Problem
February 2019 is the financial year-end of Blue traders Lid. The company has promised the financial analysts and traders, earnings per share (EPS) growth of 15%. In January 2019 management became aware of a major customer who is in severe financial difficulty and it is clear that the customer will be liquidated. The customer owes Blue Traders R1.5m. If management provides the full outstanding amount as a provision for bad debts, the earnings per share target of 15% will not be met. Management decided not to provide any provision to ensure the earnings per share achieved the 15% growth as promised to the market.
Task
A. Do you agree with management decision? Discuss.
B. Identify assets, liabilities, income, expenses which are overstated or understated.
C. Identify 3 ratios which have been impacted by management's decision and indicate if they were overstated or understated.
D. Would you classify the above mentioned as eamings management or earnings manipulation? Briefly explain.
E. Discuss 3 shortcomings to use eamings per share as the only measure for profitability.