Chapter 11 summary of the book financial accounting theory by william r scott

Summary of Chapter 11

Chapter 11 deals with Earnings Management

What is earnings management?

“Earnings management is the use of accounting techniques to produce financial statements that

present an overly positive view of a company's business activities and financial position so in other

words earnings management is a method of manipulating financial records to improve the appearance

of the company's financial position.”(Tuovila,2019)

Companies use earnings management to present the appearance of consistent profits and to smooth

earnings' fluctuations.

One of the most popular ways to manipulate financial records is to use an accounting policy that

generates higher short-term earnings.


Earnings management can
be conducted through
accounng changes or esmates
(accrual-based 
EM), but also through
managing transacons (real
transacons earnings
management).

, Discreonary accruals –
Accruals not explained by
economic fundamentals
(intuion behind 
accruals models)
Note: accruals reverse –
managing earnings upward
now means lower earnings
later
Earnings management can
be conducted through
accounng changes or
esmates (accrual-based 
EM), but also through
managing transacons (real