Companies often are under pressure to meet or beat Wall Street earnings projecti

Question

Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results. (chapter 11)

Required: 1. How can a company manage earnings by changing its depreciation method? Is this an effective technique to manage earnings?

2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings?

3. Using a fictitious example and numbers you make up, describe in your own words how asset impairment losses could be used to manage earnings. How might that benefit the company?

Explanation / Answer

Yes, campany can manage earnings by changing its depreciation method. With stating low depreciation companies can increase earnings as depreciation expense is reduced. No it is not an effective technique as these are not real earnings.

By increasing useful lives of asset, lower depreciation can be stated for each year. Hence higher earnings. No it is not an effective technique as these are not real earnings.

Asset impairement loss would reduce the net profits

Asset Book vaue= 200,000

Due to floods Asset fair value is redued 20,000

impairement loss= 200,000-20,000= 180,000

income for that year- impairement loss= net income

Benefits to the company:

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