Income Smoothing Methods

The three procedures of accounting and bookkeeping assist an individual in recognising the most effectual use of capital incomes, gauging the properties of the cost controls across their finances. The accrued economic data is collected into usable data facts and reports are summarised for their decision-making procedure. By recognising and gauging costs, individuals can transfer capital to advance productivities and decrease costs.

1a. One potential goal of earnings management is income smoothing. Briefly discuss why income smoothing might be a goal of management, including a discussion of incentives to smooth income. What techniques might be used to accomplish income smoothing beyond the selection of depreciation and inventory costing alternatives?

The purpose of this paper is to define accounting, and identify the four basic financial statements. The paper also explains how the different financial statements are interrelated to each other and why they are useful to managers, investors, creditors, and employees.

Describe three examples of transactions that would affect a firm's income statement. For each transaction, identify if the transaction has a positive or negative effect on the firm's net income. Revenues is the amount of money a company receives for goods or services rendered. This type of transaction has a positive effect on net income. Expenses are costs that a business obtains through its operations to earn revenue. This has a negative effect on net income. Profit is a financial gain after expenses and revenues are taken into account. This has a positive effect on net income.

Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.

For as long as businesses have existed, so has accounting. With time, it has become more complicated and detailed, but it is still a process of keeping financial accounts in order. Through accounting, or financial reporting, a system is set up to keep track of, maintain and audit the financial proceedings. Because accounting and financial reporting of a business is so important for its accuracy and in general, a lot of ethical, technological and legal concerns are involved. In this paper, we will look identify and explore the concerns of each of these.

Income smoothing refers to reducing the fluctuations in a corporation's earnings. Income smoothing can range from good business methods to fraudulent reporting. The term income smoothing is more likely associated with the manipulation of earnings, creative accounting and the aggressive interpretation and application of generally accepted accounting principles. Perhaps a company will increase its allowance for doubtful accounts with a significant charge to bad debts expense in the years with high profits. Then in years of low profits, the company will reduce the allowance for doubtful accounts. Perhaps a U.S. manufacturer using LIFO will deliberately reduce its inventory quantities in low profit years in order to liquidate the old LIFO layers

Understanding the sources (incomes) and uses (expenses) of funds, and the budget deficit/surplus that results, are core accounting measures to consider in short and long term personal financial planning. Also, grasping key concepts like how your salary/wages are earned and segmented/taxed is important in determining your net incomes. How to approach deficits and surpluses and their associated action plans come from sound accounting understanding. Accounting develops controls on how to deal with budget deficits like increasing income, reducing expenses and borrowing. Understanding how sunk costs and opportunity costs factor into alternative choices and borrowing come to us from sound accounting knowledge and play a role in personal planning. Lastly, through various standard reporting approaches, we, though accounting, can develop the ability to look at current and future personal finance decisions and health via income statements, balance sheets, ratios and other common size book keeping measures.

Single sets of accounting reports incentivise companies to lower reported profits as high profits attracts higher tax . This leads to conservative accounting values and understatement, lowering comparability and quality of annual reports. Thus, BHP Billiton, Suncor and Statoil’s annual reports provide better quality by separating accounting profit and taxable income

• It is designed to enable you to become an informed preparer and user of

There are two kinds of accounting basis which can be adopted by the company to prepare its financial position. One is accrual basis of accounting where revenue and expenses are recognized when they are received and incurred and other is cash basis where all the revenue and expenses are recognized when cash is received or paid (Cleverley, Cleverley, & Song, 2012). Generally, small businesses, not-for-profit organizations, some Government agencies and community associations use the cash-basis while larger for-profit businesses use the accrual-basis (Baskerville, 2014). This is because the cash-basis is quite simple to understand and maintain while the more complicated accrual-basis produces the more accurate assessment of the financial position and performance of the business. Tax laws and accounting standards generally give small organizations a choice as to which approach they will adopt. At the same time larger organizations and public companies are required to record their financial transactions using ONLY the accrual method.

Several main reasons for the occurrence of earnings management include influencing the stock market, growing management compensation, decreasing the possibility of violating lending agreements, and averting government intervention. It is believed that managers might attempt to manage earnings because they believe reported earnings impact investor and creditor decisions. In most cases, earnings management techniques are designed to improve reported income effects and to lower the company’s capital cost. However, in order to increase future profits, management might take the chance to report more bad news in low performance

The distribution of annual net income scaled by the market value at the beginning of the year (Burgstahler and Dichev, 1997). Notice the obvious shift of observations from just under expected levels of income to just over expected levels, showing evidence of earnings management.

This paper explores the use of quality of earnings within firms and discuss measures that can be used to assess a firm’s quality of earnings. Additionally, an examination of a large firm’s annual report will be assessed by utilizing various measures within the study. A quality of earnings is used by analysts and users of financial data, for information about a company’s past performance and future cash flow (Schroeder et al, 2011). Managers use this information to assess the firm’s productivity and operations, to identify areas that may be problematic for the firm. This paper examines various areas of quality of earnings and identify various measures that are used by

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide