Reference no: EM132594914

Question 1. In executive compensation contracts today, managers are often paid a combination of (a) salary, (b) bonuses, and (c) stock options. From a contracting/agency theory perspective, explain why these three are likely to all be included in the executive compensation plan. Please label your discussion for each of the three.

A. Salary:

B. Bonuses:

C. Stock options:

Question 2. Management has the ability to manage earnings through the use of discretionary accruals. Suppose that management wanted to increase earnings for the current period. In the following situations, explain how management can legally exercise discretion over earnings under GAAP. (please label each answer)

a. Measurement of bad debt expense.

b. Measurement of depreciation expense

c. Measurement of warranty expense (imagine a company like general motors).

Question 3. Explain the following two terms in the lexicon of earnings management. When you explain each term, give an example, including a clear description, of how it is done. Please label each answer.

a. Big Bath

b. Cookie Jar Reserves

Question 4. One controversial point related to stock options is that some claimed these could not be reliably measured. In the U.S. in 2020, options are recognized as expenses over the period in which the employee earns the compensation benefit. Identify the inputs in the option pricing model and explain how management has the potential to manage earnings with the model.