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Proprietary Income
From entity income deduct interest costs and stock
option costs
Result is proprietary income, income to the
shareholder
Earnings Management
....purposeful
intervention in the
external financial
reporting process,
with the intent of
obtaining some
private gain
(Schipper)
Earnings Management
Managing income to affect management
compensation
Income might be managed by manipulating
discretionary accruals
Studies find that managers manage income when bonus
plans are dependent on earnings levels
Income smoothing
Managers smooth income to facilitate better predictions
of future cash flows on which firm value is based
Studies tests confirm income-smoothing behavior
Developments
Pre-FASB more time and effort was placed
on refining the income statement to the
detriment of the balance sheet
Since FASB, a shift toward
cleaning up the balance sheet
a movement toward more of an asset-liability
approach to the financial statements consistent
with the conceptual framework project
Developments
Cash earnings
Pro forma earnings
Retrospective reports
Quality of earnings
Increasingemphasis on earnings sustainability
and an absence of earnings management
Accounting scandals
Chapter 11:
The Income Statement
Evolving definitions
Future events
Comprehensive
income
Earnings Per Share
Earnings management