Question

Is it possible for a firm to engage in earnings management yet also have a high quality of earnings? Why or why not?

• A  :

  Yes, it is possible for a firm to do both. In order to be successful, however, the firm must provide full and transparent information related to any unusual or unexpected changes in revenues, expenses, gains, and/or losses.

• B  :

  Yes, it is possible for a firm to do both. In fact, the more a firm engages in earnings management practices in order to smooth out its revenues, expenses, gains, and/or losses, the higher its quality of earnings will be.

• C  :

  Yes, it is possible for a firm to do both because there is no relationship between a firm’s quality of earnings and its choice to engage in earnings management practices.

• D  :

  No, it is not possible for a firm to do both. In fact, any attempts to engage in earnings management practices of any kind automatically decrease a firm’s quality of earnings.

Answer 1

The answer is:A

A: Yes, it is possible for a firm to do both. In order to be successful, however, the firm must provide full and transparent information related to any unusual or unexpected changes in revenues, expenses, gains, and/or losses. is correct because we can decide whether the firm has fraudulently tried to increase its earnings.

B is not Correct because if the firm does not provide transparent details then there are chances of concealing income and showing high profits.

C is not correct because there is relationship between earnings management practices and quality of earning because the quality of earning depletes as and when the firm tries to dress up the financials of other companies.

D is not Correct because a firm can do both.