Answer questions Essay Example | Topics and Well Written Essays - 1000 words - 10

Answer questions - Essay Example Managers of Corporation have decided to play a mind game to the investors in manipulating the earnings of the income to lure investors. According to (Palepu, & Healy, 2000), income smoothing refers to the minimization of fluctuations in the earnings of a corporation. He further expounds by claiming that it can be of good course and at the same time be a fraudulent act. A firm can decide to defer revenue for a successful fiscal year to the following that is anticipated to be challenging. This will stabilize the income and prove consistency. Other firms can postpone expenses in a difficult financial year and recognize it in the next financial that is prosperous. Working capital measures the liquidity of a firm by deducting the current liabilities from current assets. Liquidity is the ability of a firm to pay its short term due without interfering with its normal operations (Palyi, 1984). Including inventory, prepaid expenses and deferrals in the current assets to determine working capital will not give a realistic state of the firm. Inventories are not easily convertible to cash to run operations of the firm during that financial year. Even if they are auctioned, they will consume much time before cash is earned. Prepaid expenses cannot be reversed easily under normal condition, and, therefore, the cash paid will not be available at the moment to run other business operations. According to (Chattopadhyay, 1982), deferral specifically revenue represents transactions that occurred, but payment will be in the next financial year. He emphasizes that it does not mean the other party will honor and pay the dues. So for these items to be included in determining the liquidity of a firm will result in a false interpretation. The principle of relevance and faithfulness representation of the state of the company under U.S. GAAP is beneficial to stockholders. Stockholders need