# Question Deliberate understatement of profits in prosperous years to create hidden reserves for future periods is commonly described as: A) Capital gearing B) Creative accounting C) Income smoothing D) Secretarial control --- # Step-by-Step Solution ## Step 1: Understand the Question - The key phrase is **"deliberate understatement of profits in prosperous years to create hidden reserves for future periods"**. - The practice involves intentionally reporting lower profits when times are good, with the intention of having extra reserves (profits not shown now but can be revealed later) for less profitable years. ## Step 2: Analyze Each Option ### A) Capital gearing - **Definition:** Refers to the ratio of debt to equity in a company's capital structure. - **Relevance:** Not related to profit understatement or hidden reserves. ### B) Creative accounting - **Definition:** Use of accounting methods to present financial results in a way that may be misleading, but still within the law. - **Relevance:** Is a broad term, and can include many practices, including income smoothing, but does not specifically refer to the deliberate understatement for hidden reserves. ### C) Income smoothing - **Definition:** Accounting techniques used to level out net income fluctuations from one period to another. - **Relevance:** Specifically involves actions like understating profits in good years and overstating them in bad years, often by creating or releasing reserves. ### D) Secretarial control - **Definition:** Refers to administrative control and compliance, not financial reporting or profit manipulation. - **Relevance:** Not related. ## Step 3: Identify the Best Match - The described practice — **understating profits in good years to create reserves for bad years** — is a classic example of **income smoothing**. --- # Final Answer **C) Income smoothing**