ACCA Strategic Business Reporting (SBR) Practice Exam

What does earnings management commonly involve?

1. Estimation of future cash flows

2. Deliberate use of accounting techniques

3. Accurate financial reporting without adjustments

4. Recording non-financial performance indicators

The correct answer is: Deliberate use of accounting techniques

Earnings management commonly involves the deliberate use of accounting techniques to influence reported financial results. This practice can take various forms, such as adjusting revenue recognition timing, manipulating expenses, or choosing accounting policies that serve to paint a more favorable picture of a company's financial performance than may actually be the case. This manipulation is often done within the bounds of Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), but it raises ethical concerns as it may mislead stakeholders about the true financial health of a business. By adopting certain accounting methods, management can achieve specific financial outcomes, which may benefit them in terms of bonuses, stock price stabilization, or favorable perceptions from investors and creditors. In contrast, the other options do not align with the definition of earnings management. Estimation of future cash flows relates to forecasting rather than manipulation of current earnings. Accurate financial reporting without adjustments would be antithetical to the concept of earnings management. Lastly, recording non-financial performance indicators pertains to measuring aspects like customer satisfaction or operational efficiency, which falls outside the realm of financial earnings manipulation.