Companies may intentionally understate earnings when income is high to create a reserve of "earnings" that may be used in future years to increase earnings. This practice is known as:
A) performance-based management.
B) earnings management.
C) asset management.
D) expense management.

Question

Quizplus · Accepted Answer

The practice described is known as earnings management, which involves manipulating financial statements to achieve certain financial goals or objectives. One specific form of earnings management involves intentionally understating earnings in a particular period to create a reserve of earnings that can be used to boost earnings in future periods.

Companies May Intentionally Understate Earnings When Income Is High to Create