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4. When warranty expense is understated, it results in lower reporting lower expenses, thereby increasing the...

4. When warranty expense is understated, it results in lower reporting lower expenses, thereby increasing the ner earnings for the period.This is n example of managing earnings up.

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Answer #1

A strategy to manage an upward shift in earnings includes either (1) inflation of revenues or (2) deflation of expenses. In this case, warranty expense incurred implies, expenditure incurred towards warranty liability. In other terms, its a repair service rendered free of cost due to coverage of warranty period for the product sold by the enterprize.

So non-inclusion of warranty expenses or understated expenses, shall increase the NET EARNINGS for the period. Hence the given statement is true.

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