Firms approaching deterioration in financial performance may make income-increasing accounting choices in an attempt to survive what is probably deemed by the management as a temporary bad period. This study attempts to empirically examine real activities-based earnings manipulation among financially troubled firms in Malaysia over the years prior and after being officially designated as a “financially distressed firm.” The study detects real activities manipulation by investigating patterns in cash flow from operations (CFO), discretionary expenses, and production costs. Results reveal that CFO and discretionary expenses are unusually low for the years preceding the official designation as a financially distressed firm. This evidence suggests that distressed firms temporarily increase sales and reduce discretionary expenditures to improve reported margins. Moreover, having likely exhausted the opportunities for accounting manipulation, distressed firms manipulate real activities, such as sales and discretionary expenditures, highly aggressively in the years after being identified as a financially distressed firm. This study contributes to literature by going beyond the examination of abnormal accruals derived from accruals models to gain insight into the measurement of operational elements of income rather than the implementation effects of the accounting system.