Certified Fraud Examiner Practice 2026 - Free Practice Questions and Study Guide

Income smoothing refers to the practice of deliberately altering the timing of revenue and expense recognition in order to produce more consistent financial results, often to present a less volatile income stream. This technique can involve reporting revenues and expenses in periods that might not accurately reflect the actual timing of the economic activity.

By shifting revenues and expenses to different accounting periods, a business can minimize fluctuations in reported income, creating an appearance of stability and predictability. This practice can be attractive to management as it may help to meet financial targets, satisfy investors, or maintain stock prices.

The choice of reporting revenues and expenses under the wrong periods correctly encapsulates the essence of income smoothing, as it emphasizes the manipulation of timing to achieve desired financial outcomes. It is important to note that while income smoothing can be used to manage perceptions of profitability, it must be executed in accordance with accounting principles and standards to avoid potential legal implications.