In Chapter 2 introduces you basic aspects of financial statements analysis. It e
ID: 2337559 • Letter: I
Question
In Chapter 2 introduces you basic aspects of financial statements analysis. It emphasis the difference between book value and the market value of the stocks; the process of computing net income in the income statements; the differences between marginal and average tax rates; and
Discuss the following question below in one page discussion notes and answers the discussion questions below used the terms above:
Discuss examples of accounting malpractice that corporations have used in the past to bolster reported earnings per share.
Explanation / Answer
Common Accounting malpractices that corporations have used to bolster the reported earnings per share are as foloows:
1. The corporation can use higher market value than book value so as to make good earnings per share ratio and to make their stock overvalued.
2. The corporations can alter the way of calculating their Net income in the income statement by following different alternatives like:
- Changing the Depreciation method, or altering the life of asset.
- Capitalising expenditures,which are ideally to be fully expenditured in that particular period.
- Deferring the Expeditures.
- Changing their revenue recognition policies so as to make huge revenues.
3. If the Corporations are in a high tax bracket and are expecting high revenues,They would prefere to go for marginal tax rate raher than paying an amout on basis of average tax rate on entire revenue amount.