Companies That Find Themselves with Poor Earnings in a Certain

question 37

Essay

Companies that find themselves with poor earnings in a certain year will often decide to take a "big bath".
Required:
Explain what a "big bath" is and the motivation behind it.Why does this type of earnings management "tread very close to the line of ethical reporting"?

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Definitions:

Effective Annual Rates

The real return on an investment, taking into account the effect of compounding interest over multiple periods within a year.

Equal Installments

Periodic payments of the same amount over the term of a loan or investment.

Borrowed

Borrowed refers to funds that have been taken on loan from external sources, which are expected to be paid back with interest over time.

Daily Compounding

The process where the interest on an investment is calculated daily and added to the principal, so that each subsequent calculation of interest includes interest previously earned.