Abstract
Earnings management involves actions by managers to influence reported financial results, often to present a more favorable view of company performance. In this chapter, we discuss the tools available to managers for earnings management. We first consider manipulation of net income through accruals and real earnings management. Then, we disaggregate earnings management along the income statement, comparing manipulation of revenue, expenses, and gains and losses. We next consider how managers can leave bottom-line earnings unchanged but instead engage in expectations management to meet or beat earnings forecasts. We also explain how managers can manipulate the market perception of the firm's performance through classification shifting and non-GAAP reporting. Finally, we conclude with a discussion of the trade-offs of these tools.