Earnings Management and Inventory Flashcards
__________ _____________ occurs when management uses “discretion” to mask the underlying economic performance of a company.
Earnings management
What are the two main motives for utilizing earnings management?
- the desire to mislead financial statement users to gain economic advantage
- the desire to influence legal contracts to specify contractual obligations and outcomes
_______ ____ ________ describes the extent to which reported income reflects the underlying economic performance of a company.
quality of earnings
What are the four main tactics of earnings management?
transaction timing, overly optimistic / pessimistic estimates, channel stuffing and strategic timing of gains / losses
The earnings mgmt tactic that includes timing the transaction accordingly to when the money makes sense to be depicted.
transaction timing
The earnings mgmt tactic that includes taking advantage of the extensive use of estimates in accrual accounting, such as depreciation.
overall optimistic. / pessimistic estimates
The earnings mgmt tactic that includes the company using market power over customers to induce them to purchase more goods than necessary to meet immediate needs.
channel stuffing
The earnings mgmt tactic that includes gains / losses timed to maintain steady improvement in income each year, part of strategic timing of gains/losses.
income smoothing
The earnings mgmt tactic that includes the recognition of nonrecurring loss in a period of already depressed income.
big bath
________ includes items a company intends to sell to customers in the ordinary course of business.
inventory
Inventory starts out as a ______ ________ on the ________ __________.
current asset on the balance sheet
Inventory, when sold, transitions to a _____ ____ ______ ______ on the ________ __________.
cost of goods sold (COGS) on the income statement
A ___________ company purchases inventory ready to sell to customers, do not produce or manufacture it.
merchandising
A ___________ company produces goods that are then sold, buying inputs that go through the manufacturing process.
manufacturing
What are the three manufacturing inventory classifications?
raw materials inventory, work-in-progress inventory, and finished goods inventory
This classification of manufacturing inventory includes parts and materials purchased from suppliers for use in the production process.
raw materials
This classification of manufacturing inventory includes inventory of partially completed goods; includes materials, labor and overhead cost.
work-in-progress
This classification of manufacturing inventory includes completed products ready for delivery.
finished goods
What are the three cost flow assumptions?
LIFO, FIFO and Average Cost
This cost flow assumption assumes that a company uses (sells) goods in the order in which they’re purchased.
the FIFO method
This cost flow assumption assumes that a company uses (sells) the most recently purchased goods first.
the LIFO method
This cost flow assumption assumes that a company prices COGS and inventory based on the average cost of the items available during the period.
the average cost (AC) method
At the end of the period, under the _____ method, the COGS contains the earliest items purchased / manufactured and the inventory includes the most recent items purchased / manufactured.
FIFO
At the end of the period, under the _____ method, the COGS contains the most recent items purchased / manufactured and the inventory includes the earliest items purchased / manufactured.
LIFO
