Accounting Theory and Current Issues Task – Due Thursday 27th of May 2021at 6:00 PM Word limit – 3,000 words · The assignment must be in MS Word format, with no spacing, 12-pt Arial font and 2 cm...

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Accounting Theory and Cu
ent Issues
Table of Contents
Part A    3
Earnings management concept    3
Part B    4
Positive Accounting Theory    4
Manipulation of financial statements    5
Opportunistic perspective of positive accounting theory    7
References    10
Part A
Earnings management concept
Earnings management can be defined as the use of various different accounting techniques which helps in presenting the favorable and positive view of the business activities donein the business and presenting the overly positive financial position of the company.The earnings management concept helps the management of the company to take advantage of the manner in which accounting rules need to be applied and creating such a financial statement the inflate or we can say smooth the earnings of the company (Callao, Jarne and Wróblewski, 2014). Earnings management can be viewed as a popular method through which financial records of the company can be manipulated and helps management in presenting the consistency of profits to handle or smooth the fluctuations in earnings. There are many techniques or tools which the managers and executives of the company use to achieve the desired or expected level of financial position of the company. These tools are used by the managers according to their best knowledge and judgments. It is very common to have large fluctuations in incomes and expenses in the normal course of business for any company but this may be an alarming point for the investors of the company who have invested their money in the company for stability and growth. In order to meet the financial expectations of the company and maintain the prices of the company’s stock, management manipulates the accounting practices being followed in the company. Many executives or managers receive a very good amount of bonus for this purpose and even some become eligible for the stock options when the prices of stocks of the company increase.
Every company follows the practice of corporate disclosure for its stakeholders to review the financial position of the company through which their interests are booked. Financial statements such as balance sheets and income statements play a major role in presenting the true and fair position of the company. Apart from this, there are many other factors also which are vital in financial reporting and ascertaining the profit of any corporate such as the time at which various incomes, revenue, and expenses are recognized and the manner in which these are recognized (Gerakos, 2012). The accounting is basically done using the accrualand matching concept while recording the transactions. The accrual concept says that the incomes, losses, revenues, and gains are to be recognized in the same period in which these transactions occur rather than when the cash is actually received or paid by the company. This accrual concept is followed to help the investors of the company to assess the financial performance of the company during a period.
There are many reasons due to which the timing of recognizing events that impact income, revenue or profit, or expenses is important for managers. The main motive of management behind using the earnings management concept is to improve or enhance the financial position of the company infront of stakeholders or investors. There are many ways in which management can do earnings management like if we say that any company is performing poorly and its financial position is not good, so much information can be concealed (Callao, Jarne and Wróblewski, 2014). If we talk about using the accrual concept while recording various revenues, incomes, profits, and losses that arerecording them at the time of when the transaction occurs could sometimes display a weak position of the company in the cash flows. Managers can use earnings management to shift the earnings of a particular period to the next period or any other period for optimal tax planning. The optimal tax planning by shifting earnings to the next period canact as a sign of strength for a company. The earnings can also be managed to reach a certain level of earnings to maintain the bank loan covenants. If a certain level of earnings is not reached then the lender of loans can call the loans as due or outstanding which will create the problem of liquidity and this will display the company as weak and not having good credibility in front of banks and other creditors. The managers of the company use earnings management as a tool to improve their rating in the company regarding tier managerial capabilities and this will also set as a benchmark for them in the further financial reporting periods. Even the managers are provided a bonus for maintaining and presenting a good financial position of the company in front of the investors this acts as a motivating factor for them to use earning management techniques in the preparation of financial statements and applying their judgments rationally. There are many techniques through which earnings management can be ca
ied out such as cookie jar under which the manager of a company create a reserve or can also create a financial slack in the financial records of the company (Al Azeez, Sukoharsono and Andayani, 2019). This is done by recording more expenses in the present financial records of the company in order to boost the earnings of the company in future periods. This can be explained with the help of an example if the manager of the company reports the higher cost of the inventory in the cu
ent period, so by doing this he can reduce the same in future financial periods. There are many other techniques also which can be used by managers for earnings management like stock buybacks, early retirement of corporate debt, operating v/s non-operating income, and change in GAAP. This shows that the timing at which the incomes, revenues, profits, and losses are recognized or recorded in the books are important for ascertainment of profit and if these are altered using the earning management concept by the managers of the company, it can benefit the company in presenting its financial records to the investors and can increase the prices of company stock and can even help in optimal tax planning. Even if the profits of the company are disclosed higher or we can say there are smooth earnings it will also benefit the managers in terms of incentives and building a good image in the company for future periods also.
Part B
Positive Accounting Theory
Positive accounting theory is...