Discretionary Accrual

In: Business and Management

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DISCRETIONARY ACCRUAL

Earning manipulation has been an important issue to economists, investors, regulators, and publics because they usually use financial statement to measure company’s performance. There are two possibilities that could be done with revenues. First, increasing the revenues by recording the revenue earlier so it could increase. Second, decreasing the revenues by recording the revenue later so the numbers in financial report could decrease. Costs and expenses could be increased and decreased by relying on discretionary costs (Roychowdury, 2006).

In order to make financial report, accrual accounting has been chosen because it is more rational and fair by stating the performance in reality. Financial statement users fascinated in how discretionary accrual should be understood, like how the numbers enhance or lessen the informative of reported earnings. Corporate financial reports use accrual accounting rather than cash accounting because accrual recording costs and benefits incorporate with economic transaction and it uses net income as primary periodic performance.

Cash accounting does not record the full transaction of the full economic because it records the production costs, but not the potential cash received. It involves recording transactions when it enters or leaves. The advantages using cash accounting is because the transactions recorded are highly reliable because it has been completed and the amounts are specific. But, the earning measurement is not very steady, which sometimes make it confused for the relevance. Instead, accrual accounting undertakes to correct the matter by recording the expected cash received; even though the cash has not been received. This is an effort to the revenue recognition in the period in which the cash were actually earned in order to match the connected expenses to the revenue earned (GAAP matching…...

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