Financial Management assignment-Provide 1 response to each student post. Each response should be 150 words each. Turnitin and Waypoint is being used to check for plagiarism and Please use APA format....

Shauna Geissinger

To avoid large swings in earnings from period to period income smoothing is used by financial experts to control the effects of the highs and lows on the corporate incomes (cleverism.com). Income smoothing is generally an accepted principle in financial protocol.

Two tactics that can be used by a financial manager to manage earnings is 1) revenue recognition and 2) matching principle. Revenue recognition “states that revenues are recorded when a transaction has occurred” (Byrd, Hickman, & McPherson, 2013). This would be when the money changes hands. The matching principle is “rules of accounting require that the expenses of recorded on the income statement be sales recognized during that period” (Byrd, Hickman, & McPherson, 2013). Expenses are the cost of producing items sold.

Shareholder wealth is the financial goal of the company. Managers must make investments that have higher value than their costs. Residual cash flow is needed to increase shareholder wealth. So, you can see the importance and relationship between the two.

With the balance sheet revealing the company’s assets, liabilities, and equity (Byrd, Hickman, & McPherson, 2013) and can be used in monthly/yearly budgeting and forecasting. By purchasing an asset for the company, this is more than over the normal costs that the company incurs. Stocks and bonds are outstanding while looking like there is an increase in the cash flow. When the investors want their returns that they invested can result in lower dividend to the investor.

References

Byrd, J., Hickman, K., & McPherson, M. (2013).
Managerial Finance
[Electronicversion]. Retrieved from
https://content.ashford.edu/(Links to an external site.)

https://www.cleverism.com/lexicon/income-smoothing-definition/

David Fitzpatrick

Companies often try to keep accounting earnings growing at a relatively steady pace in an effort to avoid large swings in earnings from period to period. They also try to manage earnings targets.

Are these practices ethical?

If a corporation is publicly traded, they have an obligation to their shareholders and possible investors to report accurate information. The U.S. Securities and Exchange Commission requires organizations that are publicly traded to follow these principles/guidelines. The U.S. SEC (Securities and Exchange Commission) is the agency that oversees and enforces the G.A.A.P use and implementation. Kimmel, Weygandt, Kieso (2016) states regulatory agencies ensure organizations are abiding by the rules, otherwise mistrust of financial reporting effects stocks and investors faith. The format of the reports created are uniform, essentially making organizational financial statements easily understandable. Shareholders, potential investors and other entities know the information included in each of the financial statements as they are the standard. These principles set standards and principles that establish the foundation for accounting practices. Organizations have ethical responsibilities to report true earnings where they belong.

What are two tactics that a financial manager can use to manage earnings?

There are a several ways that financial managers can manage earnings. The two I will discuss are cookie jar reserves and revenue recognition.

Cookie Jar Reserves: This is when a company accrues reserves from current year so that they can under-accrue for the next year. This tactic can give a skewed view of what is actually going on from a shareholder’s point of view.

Revenue Recognition: This is when the prior years financial statement was inflated and therefore the following period they must be inflated. This can cause major shortfalls within organizations.

What are the implications for cash flow and shareholder wealth?

According to Byrd, Hickman, and McPherson (2013) cash flows is what measures business or investment success. Therefore, cash flow affects the shareholder wealth as it makes all the difference. A financial manager must manage cash flow to ensure as it ensures they are making their target for the period at hand.

Using the financial balance sheet as displayed in the text, provide an example of how purchasing an asset or issuing stocks or bonds could potentially impact earnings targets.

An example that I can think of would be investing in a server for an online firm. The servers are going to utilize power/space/cooling, however they are going make point of sale transactions. The corporation is going to make a profit from this purchase both retained and reinvested into other products. My thought is, did management make the correct decision? Will profits and retained earnings be what is expected? Should management have purchased a cheaper servers or brand. Would cheaper servers have the same type of warranty and service or cost more in the long run? All of these items have impact on the target earnings.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Financial accounting: Tools for business decision making (8th ed.). Retrieved from https://content.ashford.edu/

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from
https://content.ashford.edu/(Links to an external site.)