9.4 An Accounting policy is a policy which is consistently followed by the firm from one period to another period. For example: a depreciation accounting policy, inventory valuation policy, etc. The accounting policy to be followed by the firm is in line with the consistency principle of accounting since any changes in the accounting policy can affect the earnings reported.

For example: when the prices of the raw materials are decreasing a firm can change the inventory valuation method from FIFO to LIFO in order to show the better results for the firm. The inventory valuation under LIFO method will be higher compared to FIFO method and consequently earnings reported under LIFO method will be higher. Thus the firm can manage its earnings by a choice of accounting policy in inventory valuation.

9.5 Income smoothing is the shifting of revenues and expenses by the firm to different reporting periods to present a false impression that the business is doing well and earnings are good. The income smoothing can be achieved by management by either reporting higher revenues during the period or lowering the expenses to be matched against the revenue. The management tries to achieve the income smoothing within the accounting standards that allows management to defer or accelerate certain items. The typical examples are the accounting estimates used by the management to provide for the expenses during the period. For example: the accounting of bad debts expenses at end of the period is based on the estimate of uncollectible. A firm can show higher uncollectible estimates in order to increase the bad debts expenses and lower the income to be reported and thus manage its earnings during the period.