Paper Topic:

accouting theory

Big Bath Accounting

Big Bath Accounting is the direct opposite of the Optimism principle which involves the overstatement of a company 's profits and the overvaluation of its assets (Jiang , 2006 . It is defined as the accounting procedures undertaken by a company 's management for the specific purpose of bringing down the profit figures for the current year . The end objective is to achieve increased profit figures for the subsequent year . The lower the figures are for the current year as the base year , the higher the computed increases will be in

terms of rates of return and profitability ratios for the next year . This , then , will paint a better picture of the management 's overall performance (Riahi-Belkaoui , 2003 ,

. 135

Thus , taking a bath would mean writing off unusable assets or those that were acquired to implement old projects , recording provisions for all kinds of estimated losses and expenses , and deferring revenues to arrive at a reduced current income figure (Riahi-Belkaoui , 2003 ,

br 135 ) As necessary , management would change the company 's accounting policies , manipulate discretionary accruals , decide to adopt a new accounting standard at a suitable time , and revise operational standards for variables such as manufacturing overhead and general expenses Management can choose to do any of these things to protect its own interests or to generally serve its own purposes . The Positive Accounting Theory (PAT ) establishes that a company 's management would naturally make decisions that are bent toward maximizing their own utility and not necessarily the...

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