Analysis of Income Smoothing Practices

in Snacks Manufacturing Companies

Authors:
Leni Gusliani Triyana1, Umi Sholihah2, Kanina M. Putri3,

Victor Delanov4, Yanuar Ramadhan5

Economic and Business Faculty, Universitas Esa Unggul

ABSTRACT

Fluctuating earnings are often considered as a bad signal that will have an impact on
dysfunctional behavior. The purpose of this research was to investigate the practice of
income smoothing in snack manufacturing companies. The study was carried out at a snack
manufacturing firm listed on the IDX. This study's sample consisted of five manufacturing
companies that submitted financial statements and publicized obligations from 2018 to 2022.
This investigation revealed that none of the companies practiced income smoothing using the
Eckel index calculation. In this study, descriptive statistics with deviation standard, average,
and comparison analysis tools were used to compare firms with high yield and companies
with low yield, as well as to compare corporate characteristics of companies with income
smoothing. According to the findings of the study, the income smoothing phenomena in
Indonesia for food and beverage manufacturing enterprises tended to be not applied
anymore.

Keywords: financial statement, income smoothing, sales, profit, cost, net income,
investment.

INTRODUCTION

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The snack industry is one of the business areas that is still expanding. The amount of snack
demand in Indonesia is expanding in tandem with the country's growing population. Demand
and sales of snack products were not affected by economic conditions even though they were
currently in unfavorable conditions. Because of the Indonesian people's preference for ready-
to-eat food, many new firms have emerged in the food and beverage sector, believing that the
snack industry sector has profitable potential both now and in the future.

This of course makes competition in the snack industry even tighter. The snack industry is
one of the industries that supports Indonesia's industrial world. As the food and beverage
business grows, organizations must be able to enhance performance based on whole company
performance, which is known as efficiency, or the capacity to achieve a very minimal level of
input to create a particular level of output. The profit and loss report also includes a summary
of activities related to selling products or services, production costs to obtain goods or
services to sell, costs incurred in distributing products or services to consumers, and
operational administrative costs and financial costs associated with running a business.

The way in which the success of a company can be assessed was by how far the company can
increase sales and make profits. Profit may be used to evaluate the success of a firm.
Company performance refers to the results of complicated decision-making, such as
effectiveness, efficiency, capital utilization, and profitability in business operations. Aside
from profit, output in the manufacturing business may be seen in the present era. By using
input variables in effective industrial operations, expenses are automatically reduced,
allowing you to acquire output in the form of maximum sales levels and corporate profits.

Income smoothing is a financial management strategy used by companies to even out

fluctuations in reported profits over several accounting periods. This involves manipulating
accounting methods, reserves, or other financial measures to reduce the volatility of reported
earnings. Companies often use income smoothing to present a more stable and predictable
picture of their financial performance to investors, creditors, and analysts. This can help
maintain investor confidence and potentially influence share prices. However, income
smoothing is sometimes considered unethical if it involves misleading or distorted financial
statements. Regulatory and accounting standards aim to ensure transparency and prevent
excessive income smoothing practices. It is important to strike a balance between managing
income volatility and adhering to ethical and legal standards when considering income
smoothing strategies.
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The phenomenon of the practice of income smoothing has often occurred in Indonesia. For
example, as was done by PT. Ades Alfindo in 2001-2004 which was revealed during a
change of management where the new manager discovered inconsistent sales recording. The
new manager revealed that in 2001 there was a sales difference of 13 billion, in 2002 there
was a sales difference of 45 billion, in 2003 there was a sales difference of 55 billion and in
2004 there was a sales difference of 2 billion in the first 6 months. This happened and
escaped the auditor's supervision because PT. Ades Alfindo does not include sales volume in
its audited financial reports. This inconsistent reporting of sales value resulted in profits in
the company’s financial statements. Ades Alfindo was higher than the actual financial report.
Income Smoothing is often performed by corporate management to demonstrate to investors
or potential investors that the firm is steady in generating profits to enhance share value and
deliver dividends, hence increasing investors' interest in putting their capital in the company
(Detik.com, 2004).

This shows that the practice of income smoothing is used to attract investor interest regarding
share investment decisions. Investors tend to like companies with a small level of profit
fluctuation, which means the company management can be judged to be doing their job well.
Income smoothing can be done by setting the income or expense recognition period not in
real time to create financial report values related to profits from one accounting period to
another.

LITERATURE REVIEW

Definition

The Financial Statements

The company's own accountants create the financial statements. Accountants certify that the
financial statements of a company are comprehensive in all relevant elements and that the
data were prepared using accepted measuring standards. To conclude our examination of
financial statements, we must highlight some of the principles and approaches used by
accountants:
Profit after taxes. Net income denotes the change in a company's wealth from all sources
other than the injection or withdrawal of investment capital over a certain time.

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• The transactional approach. Only validated gains in wealth from data referring to actual
interactions with individuals outside the firm are recognized as income under this approach.
The approach, for example, fails to recognize the value gained by a service organization by
recruiting a vibrant new employee who would develop salable goods.
• Income recognition. This includes revenue and spending forecasts.
The accountant must estimate the proportion of gross sales while keeping in mind that
payment for some things will never be collected. Estimated expenses are based on the
historical cost of resources utilized. Thus, net income is the difference between the value
produced from resource utilization and the cost of the resources utilized in the process. (From
Accounting Ethics, Second Edition. 2011; Ronald Duska, Brenda Shay Duska, and Julie
Ragatz).
According to Kristina Russo, 2022, Financial statements are standardized reports that
communicate financial information to stakeholders both inside and outside of a business.
According to Munawir (2007) "Financial statements are a very important tool for obtaining
information regarding the position and results that have been financially achieved by the
company concerned".
information with respect to the position and results that have been financially achieved by the
company concerned."
According to Myer, 2007, An accountant compiles financial accounts for a corporation at the
conclusion of a period. The balance sheet or financial position list and the income list or
profit and loss list are the two lists. Companies have recently added a third list, namely a list
of surpluses or a list of undistributed profits (retained earnings).
From some of the opinions of the experts above, it can be concluded that the definition of a
financial report is a company's most important tool that contains useful information and can
describe the condition of a company.

The Effect of Financial Statements on Investors

The effect of financial statement information for investors, namely the part that is most
analyzed by investors in order to determine the condition of a company is healthy or not is
information obtained from financial reports that describe the financial condition of the
Company such as the acquisition of information about the company's financial illiquidity,
then this shows that the company has shown a tendency to be unhealthy and needs funds to
help achieve liquidity again.
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has shown an unhealthy tendency and needs funds to help achieve liquidity again.
Meanwhile, according to Werner R. Murhadin, financial statement information functions in
decision making "Decisions made by these parties are not only in the form of decisions to
buy, maintain or sell a company's shares, but also the time to take the purchase or sale
action".

Profit
According to (PSAK 46, 2018), accounting profit is net profit before subtracting tax charges
within a certain time. (Ardhianto, 2019: 100) defines profit as "the excess of total revenue
over total expenses, also known as net income or net earnings."
While Adam Smith defines income as an increase in wellbeing in Riahi and Belkaoui (2001;
128).
Subramanyam and Wild (2014: 109), in their book define profit as follows:
"Profit or also known as earnings or Profit is a summary of the net results of business
operations in a certain period expressed in
summary of the net results of business operating activities in a certain period expressed in
financial terms".
In the case of a company, this can be operationalized as the cash flow of the business unit
plus changes in the value of the company" From some of the opinions of the experts above, it
can be concluded that the definition of profit is the final part of the profit and loss statement,
namely profit after tax which describes the increase in the welfare of a company.

Income Smoothing
Income smoothing, according to Beidleman (1973), is an endeavor by management to
eliminate anomalous swings in profits to the degree permitted by solid accounting and
management standards. Earnings management includes income smoothing (Agrawal and
Chatterjee, 2015; Demerjian et al., 2020; Tabassum et al., 2015). Managers either utilize their
judgement to adjust results through different accounting decisions or change operations to
meet earnings objectives. This goal might be established by management or demanded by a
group of stakeholders. By minimizing income volatility, future earnings may be forecast
more precisely, increasing shareholder value. Income smoothing may be seen of as
management's purposeful endeavor to communicate information to financial consumers. An
older definition is "the deliberate dampening of fluctuations about some level of earnings
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which is considered to be normal for the firm" (Barnea et al. 1976,). According to Dechow
and Skinner (2000), "to characterize income smoothing as earnings management, we need to
define the point at which managers' accrual decisions result in "too much" smoothing and
thus earnings management."
Income smoothing is the process of reducing the fluctuation in periodic profit over time to the
degree permitted by accounting and management rules. Income Smoothing According to is a
general form of earnings management and included in one aspect of earnings management.
Earnings management is a management process profits made by company management
within standard limits to achieve a goal for certain purposes, earnings management has a
negative relationship with quality financial reporting because it can reduce the usefulness of
information in financial reports. In this research, Smoother is defined as a company that does
income smoothing while non-smoother is a company that does not smooth profit. Income
Smoothing actions can only be calculated using the Eckel Index (1981). Eckel Index is the
number of samples that have been selected classified into leveling and non-leveling groups
using the Eckel Index, because The Eckel Index is an appropriate classification tool for
separating companies profit smoothing with the company is not profit smoothing. Based on
the Eckel index, the company classified as a profit smoothing company if the results of
dividing CV ΔI and CV ΔS less than 1. If the company practices income smoothing, it will be
given status 1, Meanwhile, if the company does not practice income smoothing, it will be
given the status 0. The formula for the Eckel index itself is as follows:
𝐼𝑛𝑑𝑒𝑥 𝐸𝑐𝑘𝑒𝑙= CVΔI / CV ΔS
Information:
CVΔI: Coefficient of variation of changes in profit
CVΔS: Coefficient of variation of change in sales

How to find the coefficient of variation for changes in profit and sales using the formula as
follows:
√Σ (ΔX − Δx̅ )2 𝑛 − 1: Δ𝑋̅
Information:
Δ𝑋 = Change in net income or profit (I) or sales (S) between years n and n-1
Δ𝑥̅ = Average change in net income or profit (I) or sales (S) between n years with n-1
𝑛 = Number of years studied

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Once the results of the Eckel index calculation are known, the company has categorized into
profit smoothing and non-profit smoothing groups. Companies with the index are less than
included in the category of companies that carry out income smoothing. Meanwhile,
companies with more than one index are categorized as non-companies’ income smoothing.

METHODS

In this study, the object used is the measurement of the Earnings Smoothing Index to

Measuring snack industry companies that flatten earnings during the period 2018 - 2022. The
research method used to find and get

The research method used to find and get answers to the problems studied is descriptive
research method. Descriptive method is research to determine the value of independent
variables, either one or more variables without being analyzed, independent variables either
one or more variables without making comparisons or being associated with other variables.
While research with a quantitative approach according to (Sugiyono, 2017) says that
"Quantitative methods are scientific methods because they fulfill scientific rules that are
concrete / empirical, objective, measurable, rational, and systematic". This quantitative
method processes data in the form of numbers.

From some of the definitions of the researchers above, it can be concluded that quantitative
descriptive research methods are research conducted to determine the value of variables by
collecting data in the form of numbers without the need to compare one variable with other
variables and without the need to correlate other variables, where the variable is the same.

Others and without the need to correlate with other variables, where the variable process data
with numbers. The population in this study are snack food companies listed on the Indonesia
Stock Exchange for the period 2018 - 2022. The sample technique used is by using purposive
sampling method. With the number of observations of 5 snack food companies.

This research data uses secondary data in the form of annual financial reports that have been
registered on the Indonesia Stock Exchange in 2018-2022.

The sample technique used is by using purposive sampling method. With the number of
observations of 5 snack food companies. This research data uses secondary data in the form

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of annual financial reports that have been registered on the Indonesia Stock Exchange in
2018-2022.

The source of this data is obtained from the web www.idx.co.id and http://web.idx.id. The
data analysis technique of this research is descriptive statistical analysis technique. So, the
data that has been collected and will be sampled is identified using descriptive statistical
analysis to provide an overall picture of the data used to explain what the highest value of the
Earnings Smoothing Index is, the average value and the standard deviation in a research
sample. Then it can be classified with the largest status value of 1 and the smallest value of 0.
This descriptive statistic is described only to provide information and not to draw
conclusions. In this study, the research variable is earnings smoothing. Earning smoothing
practices are measured using the eckel index. This eckel index is done to determine
companies that do earnings smoothing with companies that do not do earnings smoothing.
The earnings’ smoothing index is calculated using the following formula:

𝐼𝑛𝑑𝑒𝑥 𝐸𝑐𝑘𝑒𝑙= CVΔI / CV ΔS

Information:
CVΔI: Coefficient of variation of changes in profit
CVΔS: Coefficient of variation of change in sales

How to find the coefficient of variation for changes in profit and sales using the formula as
follows:
√Σ (ΔX − Δx̅ )2 𝑛 − 1 : Δ𝑋̅
Information:
Δ𝑋 = Change in net income or profit (I) or sales (S) between years n and n-1
Δ𝑥̅ = Average change in net income or profit (I) or sales (S) between n years with n-1
𝑛 = Number of years studied

RESULTS

This analysis is used to analyze data in a descriptive way, or it can also be understood to
describe a group of research data that has been collected without generalizing. The companies
financial data during 2018 – 2022 are presented in table 1.
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 in billion IDR
Sales Net Income
No. Company Year (S) (I)
a b

1 ICBP 2022 64,797.50 5,722.20

2021 56,803.70 7,911.90
2020 46,641.00 7,418.60
2019 42,296.70 5,360.00
2018 38,413.40 4,658.80

2 MYOR 2022 30,669.41 1,970.07

2021 27,904.56 1,211.05
2020 24,476.95 2,098.17
2019 25,026.74 2,051.40
2018 24,060.80 1,760.43

3 AISA 2022 1,843.76 - 62.36

2021 1,520.88 5.76
2020 1,283.33 1,204.97
2019 1,510.43 1,134.78
2018 1,583.27 - 123.51

4 STTP 2022 4,241.86 617.57

2021 3,846.30 628.63
2020 3,512.51 482.59
2019 2,826.96 255.09
2018 2,825.41 216.02

5 GOOD 2022 10,511.00 522.00

2021 8,800.00 493.00
2020 7,719.00 245.00
2019 8,438.63 435.77
2018 8,048.95 425.48

Table 1 Financial Date (Source: IDX)

The Company's financial data is obtained from the Indonesia Stock Exchange website. Sales
and profit data are obtained from the Company's profit and loss statement. The profit figure
used is net profit after tax. The sales and profit figures obtained have a varied range of
numbers so that for the calculation of profit smoothing analysis, the standard deviation and
average numbers from the period range are needed. The calculated standard deviation and
average are presented in table 2.

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 in billion IDR
Sales Change of
Net Income Change of Std Dev Std Dev Average Average
(S) Sales
No. Company Year (I) Income (ΔI) ΔS ΔI ΔS ΔI
(ΔS)
a b c d e f g h

1 ICBP 2022 64,797.50 5,722.20 7,993.80 (2,189.70)

2021 56,803.70 7,911.90 10,162.70 493.30
2020 46,641.00 7,418.60 4,344.30 2,058.60 3,005.78 1,778.10 6,596.03 265.85
2019 42,296.70 5,360.00 3,883.30 701.20
2018 38,413.40 4,658.80

2 MYOR 2022 30,669.41 1,970.07 2,764.85 759.01

2021 27,904.56 1,211.05 3,427.60 (887.12)
2020 24,476.95 2,098.17 (549.79) 46.76 1,799.05 692.56 1,652.15 52.41
2019 25,026.74 2,051.40 965.94 290.97
2018 24,060.80 1,760.43

3 AISA 2022 1,843.76 - 62.36 322.88 - 68.12

2021 1,520.88 5.76 237.55 - 1,199.21
2020 1,283.33 1,204.97 - 227.10 70.20 258.58 1,004.99 65.12 15.29
2019 1,510.43 1,134.78 - 72.84 1,258.29
2018 1,583.27 - 123.51

4 STTP 2022 4,241.86 617.57 395.56 (11.06)

2021 3,846.30 628.63 333.79 146.04
2020 3,512.51 482.59 685.55 227.50 280.64 107.12 354.11 100.39
2019 2,826.96 255.09 1.55 39.07
2018 2,825.41 216.02

5 GOOD 2022 10,511.00 522.00 1,711.00 29.00

2021 8,800.00 493.00 1,081.00 248.00
2020 7,719.00 245.00 (719.63) (190.77) 1,040.89 179.36 615.51 24.13
2019 8,438.63 435.77 389.68 10.29
2018 8,048.95 425.48

Table 2 Standard Deviation and Average Calculation

After standard deviation and average were obtained, then coefficient of change of sales and
profit (income) should be calculated by dividing standard deviation with the average for both
sales and profit. The result of calculation was shown in table 3.

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 Std Dev Std Dev Average Average
CVΔS CVΔI
No. Company ΔS ΔI ΔS ΔI
e f g h (i)= e/g (j)= f/h

1 ICBP 3,005.78 1,778.10 6,596.03 265.85 0.46 6.69

2 MYOR 1,799.05 692.56 1,652.15 52.41 1.09 13.21

3 AISA 258.58 1,004.99 65.12 15.29 3.97 65.74

4 STTP 280.64 107.12 354.11 100.39 0.79 1.07

5 GOOD 1,040.89 179.36 615.51 24.13 1.69 7.43

Table 3 Coefficient calculation

Lastly, by using index eckel formula coefficient profit should be divided by coefficient sales.
From the result of calculations, we could get the number of indexes that could represent the
income smoothing practice indication. The result of calculations was shown in table 4.

Index Code
CVΔS CVΔI
No. Company Eckel 1 = Yes Index < 1
0 = No Index > 1
(i)= e/g (j)= f/h (j) / (i)

1 ICBP 0.46 6.69 14.68 0

2 MYOR 1.09 13.21 12.14 0

3 AISA 3.97 65.74 16.56 0

4 STTP 0.79 1.07 1.35 0

5 GOOD 1.69 7.43 4.40 0

Table 4 Index Eckel Calculation

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DISSCUSSION AND CONCLUSSION

The result calculation by using eckel index formula shows that all samples have no indication
in income smoothing practice. It shows by the number of index that if the index is less than 1,
its mean there is the income smoothing indication. On the other hand, if the number of
indexes more than 1, it is means that no indication of income smoothing practices. However,
the indication of income smoothing should be explored more deeply.
Income smoothing practices categorized as creative accounting. It could occur when there
was a push from some factors. The analysis could be continued by another research that
correlates the indications with the impacted factors.

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