Question

Income smoothing refers to: a. the ability of management to use accruals to reduce the volatility of reported earnings over time. b. the ability of management to maintain sales to its current customers for several years. c. the ability of management to report an earnings amount in each period less than actual earnings. d. the ability of management to report an earnings amount in each period greater than actual earnings.

Answer 1

Answer: The correct answer is "a. the ability of management to use accruals to reduce the volatility of reported earnings over time.".

Explanation: Income smoothing refers to the ability of management to use accruals to reduce the volatility of reported earnings over time.

The smoothing of earnings is a practice that consists in reducing fluctuations in recognized income and, therefore, fluctuations in earnings. That is, the smoothing of earnings implies saving income in bonanza times to recognize them accountingly when income is meager.