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Earnings Management and Income Smoothing Paper

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The Use of Ratios in Analyzing Financial Statements

Student’s Name:

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Earnings Management and Income Smoothing

Introduction

The current financial society seems to be greatly concerned with the increased incorporation of

earnings management and income smoothing seen in a number of organizations (Cheng et al,

2016). In this article, there is a detailed discussion of what these terms mean with the basis

placed on the WorldCom Company located in the United States (Panikkar, 2016). The case of

this company brings out how earnings management and income smoothing have impacts on

companies. It as well outlines the reasons behind those practices as well as how their financial

statements are evaluated. Additionally, there is a discussion on other methods that can be used in

the evaluation.

Background

Earnings management means the bringing together of previous financial records in order to come

up with the company financial earnings that actually did not exist (Cheng et al, 2016).

Companies practice earnings management with the sole purpose of drawing a better picture of

their profitable processes. With this practice, the value of the company is raised thus giving it a

leeway to access too many investors. Income smoothing entails a company making adjustments

on their income and expenses to ensure that their accounting systems are made stable (Baik et al,

2019). They accomplish this by changing various operational activities within the organization

and making necessary changes on their accounting processes in order to make themselves be

more profitable while impacting the other listed companies on their profitability. This behavior

makes the earnings of a company to be volatile at times. With the smoothing of earnings within

the year, managers put the positions of their companies at strategic points that enable them to

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1 The Use of Ratios in Analyzing Financial Statements Student’s Name: Institutional Affiliation: 2 Earnings Management and Income Smoothing Introduction The current financial society seems to be greatly concerned with the increased incorporation of earnings management and income smoothing seen in a number of organizations (Cheng et al, 2016). In this article, there is a detailed discussion of what these terms mean with the basis placed on the WorldCom Company located in the United States (Panikkar, 2016). The case of this company brings out how earnings management and income smoothing have impacts on companies. It as well outlines the reasons behind those practices as well as how their financial statements are evaluated. Additionally, there is a discussion on other methods that can be used in the evaluation. Background Earnings management means the bringing together of previous financial records in order to come up with the company financial earnings that actually did not exist (Cheng et al, 2016). Companies practice earnings management with the sole purpose of drawing a better picture of their profitable processes. With this practice, the value of the company is raised thus giving it a leeway to access too many investors. Income smoothing entails a company making adjustments on their income and expenses to ensure that their accounting systems are made stable (Baik et al, 2019). They accomplish this by changing various operational activities within the organization and ...
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Tags: earnings management income smoothing current financial society financial earnings financial ratios