Final answer:
Xerox violated SFAS No. 5 by engaging in fraudulent accounting practices including the use of cookie-jar reserves, topside lease accounting adjustments, and recognition of a one-time gain to artificially inflate reported revenue and earnings.
Step-by-step explanation:
The question pertains to how Xerox Corporation violated the SFAS No. 5 accounting standard during the period from 1997 through 2000. The Statement of Financial Accounting Standards No. 5 (SFAS No. 5) deals with the accounting for contingencies, which requires that companies should recognize an expense and a liability for an estimated loss from a loss contingency if information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.
Xerox engaged in several fraudulent accounting practices to manipulate its financial statements to meet or exceed Wall Street expectations.Xerox used cookie-jar reserves, topside lease accounting adjustments, and recognized a one-time gain—all tactics that distorted the company's reported revenue and earnings.
For example, by using topside lease accounting, Xerox recognized lease revenues too early, while cookie-jar reserves were utilized to smooth earnings over multiple periods, violating SFAS No. 5's requirements. By improperly recognizing revenue and creating one-time gains, Xerox overinflated its financial performance to investors, leading to a significant restatement of its financial results and various penalties.