Question

How can operating income be manipulated through the use of liabilities? (check all that apply.)

O cookie-jar reserves are not set up to adjust recorded liabilities
O liabilities can be used to increase or decrease recorded operating expenses improperly
O liabilities are recorded based on the probability that future obligations exist
O revenue is recorded when cash is received but a deferred liability is not set up when future obligations remain

Answer 1

Operating income can be manipulated by improperly using liabilities to alter recorded expenses, failing to set up cookie jar reserves, improperly estimating liabilities based on probability, and not setting up a deferred liability when revenue is recorded but future obligations remain. O cookie-jar reserves are not set up to adjust recorded liabilities

Step-by-step explanation:

Operating income can be manipulated through the use of liabilities in a few ways. One of these methods involves improperly using liabilities to increase or decrease recorded operating expenses. When a company does not establish cookie jar reserves to adjust recorded liabilities, it leaves room for adjusting expenses in future periods to meet earnings targets.

Secondly, liabilities can be recorded based on the probability that future obligations will exist, allowing for discretion in how liabilities are estimated and reported.

Finally, issues arise when revenue is recorded as cash is received, but a corresponding deferred liability is not set up for future obligations. These manipulative practices can lead to misrepresentation of a company's financial performance and are contrary to generally accepted accounting principles (GAAP).