Earnings manipulation

Definition

Earnings manipulation involves the deliberate adjustment of financial statements to present a desired image of a company’s financial health. It often aims to meet earnings targets or influence investor perceptions.

5 Must Know Facts For Your Next Test

1. Earnings manipulation can involve techniques such as accelerating revenue recognition or delaying expenses.
2. Manipulating receivables is a common method, including practices like 'channel stuffing' or extending credit terms.
3. The objective is often to improve ratios that investors and analysts closely watch, such as earnings per share (EPS).
4. Earnings manipulation can lead to significant legal and regulatory consequences if detected.
5. Detecting earnings manipulation requires careful analysis of financial statements, especially unusual increases in accounts receivable.

Review Questions

• What are two common techniques used in earnings manipulation?
• How might manipulating receivables affect a company's financial statements?
• What are some potential consequences for a company found guilty of earnings manipulation?

Related terms

Channel Stuffing: A practice where a company sends more products to distributors than they can sell to inflate sales figures temporarily.

Revenue Recognition: The accounting principle dictating the specific conditions under which income becomes realized as revenue.

Accounts Receivable Turnover Ratio: A measure of how efficiently a company collects revenue from its customers, calculated by dividing net credit sales by average accounts receivable.