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Far 600 Case Study-Jim

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Question B i. For the first Jim’s proposal which is to accelerate the production and shipment of a large order to Imperial, in my opinion Jim proposal is a good earning management because under literature, Scott 2000, state that there are two type of efficient earning management and opportunistic earning management. While for this proposal it falls under efficient earning management. This is because Jim is trying to improve earnings informativeness in communicating private information. Jim is trying to accelerate the production and shipment where the promise date was for the fifteenth of January and early shipment would acceptable to the customer. Moreover, Jim would create an overtime premium of $100,000 to accelerate the production and shipment by the end of the month. Related to this information, it concludes that accelerating production and shipment have a positive and significant relationship with future profitability. These positive relationships describe the ability that accelerating the production and shipment has to communicate to the public and this consistent with efficient earning management. This proposal can be related with Subramanyam (1996) where it concludes that discretionary accrual have a positive and significant relationship with future profitability. Moreover, Krishnan (2003) also find the consistent evidence that show discretionary accrual (earning management proxy) have a positive and significant relationship with future profitability. This result indicates that the type of earnings management tend toward efficient earnings management.

ii. While for the second proposal where is Jim trying to reduce inventory to create a LIFO inventory layer adjustment. This proposal will be more probably a bad earning management. As we know, LIFO method known as “the cost of goods sold” as opposed to using what was paid for the inventory already in

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