Financial Accounting Theory

Front 1

What is the prospect theory

Back 1

seperate evaluations of gain and losses

disposition effect

causes earnings mgmt

Front 2

what is the effect called where investors interpret gains and losses different ally (not a linear result)

Back 2

disposition effect

Front 3

what theory does Burgshahler and Dichev present

Back 3

earnings management (kinky graph )

Front 4

Who proposed the idea that earnings management graph have a kinky relationship

Back 4

Burgstaler and Dichev

Front 5

Explain the earnings management theory

Back 5

Earnings Management does in fact exist (without man made interference earnings distribution would be normal. This is consistent with the prospect theory. Managers behave rationally and thus lenders demand high i/r from firms that report losses.

Front 6

Post-Announcement Drift was by who and what happened

Back 6

Bernard Thomas

Replicated Ball and Brown with quarterly data

Abnormal share returns drift upwards and and downwards for several months after B-news and good news firms.

Front 7

What are the sloan studies

Back 7

accrual anomoly

Front 8

What is the accrual anomoly

Back 8

market should properly react to high and low accrual firms (immediately) it takes time. (Apple and Crazy Eddie)

Front 9

what famous person are associated with the stock options

Back 9

Steve Jobs

Front 10

what company reported change in accounting estimates

Back 10

Crysteler

Front 11

· what company reported Change of acct estimate

Back 11

(delta)

Front 12

what is the equation for net income

Back 12

= OCF + net accruals

Front 13

what does sloan argue

Back 13

If capital markets were efficient there would be a difference between low accrual and high accrual firms

Front 14

what is the investment strategy return from a high eq firm to a low

Back 14

short low eq after announcement and buy high and hold for a 10% return - 3 % fees
year

Front 15

why is the abnormal return an anomoly

Back 15

you can make money
out of publically available info

Front 16

what are the possible explanations for anomolies

Back 16

behavior bias
transaction costs
rational investors take time to figure out whether expected earnings power has changed

Front 17

what are methods of managing stock options

Back 17

pump and dump it down to spring loading back time
pump and dump
manipulate price downwards
late timing (back timing options) steve jobs
options backdating

Front 18

Managing reported earnings

Back 18

R eal variable
A ccounting adoption
D iscretionary accruals
A ccounting policy change
C apitalizing operating expenses
A ccounting estimate change
S PE's

Front 19

who uses
1) SPES
2) capitalized operating expenses
3) accounting adoptions

Back 19

1) enron
2) worldcom
3) chrystler

Front 20

what is the equation for discretionary accruals

Back 20

NI+ OCF+ net non-discretionary accruals + net discretionary accruals

Front 21

what are some examples of discretionary accruals

Back 21

actual - predicted

Front 22

what are the 3 theories of the positive accounting theory

Back 22

Bonus plan hypothesis, Debt covenant hypothesis. Political cost hypothesis

Front 23

Does the jones model predict discretionary or non-discretionary accruals

Back 23

predicts non-discretionary accruals then discretionary accruals= actual- predicted

Front 24

Signs of earning management

Back 24

1. A history of one-time charges/special items
2. Large fourth-quarter adjustments
3. Repeated asset sales
4. Any qualified audit opinions
5. Related party transactions
6. Complex financial structure
7. SPE’s/ partnerships
8. sell receivables with recourse

Front 25

what does the modified jones model do

Back 25

adjusts jones model to exclude growth in credit sales identified in manipulation years

Front 26

what is big bath

Back 26

in accounting is an earnings management technique whereby a one-time charge is taken against income in order to reduce assets, which results in lower expenses in the future.[1

Front 27

problems at sunbean

Back 27

1. Wrote down inventory to 0 in 96
2. Increase prepaid expenses in 96 (blend in to large restructuring cost)
3. Decrease long term and other current liabilities
4. Write down value of PPE
5. Capitalize product development and advertising in 97 – violation
6. Decrease in allowance for doubtful accounts
7. Channel stuffing
8. Inventory explosion

Front 28

is channel stuffing/ bill and hold a violation of GAAP/ Real earnings mgmt

Back 28

bill and hold is both

Front 29

is restructuring charges real earnings mgmt

Back 29

potentially

Front 30

is o Conservative accounting. Rapid amortization of assets real EM / violation of gaap

Back 30

only real EM

Front 31

is allocation of purchased goodwill real em?

Back 31

no real EM

Front 32

what is cookie jar accounting

Back 32

o It is an accounting practice in which a company uses generous reserves from good years against losses that might be incurred in bad years.

Front 33

what return can be expected from post earnings announcement drift

Back 33

hold 60 days annualized 18% return

Front 34

what are some accounts for discretionary accruals

Back 34

allowance for doubtful accounts, warranty provisions provisions for restructuring, layoffs

Front 35

who observes discretionary accruals

Back 35

not investors directly

Front 36

why hypothesis does jones model support

Back 36

political cost hypothesis

Front 37

what should happen to accruals ina decling growth company

Back 37

should fall as sales from the past should be raking in cash

Front 38

in the jones model what is the focus on

Back 38

epsilon

Front 39

what are bonuses generally paid on?

Back 39

core earnings investors ignore non recurring earnings

Front 40

what is Burgtahler and dichevs theory consistent with

Back 40

its the earnings distribution (all slightly positive theory)... and its consistent with the prospect theory because small losses hurt more