Question

Which of the following techniques can be used to establish a cookie-jar reserve? (Check all that apply.)

a) Overestimating expenses
b) Delaying revenue recognition
c) Aggressive accounting
d) Conservative accounting

Answer 1

Techniques to establish a cookie-jar reserve include overestimating expenses and conservative accounting to set aside excess reserves for future use; aggressive accounting is not used for creating reserves.

Step-by-step explanation:

The techniques that can be used to establish a cookie-jar reserve include overestimating expenses, and conservative accounting. Overestimating expenses allows a company to report lower profits during good years by inflating the expense figures, thus setting aside reserves that can be released to boost profits in lean years. Conservative accounting involves recognizing expenses as soon as possible, even if there is uncertainty regarding them, but delaying revenue recognition until it is ensured. This principle also contributes to creating reserves that can be drawn upon later. Aggressive accounting, however, usually aims at recognizing revenues earlier and delaying the recognition of expenses to show higher short-term profits, which isn't in line with establishing a reserve.