Question

Explain what is meant by earnings management practices and discuss how specific Balance Sheet items may be impacted by such practices.

Answer 1

Earning management practice is to smoothen out the fluctuations in profits thus to show consistent profits across the years. It is done by using the financial reporting rules. It is legally but morally might not be correct.

Two methods of earning management practices are:

1. Assume company uses LIFO method in inventory management .as inventory costs rise with time so using LIFO means you are increasing cost of sales and thus lowering your profits .

2. Assuming you are capitalizing more than expensing . thus you are delaying the cost incurred in income statement and thus you inflate profit in that year.