Managing EarningsCompanies 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?* What are two tactics that a financial manager can use to manage earnings?* What are the implications for cash flow and shareholder wealth?* 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.Your post should be 200-250 words in length.Guided Response: Review your classmates’ posts. Respond to at least two of your classmates’ postings by sharing an example that supports their position or encourages them to expand or change their thinking.——————————————-Ethics Ethical practice can be evaluated differently and depend on the ethos used to assess the action. For instance, individualism in ethics is doing what is best for the individual, not the greater good (Moreland, 2009). In business sometimes the workforce will act in their best interest and not what is best for the company. In contrast, utilitarian is the ethos to do what is aligned with the greater good, which in business should be what is best for the organization and clients. In my view, it would be ethical to try to support financial stability with fixed steady growth as this will positively impact the organization and keep consumers happy. If one was to grow too fast, then the company may not be able to cover the costs for work and stay afloat during the financing gap (Byrd, Hickman, & McPherson, 2013). The financing gap is the lag time from the cost to provide a good or service and the compensation for its item (Byrd, Hickman, & McPherson, 2013). For instance, if a contractor was doing a job for a remodel the payment would not be paid until the job is completed, but in the interim, the contractor has incurred costs for materials and labor. If the job is not paid for say 30 days, but the staff still need to be paid it can cause a financial gap. Ethically, having stability would be the support of a utilitarian business model.Two Tactics To Manage Earnings Managing earnings for financial managers can be seen in how the funds are allocated for a designated time and alignment with recognition later. To do this one may need to do things that could seem questionable but allow for more normalization over time. For instance, in the recognition aspect, one would denote expenses in a month in which the revenue is higher to balance, instead of the time it was incurred (Merritt, 2018). In the same manner, one sees revenues for a month and not formally recognize the allocation until later. Doing such practice can give the appearance of stability but can be risky as it is predicting that money can be balanced in the future, which may not occur. Another method is the designated time, which would be to push a big one-time cost to a bad month (Merritt, 2018). For instance, last year my company did not meet the budget needs and so many one-time expenses were noted at the end of the fiscal year, since if we are going to fail anyway, then fail big to set yourself up better in the future year. Another way to view this is that if one needed to buy new equipment it would be a significant cost and may need to be spread over a year, but if incurred completely at the end of one month then the next month or year it is already paid off. The tactics can seem to be manipulating the numbers, which they are but can still be accurate at the time presented.Implications for Cash Flow and Shareholder Wealth Cash flow is the way that money moves from one side of the financial balance sheet to the other, which should continue over time and link to profits for the shareholders. For instance, companies need money to start up, such as the funds from investments of shareholders on the right side of the sheet, which then move the cash flow to the left-side. The left-side then generates cash flow from the product or services that then moves back to the right-side revenue. The flow then would result in dividends for the shareholders if the company has profited over the utilized amounts. However, cash flows are not the same as a profit as cash can flow out of a company in a negative manner as well as the positive of profits (Byrd, Hickman, & McPherson, 2013). In this example, the cash is flowing in a circle from one side to the other, with a slight offshoot back to the shareholders when positive.Purchasing an Asset Impact on Earnings Targets In assessing an investment, it can seem that nothing is a guarantee. In many instances, such as a stock, one is purchasing in hopes to have more money in the end once it is sold at an increased price. In business, the company can be looking for the funds from the sale to finance another project, thus if it not to the level of the estimated earnings, then it will impact other aspects for the business and their earning targets. As an illustration, if a stock was purchased with the plan that it would produce 7% return when sold later that year, but the stock does not reach this amount, then the company may not have enough cash to fund the project to increase business, thus the company earns less impacting the target. One may have the option to borrow the funds needed to move a project forward, but then it needs to be assessed in how soon the loan is paid off an if-then the investment is still wise to pursue. In investments, if it’s not a certainty, then one needs to assess other options to ensure the company can bridge the financial gaps that may occur.ReferencesByrd, J., Hickman, K., & McPherson, M. (2013). Managerial finance. Retrieved from https://content.ashford.edu/Merritt, C. (2018, April 18). Techniques in Earnings Management, AZCentral. Retrieved from https://yourbusiness.azcentral.com/techniques-earnings-management-11857.htmlMoreland, J.P. (2009, April 17). Ethics Theories: Utilitarianism Vs. Deontological Ethics, CRI. Retrieved from https://www.equip.org/article/ethics-theories-utilitarianism-vs-deontological-ethics/—————————————————————-2. Kevin.Companies of all shapes and sizes must account for their revenue and expense utilizing the Generally Accepted Accounting Principles. In order to keep income statements steady from period to period is to decline, postpone, or rush business to fit into a certain accounting period. By declining or postponing business, companies can limit short-term gains to the balance sheet. Additionally, if the current period sales are low, companies can offer incentives and product sales to increase short-term income. This practice could be viewed as making the best decision for the, therefore it would not be interpreted as unethical. In fact, making these decision can prevent a company from becoming bankrupt, who might take on to much business beyond the level of cash flow it has available for operation (Byrd, Hickman, & McPherson, 2013). When discussing cash flow, its important to understand that a company could be profitable and have a negative cash flow. Based on the example provided within the text, if cash flow is 30-60-90 days late, it can lead to a delay or actual accounting of shareholders wealth. If a company’s cash flow is consistent with its invoices, shareholders have an opportunity to see immediate returns through dividends or increase in share price. One way earnings could be hurt by the company’s actions is the purchase of equipment such as vehicles or buildings. Cash on hand is shareholders equity, as the cash is spent on items that benefit the company it also takes away from equity that could be distributed. On the other end of the spectrum, by issuing bonds or stock, the company is raising money that could be used for further investments and reduce the need to use existing shareholders equity for expenditures. Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. Retrieved from https://content.ashford.edu ————————————Required ResourceTextByrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/* Chapter 3: Time is Money* Chapter 4: Time Value Applications – Security Valuations and Expected Returns* Chapter 6: Capital Budgeting – Investing to Create Value
