Expense recognition requires a number of estimates. Since the estimates are involved, it is possible for firms to delay or accelerate the recognition of expenses. Delayed recognition increases current net income and is therefore more aggressive.
If a firm's bad debt expense has recently decreased, did the firm lower its expense estimate because its collection experience imporved, or was the expense decreased to manipulate net income?
If a firm's warrant expense is significant;y less than that of a peer firm, is the lower warranty expense a result of higher quality products, or is the firm's expense reognition more aggressive than that of the peer firm?
Firms disclose their accounting policies and significant estimates in the financial statement footnotes and in the management discussion and analysis (MD&A) section of the annual report.
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