Question 2 Answer The information of the company especially financial statements give external users the key information

they need when making decisions about a company. From the information they will know that the companys management efficiently operating. The company need to know the performance of the company by see the earnings information. It is important because it shows whether the company was able to survive and generated enough revenue to cover the expenses of running the business. The management strategies that are looking upon to maximize the profit can be influence through the economic consequences and decision approach. The economic consequences can be dividing by three that is bonus plan, debt covenant and political cost analysis. The management compensation hypothesis (bonus plan) states that managers who have accounting incentives or their remuneration that is tied up with the firm's accounting performance will tend to manipulate accounting method and figures to show the accounting performance better than it should be. The bonus plan relicts that managers who are compensated by means of a bonus plan dependent on net income will be likely to maximize current reported profits by choosing accounting policies. From this, it is easier for the decision making process because all the information shows the company in a good performance and condition. Debt covenant. The debt covenant hypothesis states that managers will tend to show better profits in the intention of having a better performance and liquidity position to pay the interest and principal of the debt in the business. The higher the debt level the more likely it is that the managers will tend to use accounting methods and procedures in maximize the company profit. Lower net income may put the firm into covenant violation, or at least move the firm closer to such violation. This could have the further consequence of causing managers to adopt less risky operating strategies and for the decision making process. Political cost hypothesis. The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries. The greater the political costs faced by a firm, the more likely the manager are to choose accounting policies that defer reported earnings. Political costs could come in the form of public or media attention to some highly visible industries such as Banks, Insurance or Oil companies. These industries are often targeted because of their size and profitability. High reported profits among members of these groups often lead to calls for higher corporate taxes, lower prices or increased government regulations.