Why Are Overstated Reserves Sometimes Referred to as "Cookie Jar

question 28

Multiple Choice

Why are overstated reserves sometimes referred to as "cookie jar" reserves?

• A) Companies involved in mergers or acquisitions overstate their liabilities by creating "cookie jar" reserves.
• B) The reserve is commonly created during bad times or when routine senior management changes occur.
• C) Some companies may require customers to make deposits for future goods or services that can be intentionally recorded as revenue, which is like money stored in a cookie jar.
• D) Like money stored in a cookie jar, overstated revenues represent a stash of accounting earnings that can be used to bolster the perceived performance of the company in the future.

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Definitions:

Inventory

Goods and materials that a business holds for the ultimate goal of resale or production.

Perpetual Inventory System

A method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.

Journal Entries

Transactions registered in a ledger that form the basis of all financial reporting and accounting.

Adjusting Entries

Journal entries made in accounting records at the end of an accounting period to update the accounts for accruals and deferrals.