Fig. 1. Managerial discretionary accrual decisions as a function of earnings before discretionary
accruals and bonus plan parameters in the first period of a two-period model. L -- the lower bound
defined in the bonus plan, U = the uppe r bound on earnings, L'= a cutoff point which is a
function of the lower bound, the manager's risk preference, expected earnings in period 2 and the
discount rate, K= the limit on discretionary accruals, C- cash flows from operations, and
NA --- non-discretionary accruals.
Case