Manage Earnings by Influencing Financial Accounting
It is vital for the company’s management to come up with uniform and clear standards of accounting and operating procedures, as this enhances consistency and allows all the staff members to follow similar organized standards. By sticking to the appropriate financial accounting practices, the management is able to manage earnings in the long run through documenting business transactions in monetary terms, adopting accrual-based accounting, and preparing financial statements.
By using balanced scorecards, management is able to alter financial, non-financial, and operational factors such as customer satisfaction as well as product quality that lead to future increments in sales and income. Through its involvement in financial, operating, and dividend policy decisions, management is able to manipulate quantitative rebuttable presumptions and associated undertakings, thus influencing the earnings in the long run. This is achieved through changing its account treatment by marginally adjusting holdings and exercising much influence over its operating and financial policy.
Management is the key decision-maker in determining whether to enter in certain transactions or not, as well as the mode of computing financial ratios. Transactions influence financial statements, which in turn influence the decision of potential investors on whether to invest in the company or not. Thus, the management is able to weigh the economic outcomes of its decision on certain transactions. The financial statements and ratios are representations of the company’s earning and solvency power; therefore, by use of financial accounting information, the management is able to influence the earnings of the company in the long run by attracting and investing capital. Moreover, management will, in essence, always try to accumulate a return on investments that is way above the cost of capital in the long run through influencing the company’s earnings.