key term - Earnings management

Definition

Earnings management is the practice of using accounting techniques to produce financial reports that present an overly positive view of a company's financial position. It often involves manipulating revenues, expenses, and receivables to meet specific targets or expectations.

5 Must Know Facts For Your Next Test

1. Earnings management can involve manipulating the allowance for doubtful accounts to inflate earnings.
2. Companies might accelerate revenue recognition from receivables to boost current period earnings.
3. Channel stuffing is a technique where companies ship excessive products to distributors to record higher sales temporarily.
4. Earnings management can lead to misleading financial statements, impacting stakeholder decisions.
5. The SEC closely monitors and regulates practices related to earnings management to ensure transparency.

Review Questions

Related terms

Allowance for Doubtful Accounts:

A contra-asset account used to estimate the portion of receivables that may not be collected.

Revenue Recognition:

The accounting principle dictating when revenue should be recorded in the financial statements.

Channel Stuffing:

A practice where a company sends more goods than usual through its distribution channels to inflate sales figures temporarily.