Question

Which requirement requires companies to achieve financial targets, such as maintaining specific levels of assets or stockholders equity and sometimes leads to dishonest managers misreporting the company's financial statements?

Answer 1

The requirement that leads to managers potentially misreporting financial statements is related to achieving certain financial targets. This can result from the pressure to satisfy shareholders, causing ethical dilemmas. Managers must wisely choose between issuing stock and borrowing, weighing control against financial duty.

Step-by-step explanation:

The question pertains to a requirement that pushes companies to achieve specific financial targets, such as maintaining certain levels of assets or stockholders' equity.

This requirement might lead to undesirable outcomes such as managers misreporting the company's financial statements to meet these targets.

This unethical practice often stems from the pressure to satisfy shareholders or meet market expectations, potentially resulting in financial misconduct.

Choosing the right source of financial capital is pivotal; issuing stock means selling ownership and answering to the board and shareholders, while borrowing allows the firm to retain control but comes with the obligation of scheduled interest payments.