Many companies have contractual provisions like debt covenants, managerial compensation agreements etc. So$,$ to show its financial statements as per contractual provisions, managers of the company use the equity method. Under this method managers show lower values of assets & liabilities in the financial statements of the company thus as a result these statements show higher returns on invested amount & good profitability on sales revenue. Such presentation of financial statements also depicts good & favorable debt$-$equity ratio. Managers have several strong motives or incentives to use the equity method. First, Equity Incentives are legal contracts between a corporation and its employees to provide the employee with an interest in the Corporation. It aims to strengthen the financials of the Corporation by providing incentive stock options to its employees. In addition, Certified pre$-$owned incentives are reduced$-$rate loans offered by manufacturers to qualified buyers of CPO vehicles. Finaly, CEO incentives are the incentives for managers to manipulate their firms' reported earnings.

Why is it important to understand these types of incentives?