Tugas 4

NAMA : GUNAWAN
NIM : 1511060085
KELAS : 6604
TEORI AKUNTANSI
3. Why might managers choose accounting methods that increase current period
reported earnings?
Conclusion:
Managers can use earnings management for personal reasons (for example, increasing current
period earnings to receive a bonus) and managers can use earnings management to influence
the market value of the company (for example, claiming less amortization expense in order to
increase net income for that period).
4. Why might managers choose accounting methods that reduce current period reported
earnings?
Conclusion:
Managers might choose accounting methods that reduce current period reported earnings
inorder to avoid political costs. For example, high reported earnings can be seen by
employees as the results of exploiting their labour, and consequently they might lobby for
increased salary through labour unions. Alternatively, managers might reduce current period
reported earnings if high earnings are considered to be an indication of a mature industry, and
the government might then remove tariff or subsidies that protect the industry.Other reasons
why managers might choose accounting methods that reduce current period reporting
include:
(a) to smooth income trends in a high profit year (saving this period to boost the next periods
reported earnings)
(b) to take a bath by reducing profits this year in order to have higher profits next year,
when earnings might be sufficiently high to earn a performance-based bonus for the manager
(c) to signal to shareholders that there are reduced earnings in the future (rather than have
future profits suddenly slump, the signal might be gentler to shareholders)
(d) to warn of bad news early so that management mitigates the likelihood that shareholders
or others will litigate against them for misleading their investment or other decisions with
high reported earnings.
11. Agency relationships give rise to agency costs that are borne, at least initially, by
different parties. Briefly explain how agency relationships arise and give rise to agency
costs?
Conclusion:
Agency theory is based on the more general contracting theory that the most cost-effective
form of organizing economic activity is through a firm-based structure. Using this structure
and assuming that contracting is a costly activity, then a firm-based structure leads to a
reduction in the number of contracts written (factor suppliers and consumers only contract
with the firm rather than directly). The firm thus becomes a nexus of contracts between
suppliers of factors of production and consumers of their productive efforts. In agency theory
attention is concentrated on the specific contracts involving agency relationships. The main
agency relationships are between shareholders/managers and shareholders/debtholders. In
agency theory, agents have incentives to not always act in the best interest of the principal.
The principal is aware of the possibility of such aberrant behavior and therefore introduces
constraints into the principalagent contract to modify such behavior. The costs of such
controls are called agency costs.
14. Because of ex post settling up and price protection, much opportunistic behavior is
prevented or compensated for. What is price protection and how does it reduce the cost
of opportunistic behavior?
Conclusion:
Opportunistic behavior by management can be constrained by:
monitoring costs
bonding
informed and efficient markets.
Monitoring costs are the costs of monitoring the agents performance. Initially, they are borne
by the shareholders to monitor managers. For example, shareholders could appoint an outside
accounting firm to investigate the managers performance in managing the financial affairs of
the firm. Being rational, the shareholders would reduce the remuneration to the manager by
an amount that increases as the monitoring costs increase. The managers remuneration will
therefore be reduced relative to what it would be in the absence of the need for monitoring,
by the full amount of the monitoring costs incurred by the shareholders. The monitoring costs
are incurred initially by the principal, but are then passed on to the agent

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Opportunistic behavior by management can be constrained by:

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