The study conceptualizes theoretical issues in relation to different motives of firms to manage published earning figures and therefore it empirically tests whether Sri Lankan companies manage or smooth their income figures shown in published accounts when periodic performances are unsatisfactory and below expectations. The sample comprises top 20 companies in terms of market capitalisation and other 30 companies randomly which represented all the business sectors as per CSE classification, except Oil Palm and Investment Trust sectors.Time horizon is six years from 2003/2004 to 2008/2009. The main methodology of data analysis is quantitative whereby three expectancy models namely random walk, random walk with drift (ex-ante) and random walk with drift (ex-post) and other two tests namely Profitability ratio and Smoothing test were carried out. Data required for the study was extracted from published financial statements. The results of the study reveal that most of the quoted companies do apply income management practices when preparing and presenting financial statement.However, smoothing test does not find any evidence to support that companies follow income smoothing practices to show fairly a stable and flattering income over time. The outcome of the research paves the way for future research in connection with behavioral issues and motives of management behind income management practices and why not smoothing.
Key Words: Earnings Management, Income Smoothing, Financial Statements
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