Question

what is channel stuffing and how managers use the method in earning management

Answer 1

Answer:

Channel stuffing is a business practice in which the company sends more inventory or stock must be sold to stores its distribution channel.

It means the sales force within a company, inflating the sales figures by forcing more products to its distribution channel than this channel is capable of selling. so that, sells more of the product to distributors than the distributors must sell to customer.

Channel stuffing is very deceptive. Channel stuffing or trade loading, is a common practice seen at all levels of business. Channel stuffing, distributors is temporarily increase the sales figures and related profit for a particular period.

Managers use the method in earning management :-

Earning management is term used by management to manage earning. It is not any illegal activities by management to manage earning. Managers use judgement to financial reports to some stakeholders about the economic performance of the company.

Managers must be manage earning they have flexibility in making accounting choice or operating decision. The most common methods is changing the assumption for accounting standards. In that receive bonuses based on earning performance and generate a profit when the stock price is increase. Mangers use some methods in earning management:-

Cookie jar reserve :- If a company expenses in the current period, it won't have to recognize as expense in future period. This technique is income smoothing. So that, cookie jar technique is deals with future events.

Big bath technique :-  Sometimes corporation may restructure debt, write down assets or change and close down operating system. If the managers has to report bad news, a loss from substantial restructuring.

Big bath on the future :- In that the purchase price to be written off against current earnings in the acquisition year, protecting future earnings from these charge.

And other method like creative acquisition accounting, Materiality, Revenue recognition, operating activities, these all methods are managers is used for the manage to earning management. At last i can say that the manager expecting to have a series of earning in future years is better off trying to recognize all of the bad news in one year, leaving future years by continuing losses.