Petawawa Producers Inc.has been experiencing declining sales and earnings for the past three years.The Board of Directors have replaced the top management team in hope of turning the company around, and the new managers will be paid a bonus based on how quickly they can reverse the trend.Which one of the following earnings management techniques might the new management be using?

Question

Quizplus · Accepted Answer

Taking a Big Bath is a technique in which a company intentionally takes large write-offs or expenses in a current year to make future earnings look better. This technique could be used by the new management team to quickly decrease income, making it easier for them to show a significant improvement in earnings in the near future and earn their bonus.