12 Questions
What is the primary goal of income smoothing?
To report a more consistent picture of the company's earnings performance
What is the main purpose of big bath behaviour?
To reduce the baseline or target for earnings
What is the primary effect of excessive use of big bath behaviour?
It affects the trust shareholders have
What is the purpose of 'Bill and hold' and 'right to cancel sale' revenue manipulation techniques?
To boost revenue artificially for a given period
What is the purpose of accounting changes?
To manipulate the timing or magnitude of earnings recognition
What is an example of 'real' earnings management?
All of the above
What is a potential consequence of earnings management on corporate decision-making?
Distortion of long-term sustainability and functioning
What is the effect of classification of expenditure?
It gives a distorted opinion of profitability and operational efficiency
What is accruals management?
Utilising accounting standards to meet financial reporting objectives
Why might management opt for a 'Big Bath'?
To sweep problems under the rug
What is a potential consequence of earnings management on employee relations?
Increased employee turnover
Why do distorted earnings reports impact analysts' work?
Because they undermine investor confidence and increase market volatility
Test your understanding of accruals management and income smoothing techniques used by companies to achieve their financial reporting objectives. Learn how to time revenue recognition, adjust discretionary expenses, and utilize accounting methods to report a consistent earnings performance.
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