Why smooth earnings

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Income smoothing uses accounting techniques to level out fluctuations in net income from one period to the next. Companies indulge in this practice because investors are generally willing to pay a premium for stocks with steady and predictable earnings streams as opposed to stocks whose earnings are subject to more volatile patterns, which can be regarded as riskier. Income smoothing is not illegal if the process follows generally accepted accounting principles GAAP.

Talented accountants are able to adjust financial books in an above-board way to ensure the legality of income smoothing. However, many times income smoothing is done under fraudulent methods. The goal of income smoothing is to reduce the fluctuations in earnings from one period to another to portray a company as if it has steady earnings. It's intended to smooth out periods of high income vs.

Accountants do this by moving around revenues and expenses in a legal fashion. Examples of income smoothing techniques include deferring revenue during a good year if the following year is expected to be a challenging one or delaying the recognition of expenses in a difficult year because performance is expected to improve in the near future.

Materials provided by Indiana University. Note: Content may be edited for style and length. Science News. Story Source: Materials provided by Indiana University. ScienceDaily, 26 November