Earnings ja niiden managementointi

Question 1

What are earnings?

Answer 1

Earnings are one representation of many realities. Thats why one could argue that earnings are fiction.

Earnings are fiction until they become reality.

Question 2

Are earnings usefull?

Answer 2

Earnings provide value relevant information to investors.

Question 3

What is earnings management?

Answer 3

Application of accounting policies and real actions to influence earnings in a way that predetermined earnings objectives are met.

Question 4

What reasons drive earnings management?

Answer 4

1. executive compensation
2. M&A activities depend on it
3. raising capital for the firm depends on it

Question 5

What are earnings?

Answer 5

A company’s earnings are its after-tax net income, or profits, in a given quarter or fiscal year. Earnings are crucial when assessing a company’s profitability and are a major factor in determining a company’s stock price.

Question 6

How are earnings managed?

Answer 6

There are two ways on doing earnings management

1. Making choices on accounting policies.
2. Taking real actions that influence earnings.

Question 7

Making choices on accounting policies AS A EARNINGS MANAGEMENT WAY?

Answer 7

Accounting standards leave a lot of room for different interpretations. This allows earnings management.

For example:

a) management can use Accrual accounting rules when reporting earnings.
b) they can also distribute revenues and expenses among several reporting periods to make the earnings look relatively steady.

Question 8

Taking real actions that influence earnings AS A EARNINGS MANAGEMENT WAY?

Answer 8

Real actions include Influencing the operations in a) advertising, b) R&D and c) productions levels.

Many companies have IFRS specialists that make sure that actions taken by the management are in line with the accounting requirements. Many IFRS standards are PRINCIPLE based (eli ei suoraan vaadi mitään, vaan antaa periaatteen), and so expert estimates are often needed.

Question 9

Working capital accruals in earnings management?

Answer 9

Working capital accruals are popular way of managing earnings. It includes receivables or payables through assumptions of payment schedules.

(kuuluu accounting policies tapaan)

Question 10

How earnings management differ from fraud?

Answer 10

Fraud would occur if the firm would intentionally manipulate its financial statements, to create a false appearance of its financial position so that the information would mislead investors and other stakeholders.

Question 11

How earnings management differ from fraud?

Answer 11

Fraud has the same objective as earnings management, but differs from earnings management in that fraud is outside of generally accepted accounting principles (GAAP), whereas, earnings management is within GAAP.

Fraud would occur if the firm would intentionally manipulate its financial statements, to create a false appearance of its financial position so that the information would mislead investors and other stakeholders.

Question 12

How can earnings change using accrual accounting?

Answer 12

Earnings can be reduced or increased by using accrual accounting.

Question 13

COST OF CAPITAL -osio alkaa nyt

Answer 13

Oli niin vähän dioja, että laitoin tähän samaan!

Question 14

Weighted Average Cost of Capital (WACC) -> yleisesti

Answer 14

The weighted average cost of capital (WACC) represents a firm’s average cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt.

Question 15

WACC formula

Answer 15

WACC
= E/(E+D) × R_E + D/(E+D) × R_D × (1−t),

where:
E = Equity
D = (Net) interest-bearing debt
R_E = Cost of equity capital
R_D = Cost of debt capital
t = Corporate tax rate

Question 16

Mikä ero on Cost of capital ja WACC:lla?

Answer 16

Cost of capital is the total of cost of debt and cost of equity,

whereas WACC is the weighted average of these costs derived as a proportion of debt and equity held in the firm.

Question 17

WACC lisää

Answer 17

WACC is the rate of return required by investors. And it consists of 2 component:

1) Equity investors point of view = Cost of equity
2) Debt investors point of view = Cost of debt

Investors define the required rate of return for a firm based on their assessment of the risk of the firm

Interest payments are tax deductable
–> Reduces the cost of debt capital

Question 18

Mikä on kaava tälle: Cost of equity?

Answer 18

R_E
= R_f + β_e × (R_m − R_f)

where:
R_e = the cost of equity

R_f = the risk-free interest rate

β_e = the systematic risk on equity:
- (un)systematic risk is (not) priced by the market

R_m = the return on market portfolio:

• (R_m − R_f) is called the market risk premium
• Approximately 2.5 - 6 percent depending on the market/country
• Not stable across time

Question 19

R_f = the risk-free interest rate, what does it express?

Answer 19

R_f = the risk-free interest rate:

• expresses how much an investor can earn without incurring any risk
• the yield from a government bond is typically applied as proxy for the risk-free rate