"Earnings management" is the deliberate manipulation of financial reporting in order to achieve a desired result. This may be done in order to meet certain financial targets, such as increasing earnings per share, or to smooth out earnings volatility. Often, earnings management is done within the bounds of generally accepted accounting principles (GAAP), but it can also involve illegal activities, such as cooking the books.
Which statement best defines earnings management?
There is no one definitive answer to this question. Depending on who you ask, you may get different definitions. Generally speaking, however, earnings management refers to the intentional manipulation of financial statements in order to achieve a desired result. This could involve overstating or understating income, assets, or expenses in order to make the company's financial situation look better than it actually is.
What are the techniques of creative accounting? Creative accounting is the process of manipulating financial statements in order to portray a more favorable financial picture. This can be done through a variety of techniques, such as:
-Reclassifying expenses: This involves classifying expenses in a way that makes them appear lower than they actually are. For example, a company might reclassify advertising expenses as research and development expenses.
-Recognizing revenue prematurely: This involves recognizing revenue before it is actually earned. For example, a company might recognize revenue from a long-term contract as soon as the contract is signed, even though the work has not yet been completed.
-Deferring expenses: This involves postponing the recognition of expenses until a later period. For example, a company might defer the recognition of repairs and maintenance expenses until the end of the fiscal year.
-Capitalizing expenses: This involves recording expenses as assets on the balance sheet rather than as expenses on the income statement. For example, a company might capitalize research and development costs, which would then be amortized over time.
-Using creative accounting techniques can be beneficial for a company because it can make the company's financial statements look better than they actually are. However, it is important to note that creative accounting is considered to be a form of fraud and can result in serious penalties if it is discovered. What is a big bath in accounting? A "big bath" in accounting is a situation in which a company records a large, one-time expense in order to reduce its taxable income in future years. This strategy is often used by companies that are expecting to incur substantial losses in the near future. By taking a big bath, these companies can minimize their tax liability and preserve their cash flow.
What are the two types of earnings management? There are two types of earnings management:
1. discretionary earnings management
2. nondisclosure-based earnings management
Discretionary earnings management is when management uses their discretion to choose how to report earnings. For example, they may choose to report one-time gains or losses in a certain way to make the overall numbers look better.
Nondisclosure-based earnings management is when management fails to disclose information that would be important for investors to know. For example, they may fail to disclose information about a change in accounting standards that will have a material impact on the company's financial statements. What is the difference between earnings management and earnings manipulation? There is a big difference between earnings management and earnings manipulation. With earnings management, a company is trying to use accounting techniques to smooth out its earnings so that they are more predictable and not as volatile. This is done within the bounds of generally accepted accounting principles (GAAP). On the other hand, earnings manipulation is an illegal activity where a company deliberately misstates its earnings in order to mislead investors.