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a) Explain what earnings management is b) Evaluate a number of common methods of earnings management,...

a) Explain what earnings management is

b) Evaluate a number of common methods of earnings management, including accounting policy choice, accrual accounting, income smoothing , real activities management and big bath write-offs

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Answer #1

Earning management is a way of window dressing the books of accounts so as to show a favourable view of the financial statement or make the financial statement look better.  Earnings management is not suggested as the Company runs of the risk of losing its financial credibility as the financial statement does not give a correct picture.

Common methods of earnings management are : a. Choosing an accounting policy which is not in line with the actual scenerio but its application results in increase in profit or use of conservative accounting policies. b. Cookie jar reserves c. Use of management estimates to inflate/deflate profit.

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