FIN 335 FINAL

Earnings Management (EM)

The practice where managers use accrual accounting discretion to report accounting numbers in a manner that does not accurately reflect the true, underlying economic performance of the firm.

High-Quality Earnings

Earnings that more accurately reflect the firm's permanent, repeatable earnings. High quality is maintained when managers select conservative options, limit discretion, and manage business risk.

Permanent (Sustainable) Earnings (PE)

The portion of net income expected to continue sustainably into the future (e.g., core operating income).

Transitory Earnings (TE)

The portion of net income resulting from non-recurring, one-time events.

Value Irrelevant Earnings (VIE)

The portion of net income that stems strictly from structural adjustments in accounting policies and subjective estimates.

Restructuring Charges

Expenses resulting from the systematic elimination of assets, corporate mergers, or organizational layoffs/reorganizations.

Impairment Charges

GAAP-mandated write-downs of long-term assets to their fair market value when their worth drops below historic book value.

Pension Settlement Gains/Losses

Income or expenses booked when a firm settles pension liabilities by purchasing annuity contracts for less (gain) or more (loss) than the booked liability value.

Divestitures of Peripheral Activities

Material, infrequent gains or losses resulting from selling off blocks of stock or property, plant, and equipment (PP&E).

Discontinued Operations

Gains or losses arising when a company completely exits a segment of business that is physically and operationally distinct from its remaining segments.

Extraordinary Items

Income statement items that are strictly material (significant value), unusual in nature, and non-recurring.

Cumulative Changes in Accounting Principles

Structural adjustments resulting from a firm adopting a completely new accounting standard or framework.

Changes in Accounting Estimates

Adjustments that occur when a firm updates or alters its previous mathematical estimates of asset or account values.

Aggressive Accounting

Principles chosen to artificially overstate current period earnings (e.g., inflating asset lives, FIFO under inflation).

Conservative Accounting

Principles chosen that understate current period earnings, accelerating expense or deferring revenue (e.g., accelerated depreciation, LIFO under inflation).

Big Bath

Concentrating a massive amount of restructuring charges into a single year to clear out bad news all at once and protect future periods.

Cookie Jar Reserves

Intentionally overestimating liability reserves (like warranties or bad debts) during good financial years so they can be written back into pre-tax income to pad earnings during bad years.

Materiality

The threshold of significance; a transaction is considered material if it represents a large, impactful proportion of net income.

Bill and Hold

A violation of GAAP where a firm recognizes revenue on a product sale while agreeing to hold and defer physical delivery until the following accounting period.

Statement of Cash Flows

A core financial statement providing structural data on cash inflows and outflows over a specific accounting interval.

Immediate Liquidity

A firm's capability to deploy cash to immediately satisfy short-term bills, cover fixed structural obligations, and retain operational working capital.

Financial Flexibility

A firm's ability to sustain strategic investments (like R&D) and maintain operational capacity even when market demand for its product drops.

Cash and Cash Equivalents

Short-term, highly liquid investments including Treasury bills, commercial paper, notes, corporate bonds, and Certificates of Deposit (CDs).

Cash Flow From Operations (CFO)

Cash derived from or spent on core operating processes—namely, producing or delivering goods and providing customer services.

Cash Flow From Investing (CFI)

Cash spent or acquired via investing activities: acquiring/disposing of long-term productive assets (PP&E), purchasing/selling stocks and bonds of other firms, or making/collecting loans.

Cash Flow From Financing (CFF)

Cash transactions relating to external capital markets: borrowing/repaying principal debt, issuing stock, purchasing treasury stock, or distributing cash dividends to shareholders.

Direct Method

A method of calculating CFO that directly lists the literal cash collections from customers and cash payments to suppliers/employees/tax agencies.

Indirect Method

A method of calculating CFO that begins with Net Income and reverses out non-cash transactions, non-operating items, deferrals, and operational accruals.