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Accounting Strategies: Accruals Management and Income Smoothing

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Accounting Strategies: Accruals Management and Income Smoothing

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Questions and Answers

What is the primary goal of income smoothing?

To increase the company's earnings in a single period

To eliminate fluctuations in earnings over multiple periods

To report a more accurate picture of the company's earnings performance

To report a more consistent picture of the company's earnings performance (correct)

What is the main purpose of big bath behaviour?

To reduce the baseline or target for earnings (correct)

To present a more accurate picture of the company's financial performance

To improve the company's earnings performance

To increase the company's earnings in a single period

What is the primary effect of excessive use of big bath behaviour?

It affects the trust shareholders have (correct)

It improves the company's financial performance

It increases the trust of shareholders

It reduces the company's earnings in the long run

What is the purpose of 'Bill and hold' and 'right to cancel sale' revenue manipulation techniques?

To boost revenue artificially for a given period Signup and view all the answers

What is the purpose of accounting changes?

To manipulate the timing or magnitude of earnings recognition Signup and view all the answers

What is an example of 'real' earnings management?

All of the above Signup and view all the answers

What is a potential consequence of earnings management on corporate decision-making?

Distortion of long-term sustainability and functioning Signup and view all the answers

What is the effect of classification of expenditure?

It gives a distorted opinion of profitability and operational efficiency Signup and view all the answers

What is accruals management?

Utilising accounting standards to meet financial reporting objectives Signup and view all the answers

Why might management opt for a 'Big Bath'?

To sweep problems under the rug Signup and view all the answers

What is a potential consequence of earnings management on employee relations?

Increased employee turnover Signup and view all the answers

Why do distorted earnings reports impact analysts' work?

Because they undermine investor confidence and increase market volatility Signup and view all the answers