[Technical] Examples of Ways Companies Can Manipulate Earnings

Examples of ways companies can manipulate earnings:

Interview Questions


  • Switching from LIFO to FIFO or vice versa – in a rising cost environment, switching to LIFO from FIFO will show lower earnings, higher costs, and lower taxes
  • Switching from fair value to cash flow hedges. Changes in fair value hedges are in earnings, changes in cash flow hedges are in other comprehensive income. Having negative fair value hedges and then shifting them to cash flow hedges will increase earnings
  • Changing depreciation methods
  • Taking write-downs to inventory will decrease earnings
  • Revenue recognition policy – accounts receivable will increase rapidly with a more aggressive revenue recognition policy
  • Capitalizing interest that shouldn’t be capitalized, so you decrease interest expense on the income statement
  • Manipulating pre-tax or after-tax gains
  • Mark-to-market / mark-to-model