The document discusses earning management and earning response coefficients among manufacturing companies listed on the Indonesian Stock Exchange. It analyzes how profitability, leverage, company scale, manager bonuses, working capital composition, and manager ownership influence earning management and earning response coefficients. The study uses census and descriptive-verification methods, along with multiple regression analyses. The results show that the variables positively and significantly influence earning management and earning response coefficients both simultaneously and partially. Leverage has the strongest influence on earning management, while company scale most influences earning response coefficients.
This document analyzes the relationship between working capital, liquidity, profitability, and solvency of ACC Limited, an Indian cement company, from 2000-2010. It finds that despite having negative working capital for most of the period, ACC was able to earn good returns through an aggressive working capital policy, but that this ultimately put its solvency at risk. The study uses various financial ratios and tests to evaluate ACC's liquidity, profitability, and risk over time.
This document provides an analysis of various financial ratios for a company over two years. It begins with an introduction to ratio analysis and its importance. It then calculates and interprets various ratios including current ratio, debt to equity ratio, net profit margin, gross profit margin, inventory turnover, debtors turnover, creditors turnover and return on capital employed. The analysis found that the current ratio and return on capital employed increased slightly but debt to equity ratio also increased, indicating less financial stability. Profit margins were low. Inventory turnover and creditors turnover decreased. The conclusion recommends the company improve utilization of assets, pricing strategies and timely payment of creditors.
The document analyzes various financial ratios for Scientex Berhad for 2012 and 2011. It finds that the company's liquidity ratios decreased slightly from 2011 to 2012, indicating weaker short-term financial health. Efficiency ratios also decreased slightly, suggesting the company was turning over inventory and collecting debts slightly slower. Debt ratios increased marginally from 2011 to 2012, demonstrating a small increase in leverage. Profitability ratios remained mostly stable, with operating and net profit margins rising slightly from 2011 to 2012. In conclusion, the company's financial performance was stable but showed some minor weaknesses in liquidity and efficiency from 2011 to 2012.
This document discusses financial ratio analysis and provides examples of calculating various ratios for a company called Davies Inc. and comparing them to peer group averages. It defines different types of ratios including liquidity, asset management, profitability, leverage, and market value ratios. Formulas for calculating each ratio are given. An example shows Davies Inc.'s ratios calculated from financial data provided and compared to the peer group averages. Additional questions with examples of calculating total assets turnover and debt ratio are also included.
Antecedent Variables of Dividend Policy in Public Manufacturing Companies: Ca...IJSRED
This study examines the influence of earnings management, managerial ownership, and free cash flow on dividend policy in Indonesian manufacturing companies from 2015-2018. The results of the multiple linear regression analysis show that earnings management and managerial ownership do not significantly influence dividend payout ratios. However, free cash flow has a significant positive influence on dividend payout ratios. Specifically, companies with higher free cash flow levels pay out higher dividends, potentially to minimize agency costs by discouraging managers from using free cash flows in ways that decrease shareholder wealth. Overall, the study finds that while earnings management and managerial ownership do not impact dividend policy decisions, free cash flow is an important determinant of the level of dividends paid out by companies.
It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
Professor Aloke (Al) Ghosh Presents at HEC Business SchoolProfessorAlokeGhosh
Professor Aloke (Al) Ghosh spoke at the HEC Business School, Switzerland in 2010. During this presentation, Professor Ghosh discusses managerial exposure to losses.
Working capital management and profitability an empirical analysisIAEME Publication
This document summarizes a study examining the relationship between working capital management and profitability among Indian manufacturing firms. The study uses financial data from 1,198 manufacturing firms over a 5-year period. Correlation analysis found negative relationships between measures of working capital management (debtor's days, inventory days, creditor's days, cash conversion cycle) and firm profitability. Regression analysis will further examine these relationships to determine how adjusting elements of working capital management could impact profitability. The results aim to provide Indian manufacturers insights on variables that influence their profits.
This document analyzes the relationship between working capital, liquidity, profitability, and solvency of ACC Limited, an Indian cement company, from 2000-2010. It finds that despite having negative working capital for most of the period, ACC was able to earn good returns through an aggressive working capital policy, but that this ultimately put its solvency at risk. The study uses various financial ratios and tests to evaluate ACC's liquidity, profitability, and risk over time.
This document provides an analysis of various financial ratios for a company over two years. It begins with an introduction to ratio analysis and its importance. It then calculates and interprets various ratios including current ratio, debt to equity ratio, net profit margin, gross profit margin, inventory turnover, debtors turnover, creditors turnover and return on capital employed. The analysis found that the current ratio and return on capital employed increased slightly but debt to equity ratio also increased, indicating less financial stability. Profit margins were low. Inventory turnover and creditors turnover decreased. The conclusion recommends the company improve utilization of assets, pricing strategies and timely payment of creditors.
The document analyzes various financial ratios for Scientex Berhad for 2012 and 2011. It finds that the company's liquidity ratios decreased slightly from 2011 to 2012, indicating weaker short-term financial health. Efficiency ratios also decreased slightly, suggesting the company was turning over inventory and collecting debts slightly slower. Debt ratios increased marginally from 2011 to 2012, demonstrating a small increase in leverage. Profitability ratios remained mostly stable, with operating and net profit margins rising slightly from 2011 to 2012. In conclusion, the company's financial performance was stable but showed some minor weaknesses in liquidity and efficiency from 2011 to 2012.
This document discusses financial ratio analysis and provides examples of calculating various ratios for a company called Davies Inc. and comparing them to peer group averages. It defines different types of ratios including liquidity, asset management, profitability, leverage, and market value ratios. Formulas for calculating each ratio are given. An example shows Davies Inc.'s ratios calculated from financial data provided and compared to the peer group averages. Additional questions with examples of calculating total assets turnover and debt ratio are also included.
Antecedent Variables of Dividend Policy in Public Manufacturing Companies: Ca...IJSRED
This study examines the influence of earnings management, managerial ownership, and free cash flow on dividend policy in Indonesian manufacturing companies from 2015-2018. The results of the multiple linear regression analysis show that earnings management and managerial ownership do not significantly influence dividend payout ratios. However, free cash flow has a significant positive influence on dividend payout ratios. Specifically, companies with higher free cash flow levels pay out higher dividends, potentially to minimize agency costs by discouraging managers from using free cash flows in ways that decrease shareholder wealth. Overall, the study finds that while earnings management and managerial ownership do not impact dividend policy decisions, free cash flow is an important determinant of the level of dividends paid out by companies.
It is an analysis of strength and weakness of an organisation by establishing the quantitative relation among the items of Balance Sheet or Income Statement of such an organisation
Professor Aloke (Al) Ghosh Presents at HEC Business SchoolProfessorAlokeGhosh
Professor Aloke (Al) Ghosh spoke at the HEC Business School, Switzerland in 2010. During this presentation, Professor Ghosh discusses managerial exposure to losses.
Working capital management and profitability an empirical analysisIAEME Publication
This document summarizes a study examining the relationship between working capital management and profitability among Indian manufacturing firms. The study uses financial data from 1,198 manufacturing firms over a 5-year period. Correlation analysis found negative relationships between measures of working capital management (debtor's days, inventory days, creditor's days, cash conversion cycle) and firm profitability. Regression analysis will further examine these relationships to determine how adjusting elements of working capital management could impact profitability. The results aim to provide Indian manufacturers insights on variables that influence their profits.
Ratio analysis involves calculating and interpreting various financial ratios to evaluate a company's liquidity, solvency, operational efficiency, and profitability. Key ratios include current ratio, quick ratio, debt-to-equity ratio, inventory turnover, gross profit margin, return on equity, and earnings per share. Ratio analysis is used to analyze a company's financial health and performance over time as well as compare it to other companies.
A critical analysis of funds management in selected cement industries [www.wr...WriteKraft Dissertations
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Contact us at admin@writekraft.com OR call us on +917753818181, +919838033084
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This document discusses various financial statement analysis concepts including ratios, tools, and purposes. It provides definitions and formulas for key ratios used to analyze liquidity (current ratio, quick ratio, cash ratio), profitability (gross profit ratio, net profit ratio, return on capital employed), and capital structure (capital gearing ratio). Ratio analysis involves calculating ratios, comparing them to standards, and interpreting the relationships between financial statement figures to evaluate a company's performance and financial position.
A Study on Financial Statement Analysis of Ultratech Cement Limitedijtsrd
The process of Financial Statement Analysis includes various steps like ratio analysis, trend analysis, comparative statement analysis, schedule of changes in working capital, common size percentages, fund analysis, etc. Financial statement analysis refers to an assessment of the viability, stability and profitability of a business, sub business or project. The main objective of any financial analysis or financial statement analysis will be assessing corporate excellence, judging creditworthiness, forecasting bond ratings, predicting bankruptcy, and assessing market risk. Saddapalli Sai Deekshitha | Dr. B. C. Lakshmanna "A Study on Financial Statement Analysis of Ultratech Cement Limited" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-5 , August 2021, URL: https://www.ijtsrd.com/papers/ijtsrd45154.pdf Paper URL: https://www.ijtsrd.com/management/accounting-and-finance/45154/a-study-on-financial-statement-analysis-of-ultratech-cement-limited/saddapalli-sai-deekshitha
Ratio: It is the quantitative relation between two amounts showing the number of times one value contains or is contained within the other.
Accounting Ratio: It means ratio calculated on the basis of accounting information.
Ratio analysis: A ratio analysis is a quantitative analysis of information contained in a company's financial statements. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency.
Ratios are categorized into following basic categories:
1. Liquidity Ratios
2. Solvency Ratios
3. Activity or Turnover Ratios
4. Profitability Ratios
Ratio analysis involves quantitatively comparing financial metrics to analyze a company's performance and financial position over time. Key ratios indicate profitability, asset utilization, liquidity, and financial leverage. Ratio analysis is useful for management, shareholders, creditors, employees, and governments. Interpreting ratio trends and comparisons to industry averages is more important than just calculating ratios. An example analyzes asset turnover and return on equity ratios for Sensient Technologies Corporation over several years compared to industry averages.
1) The document analyzes the financial ratios of Unilever from 2011-2009 to evaluate the company's performance. Ratios like gross profit margin, net profit margin, return on assets, return on equity, current ratio, and debt-to-equity ratio are discussed.
2) Most of Unilever's profitability ratios improved from the previous years, indicating higher profits and returns. However, inventory turnover decreased, suggesting less efficient inventory management.
3) Overall, the ratio analysis shows that Unilever's financial position is stable and provides opportunities for future growth, although some areas could be improved through strategic planning.
This document provides an overview of ratio analysis for B.Com students based on the Goa University syllabus. It defines ratios and explains that they are used to analyze the financial performance and position of a company. The document then classifies ratios into four main categories - liquidity ratios, profitability ratios, activity ratios, and capital structure ratios. Specific ratios like current ratio, return on assets, inventory turnover ratio, and debt-to-equity ratio are also defined and their calculations explained.
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
Ratio analysis is a useful management tool that allows managers to analyze financial results and trends over time to identify organizational strengths and weaknesses. It involves calculating and comparing various types of ratios related to profitability, liquidity, asset usage, debt, and investor returns. Higher ratios may indicate better performance, with targets varying by industry. The document then provides examples of specific profitability, liquidity, turnover, valuation, and leverage ratios, calculating them for Hindustan Unilever for 2014 and 2015 to analyze the company's financial performance.
A Study on Capital Budgeting at Bharathi Cement Ltdijtsrd
The investment decision of a firm are generally known as the capital budgeting, or capital budgeting decisions may be defined as the firms decisions to invest its current funds most efficiently in the long term assets anticipation of an expected flow of benefits over a series of years .The long term assets are those that affect the firms operations beyond the one year period .The firm’s investment decisions would generally include expansion, acquisition, modernization and replacement of the long term assets. Sale of a division or business is also as an investment decision. Decisions like the change in the methods of sales distribution, or an advertisements campaign or a research and development programmes have long term implications for the firms expenditure and benefits, and therefore they should also be evaluated as investment decisions. It is important to note that investment is the long assets invariably requires large funds to be tied up in the current assets such as inventories and receivables. As such, investment in fixed and current assets is one single activity. A D Mamatha | Dr. P. Basaiah "A Study on Capital Budgeting at Bharathi Cement Ltd" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-4 | Issue-6 , October 2020, URL: https://www.ijtsrd.com/papers/ijtsrd33161.pdf Paper Url: https://www.ijtsrd.com/management/other/33161/a-study-on-capital-budgeting-at-bharathi-cement-ltd/a-d-mamatha
- The document analyzes the ratio analysis of Amara Raja Batteries Limited over 5 years from 2009-2014.
- Key ratios like current ratio, quick ratio, total debt ratio, and debt-equity ratio are calculated from the company's annual reports.
- Current ratios were above 2:1 standard except in 2011-2012. Debt ratios increased over time, showing a rising dependence on debt financing rather than equity.
This document analyzes the financial performance of Radico Khaitan Ltd over several years using ratio analysis. It begins with an introduction and outlines the company profile. The analysis then calculates and compares various liquidity, profitability, and turnover ratios from 2016-2020. Key findings include the company's satisfactory but improving liquidity and profitability positions. The document concludes with recommendations to maintain profits and control costs, while acknowledging limitations of only considering monetary financial data.
The major objective of any firm is to maximize the shareholders wealth. This is evidence through dividend yield and payout ratio and this encapsulate into the dividend policy of a company. The research purpose aimed at examining the influence that dividend policy has on the volatility of share prices among the listed insurance corporations in Kenya. Research design, approach and method: Data was collected from listed insurance corporations over a 10-year period with a total of 49 data points. The Pearson correlation and ordinary regression analysis were employed. The results reveal the existence of a positive link among the study variables. The correlations were found to be substantial at ninety-five percent confidence level. It is worth noting that the model summary shows forty-three-point one percent of changes in the volatility of stock price are explicated by dividend yield and payout ratio. ANOVA statistics which examines whether the analytical model as set out in the study explains variations in the dependent variable concluded that the model is analytically substantial. The outcome revealed a statistically significant positive link between stock price variations and the ratio of dividend payout. Research also established a statistically substantial negative interrelation between volatility of stock prices and dividend return. Results therefore recommend that companies should have dividend policies which are mapped to shareholders wealth maximization objective. The study suggests further studies be undertaken to determine whether there exists an analytically substantial difference between the dividend policies of various sectors in the economy.
- The document analyzes various financial ratios for Virat Industries Ltd, an Indian company that produces cotton socks.
- It calculates liquidity ratios like current ratio and acid-test ratio to assess the company's ability to meet short-term obligations. It also calculates leverage ratios like debt-equity ratio to examine the firm's capital structure.
- The document concludes that the company's current ratio and cash ratio indicate a marginally satisfactory liquidity position. It also finds that the debt-equity ratio has been continuously decreasing, showing efforts to reduce debt levels.
This document summarizes a study that examined the effect of assets management on the profitability of selected quoted firms in Nigeria from 2007 to 2016. Specifically, it analyzed the effect of current assets, non-current assets, and debt-equity ratio on profit after tax. Data were collected from the annual reports of 10 quoted firms and analyzed using panel estimation techniques. The results revealed that current assets had an insignificant positive effect on profit after tax, while non-current assets had a significant positive effect. Debt-equity ratio had an insignificant negative effect on profit after tax. The study concluded that assets management contributes meaningfully to improved firm performance, especially when measured by profit after tax.
This document provides an overview of financial statement analysis and various methods used for analysis. It discusses the key users and purposes of analysis, as well as common analysis techniques like horizontal analysis, vertical analysis, trend analysis, and ratio analysis. It then provides an example of calculating ratios for a company called Norton Corporation using information from their financial statements.
Respond to... Companies often try to keep accounting earnings .docxwilfredoa1
Respond to...
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. Reflect on these practices and discuss the following in your discussion post.
Are these practices ethical?
According to Ortega & Grant (2003), “earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company to influence contractual outcomes” (p. 51). Because these practices are used to alter the financials of a firm from actuality, then, no, these practices are not ethical, however there are common practice and, in some circumstances, acceptable.
What are two tactics that a financial manager can use to manage earnings?
Financial managers at times will use certain tactics to manage earnings. Two tactics that financial managers use to manage earnings are the Big Bath technique and the cookie jar reserve. The big-bath technique consists of taking a one-time, large write-offs or restructuring charges against income in order to reduce assets to further lower future expenses (Hope & Wang, 2018). The use of the big bath method can affect a firms’ competitiveness as it is essentially reporting a loss, which can have negative results on stock prices. The other method is the cookie jar reserve occurs when a company saves money from successful years and draws from that money and applies it to bad years in order to bolster earnings reports (CPA Journal, 1999). The method is used as way to smooth income and appear financially better when in actuality the company is having a bad year.
What are the implications for cash flow and shareholder wealth?
Ultimately, financial manager’s job is to maximize profit, because of this conflict of interest may occur. According to Chalak & Mohammadnezhad (2012), “with respect to increase shareholder wealth, free cash flows are of importance because allow managers to seek growth opportunities which increase share value” (p. 430). Therefore, the use of the techniques in the regards to implications for cash flow and shareholder wealth can be detrimental due to unreliable and inaccurate information, which occurs from managers intentionally influencing actual financials.
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.
When purchasing an asset or issuing stocks earnings targets are impacted due the changes in cash flow. For instance, when purchasing assets, the cash accounts will decrease the purchase amount, while issuing stocks or bonds increases by the amount received for the purchased stocks. These actions can a company to miss or exceed its earnings targets by the amounts of cash flow coming in or going ou.
The document discusses earnings management, which refers to intentionally manipulating a company's earnings to match targets. Earnings are a key indicator of a company's performance and value. While some earnings management is legal and used as a business strategy, excessive manipulation can mislead investors. There are various techniques used for earnings management, such as shifting expenses between periods or overstating revenues. While earnings management may benefit companies in the short-term, lack of transparency damages stakeholder trust in the long-run.
The document discusses the concept of earnings management and whether it is good or bad. It defines earnings management as when managers manipulate financial statements to present a more favorable view of company performance rather than the actual results. Managers have incentives like bonus plans, debt covenants, and avoiding losses to engage in earnings management. While it allows some flexibility, earnings management can mislead investors and hinder resource allocation if overused. The document reviews literature on identifying earnings management and calls for stronger auditing standards to improve detection of fraudulent financial reporting.
Running head business management research aryan532920
This document is a research report submitted by Allan A Lusenji to Masinde Muliro University in partial fulfillment of the requirements for a Bachelor of Commerce degree. The report examines the relationship between capital structure and financial performance of banks listed on the Nairobi Securities Exchange. It provides background information on capital structure and financial performance. It also reviews various studies that have found both positive and negative relationships between leverage/debt and profitability/performance. The report will analyze the capital structure and financial performance of banks listed in Nairobi and determine the nature of the relationship between the two factors.
Ratio analysis involves calculating and interpreting various financial ratios to evaluate a company's liquidity, solvency, operational efficiency, and profitability. Key ratios include current ratio, quick ratio, debt-to-equity ratio, inventory turnover, gross profit margin, return on equity, and earnings per share. Ratio analysis is used to analyze a company's financial health and performance over time as well as compare it to other companies.
A critical analysis of funds management in selected cement industries [www.wr...WriteKraft Dissertations
We started this Academic Writing Help in the year 2011.Writekraft Research & Publication: www.writekraft.com 1000s of students have graduated across the globe from our in-depth research.
We help students with the following services:
1. Thesis Writing (from 50 pages and above)
2. Dissertation writing
3. Research Writing for Publishing
4. Data Analysis
5. Research Proposal Writing
6. Study Plan
7. Plagiarism Report
Contact us at admin@writekraft.com OR call us on +917753818181, +919838033084
The charges are fair and we allow negotiations as per the student’s budget. You can also inbox me for more direction.
This document discusses various financial statement analysis concepts including ratios, tools, and purposes. It provides definitions and formulas for key ratios used to analyze liquidity (current ratio, quick ratio, cash ratio), profitability (gross profit ratio, net profit ratio, return on capital employed), and capital structure (capital gearing ratio). Ratio analysis involves calculating ratios, comparing them to standards, and interpreting the relationships between financial statement figures to evaluate a company's performance and financial position.
A Study on Financial Statement Analysis of Ultratech Cement Limitedijtsrd
The process of Financial Statement Analysis includes various steps like ratio analysis, trend analysis, comparative statement analysis, schedule of changes in working capital, common size percentages, fund analysis, etc. Financial statement analysis refers to an assessment of the viability, stability and profitability of a business, sub business or project. The main objective of any financial analysis or financial statement analysis will be assessing corporate excellence, judging creditworthiness, forecasting bond ratings, predicting bankruptcy, and assessing market risk. Saddapalli Sai Deekshitha | Dr. B. C. Lakshmanna "A Study on Financial Statement Analysis of Ultratech Cement Limited" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-5 , August 2021, URL: https://www.ijtsrd.com/papers/ijtsrd45154.pdf Paper URL: https://www.ijtsrd.com/management/accounting-and-finance/45154/a-study-on-financial-statement-analysis-of-ultratech-cement-limited/saddapalli-sai-deekshitha
Ratio: It is the quantitative relation between two amounts showing the number of times one value contains or is contained within the other.
Accounting Ratio: It means ratio calculated on the basis of accounting information.
Ratio analysis: A ratio analysis is a quantitative analysis of information contained in a company's financial statements. Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency.
Ratios are categorized into following basic categories:
1. Liquidity Ratios
2. Solvency Ratios
3. Activity or Turnover Ratios
4. Profitability Ratios
Ratio analysis involves quantitatively comparing financial metrics to analyze a company's performance and financial position over time. Key ratios indicate profitability, asset utilization, liquidity, and financial leverage. Ratio analysis is useful for management, shareholders, creditors, employees, and governments. Interpreting ratio trends and comparisons to industry averages is more important than just calculating ratios. An example analyzes asset turnover and return on equity ratios for Sensient Technologies Corporation over several years compared to industry averages.
1) The document analyzes the financial ratios of Unilever from 2011-2009 to evaluate the company's performance. Ratios like gross profit margin, net profit margin, return on assets, return on equity, current ratio, and debt-to-equity ratio are discussed.
2) Most of Unilever's profitability ratios improved from the previous years, indicating higher profits and returns. However, inventory turnover decreased, suggesting less efficient inventory management.
3) Overall, the ratio analysis shows that Unilever's financial position is stable and provides opportunities for future growth, although some areas could be improved through strategic planning.
This document provides an overview of ratio analysis for B.Com students based on the Goa University syllabus. It defines ratios and explains that they are used to analyze the financial performance and position of a company. The document then classifies ratios into four main categories - liquidity ratios, profitability ratios, activity ratios, and capital structure ratios. Specific ratios like current ratio, return on assets, inventory turnover ratio, and debt-to-equity ratio are also defined and their calculations explained.
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
Ratio analysis is a useful management tool that allows managers to analyze financial results and trends over time to identify organizational strengths and weaknesses. It involves calculating and comparing various types of ratios related to profitability, liquidity, asset usage, debt, and investor returns. Higher ratios may indicate better performance, with targets varying by industry. The document then provides examples of specific profitability, liquidity, turnover, valuation, and leverage ratios, calculating them for Hindustan Unilever for 2014 and 2015 to analyze the company's financial performance.
A Study on Capital Budgeting at Bharathi Cement Ltdijtsrd
The investment decision of a firm are generally known as the capital budgeting, or capital budgeting decisions may be defined as the firms decisions to invest its current funds most efficiently in the long term assets anticipation of an expected flow of benefits over a series of years .The long term assets are those that affect the firms operations beyond the one year period .The firm’s investment decisions would generally include expansion, acquisition, modernization and replacement of the long term assets. Sale of a division or business is also as an investment decision. Decisions like the change in the methods of sales distribution, or an advertisements campaign or a research and development programmes have long term implications for the firms expenditure and benefits, and therefore they should also be evaluated as investment decisions. It is important to note that investment is the long assets invariably requires large funds to be tied up in the current assets such as inventories and receivables. As such, investment in fixed and current assets is one single activity. A D Mamatha | Dr. P. Basaiah "A Study on Capital Budgeting at Bharathi Cement Ltd" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-4 | Issue-6 , October 2020, URL: https://www.ijtsrd.com/papers/ijtsrd33161.pdf Paper Url: https://www.ijtsrd.com/management/other/33161/a-study-on-capital-budgeting-at-bharathi-cement-ltd/a-d-mamatha
- The document analyzes the ratio analysis of Amara Raja Batteries Limited over 5 years from 2009-2014.
- Key ratios like current ratio, quick ratio, total debt ratio, and debt-equity ratio are calculated from the company's annual reports.
- Current ratios were above 2:1 standard except in 2011-2012. Debt ratios increased over time, showing a rising dependence on debt financing rather than equity.
This document analyzes the financial performance of Radico Khaitan Ltd over several years using ratio analysis. It begins with an introduction and outlines the company profile. The analysis then calculates and compares various liquidity, profitability, and turnover ratios from 2016-2020. Key findings include the company's satisfactory but improving liquidity and profitability positions. The document concludes with recommendations to maintain profits and control costs, while acknowledging limitations of only considering monetary financial data.
The major objective of any firm is to maximize the shareholders wealth. This is evidence through dividend yield and payout ratio and this encapsulate into the dividend policy of a company. The research purpose aimed at examining the influence that dividend policy has on the volatility of share prices among the listed insurance corporations in Kenya. Research design, approach and method: Data was collected from listed insurance corporations over a 10-year period with a total of 49 data points. The Pearson correlation and ordinary regression analysis were employed. The results reveal the existence of a positive link among the study variables. The correlations were found to be substantial at ninety-five percent confidence level. It is worth noting that the model summary shows forty-three-point one percent of changes in the volatility of stock price are explicated by dividend yield and payout ratio. ANOVA statistics which examines whether the analytical model as set out in the study explains variations in the dependent variable concluded that the model is analytically substantial. The outcome revealed a statistically significant positive link between stock price variations and the ratio of dividend payout. Research also established a statistically substantial negative interrelation between volatility of stock prices and dividend return. Results therefore recommend that companies should have dividend policies which are mapped to shareholders wealth maximization objective. The study suggests further studies be undertaken to determine whether there exists an analytically substantial difference between the dividend policies of various sectors in the economy.
- The document analyzes various financial ratios for Virat Industries Ltd, an Indian company that produces cotton socks.
- It calculates liquidity ratios like current ratio and acid-test ratio to assess the company's ability to meet short-term obligations. It also calculates leverage ratios like debt-equity ratio to examine the firm's capital structure.
- The document concludes that the company's current ratio and cash ratio indicate a marginally satisfactory liquidity position. It also finds that the debt-equity ratio has been continuously decreasing, showing efforts to reduce debt levels.
This document summarizes a study that examined the effect of assets management on the profitability of selected quoted firms in Nigeria from 2007 to 2016. Specifically, it analyzed the effect of current assets, non-current assets, and debt-equity ratio on profit after tax. Data were collected from the annual reports of 10 quoted firms and analyzed using panel estimation techniques. The results revealed that current assets had an insignificant positive effect on profit after tax, while non-current assets had a significant positive effect. Debt-equity ratio had an insignificant negative effect on profit after tax. The study concluded that assets management contributes meaningfully to improved firm performance, especially when measured by profit after tax.
This document provides an overview of financial statement analysis and various methods used for analysis. It discusses the key users and purposes of analysis, as well as common analysis techniques like horizontal analysis, vertical analysis, trend analysis, and ratio analysis. It then provides an example of calculating ratios for a company called Norton Corporation using information from their financial statements.
Respond to... Companies often try to keep accounting earnings .docxwilfredoa1
Respond to...
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. Reflect on these practices and discuss the following in your discussion post.
Are these practices ethical?
According to Ortega & Grant (2003), “earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company to influence contractual outcomes” (p. 51). Because these practices are used to alter the financials of a firm from actuality, then, no, these practices are not ethical, however there are common practice and, in some circumstances, acceptable.
What are two tactics that a financial manager can use to manage earnings?
Financial managers at times will use certain tactics to manage earnings. Two tactics that financial managers use to manage earnings are the Big Bath technique and the cookie jar reserve. The big-bath technique consists of taking a one-time, large write-offs or restructuring charges against income in order to reduce assets to further lower future expenses (Hope & Wang, 2018). The use of the big bath method can affect a firms’ competitiveness as it is essentially reporting a loss, which can have negative results on stock prices. The other method is the cookie jar reserve occurs when a company saves money from successful years and draws from that money and applies it to bad years in order to bolster earnings reports (CPA Journal, 1999). The method is used as way to smooth income and appear financially better when in actuality the company is having a bad year.
What are the implications for cash flow and shareholder wealth?
Ultimately, financial manager’s job is to maximize profit, because of this conflict of interest may occur. According to Chalak & Mohammadnezhad (2012), “with respect to increase shareholder wealth, free cash flows are of importance because allow managers to seek growth opportunities which increase share value” (p. 430). Therefore, the use of the techniques in the regards to implications for cash flow and shareholder wealth can be detrimental due to unreliable and inaccurate information, which occurs from managers intentionally influencing actual financials.
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.
When purchasing an asset or issuing stocks earnings targets are impacted due the changes in cash flow. For instance, when purchasing assets, the cash accounts will decrease the purchase amount, while issuing stocks or bonds increases by the amount received for the purchased stocks. These actions can a company to miss or exceed its earnings targets by the amounts of cash flow coming in or going ou.
The document discusses earnings management, which refers to intentionally manipulating a company's earnings to match targets. Earnings are a key indicator of a company's performance and value. While some earnings management is legal and used as a business strategy, excessive manipulation can mislead investors. There are various techniques used for earnings management, such as shifting expenses between periods or overstating revenues. While earnings management may benefit companies in the short-term, lack of transparency damages stakeholder trust in the long-run.
The document discusses the concept of earnings management and whether it is good or bad. It defines earnings management as when managers manipulate financial statements to present a more favorable view of company performance rather than the actual results. Managers have incentives like bonus plans, debt covenants, and avoiding losses to engage in earnings management. While it allows some flexibility, earnings management can mislead investors and hinder resource allocation if overused. The document reviews literature on identifying earnings management and calls for stronger auditing standards to improve detection of fraudulent financial reporting.
Running head business management research aryan532920
This document is a research report submitted by Allan A Lusenji to Masinde Muliro University in partial fulfillment of the requirements for a Bachelor of Commerce degree. The report examines the relationship between capital structure and financial performance of banks listed on the Nairobi Securities Exchange. It provides background information on capital structure and financial performance. It also reviews various studies that have found both positive and negative relationships between leverage/debt and profitability/performance. The report will analyze the capital structure and financial performance of banks listed in Nairobi and determine the nature of the relationship between the two factors.
Response 1:
Part 1
Memo:
Understanding Similarities and Differences between Financial and Managerial Accounting
Attention
: Susan Thompson
Susan-
In an effort to get you up to speed on our expectations, I wanted to provide some details on the differences you can expect to see between managerial and financial accounting and provide you some examples from both areas.
Financial accounting is the backbone of the day-to-day functions of accounting. From payables, to receivables to collections, this area ensures all of the outstanding bills and debts are paid so the organization can operate. The details received from the day to day management of financial accounting are provided to stakeholders’, creditors, vendors and management to ensure the organization is being forthcoming and so management can use the data to further the position of the company(MUSE: Financial and Managerial Accounting). Reports provided within financial accounting include the following:
Income Statement
Statement of Owners Equity
Balance Sheet
Cash Flow Statement
Each of these documents is used by managerial accounting team members to help make decisions about the future of the organization.
Managerial accounting is optional. This is a team of managers who are trying to plan for future business and need to understand the ebbs and flows of the business itself and how any of the business segments or areas can function more productivity. One thing to note is that Financial Accounting is handled by external persons who try to ensure the strength of financial decisions whereas Managerial Accounting is managed by internal managers responsible for the success of the organizations. Financial Accounting Reporting for the IRS is mandatory and GAAP accounting rules must be adhered too. Managerial Accounting has no set rules nor are they bound to any oversight group and are not required to provide any sort of mandatory reporting.
Additional reports used to analyze the health of an organization are horizontal and vertical analyzes.
Horizontal analysis is where we take a series of reports year over year and try to determine what trends were in assets, equity, cash flow, etc. Using these reports allows the management team to better understand the business and what could be coming in the future. Vertical analysis is where we analyze financial statements based on entries for assets, accounts, liabilities and equities. We review each of these as a proportion of the total account and try to understand what led to any inconsistencies.
If you need any further clarification regarding these concepts, reporting or analysis, please reach out to me directly.
Thank You
Part 2
Attn: Board of Directors
MEMO
In an effort to help our team better understand how we can use our current and previous accounting information to help plan and control for future business, I have broken down details on four key financial reports we receive regularly. These reports include the income sta ...
Earnings management involves using accounting techniques to alter financial results within GAAP, while fraud intentionally misleads through financial statements in violation of law. While the two can be similar in distorting financial reports, earnings management does not necessarily constitute fraud if performed within the boundaries of accepted accounting standards. However, abusive earnings management could lead firms into committing accounting fraud.
Earnings response coefficient (ERC) measures stock price reaction to earnings announcements. Studies have found ERC decreases with higher default risk as proxied by bond ratings and debt-to-equity ratios. Higher debt-to-equity ratios mean firms use more debt in their capital structure. For highly leveraged firms, increases in earnings provide more security to lenders than shareholders. Thus, highly leveraged firms have lower ERC as earnings news impacts lenders more than shareholders.
This document summarizes a study that examined the effects of profitability, financial leverage, dividend policy, and firm size on income smoothing practices of manufacturing companies in Indonesia from 2016-2018. The study found that profitability had a negative significant effect on income smoothing, while firm size had a positive significant effect. Financial leverage and dividend policy did not have a significant effect. Firm size weakened the effect of profitability and dividend policy on income smoothing, but did not moderate the effect of financial leverage. The study used agency theory and positive accounting theory to develop hypotheses about the relationships between the variables.
The document provides background information on Apple Inc.'s founding and history. It was established in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne to sell the Apple I computer kit. In 2007, Apple Computer Inc. changed its name to Apple Inc. The document also discusses research methodology, objectives, limitations and definitions of ratio analysis as it relates to analyzing financial statements. Ratios simplify and summarize accounting figures to assess a company's performance, financial position, and efficiency.
Comparative analysis of fair value and historical cost accounting on reported...Alexander Decker
This document summarizes a research study that examined the effects of fair value accounting and historical cost accounting on reported profits of selected manufacturing companies in Nigeria. The study found that both accounting methods have a significant effect on reported profits. Specifically, it was found that the amounts calculated for depreciation, taxes charged, and dividends paid greatly influence reported operating profits. The study concluded that the accounting method used to measure profit will significantly impact taxes, depreciation, and dividend amounts. It recommended that companies prepare financial reports using both historical cost and fair value accounting simultaneously to better understand their true financial position.
Key performance ratios indicate the underlying level of performance and health of the enterprise. Therefore,
understanding the components of the final accounts and their performance ratios is important because of the crucial
nature of ROE. Even though PRA represents one of the best ways to compare the performance of a business and its
peers in the same industry it could be highly distorted due to taxation challenges, hidden gains or losses as well as
the issues of window-dressing. Generally, ratios look at the path an enterprise appears to be moving towards as well
as its recent performance and current financial situation so as to guide management actions with the aim of
enhancing ME. The exploratory research design was used for the study. There were 66 participants in the study and
data were collected from both primary and secondary sources. The multiple method of data generation made it
possible for data of the study to be compared and contrasted with each other. Data were analyzed through descriptive
and regression statistical methods. The result showed a strong positive correlation between PRA and ME. The study
was not exhaustive; therefore, further study could examine the relationship between PRA and Trade Debt in Nigeria
as a way of helping firms chart a way of meeting their debt obligations. On the basis of the result of this study it was
suggested that management of companies should institutionalize effective PRA mechanism adequate enough to track performance at regular intervals.
Post privatization Corporate Governance and the challenges of working capital...inventionjournals
The document discusses corporate governance and working capital challenges in Nigeria after privatization. It examines the impact of corporate governance proxies like ownership structure, board characteristics, and privatization on the liquidity ratio of Ashaka Cement Company. Trend analysis found the liquidity ratio was generally higher before privatization but declined significantly at times due to economic issues. Regression analysis suggests some corporate governance factors like minority ownership and privatization had a positive impact on liquidity ratio, while others like non-executive directors and market value had a negative impact. The study concludes corporate governance significantly impacts liquidity ratio but macroeconomic environment also influences company efficiency.
This document summarizes a research study that analyzed the impact of good corporate governance and financial performance on predicting financial distress using a modified Altman Z-score model. The study used secondary data from 169 manufacturing companies in Indonesia. It developed a financial distress prediction model by adding factors like managerial ownership, institutional ownership, and financial ratios to the original Altman Z-score model. Based on the results, managerial ownership, institutional ownership, debt ratio, return on equity, retained earnings to total assets, earnings before interest tax to total assets, and return on assets were found to have a large impact on predicting financial distress. The modified model was found to perform better than the original Altman Z-score model according to statistical tests.
Corporate Governance on Earnings Management in Listed Deposit Money Bank in N...ijtsrd
The increase in the manipulation of accounting records and collapse of some Nigerian Deposit Money Banks have left question in the mind of researchers on the role of corporate governance. This paper was carried out to examine the impact of corporate governance attributes on earnings management of listed Deposit Money Banks from 2009 to 2017. The study used a sample size of thirteen 13 banks. The dependent variable was measured using Discretionary Loan Loss Provision Model by Chang, Shen and Fang 2008 . Correlational design was employed the secondary data was obtained from the annual reports of the firms and Nigerian Stock Exchange website. The results from the multiple regression analysis proved that board size has positive and significant impact on earnings management board independence has negative and significant impact on earnings management while board of directors' ownership has insignificant impact on earnings management. The study concludes that effective monitoring role of independence directors will constrain the opportunistic behavior by managers. The paper therefore recommends among others that banks should increase the numbers of independent directors on the board to improve their monitoring effectiveness. Olaleye John Olatunde | Amafa Etupu Oluwafunmilayo "Corporate Governance on Earnings Management in Listed Deposit Money Bank in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-4 | Issue-1 , December 2019, URL: https://www.ijtsrd.com/papers/ijtsrd29515.pdfPaper URL: https://www.ijtsrd.com/management/other/29515/corporate-governance-on-earnings-management-in-listed-deposit-money-bank-in-nigeria/olaleye-john-olatunde
This document summarizes a research report on the relationship between working capital management and profitability. The report analyzes data from 60 Pakistani textile companies over 2001-2006. The results show a statistically significant negative relationship between profitability (measured by return on assets) and the number of days accounts receivable, inventory, and accounts payable are outstanding. Proper management of working capital through optimizing current assets and liabilities can thus improve company profits. The report also acknowledges the importance of balancing liquidity and profitability in working capital management.
The document discusses key elements of financial statement analysis including the four main financial statements, understanding the industry and company strategies, assessing the quality of financial statements, and analyzing current profitability and risk. It provides examples of various techniques used in financial statement analysis such as horizontal analysis, vertical analysis, common-size analysis, and calculating financial ratios to evaluate liquidity, asset management, debt, and profitability.
Finance is the lifeblood and lifeline of any business entity either commercial or non-commercial. The
Survival, Stability and Sustainability of a firm is highly associated with its financial wellness. It can be observed through its ability to pay(re) short-term as well as long term liabilities, meeting the regular financial obligations, to increase the value of firm and ability to generate profit. Financial analysis, evaluation, and assessment help in determines the financial position and financial strength of a firm. Among the plenty of methods and tolls available for financial performance, ratio analysis is more useful and meaningful. These ratios make it possible to analyze the evolution of the financial situation of a firm (trend analysis), cross-sectional analysis and comparative analysis.
This document analyzes the financial ratios of Sample Company using its financial statements from December 31, 2000. Various profitability ratios are calculated, including return on investment (ROI), return on equity (ROE), operating margin, net profit margin, and price-earnings ratio. Sample Company's ROI of 4.8% and ROE are below industry averages. Liquidity, activity, and financial leverage ratios are also examined but not discussed in detail. Historical trends and comparisons to industry benchmarks are used to evaluate Sample Company's financial performance. Recommendations for improvement are not provided.
THE EFFECT OF PROFITABILITY, FIRM SIZE, LEVERAGE AND FIRM VALUE ON INCOME SMO...AJHSSR Journal
ABSTRACT : The purpose of this study was to obtain empirical evidence of the influence of profitability,
firm size, leverage and firm value on income smoothing. The number of research samples was 21 companies for
five years with a total of 126 observations. The sample collection method uses a purposive sampling technique.
The data analysis technique used in this study is logistic regression analysis. Based on the results of the analysis
it was found that profitability, firm size, leverage, and firm value have a positive effect on income-smoothing
practices. This study provides additional information about the effect of profitability, firm size, leverage, and
firm value on income smoothing practices on the IDX, especially the LQ45 index.
KEYWORDS: income smoothing, profitability, firm size, leverage, firm value.
THE EFFECT OF PROFITABILITY, FIRM SIZE, LEVERAGE AND FIRM VALUE ON INCOME SMO...
E038041054
1. International Journal of Business and Management Invention
ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X
www.ijbmi.org Volume 3 Issue 8 ǁ August. 2014 ǁ PP.41-54
www.ijbmi.org 41 | Page
The Analysis of Earning management and Earning Response Coefficient: Empirical Evidence from Manufacturing Companies Listed in Indonesian Stock Exchange 1,Gunarianto , 2,Marjani Ahmad Tahir , 3,Endah Puspitosarie 1,2,3 (Faculty of Economic, Widya Gama University, Malang-Indoenesia) ABSTRACT : Research aims to obtain empirical evidence and to find clarity about the phenomenon of the influence of profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager, either simultaneously or partially on earning management and earning response coefficient.It is expected that research provide contributions to the development of accounting knowledge especially about positive accounting theory, agency theory, contracting cost theory and creative accounting practices, which are still rarely used as research materials in Indonesia. For practitioners outside the company, result of this research can be useful to detect earning management and earning response coefficient, as well as used as an instrument to assess the performance of company.Research method used is a census study. Type of research is descriptive-verification. Hypothesis testing involves some techniques such as Principal Model, multiple logistic regression analysis, and multiple regression analysis. Result of hypothesis testing shows that the variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, are influencing earning management and earning response coefficient either simultaneously or partially, and also in positive and significant manner. The magnitudes of simultaneous and partial influences are 78.5% and 86.1%. The variable of leverage has dominant influence on earning management, while earning response coefficient is dominantly influenced by variable of company scale. The implication of this research is that profitability, leverage, company scale, giving bonus to manager, company’s working capital composition, and ownership of the company by manager are proven to contribute positively and significantly to Earning Management and Earning Response Coefficient. KEYWORDS: Earning Management, Earning Response Coefficient, Creative Accounting Theory, Positive Accounting Theory
I. INTRODUCTION
Final statement is a method to ask for accountability to what has been done by manager with owner resources (Belkaoui, 1993). A parameter in final statement used to measure manager performance is earning. As stated in Statement of Financial Accounting Concept (SFAC) No. 1, earning information is highly attended in assessing performance or accountability of manager. Also, earning information helps owner or other parties in interpreting “earning power” of company in the future. Therefore, hereby, final statement which is designed as the alternative tool of accounting measurement is evaluated for the ability to predict events considered by decision maker.The users of financial statement may be such parties as manager, stockholder, creditor, government, company employee, supplier, consumer, and other members of community. All of them are assigned into two groups, internal and external. Any disputes between both internal and external groups can trigger a bitter conflict. Causes of this conflict can be elucidated as follows: (1) Manager insists on increasing their prosperity but stockholder also wants to increase their wealth; (2) Manager desires to have credit as huge as possible but with low interest, while creditor only provides credit based on company ability to pay; and (3) Manager attempts to pay tax as low as possible, while government insists to collect tax as high as possible. A medium of communication used to connect these parties is financial statement, which is usually made by manager as internal party to make account for their work result to external parties. In general, all properties of financial statement include balance sheet, income report, retained earning report, cash flow report, and notes related to financial statement. Almost all readers of financial statement only focus their view onto earning in the income report (Beaver et al, 1986; Ayres, 1994; Baiman, 1982). This trend is underlined by the fact that the performance of manager is measured by earning. However, it leads to dysfunctional
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behavior (inappropriate behavior). One such behavior is earning management. Financial performance of manufacturing companies listed in Indonesia Stock Exchange (ISE) and their fund capitalization through capital market (market capitalization) in the last five years (2003-2007) have great contribution to the real sector, as shown in the following table. Table 1 The Growth of Financial Performance of Manufacturing Companies Listed in ISE for Period 2003-2007
No
Items
2003
2004
2005
2006
2007
Means
Growth (%)
1
Dividend Per Share
335.62
358.31
356.55
347.40
437.47
367.07
6.85
2
Leverage Ratio (%)
0.45
0.44
0.44
0.45
0.45
0.27
0.48
3
Gross Profit Margin (%)
0.30
0.30
0.25
0.25
0.24
0.11
-4.66
4
Closing Price
6,556.90
7,960.95
9,879.29
12,314.67
13,572.52
10,050.87
19.95
5
Price Book Ratio
1.88
2.01
2.78
2.67
2.67
2.40
9.13
6
Dividend Payout Ratio (Rp)
30.99
35.03
36.51
35.33
31.70
33.71
0.56
7
Dividend Yield (%)
4.11
3.53
3.29
2.32
2.96
3.24
-7.92
8
Current Ratio (%)
3.13
2.84
2.45
2.72
2.47
2.72
-5.69
9
Operating Profit Margin (%)
0.12
0.13
0.11
0.10
0.07
0.11
-3.91
10
Total Assets Turnover (%)
1.25
1.31
1.38
1.28
9.17
9.68
1.94
11
Net Profit Margin (%)
0.15
0.20
0.07
0.06
8.63
8.34
-18.46
12
Inventory Turnover (%)
11.14
6.78
7.29
7.88
1.35
1.31
-6.18
Source: Indonesian Capital Market Directory (2008) Table 1 has shown that financial performance of go public manufacturing companies listed in ISE for period 2003-2007 has delivered dividend per each sheet of circulated stock about Rp. 367.07 per stock sheet at annual growth rate of 6.85%. Investors’ attention is only centralized upon earning information but disregarding the procedure needed to produce this earning information. Therefore, manager is tempted to do a specific thing on earning (earning management) or to manipulate earning (earning manipulation). A hypothesis proposed to explain earning management is earning-smoothing hypothesis or income-smoothing hypothesis, which states that earning is manipulated to reduce the fluctuation until the company is considered as normal. Issues of earning management have long been discussed in accounting literatures. Result of empirical research by Ashari et al (1994) has found that companies listed in Singapore Stock Exchange are commonly practicing earning management. Ashari et al (1994) also discover four factors influencing earning management, which are company size, profitability, industry type, and ownership nationality.
A research by Securities and Exchange Commission (September, 1999) indicates that trying hard to safe their existence from liquidation (or remaining in financial distress), companies always do earning management. Big companies such as CEC Industries Corp, Intex Corp, Mercury Finance Co, Model Imperial Corp, Photran Corp, WIZ Technology Inc, GE Corp, Miniscribe Corp and others are quite familiar with such method. This fact is supported by Levitt (1998) who reports that not least 1,600 companies in America have indeed done creative accounting every year through financial numbers game by using some instruments such as “revenue recognition, big bath change, materiality and errors, cookie jar reserves, and creative acquisition accounting”. The peak, involving scandals in failed companies such as Enron, Worldcom, Xerox and Merck, is
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representing a conflict of interest in company between manager, stockholder, creditor, government, employee, supplier, consumer and community. In other words, it is conflict of interest between agent and principal. Fraudulent mechanism is often carried out by manager (agent) as the party who is authorized to set financial statement because they are the direct managing person of company asset. Manager attitude is influenced by their position to maintain company’s working capital composition and also by the presence of restrictions in the credit agreement between company and creditor. These restrictions are working capital limit, liquidity rate or solvability ratio. The goal of these restrictions is to ensure the presence of an acceptable asset management and also to ascertain that manager is working professionally. Financial statement which is made through earning management is actually aimed to build up trustable perception among the interest parties in company, or to avoid the perception of financial distress. Result of preliminary survey indicates that go public manufacturing companies listed in ISE cannot escape from this reality. In company with financial distress, manager is working hard to keep its debt to equity ratio be healthy and ideal and to produce appropriate working capital composition. Business disturbance absence (or going concern status) may be possible seen from accounting information. In this favorable situation, manager sets financial statement through selecting accounting method, regulating transaction timing, and classifying accounting system into that is increasing reported earning, reducing reported earning, and distributing reported earning (earning management). Company earning at certain period is a main viewpoint attended by the users of financial statement because earning in financial statement is a parameter used to measure the performance of manager at certain period. Net earning information is highly attended by the interested party to estimate performance and accountability of manager in managing company, and also to predict future prospect. It is not surprising if the users often watch over earning rate reported in financial statement (Beaver et al, 1986; Dascher and Malcom, 1970). Financial management is a field where a research to examine the relationship between stock return and profit is conducted. Earning rate is considered as dependent variable which is regressed against stock return as independent variable. Some methods are useful to calculate stock return, but this research considers a method, which is Earning Response Coefficient (ERC), to measure earning. Beaver et al (1986) have shown that stock price contains important information provided by earning. Ayres (1994) and Baiman (1982) use ERC as an alternative tool to measure value relevance of earning information. Low ERC means that earning is less informative to investor to make economic decision. Earning and its quality are measured by comparing earnings between companies and understanding earning quality. Earning quality does not have absolute measure but qualitative and quantitative approaches are used to analyze and to explain earning quality. Quantitative approach applies ratio analysis, while qualitative approach is based on opinion (judgment) or viewpoint which is underlined by logic, experience and insight. Earning quality is not related with high or low reported earning. Siegel (1990) quoted by Adhariani (2004) asserts that understatement and overstatement of earning (net earning), stability of components in income report, realization of asset risk, and capital maintenance, are the predictors of future earning (Predictive Value).This current research is a follow up from a research by Ashari et al (1994) in Singapore Stock Exchange. The author of this research attempts to see generalities possibly made from the findings of Ashari et al (1994) by examining companies listed in Indonesia Stock Exchange. The aim is to ensure whether geographic difference may determine factors influencing earning management practice and earning response coefficient. Background aspects of why this research is important for knowledge development are as follows:
(a) Research of earning management and earning response coefficient with go public manufacturing companies listed in ISE as research population is still few in Indonesia context. Therefore, this research will produce a model of earning management and earning response coefficient equations for go public manufacturing companies listed in ISE;
(b) The estimation that earning management and earning response coefficient are influenced by variables such as profitability, leverage, working capital composition, giving bonus to manager, and corporate ownership by manager, is expected to provide more complete generalizations.
(c) The instruments of financial statement preparation such as accounting method selection (artificial), accounting system classification, and transaction (real) are rarely used in Indonesia context. All these instruments are called as creative accounting practices;
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(d) This research attempts to ensure whether there is a conflict of interest between agent and principal among go public manufacturing companies listed in ISE if it is reviewed under agency theory.
Main problems are determined as follows: (1) how much is the influence of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, simultaneously or partially, on earning management and earning response coefficient?; and (2) Which one among profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager is with dominant influence on earning management and earning response coefficient? This current research insists on seeking the clarity of the phenomenon related to earning management and earning response coefficient, and the factors influencing both and its application in financial statement preparation at manufacturing companies listed in ISE. Factors influencing income smoothing are usually related to the assessment of stock performance and the interest to obtain dividend stability.The objectives of research are (1) to obtain empirical evidence and to find clarity about the phenomenon of the influence of profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager, either simultaneously or partially on earning management and earning response coefficient; and (2) to understand which one among profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager, with the most dominant influence on earning management and earning response coefficient at manufacturing companies listed in ISE.
II. METHOD
Research is aimed to obtain empirical evidence, to examine and to explain some factors influencing earning management and earning response coefficient and their application in financial statement in go public manufacturing companies listed in ISE. Type of research is quantitative study at explanative level which explains the causal relationship of the variables observed. Principal Component Analysis (PCA) is designed to reduce (to eliminate) number of variables into the manageable variables but with overlapped measurement characteristics. The use of principal component analysis will simplify structure and dimension and facilitate the interpretation of all information. Principal component analysis is also explaining the structure of variance through a linear combination of variables but the main concept is still reducing and interpreting the data. Data that will be reduced through PCA are (1) profitability consisting of PROFIT1, PROFIT2, PROFIT3 and PROFIT4; (2) leverage comprising to LEVER1, LEVER2, LEVER3 and LEVER4; (3) Company scale including SKALAP1, SKALAP2, SKALAP3, and SKALAP4; and (4) Company's working capital composition involving KOMOKER1, KOMOKER2, KOMOKER3, and KOMOKER4. Result of these reduced data is principal components of PCPROFIT, PCLEVER, and PCKOMOKER. Data analysis method is made based on the goal and hypothesis of research because response variables are categorical and dichotomous. Response variable of earning management is analyzed with multiple logistic regression analysis, while that of response variable of earning response coefficient is analyzed with multiple regression analysis. III. RESULT AND DISCUSSION 3.1. Result Research population is 173 companies but only 20 manufacturing companies which meet the model proposed by Guidry et al (1999) and satisfy the criteria of sampling. Analysis is conducted over the sample. These 20 manufacturing companies are shown in Table 2 as follows: Table 2 Manufacturing Companies as Sample No Name of Companies Company Code
1
PT. Bakrie Sumatra Plantasion, Tbk
UNSP
2
PT. Tambang Batubara Bukit Asam, TBk
PTBA
3
PT. Timah, Tbk
TINS
4
PT. Indocement Tunggal Prakarsa, Tbk
INTP
5
PT. Alumindo Light Metal Industry, Tbk
ALMI
6
PT. Betonjaya Manunggal, Tbk
BTON
7
PT. Budi Acid Jaya, Tbk
BUDI
8
PT. Astra International, Tbk
ASII
9
PT. Astra Otopart, Tbk
AUTO
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10
PT. Sepatu Bata, Tbk
BATA
11
PT. Indofood Sukses Makmur, Tbk
INDF
12
PT. Mayora Indah, Tbk
MYOR
13
PT. Siantar Top, Tbk
STTP
14
PT. Ultra Jaya Milk Industry, Tbk
ULTJ
15
PT. Bentoel International Investama, Tbk
RMBA
16
PT. Gudang Garam, Tbk
GGRM
17
PT. HM Sampoerna, Tbk
HMSP
18
PT. Indofarma, Tbk
INAF
19
PT. Kalbe Farma, Tbk
KLBF
20
PT. Unilever Indonesia, Tbk
UNVR
Source: BEI Data, 2012, processed. Company earning or Earning Per Share (EPS) is used as the prerequisite of sampling and also as a part of Unexpected Earning (UE). Indeed, Unexpected Earning (UE) is used to calculate Earning Response Coefficient (ERC) in the slope of regression equation.Earning Response Coefficient (ERC) is counted from slope α1 of the relationship between CAR and UE. Each company will have a number ERC (time series / firm specific method). Result of Earning Response Coefficient (ERC) calculation using SPSS is described in Table 3 as follows: Table 3 Descriptive Statistic of Variables of Earning Response Coefficient (ERC) No COMPANY CODE α1 No COMPANY CODE α1
1
UNSP
-0.2821
11
INDF
1.2630
2
PTBA
0.4095
12
MYOR
-0.5411
3
TINS
0.0266
13
STTP
-0.0452
4
INTP
1.4659
14
ULTJ
-0.3780
5
BUDI
0.2299
15
GGRM
0.4565
6
ALMI
0.4068
16
HMSP
-1.6474
7
BTON
0.2353
17
RMBA
2.0343
8
ASII
-0.3380
18
INAF
2.7040
9 AUTO
-0.7789
19
KLBF
2.9829
10
BATA
0.0335
20
UNVR
1.3585
Source: Secondary Data, Processed in 2012 The influence of variables such as profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, on earning management is made to certain by logistic regression model.Before testing the hypothesis, the presence of categorical variable, which is giving bonus to manager, must be attended. To understand whether giving bonus to manager is influencing earning management, crosstab analysis is conducted to giving bonus to manager against earning management. Result of crosstab analysis of giving bonus to manager against earning management is shown in Table 4. Table 4 Chi-Square Test Value df Asymp. Sig. (2- sided) Exact Sig. (2- sided) Exact Sig. (1- sided) Pearson Chi-Square 23.019a 1 .000 Continuity Correctionb 21.700 1 .000 Likelihood Ratio 23.289 1 .000 Fisher's Exact Test .000 .000 Linear-by-Linear Association 22.914 1 .000 N of Valid Cases 100
a 0 cells (.0%) have expected count less than 5. The minimum expected count is 37.80. b Computed only for a 2x2 table
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Result of crosstab analysis in Table 4 indicates that there is no expected value below 0.05, and therefore, significance rate of Chi Square is used. Significance rate of Pearson Chi Square is 0.000 that is blow 0.05, and thus it is concluded that giving bonus to manager is related to earning management, or that giving bonus to manager is significantly influencing earning management. Table 5 Model Summary Step -2 Log Likelihood Cox & Snell R Square Nagelkerke R Square 1 253.034a .574 .785 a Estimation is terminated at iteration number 4 because parameter estimates have changed by less than .001.
The result of SPSS in Table 5 shows that the simultaneous influence rate of profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager on earning management is determined by Nagelkerke R Square rate which is an analogy to R-square of Multiple Regression. Based on the calculation in model, Nagelkerke R Square rate is 0.785 meaning that six variables, which are profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, are positively and significantly influencing earning management, and able to explain earning management variance for 78.5 % while the remaining 21.5 % are explained by other factor beyond this research. Table 6 Variables in the Equation B S.E. Wald df Sig. Exp(B) Step 1a Profit 7.614 2.408 10.003 1 .002 .791 Lever .531 .129 17.234 1 .000 1.542 Komoker 4.228 1.771 10.453 1 .002 4.220 Bonus (1) .281 .084 4.492 1 .031 1.197 Skalap 2.276 .973 5.288 1 .021 1.105 Kpemanj .049 .316 8.025 1 .004 1.051 Constant 1.490 1.014 2.159 1 .142 .225 a Variable(s) entered on step 1: Profit, Lever, Komoker, Bonus, Skalap, Kpemanj
Result of calculation of SPSS output in Table 6 above has produced the estimation of Multiple Logistic Equation as follows: EM = 1.490 + 7.614Profit + 0.531Lever + 4.228Komoker + 0.281Bonus + 2.276Skalap + 0.049Kpemanj Earning management equation is a multiple logistic regression (logit) using population data to be applied against research object based on predetermined requirement. Therefore, significance test is needed because slope coefficient βi is an actual slope. Partial probability rate of the influence of profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager on earning management is understood using the following model formula: Probability = 1 / {1 + exponential [-(β0 + βiXi)]} Result of the calculation of logit probability (logit P) is displayed in the following table:
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Table 7 Logistic Probability of Earning management Factors
The Influence of Independent Variables on Dependent Variable
Logit Regression Coefficient (1)
Exponential (i)
Logit Probability (P)
Profit on EM
7.614
0.791
0.616
Lever on EM
0.531
1.542
0.709
Komoker on EM
4.228
4.220
0.107
Bonus on EM
0.281
1.197
0.259
Skalap on EM
2.276
1.105
0.350
Kpemanj on EM
0.049
1.051
0.461
Source: Secondary data are processed. Result of calculation of probability table (Table 7) above is elucidated as follows: Higher profitability experienced by manufacturing companies in Indonesia is positively influencing earning management at probability rate of 61.6%. Higher leverage possessed by manufacturing companies in Indonesia is positively influencing earning management at probability rate of 70.9%. Manufacturing companies in Indonesia with higher company scale are positively influencing earning management at probability rate of 35 %. Manufacturing companies in Indonesia with greater bonus given to manager based on earning obtained are positively influencing earning management at probability rate of 25.9 %. Greater working capital composition owned by manufacturing companies in Indonesia is positively influencing earning management at probability rate of 10.7 %. If corporate ownership by manager in manufacturing companies in Indonesia is great, it is positively influencing earning management at probability rate of 46.1 %. Result of partial test has indicated that a variable with dominant influence on earning management is leverage. The probability rate of leverage is 70.9 % greater than that of other variables. Considering the analysis over the variables influencing earning management, it can be said that: (1) Greater profit margin to sales ratio, greater net income to total assets ratio, and greater return on equity in manufacturing companies are positively and significantly influencing earning management because they often increases reported earning; (2) Greater total debt to total assets ratio, greater total debt to total equity ratio, and greater long-term debt to total equity ratio in manufacturing companies are positively influencing earning management because they tend to increase reported earning; (3) Greater total assets and sale rate in manufacturing companies are positively influencing earning management; (4) Greater bonus given by company to manager is positively influencing earning management because companies tend to increase reported earning; (5) Greater net working capital to total liabilities ratio and greater net income to total liabilities ratio in manufacturing companies are positively and significantly influencing earning management because companies tend to increase reported earning; and finally, (6) Greater corporate ownership by manager in manufacturing companies is positively and significantly influencing earning management.Based on the coefficient rate obtained from result of hypothesis testing, it is acknowledged that manufacturing companies which use earning management in preparing their financial statement is giving their priority higher onto giving bonus to manager as proved by coefficient rate of 0.281. In the hypothesis test, linear regression model is used to ensure the influence of variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition, and corporate ownership by manager on earning response coefficient. Variable of giving bonus to manager is considered as dummy variable because this variable is ordinal scaled. Result of SPSS output is shown in the following Table 8: Table 8 Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .928a .861 .857 .3455597
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Table 8 Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .928a .861 .857 .3455597 a Predictors: (Constant), Corporate Ownership by Manager, Giving Bonus to Manager, Profitability, Leverage, Company Scale, Working Capital Composition Table 9 ANOVAb Model Sum of Squares df Mean Square F Sig. 1 Regression 157.743 6 26.290 220.167 .000a Residual 25.435 93 .119 Total 183.177 99 a Predictors: (Constant), Corporate Ownership by Manager, Giving Bonus to Manager, Profitability, Leverage, Company Scale, Working Capital Composition b Dependent Variable: Earning Response Coefficient
Result of SPSS calculation shows that the influence rate of variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, in simultaneous manner, on earning response coefficient is seemingly determined by R-square rate, which, based on model, is 0.861. Its significance rate is 0.000 smaller than 0.05, meaning that six variables, which are profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, are positively and significantly influencing earning response coefficient. Simultaneous influence rate is 86.1 %, while the remaining 13.9% earning response coefficient is influenced by other variable beyond this research.Result of hypothesis testing about the influence of variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, in partial manner, on earning response coefficient is shown in Table 10 as follows: Table 10 Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) .144 .129 1.115 .266 Profitability .049 .026 .050 1.885 .041 Leverage .146 .027 .166 5.342 .000 Working Capital Composition .274 .029 .317 9.377 .000 Giving Bonus To Manager .120 .047 .066 2.550 .011 Company Scale .319 .026 .393 12.047 .000 Corp. Ownership By Manager .276 .028 .331 9.741 .000 a Dependent Variable: Earning Response Coefficient
Result of SPSS output is indicating that partially, variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager are positively and significantly influencing earning response coefficient. Significance rate of each independent variable is lower than of 0.05. Linear regression model is then given as follows:
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ERC = 0.144 + 0.049Profit + 0.146Lever + 0.274Komoker + 0.120Bonus + 0.319Skalap + 0.276Kpemanj In testing the hypothesis about one among variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, with dominant influence on earning response coefficient, then the standardized beta coefficient rate of each independent variable are compared. The biggest is an independent variable with dominant influence on earning response coefficient. It seems that company scale has the biggest standardized beta coefficient rate, which is 0.393 if compared to other independent variables. Therefore, partially, company scale is dominantly influencing earning response coefficient.
III. DISCUSSION
Logistic regression analysis is used because of its compatibility to measurement scale between variables. Measurement scale of earning management variables is nominally scaled and dichotomous. Linear regression analysis is used because earning response coefficient variables are ratio scaled. After hypothesis testing, it is known that all independent variables are positively and significantly influencing earning management and earning response coefficient. Manufacturing companies in Indonesia are usually possessing greater return on assets or greater net income to total assets ratio, which are both positively influencing earning management and earning response coefficient. Its probability rate has made creditor, financial analyst and owner (stockholder) to no trust easily financial data reported by company manager in their effort to asses return on equity (ROE). It is because ROE of manufacturing companies in Indonesia has been the object of earning management and earning response coefficient in order to show greater company ability to obtain net earning from all assets managed by company. ROE is a description of the ability of capital invested into all assets to produce company gain. When earning management is considered, manager expects to control over the change of activity ratio as economic rentability and its influence on rate of return. Financial analyst and creditor are using Du Pont System analysis to determine company ROE because they suspect that ratio of finance or net income to total assets ratio, may be greater than what it shall be because manager maximizes this ratio than what must be the right of capital owner. Probability rates have shown that there is positive relationship between earning management to control over capital rentability as the ratio of after-tax net earning to equity of stockholder, and the measurement of return on investment of common stockholder. Logistic regression model indicates that the ability of company to produce earning compared to its sale may be relative and absolute. Based on the assumption of agency theory and its application within Indonesia context, stockholder must understand that financial manager and company leader really do earning management to maximize their profitability. It is supported by the finding that the interest of agent is more dominant than that of principal. It may be so because of the owner’s lower understanding about and access to the preparation of financial statement in order to ensure that they can have their expected profitability report. Greater return on equity and greater net income to common equity ratio in manufacturing companies positively influence earning management and earning response coefficient. This information must be useful for stockholder and financial analyst in assessing the possibility if company can experience financial distress which may disturb company operation. Financial distress is a condition that must be highly attended. This condition represents the incapacity of company to obtain earning and to meet the duty (insolvency). A form of financial distress is stock based insolvency which is signed by the presence of negative common equity in company balance. Other form is flow based insolvency shown by the incapacity of cash flow to stay current in company because earning management is conducted by the agent targeted toward greater net income to common equity ratio. Measuring and assessing profitability of manufacturing companies must be cautious because it is indicated that manager often does earning management to show that company can reduce their debt as if company has adequate internal fund to pay company investment. In reality, very few companies have such self-supported finance but if the money is used to bring the company into safety, the implication is not surely bad.Greater total debt to total assets ratio in manufacturing companies is positively influencing earning management and earning response coefficient.
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Probability rate may be useful for the creditor in assessing the submitted collateral to understand the ability of company to pay the debt if the company shall be liquidated. Higher level of this ratio means higher dependence of company on capital funding from external party. Greater total debt to total assets ratio may have implication to the description about the ability of company to use the asset to meet all duties.A motivation of company to do earning management is to avoid the occurrence of stock based insolvency (technical liquidation). It begins with temporary liquidity distress but it continues with a possibility that company has book rate of debt exceeding the assets in possession such that equity is negative or that company is liquidated based on equity. Greater total debt to total equity ratio in companies is positively influencing earning management and earning response coefficient. Indeed, total debt to total equity ratio is useful for the fund supplier or the creditor to connect company financial ratio to future prediction of economic. A motivation of manager to do earning management against total debt to total equity ratio is to achieve a compatible comparative rate between all debts and owner capital to avoid operational difficulty and to reduce duty stress at deadline. Otherwise, cash reserve may be depleted, especially when receivable is hardly collected. If it is anticipated badly, companies with duty at expiration rate will experience debt difficulty (loan default). The difficulty to pay long-term debt may drain the assets in possession. Such financial distress can lead to company failure (failure of firm). All these reasons are used by manager to do earning management against long-term debt to total assets ratio. In reality, manager cannot avoid this situation but in perception, it can be avoided in the future if manager has good finance by hedging all debts, preparing market plan, and ensuring good production for the behalf of company survival.Greater long-term debt to total equity ratio in companies is positively influencing earning management and earning response coefficient. It means that companies try to avoid their long-term financial distress or their insolvency. It indicates the inability of debtor to pay debt, if compared to their total equity, such that negative biased liquidity occurs which leads to company failure. Debtor’s belief that creditor persistently emphasizes onto long-term debt to total equity ratio may encourage manager to do earning management to avoid company failure. It is consistent to debt to equity ratio hypothesis suggested by Watts and Zimmerman (1978). Higher debt proportion used by company only forces stockholder to bear bigger cost. Because company shall pay fixed interest cost for their long-term debt, it only increases the risk assumed by stockholder. Greater total assets owned by companies can positively influence earning management and earning response coefficient. Its probability rate is interpreted as that company owner and creditor must compare the total assets and the ability of company to produce earning (rentability). Positive influence may indicate the desire of manager to maintain company rentability rate. Total assets can be defined as capital goods stated in the debit part of balance which are productive to generate income. Companies with more assets have greater risk but also have more opportunities to obtain greater earning. Greater sale rate by companies is positively influencing earning management and earning response coefficient. Based on size hypothesis, it is assumed that big scale companies tend to postpone or to shift the earning from current period to future period. Reverse action is apparent for small scale companies. Its probability rate shows that activity rate of companies is described from their sale activity. Manager is interested to do something with sale rate because it is related more closely to tax burden than all assets invested in the company. This manipulation may produce earning as the result after reducing principal price and company periodic burden. The probability rate of the influence above can also be interpreted based on “political cost” where big companies must pay greater political cost (to minimize earning) to avoid the increment of employee payroll, tax allocation and public claim. In small companies, however, manager attempts to increase earning to obtain fund from creditor. Companies at bigger scale will reduce their reported earning in pursuance of statement which supports company equity transfer hypothesis. Current research is not so different from foreign research. The only difference is that company scale in Indonesia may not quite similar to that in United States. Giving bonus to manager based on the obtained earning is positively influencing earning management. This probability is meaningful to company owner because it implies to manager compensation plan or bonus plan hypotheses. The implication may be explained as follows: (a) giving bonus to manager is related to manager interest and influential to company manager; (b) financial statement which presents the information about company performance is a base of giving bonus to manager; and (c) giving bonus to manager may reduce conflict between investor and manager.
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In wider sense, a contract of giving bonus to manager is quite influential to the interest of agent to maximize the reported earning as long as this is not defying the generally acceptable accounting principles. It is called as creative accounting practices. If companies shall loss during the current year, manager will reduce earning report as low as possible by assuming that reported earning is increasing in the future (above net earning allocated for giving bonus) and therefore, obtain bonus contract in that year. Consequently, principal is always cautious to the bonus contract given to agent because its rate is determined by the obtained earning. Principal shall use other format in giving compensation to manager, such as based on the price of company stock in capital market. Greater net working capital to total liabilities ratio in companies is positively influencing earning management and earning response coefficient. Probability rate of this influence is reflecting “a statement of sources and usage of fund”. It is needed to produce an acceptable management of working capital to keep up going concern status of company. Greater net working capital to total liabilities ratio means that companies do have greater ability to pay the duty or seem more liquid. Each company always concerns with retaining their ratio to prevent their liquidity from being threatened. Financial analyst must be careful in giving their recommendation because greater net working capital is perceived as lower risk, or lower net working capital is related to higher probability that company is illiquid. In reality, financial statement is influenced by many factors. Therefore, owner (principal) and financial analyst must be smart enough to use this ratio because net working capital to total liabilities ratio, based on company financial data, is often subjected to earning management by agent.Greater net income to total liabilities ratio in companies is positively influencing earning management and earning response coefficient. The effectiveness of working capital usage is a part of management of current assets supported by long-term fund. If, based on income and risk, company fails to produce earning, it is then company called as technically insolvent (unable to pay debt). Company earning is increased in two ways, which are by increasing income and by reducing burden. Burden is reduced by increasing the efficiency of expense posts, and earning is increased by investing into profitable assets which can produce great income. The users of financial statement shall remember that company's working capital can be met through financing mix, such as: (a) Aggressive approach, in which the demand of short-term fund is financed by short-term fund source, while the demand of long-term fund is seemingly financed by long-term fund source; (b) Conservative approach, in which all demands for fund are financed by long-term funds and short-term funds but only usable in emergency condition; and (c) Tradeoff between both approaches is that companies may use their expense plan between high profit high risk (aggressive approach) and low profit low risk (conservative approach) such that the obtained earning is quite reliable (moderate) with not too high risk. Greater corporate ownership by manager in manufacturing companies is positively influencing earning management and earning response coefficient. In this model, higher percentage of corporate ownership by manager means higher earning management aspect. Manager always avoids the possibilities of take-over or replacement of company management. Logistic probability may be useful for the capital owners when agent also works as the owner (principal) of company. It is suspected that stock ownership by company leader is related to company achievement. The proportion of stock ownership controlled by manager can influence company policy. By this ownership, the interests of manager and stockholder may stay equal. Manager benefits directly from good decision, but also losses due to poor decision. This method is called as balancing model of agency cost Considering all models so far, auditors are suggested to be careful in examining financial statement of manufacturing companies (although the accountability of financial statement fit remains in the hand of manager). It is evident because managers always use the slack in accounting principle as long as it keeps consistent to Financial Accounting Standard in order to maximize their interest by increasing earning report under several reasons explained previously. This method is called as “creative accounting practices” conducted with financial numbers game”. Financial analyst, creditor, and principal are suggested that before making decision or giving opinion and recommendation, they shall use presumption principle that financial statement prepared by management is respecting reliability of financial information and therefore, it is tested to ensure whether there is earning management or not.
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All results of hypothesis testing of variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager, are indicating that there obvious influence from profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager on Earning Response Coefficient (ERC). These results also can be described as that higher company earning, greater company debt, greater company size, greater bonus given to manager based on earning or not, greater working capital composition, and greater proportion of corporate ownership by manager, are positively and significantly influencing earning response coefficient. In other words, it is assumed that variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager are significantly influential in explaining Earning Response Coefficient (ERC). Results also proves that variables of profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager provide additional explanatory strength upon the difference of earning response coefficient. These results are consistent to Etty (2008) who reports that there is obvious influence of Size on Earning Response Coefficient (ERC). According to Etty (2008), the abundance of information available every year in big companies is less reacted by market during earning announcement. The differences of control variable placement, company that is observed, and obvious rate/level or trust level, may be the reason behind different result between current research and Etty (2008).Theoretically, profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager can influence earning reported by company which is then responded by the users of financial statement made by manager or management. The wider information about company can produce better consensus about economic earning. More information available about company activities will help market to interpret the information in the financial statement. IV. CONCLUSION
1. Profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager are determinants or consideration bases used by management (agent) to do earning management. Companies (agent) that do earning management can also increase their earning response coefficient, which may also increase their positive response strength of investor.
2. Profitability, leverage, company scale, giving bonus to manager, company's working capital composition and corporate ownership by manager can influence earning reported by company which is then responded by the users of financial statement made by manager and management. The users of financial statement are indeed quite concerned with the scope of information about company because it can produce better consensus about economic earning. More information available about company activities acknowledged by the users of financial statement will facilitate the market, especially investor, to interpret the information in the financial statement.
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