A company decides to meet its profit target for the year by using a relatively long life to depreciate a new asset it acquired, to keep the depreciation expense low. (There was a range of reasonable estimates for the life of the asset, and the company chose one of the longer lives in the range.) This is an example of
A) Accruals management
B) Expectations management
C) Fraud
D) Real earnings management

Question

Quizplus · Accepted Answer

This is an example of accruals management because the company is manipulating its earnings by choosing a depreciation method that spreads the cost of the asset over a longer period. This accounting decision affects the timing and recognition of expenses, which is a characteristic of accruals management. It does not necessarily involve fraudulent activity, as the company is within its rights to choose from a range of reasonable estimates for the asset's life.

A Company Decides to Meet Its Profit Target for the Year