Accounting techniques to level out net income fluctuations

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Income Smoothing is the use of accounting techniques to level out net income fluctuations 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, compared with stocks whose earnings are subject to wild fluctuations. - An often-cited example of income smoothing is that of loan-loss provisions by banks, since they have considerable leeway in determining this provision. Banks may be tempted to understate annual loan-loss provisions in years of low profitability, and may be inclined to overstate them during highly profitable periods. - Given the latitude of the interpretation of generally accepted accounting principles, income smoothing actually IS NOT considered cheating. What do you have to say about this practice? Number your responses: (1) Does it pass the generalization test? (2) The utility test? (3) The virtue ethics test?

Reference no: EM131129254

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