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    Problem 2 14 Case 2 1

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    Remie Hadchiti
    Emerson has applied an income smoothing strategy over the years to maintain earnings growth. This strategy, along with excellent management decisions, has led to stable increasing earnings trends. In good years, Emerson records higher expense accruals to reduce future losses, while in bad years it records lower expenses and increases net income. Year 5 may have been when Emerson drew upon hidden reserves, as the small earnings increase that year likely came from reserves built in previous years.

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    Problem 2 14 Case 2 1

    Uploaded by

    Remie Hadchiti
    38 views2 pages
    Emerson has applied an income smoothing strategy over the years to maintain earnings growth. This strategy, along with excellent management decisions, has led to stable increasing earnings trends. In good years, Emerson records higher expense accruals to reduce future losses, while in bad years it records lower expenses and increases net income. Year 5 may have been when Emerson drew upon hidden reserves, as the small earnings increase that year likely came from reserves built in previous years.

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    Emerson has applied an income smoothing strategy over the years to maintain earnings growth. This strategy, along with excellent management decisions, has led to stable increasing earnings trends. In good years, Emerson records higher expense accruals to reduce future losses, while in bad years it records lower expenses and increases net income. Year 5 may have been when Emerson drew upon hidden reserves, as the small earnings increase that year likely came from reserves built in previous years.

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    38 views2 pages

    Problem 2 14 Case 2 1

    Uploaded by

    Remie Hadchiti
    Emerson has applied an income smoothing strategy over the years to maintain earnings growth. This strategy, along with excellent management decisions, has led to stable increasing earnings trends. In good years, Emerson records higher expense accruals to reduce future losses, while in bad years it records lower expenses and increases net income. Year 5 may have been when Emerson drew upon hidden reserves, as the small earnings increase that year likely came from reserves built in previous years.

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    of 2

    Problem 2-14

    A. What earnings strategy do you think Emerson has applied over the years to maintain its record
    of earnings growth?

    =income smoothing strategy

    B. Describe the extent you believe Emerson’s earnings record reflects business activities,
    excellent management, and/or earnings management.

    =The stable increasing trend of earning during the 20 years reveals Emerson’s key business is
    growing. The excellent management are making the proper decisions and enables Emerson to
    show increasing of earning on their financial statement. Emerson is using income smoothing as
    their earnings management strategy and managers decrease or increase reported income so as to
    reduce its volatility and the earnings trend is increasing.

    C. Describe how Emerson’s earnings strategy is applied in good years and bad.

    =In good year, the company have higher earnings and they will record higher expense accruals
    and to reduce future losses. In bad years, the company will record lower expenses accrual and
    increase year net income.

    D. . Identify years where Emerson likely built hidden reserves and the years it probably drew
    upon hidden reserves.

    = Year 5 could be the year Emerson drew upon hidden reserves because the increase from year 4
    to year 5 is only 2.8 million, which is much more less than increases of others years this might be
    the company want to drew upon hidden reserves because their increase is way larger than others
    years. The reserves might be of bad debt and inventory along with the large accruals associated
    with restructuring charges, are sometimes yield hidden reserves.

    This study source was downloaded by 100000845338147 from CourseHero.com on 10-02-2022 15:56:55 GMT -05:00

    https://www.coursehero.com/file/110179108/Problem-2-14-Case-2-1docx/
    Cases 2-1

    A. Who is responsible for the preparation and integrity of Colgate’s financial statements and
    notes? Where is this responsibility stated in the annual report?

    = The management of Colgate is responsible for the preparation and integrity of the consolidated
    financial statements and related noted that appear in the annual report. This is stated in the letter
    of management’s responsibility for financial statement.

    B. In which note does Colgate report its significant accounting policies used to prepare financial
    statements?

    = For the preparation of financial statements, the company reports its accounting policies as
    “Summary of Significant Accounting Policies” in Note 2. This section of Note 2 consists of
    various accounting policies which helps in disclosing of the company which is use of estimates,
    revenue recognition, cost of marketing, cash and cash equivalents, inventories ,PPE, goodwill
    and intangible and income tax. These accounting policies guide the company as well as provide a
    step by step framework for carrying out various activities that are required for running the
    company.

    C. What type of audit opinion is reported in its annual report and whose opinion is it?

    The Colgate company has fairly presented all its financial statements and annual reports with
    proper adherence with the GAAP. In the annual report of the company, an unqualified Audit
    Opinion is reported and the opinion is provided by the independent auditor of the company who
    is involved in auditing the reports of the company. The annual report of the company provides
    qualititative information about strategies and future plans of Colgate Company.

    D. Is any of the information in its annual report based on estimates? If so, where does Colgate
    discuss this?

    = Yes, the company has some of the information in its annual reports that based on estimates as
    we can see that generally most of the company uses forecasting to prepare their reports. Some of
    the information that is recorded during the preparation of financial statements of the company as
    estimates includes pension funds, retirement benefits, stock-based compensation, asset
    impairment and tax valuation allowances. For any of companies like Colgate, estimates are
    required to understand the fair market value that will help in a rational judgement regarding the
    valuation of their financial instruments and retirement plant assets. Finally, the actual result does
    differ from that estimates because of the uncertain externalities in the market.

    This study source was downloaded by 100000845338147 from CourseHero.com on 10-02-2022 15:56:55 GMT -05:00

    https://www.coursehero.com/file/110179108/Problem-2-14-Case-2-1docx/
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