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:

Share Rights Plan

A strategy used by companies to defend against hostile takeovers by allowing shareholders to buy additional shares at a discount.

Taxable Acquisition

A corporate acquisition or merger that is subject to taxation.

Tax-Free Acquisition

A type of corporate merger or acquisition structured in a way that allows for the transfer of assets without incurring federal income tax liabilities.

Capital Gains

The increase in value of an investment over its purchase price.