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Some Sage Advice . . .

This

short stories that follow have

nothing to do with earnings quality or
earnings management.

However

they may prove useful to you in

the future.

So,

here are three lessons from large

corporations to help you survive change

Source: The Internet, of course Where Else!

CORPORATE
LESSON
A crow was sitting on a tree, doing nothing all day.
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A small rabbit saw the crow, and asked him,
"Can I also sit like you and do nothing all day
long?
The crow answered: "Sure, why not.

So, the rabbit sat on the ground below the

crow, and rested.
All of a sudden, a fox appeared,

Jumped on the rabbit... and ate it.

CORPORATE LESSON 1
The moral of the story . . .

To be sitting and
doing nothing you
must be sitting
very, very high up.

A turkey was chatting with a bull.

"I would love to be able to get to the top of that tree,"

sighed the turkey, "but I haven't got the energy.
"Well, why don't you nibble on some of my droppings?"
replied the bull. They're packed with nutrients."
The turkey pecked at a lump of dung and found that it
actually gave him enough strength to reach the first
branch of the tree.
The next day, after eating more dung, he reached the
second branch.
Finally after a fortnight, there he was proudly perched at the
top of the tree
Soon he was spotted by a farmer
Who promptly shot the turkey out of the tree.

CORPORATE LESSON 2
The moral of the story . . .

Bullshit might get

you to the top. But
it wont keep you
there
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A little bird was flying south for the winter.

It was so cold, the bird froze and fell to the ground in
a large field.
While it was lying there, a
cow came by
and dropped some dung
on it.
As the frozen bird lay there in the pile of cow dung, it began to
realise how warm it was. The dung was actually thawing him out!
PURR....

He lay there all warm and happy, and soon began to sing for joy.
A passing cat heard the bird singing and came to investigate.
Following the sound, the cat discovered the bird under the pile of cow
dung, and promptly dug him out and ate him!

CORPORATE LESSON 3
The morals of this story are:
Not

everyone who drops

shit on you is your enemy.

Not

everyone who gets you

out of shit is your friend.

And,

when youre in deep

shit, keep your mouth shut.
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10

Time Period Principle

B
E
G
I
N
N
I
N
G

Discrete (separate) accounting

periods.

00

01

02

03

04

05

06

07

Life of the Firm

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09

E
N
D
I
N
G

First . . . Lets
at the Income Statement

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14

Uses of the Income Statement

Evaluate

the past performance of the

enterprise.

Provide

a basis for predicting future

performance.

Help

assess the risk or uncertainty of

achieving future cash flows.

Intermediate Accounting
Kieso, Weygandt, and Warfield

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The Statements Limitations

Items

that cannot be measured reliably

are not reported in the income
statement.

Income

numbers are affected by the

accounting methods employed.

Income

measurement involves
judgment.
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The Quality of Earnings

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A Multidimensional Concept
Decisions

made by standard setters

Choices

made by management about

which accounting methods to use from
the set of alternatives

Judgments

and estimates made by

management to implement the chosen
alternatives.

Walter R. Teets
Issues in Accounting Education November 2002

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The Quality of Earnings

Management

may be giving way to

manipulation; integrity may be losing out
to illusion.

Arthur Levitt
The Numbers Game
Remarks to NYU Center for Law and Business,
September 28, 1998

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The Numbers Game

Accounting
Big

Hocus-Pocus

Bath Charges

Creative

Acquisition Accounting

Miscellaneous

Cookie Jar Reserves

Materiality
Revenue

Recognition
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The Power of a Speech

The

Numbers Game speech provided

the impetus for:
SAB

99, Materiality (August 12, 1999)

SAB

100, Restructuring and Impairment

Charges (November 24, 1999)

SAB

101, Revenue Recognition (December

3, 1999)

James R. Duncan
Twenty Pressures to Manage Earnings

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Do we have a problem?
12%

of CFOs had managed their

earnings at the request of their
superiors.

55%

were asked but refused to do so.

60%

of CFOs have felt pressure to

manage earnings.

James R. Duncan
Twenty Pressures to Manage Earnings

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The Quality of Earnings

23

Earnings Management
Practices

by which earnings reports

reflect the desires of management rather
than the underlying financial
performance of the company.
Arthur Levitt
The Numbers Game
Remarks to NYU Center for Law and Business,
September 28, 1998

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Earnings Management
Earnings

management can be defined

as the active manipulation of accounting
information to create an altered
impression of the firms financial
performance, as measured by its
earnings.
Theresa Libby and Robert Mathieu
Playing by the Rules
CMA Management July/August 2001

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Earnings Management
Earnings

management is often defined

as the planned timing of revenues,
expenses, gains, and losses to smooth
out bumps in earnings.

In

most cases earnings management is

used to increase income in the current
year at the expense of income in future
years.
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Earnings Management
Earnings

management has a negative

effect on the quality of earnings if it
distorts the information in a way that is
less useful for predicting future earnings
and cash flows.

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