FINANCIAL NUMBER GAME
The game has many different names and takes on many different forms
Classification of creative accounting practice
Reward of the game
Label for the financial number game
Creative accounting practices
Any and all steps to play the financial numbers game, including the aggressive choice and application of accounting principles, fraudulent financial reporting, and any steps taken toward earnings management or income smoothing.
A form of earning management designed to remove peaks and valleys from a normal earning series, including steps to reduce and store profits during good years for use during slower years.
A forceful and intentional choice and application of accounting principles done in an effort to achieve desired result, typically higher current earning whether the practices followed are in accordance with GAAP or not.
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Political cost effects
Bonus plan effects
Borrowing cost effects
Large and high profile firms may have the motivation to manage their earnings down-ward in an effort to be less conspicuous to regulators.
Incentive compensation plan for corporate officers and key employees are typically stock option and stock appreciation rights plans.
Investors seeks out and ultimately pay higher prices for corporate earning power.
* Increased profit based bonus
* Decrease regulations
* Avoidance of higher taxes
* Higher share prices
* Reduced share price volatility
* Increased corporate valuation
* Lower cost of equity capital
* Increased value of stock options
* Improved credit quality
* Higher debt rating
* Lower borrowing costs
* Less stringent financial covenants
Getting creative with the income statement include steps taken to communicate a different level of earning power using the format of income statement
Expenses and losses can be minimized through an overvaluation of such assets.
Creative accounting practices engaged in the financial number game occur often in contemporary financial statements. Potential rewards for playing the financial numbers game can be substantial and market can be very unforgiving when news of accounting become widely known.
Company can communicate higher earning power by reporting higher earning and more sustainable cash flow.
Companies will minimize expenses by aggressively capitalizing expenditures that should have been expensed or by amortizing capitalized amounts over extended periods.
Refers to recognizing revenue for a legitimate sale in period to that called for by generally accepted accounting principles.
Problems with cash flow reporting.
Getting creative with the Income Statement
Misreported Assets and Liabilities
Aggressive capitalization and extended amortization policies
Recognition premature or Fictitious Revenue
Classification of creative accounting practices