...elsevier.com/locate/jae Accrual-based and real earnings management activities around seasoned equity offerings Daniel A. Cohen 1, Paul Zarowin à New York University, Stern School of Business, NY 10012-1118, USA a r t i c l e i n f o abstract Article history: Received 15 January 2008 Received in revised form 22 December 2009 Accepted 18 January 2010 Available online 2 February 2010 We show that SEO firms engage in real activities manipulation, and the decline in postSEO performance due to the real activities management is more severe than that due to accrual management. Our evidence is important, because it shows that post-SEO operating underperformance is driven not just by accrual reversals, but also reflects the real consequences of operational decisions made to manage earnings. We also show how firms’ choices of real versus accrual-based earnings management activities around SEOs vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. & 2010 Elsevier B.V. All rights reserved. JEL Classification: G14 G32 M4 M41 Keywords: Seasoned equity offerings Earnings management Accounting choices Accounting Accruals Real activities 1. Introduction In this paper, we examine both real and accrual-based earnings management activities around seasoned equity offerings (SEOs). Prior research has documented that SEOs are associated with earnings management and subsequent declines in operating performance...
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...elsevier.com/locate/jae Accrual-based and real earnings management activities around seasoned equity offerings Daniel A. Cohen 1, Paul Zarowin à New York University, Stern School of Business, NY 10012-1118, USA a r t i c l e i n f o abstract Article history: Received 15 January 2008 Received in revised form 22 December 2009 Accepted 18 January 2010 Available online 2 February 2010 We show that SEO firms engage in real activities manipulation, and the decline in postSEO performance due to the real activities management is more severe than that due to accrual management. Our evidence is important, because it shows that post-SEO operating underperformance is driven not just by accrual reversals, but also reflects the real consequences of operational decisions made to manage earnings. We also show how firms’ choices of real versus accrual-based earnings management activities around SEOs vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. & 2010 Elsevier B.V. All rights reserved. JEL Classification: G14 G32 M4 M41 Keywords: Seasoned equity offerings Earnings management Accounting choices Accounting Accruals Real activities 1. Introduction In this paper, we examine both real and accrual-based earnings management activities around seasoned equity offerings (SEOs). Prior research has documented that SEOs are associated with earnings management and subsequent declines in operating performance...
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...Competition Bikes, Inc. Comparative Income Statements Revenue Net Sales- The company’s net sales increased from year 6 to 7 by $1,495,000.00 or as the spreadsheet shows 33.3%. This is a very strong in increase. However, year 7 to 8 showed a net sales decreased of -$897,000.00 or -15%. This decrease shows a weakness, it is vital that net sales grow or at least stay even. Gross Profit- Gross profit shows an increase from year 6 to 7 by $447,000.00 or 37.5%, this is a strong increase. Gross profit then decreased year 7 to 8 coming in at -$266,000.00 or -16.3%, thus a sign of weakness. There needs to be an investigation in to why there was such a huge drop from year 7 to 8. Advertising may have a direct link to the decrease. Operating Expenses/ Selling Expenses Total selling expense shows the overall...
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...year 6 to 7 which signifies strength in the company. Increasing sales increases stockholder value and the overall value of the company. Net sales decreased 15% from year 7 to 8 which is a weakness for the company and affects the overall value. Advertising expenses decreased 16.3% from year 7 to 8 as well. This is a weakness for the company because the decrease in advertising can have a direct impact on the sales. In addition research and development was 37.55 from year 6 to 7 and -16.3% from year 7 to 8. Research and development will also have a direct impact on sales and year 7 to 8 shows a weakness in the company for research and development. Net earnings increased 313.4% for year 6 to 7 which is strength. Net earnings increase the value of the company. The net earnings from year 7 to 8 were -81.6% which is a weakness and decreases the overall earnings for the company. Utilities increased from 3.8% from year 6 to 7 and 11.1% from year 7 to 8. This is a weakness because it is an added expense for the company and affects overall earnings. Total operating expenses increased 23.9% from year 6 to 7 which demonstrates a weakness in the company. This decreases earnings and the value of the company. Totals operating expenses from years 7 to 8 decreased 3.6% which shows strength in the company and increases the value. Total assets decreased over 7% for both year to year comparisons. This is a weakness. Decreased assets demonstrate a decreased worth for the company...
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...Sections: From the income statement one of the most visible changes is both strength and a weakness. The jump in Net Sales from FY6 to FY7 (up 33%) is very substantial indicating a growth year for the company and a very positive result. Net sales are also a source of weakness when we look at the substantial drop in sales from FY7 to FY8, where a 15% reduction took place. Normally this may be cause for alarm and should mandate some immediate action. According to management, because their product is dependent on professional riders obtaining sponsors, the downturned economy has cause several sponsors to stop funding riders, and thus affected sales. This in itself could indicate that there isn’t enough diversification in the company’s revenue sources. Although a niche industry obtains most of its profit from its specialization, it should not depend on it as a sole source of revenue. The company is also dependent on its innovation and market leadership to maintain brand value, so special attention must be given to R&D and advertising funding. A strength in this section is that COGS has been moving in proportion to sales. Although there is a small margin of difference between the raise/fall of sales versus COGS...
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...company's stockholders. A. True B. False 5. To which of the following questions will internal users want answers? A. What selling price for our product will maximize the company's net income? B. Which product line is most profitable? C. Is cash sufficient to pay dividends to stockholders? D. All of these 6. Which of the following is not an external user of accounting data? A. Labor unions B. Customers C. Economic planners D. Chief Financial Officer 7. Which statement about users of accounting information is incorrect? A. Management is considered an internal user. B. Taxing authorities are considered external users. C. Present creditors are considered external users. D. Regulatory authorities are considered internal users. 8. Which of the following is not one of the three primary business activities? A. Financing B. Operating C. Advertising D. Investing 9. Which of the following is an...
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...Advertising whereby the only connection the consumer has to the product is the advertising and the only way a consumer can act on the advertisement or commercial is to return a coupon or make a phone call. Direct-response advertising is geared to eliminate an intermediary in the purchase process. It can utilize a wide range of media, from matchbook covers to print or radio and television, although it is typically conducted through the mail. In direct-response advertising, the effectiveness of the advertising is directly related to the amount of sales. Thus people who specialize in it are very knowledgeable about the correlation between positioning an advertisement in a publication and the resulting audience responses. Thus it focused on direct response customer right from 1996 to reach a larger portion of Medicare eligible patients to market their products. This specifically was a pretty successful campaign, as the company increased its Medicare eligible diabetes customer base from 17,000 to 545,000 in 2003. To qualify as capitalized expenditure as assets, the direct responses expenses had to prove that the specific advertisements generated sales. Leads normally did not qualify. It has to be narrowly targeted and the response needs to be tracked. The company ran various advertising commercials on the television with each commercial being given a separate toll free number. For each customer, the firm kept a track of prescription, doctor and insurance carrier. All customer names...
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...Colin Drury, Management and Cost Accounting Boston Creamery Boston Creamery Professor John Shank, The Amos Tuck School of Business Administration Dartmouth College This case is reprinted from Cases in Cost Management, Shank, J. K. 1996, South Western Publishing Company. The case was prepared by Professor John Shank from an earlier version he wrote at Harvard Business School with the assistance of William J. Rauwerdink, Research Assistant. This case deals with the design and use of formal "profit planning and control" systems. It was originally set in an ice cream company in 1973, a few years before the advent of "designer ice cream". Frank Roberts, Vice-president for Sales and Marketing of the Ice Cream Division of Boston Creamery, was pleased when he saw the final earnings statement for the division for 2000 (see Exhibit 1). He knew that it had been a good year for ice cream, but he hadn't expected the results to be quite this good. Only the year before the company had installed a new financial planning and control system. This was the first year that figures comparing budgeted and actual results were available. Jim Peterson, president of the division, had asked Frank to make a short presentation at the next management meeting commenting on the major reasons for the favorable operating income variance of $71,700. Peterson asked him to draft his presentation in the next few days so that the two of them could go over it before the meeting. Peterson said he...
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...decisions to make this estimation materialize) the actual volume of sales is not selected by the team and is determined externally, for each team, by the instructor. 2 – Your company and its market On 1 January X, each team takes responsibility for the management of a firm called Bach-n, where n is the identifier of the team. On day 1 of period X, all Bach Co firms in the simulation are identical to all the other ones. Each firm is a rather small-sized business. It designs, assembles and sells hairdryers on a limited domestic market. At the beginning of the simulation, the market is shared equally, between 5 companies, all of similar size. The overall market for the year X is estimated to be about 500,000 units (see endnote 4). It is reasonable to anticipate that the total market size will increase or decrease, beyond X at a trend average rate of about y% per year (where y is decided by the instructor), but this will depend on the decisions taken by each firm in such matters as the selling price and its evolution for the firm, advertising and marketing expenses and so on. The market is extremely sensitive to prices and to marketing expenses (In a down-market, for example, the firm with the highest marketing and sales expenses might see its market share grow, and, maybe, even its sales...
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...Rockstar PLC We had to do something different. The company was doing great according to all the performance indicators we monitored, and our managers were earning nice bonuses, but the shareowners weren`t benefiting. – William Embleton William Embleton, managing director of Rockstar PLC, explained why his company had implemented a new incentive system based on an "economic profit" measure of performance starting in the year 2000. In 2002, however, Rockstar’s managers were questioning whether their new system had had its desired effects. The new economic profit measure did not seem to be any better in reflecting shareowner returns than did the old measure – accounting earnings – on which Rockstar’s managers had previously focused. And the new system was causing some management confusion and a perceived unfairness issue. Mr. Embleton had to decide whether to modify the new system, and if so how, or to replace it with something else. The Company Rockstar PLC was founded in 1852 as a brewery serving local pubs. Over the years it had grown, both internally and by acquisition. In 2002, Rockstar PLC was a medium-sized, publicly held corporation focused on the beverages and snack foods industry. It had annual turnover of about £500 million and it employed nearly 3,500 people in six countries. Rockstar PLC was listed on the London Stock Exchange. The company headquarters were still located in Manchester, England, where the company was founded. Rockstar PLC had four operating divisions:...
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...the financial reporting system depends on answers to a few fundamental questions. At what point has revenue been earned? At what point is the earnings process complete? When have expenses really been incurred? During the 1990s' boom in the stock prices of dot-com companies, many dot-com companies earned most of their revenue from selling advertising space on their Web sites. To boost reported revenue, some dot-coms began swapping web-site ad space. Company A would put an ad for its website on company B's website, and company B would put an ad for its website on company A's website. No money ever changed hands, but each company recorded revenue (for the value of the space that it gave up on its site). This practice did little to boost net income and resulted in no additional cash flow—but it did boost reported revenue. Regulators eventually put an end to the practice. Another type of transgression results from companies recording revenue or expenses in the wrong year. In fact, shifting revenues and expenses is one of the most common abuses of financial accounting. Xerox recently admitted reporting billions of dollars of lease revenue in periods earlier than it should have been reported. And WorldCom stunned the financial markets with its admission that it had boosted net income by billions of dollars by delaying the recognition of expenses until later years. [pic] Unfortunately, revelations such as these have become all too common in the corporate world. It is no...
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...What is Earnings Management? Earning Management is the use of the accounting techniques that helps managers make financial statements look better than they actually are. In the Earnings Wizardry, author talks about Earnings Management and the pressure that issuers and non-issuers face when they have to meet investors’ expectations. According to this article, one out of five U.S. CFO’s manipulate their company earnings legally by managing earnings to misrepresent economic performance of the company. Vincent Ryan in The Search for Suspect Accounting, gets a closer look at Earnings Management and talks not just definitions, which he said are a “cover-ups” during slowdowns in financial performance,” but also explains how managers can manipulate financial data and move items from balance sheet to the income statement by itemizing expenses and boosting income. AICPA states that Earnings Management is not a term, but it can occur when managers have opportunity to make accounting decisions and when they actually exploit those opportunities. All articles agree in one, Earnings Management is at manager’s discretion and financial data can be manipulated by the managers to mislead investors. Why practicing Earnings Management? Managers manipulate earnings because of internal and external pressure. There are number of reasons why managers do manipulate financial data and the biggest reason is to meet investor’s expectations. It is expected that managers will make their budgeted/estimated...
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...CHAPTER 4 Accrual Accounting Concepts ASSIGNMENT CLASSIFICATION TABLE | | | | |Brief | | | |A | |B | |Study Objectives | |Questions | |Exercises | |Exercises | |Problems | |Problems | | | | | | | | | | | | | |*1. Explain the revenue | |1, 2, 3, 4 | |1 | |1, 2 | |1A | |1B | |recognition principle and the matching | | | | | | | | | | | |principle. | | | | | | | | | | | | | | | | | | | | | | | |*2. Differentiate between | |5 | |2 | |3 | |2A, 3A | |2B, 3B | |the cash basis and the accrual basis of | | | | | | | | | | | |accounting. ...
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...Vicki Yamasaki (CPA, CRO, One America Insurance) for taking time out their busy schedules to help with the compilation of information. TABLE OF CONTENTS Executive Summary……………………………………………………….. 5 Introduction………………………………………………………………. 6 Background………………………………………………………………. 6 Discussion Gross Profit………………………………………………………. 6 Definitions Description Figure 1 Operating Income (Loss)…………………………………………. 7 Definitions Description Figure 2 Income from Continuing Operations before Income Tax…………. 8 Definitions Description Figure 3 Income from Continuing Operations……………………………… 10 Definitions Description Figure 4 Net Income (Loss)………………………………………………… 11 Definitions Description Figure 5 Earning Per Common Share……………………………………….. 12 Definitions Description Figure 6 Conclusion…………………………………………………………………. 13 Appendix A………………………………………………………………… 14 Appendix B………………………………………………………………… 16 References…………………………………………………………………. 17 EXECUTIVE SUMMARY Financial statements are the most frequently read part of any...
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...and/or gross profit is a sign of strength while a decrease could indicate weakness and year seven to eight shows a significant decline. However, year eight remains an improvement over year six comparatively. Cost of Goods Sold (COGS) increased 31.8% from year six to seven and decreased -14.5% between years seven and eight. These changes are consistent with the net sales changes and do not point to the COGS being the reason for change between the years being compared. Operating expenses show that money spent on advertising increased 37.5% from year six to seven and then management decreased the budget by -16.3%. The savings in advertising could be part of the reason for the overall decline from year seven to eight and should be considered a weak decision by management. Total selling expenses increased 33.0% for year six to seven and decreased -14.9% for the following year comparison. The decrease in expenses (with the exception of advertising as mentioned above) shows management was aware of the economic situation and took steps to protect the company from risk....
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