Abstract
Financial statements are records within a business entity that are formally prepared and which show the financial undertakings of a business, an entity or a person in case of a sole proprietorship. They are also referred to as accounts. These statements include the balance sheet, cash flow statements and income statements. Financial statements help in evaluating the business’s cash flow and profitability so as to be able to make concrete and substantial future decisions.
It is therefore the responsibility of the management to prepare and consolidate their company’s financial statements and address the pertinent issues arising from the findings. Our case study seeks to show the interrelatedness of financial statements and whether it is possible for managers to manage earnings.
The interrelatedness of the financial statements
It is evident that there is an interrelationship between financial statements prepared in a company’s current financial situation. The findings of accounting operations are interrelated in that the same amount of retained earnings from one year’s balance sheet is carried forward to the following year’s cash flow statements as an additional for retained earnings and also the cash from one year’s balance sheet is carried forward as cash at the beginning of the following year.
Generalizations from the findings in this study relating to managing earnings
Based on the article; The dangerous morality of managing earnings (Gibson, 2011), research is carried out to identify and understand the morals of short-term earnings management. General Managers were surveyed and interviewed to come up with the findings.
There were mixed reactions from different groups in regard to the judgment of all earning-management practices and striking disagreements were observed. There were different views on what is moral and what is ethical. Most managers believe that practice is ethical if it is not clearly restricted or prohibited not bearing in mind the effects caused by the practice or the information flowing through it. There are five major generalizations that were pin-pointed from the findings:
- An average number of those interviewed thought that manipulating operating decisions or procedure would be far more acceptable compared to achieving the same targets by accounting methods
- Materiality matters: If the earnings effect is deemed large than small, then the short-term earnings management is deemed less acceptable.
- The path of the effect on earnings is also deemed vital and very influential. In this case, reduction in earnings is judged as more acceptable method compared to increasing earnings.
- Ethical judgement is also considered to be affected by the time period of the effect. In this case study, interim quarterly reporting period is viewed to be a more adequate way of managing short-term earnings as compared to doing the same at using the annual reporting period method.
There is also an effect caused by the method of managing earnings. The use of overtime to improve shipment is considered more appropriate than increasing returns by offering credit options.
Management’s ability to manage earnings in the long run by influencing financial accounting
That therefore remains the responsibility of the accountants and financial officers in the business. In conclusion, the research identifies that managers can handle short-term earnings’ management although in different methods deemed acceptable by some while to some, they are less acceptable. It is therefore upon the managers to seek to identify the method that most certainly suits their firms or businesses.
References
Gibson, C. H. (2011). Financial reporting and analysis: Using financial accounting Information (12th ed.). Mason, OH: South-Western Cengage Learning.