%)] + [60%*15%] = 10.728% D = value of total debt E = value of shareholders’ equity RD = cost of debt RE = cost of equity T = corporate tax rate b) NPV, IRR, & Payback Period Assumptions: - Generally speaking, because of difficulties related to identifying costs with particular activities and determining the future benefits, all R&D costs are expensed when incurred. They do not become part of the capitalised investment asset. As such, the €20m OMG has spent on R&D will be excluded from the NPV calculations, since this cost will be incurred...
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...Volume 3 Number 1 2004 Accounts Manipulation: A Literature Review and Proposed Conceptual Framework by Hervé Stolowy, HEC School of Management (Groupe HEC), Department of Accounting and Management Control, 1, rue de la Libération, 78351 - Jouy en Josas Cedex, France and Gaétan Breton, Université du Québec à Montreal, Department of Accounting Sciences, P.O.B. 8888, Succursale Centre-Ville, Montréal (Québec), H3C 3P8 - Canada Abstract Accounts manipulation has been the subject of research, discussion and even controversy in several countries including the USA, Canada, the U.K., Australia, Finland and France. The objective of this paper is to provide a comprehensive review of the literature and propose a conceptual framework for accounts manipulation. This framework is based on the possibility of wealth transfer between the different stakeholders, and in practice, the target of the manipulation appears generally to be the earnings per share and the debt/equity ratio. The paper also describes the different actors involved and their potential gains and losses. We review the literature on the various techniques of accounts manipulation: earnings management, income smoothing, big bath accounting, creative accounting, and window-dressing. The various definitions of all these, the main motivations behind their application and the research methodologies used are all examined. This study reveals that all the above techniques have common elements, but there are also important differences...
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...assignments, Cases and Exams for ACC 563 and many other classes. Email us support@hwmojo.com All Quizzes, Midterm Exam, Final Exam Solution Instant Download Chapter 1 Multiple Choice: 1. Which of the following bodies has the ultimate authority to issue accounting pronouncements in the United States? a. Securities and Exchange Commission b. Financial Accounting Standards Board c. International Accounting Standards Committee d. Internal Revenue Service Answer 2. What historical evidence of the business operations of the private estate of Apollonius was discovered early inthe20th century? a. The Iliad b. Plato's Republic c. The Zenon papyri d. Pacioli’s work, Summa de Arithmetica Geometria Proportioni et Proportionalita, Answer 3. Who has been given credit or developing the double-entry system of bookkeeping? a. Francis Wheat b. Fra Luca Pacioli c. A. C. Littleton d. William Paton Answer 4. Which of the following was not a criticism of the development of accounting standards by the Accounting Principles Board? a. The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that might influence their views of certain issues. b. The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB. c. Harmonization. The accounting standards developed were...
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...International Finance course at Harvard Business School for instructors considering adopting the associated material. The paper begins by arguing that the forces of globalization have fundamentally changed the scope and activities of firms thereby altering the practice of finance within these firms. As a consequence of an increasing reliance on tightly-integrated foreign operations, a parallel world of finance has been opened within every multinational firm and this world has, heretofore, been overlooked. The course materials are designed to address the many aspects of financial decision making within global firms prompted by these changes that are not addressed in traditional materials. The paper provides an overview of the structure of the course and its seven modules with particular emphasis on the three modules that constitute the core of the course. The paper also describes an analytical framework that has been developed through the creation of the course materials to guide critical financial decisions on financing, investment, risk management and incentive management within a multinational firm. This framework emphasizes the need to reconcile conflicting forces in order for multinational firms to gain competitive advantage from their internal capital markets. The paper concludes with a discussion of the course's pedagogical approach and detailed descriptions of all the course materials, including 19 case studies, corresponding teaching notes, several module notes and supplementary...
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...Value: International Evidence from the European Real Estate Industry Upon Adoption of IFRS Karl A. Muller, III Pennsylvania State University Edward J. Riedl * Harvard Business School Thorsten Sellhorn Ruhr-Universität Bochum PRELIMINARY – PLEASE DO NOT QUOTE WITHOUT PERMISSION December 2007 ABSTRACT: We examine the determinants of investment property firms’ choice to use the cost or fair value model to account for their primary asset, real estate. Our examination exploits the European Union’s adoption of International Financial Reporting Standards, which require firms to make this choice under IAS 40 – Investment Property. We hypothesize and find evidence that firms are more likely to choose the fair value model when the firm’s pre-IFRS domestic standards permitted or required fair values on the balance sheet, and when the firm exhibits a greater commitment to reporting transparency. We also find limited evidence that firms are more likely to choose the fair value model when ownership is more dispersed, and when the property market in which they operate has higher liquidity. Overall, our results reveal both the occurrence and causes of variation in firms’ reporting choices when differing accounting treatments are permitted. Key Terms: Fair value, accounting choice, IFRS, real estate, investment property, IAS 40 JEL Classification: M41, G15, G38 Acknowledgements: We appreciate useful discussion and data assistance from the following persons...
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...Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle Iwan Meier and Vefa Tarhan1 February 27, 2006 Abstract We survey a cross-section of 127 companies to shed light on various dimensions of the investment decisions. The questions posed by our survey examine the hurdle rates firms use, calculations of project related cashflows, the interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine investment decisions by either using survey data or data obtained from financial tapes, we use both sets of data. This approach produced one of our primary findings that there is a hurdle rate premium puzzle, in that hurdle rates used by our sample of firms exceed their cost of capital that we calculate using Compustat data by 5%. We investigate the determinants of the hurdle premium in question. Additionally, we find that both systematic and to a lesser extent unsystematic risk play a role in determining the hurdle rates. Furthermore, our findings show that while firms use discounted cashflow methods in evaluating projects, they do not always appear to handle the cashflow dimension of their investment decisions in a consistent manner. Finally, we uncover evidence that firms use the various financing alternatives available to them in the order predicted by the pecking-order hypothesis. However, some of the variables affiliated with the trade-off model also appear to play a role in...
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...and historical cost accounting on the reported profits. However, since the major objective of any business organization is to make profit and continue in business, what they face in the course of doing their business and the method of accounting they use in reporting their profit may make this noble objective to be unrealistic particularly during inflationary period. Data were collected from both primary and secondary sources and presented and analyzed using ordinary least square. The study revealed that both historical cost and fair-value accounting have significant effect on reported profit. Conclusively, Based on the findings of the study, it is concluded that the amount calculated as depreciation, charged as taxes and paid as dividends greatly influence the operating profit of the company. This simply means that the method of profit measurement will greatly influence the amount charged as taxes, depreciation and dividend on the profit of the company. The study recommended that companies should prepare their financial report using both historical cost and fair-value methods simultaneously. This will allow the companies to know the true financial position of their companies before declaring dividend and other benefits. Keywords: Current Cost, Depreciation, Dividend, Fair Value, Historical Cost 1.0 Introduction The basic purpose...
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...DEVELOPMENT OF CONCEPTS OF CAPITAL AND INCOME IN FINANCIAL REPORTING IN THE NINETEENTH CENTURY Calculation, Context and Consequence THOMAS REGINALD (Tom) ROWLES B.Ec (Hons), Dip.Ed (Monash) A THESIS SUBMITED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN THE SCHOOL OF ACCOUNTING AND LAW OF RMIT UNIVERSITY, MELBOURNE, VICTORIA, AUSTRALIA ii DECLARATION I certify that: Except where due acknowledgement has been made, this thesis is mine alone; and The work has not been submitted previously, in whole or part, to qualify for any other academic award; and The content of the thesis is the result of work that has been carried out since the official commencement date of the approved research programme. THOMAS R. ROWLES iii TABLE OF CONTENTS Chapter Introduction 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Introduction Purpose of the Study Sombart’s Hypothesis An Alternative Model; Entrepreneurial Decision-making Context: The Industrial Revolution and ‘Profit’ The Changing Nature of ‘Investment’ The Great Depression of 1873-96 Intellectual Introspection Irving Fisher and the Conception of Capital and Income 17 17 17 23 25 26 30 32 34 34 35 36 38 38 38 39 43 46 49 50 51 54 55 1.10 Research Issues Identified 1.11 Summary Derivation of Research Issues 2.1 2.2 Introduction Evidence from Extant Accounts 2.2.1 Fixed Assets in Mercantile Accounting 2.2.2 The East India Company 2.2.3 Fixed Assets and Early Industrial Accounting 2.2.4 Capital Asset Accounting After 1870...
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