CFA Level I · CFA Level I Exam · Financial Reporting Quality
A manager who deliberately overstates a restructuring provision in a strong earnings year, then releases part of it in a weak year, is most likely engaging in:
The manager is engaging in earnings smoothing through a cookie jar reserve. Excess provisions are built in a strong year and released in a weak year, which shifts income between periods and reduces volatility without any change in the underlying economic performance.
- Achannel stuffing to accelerate revenue
- Bearnings smoothing using a cookie jar reserveCorrect
- Ccapitalizing operating costs as assets
Explanation
Overstating a provision in a good year and reversing it in a weak year creates reserves used to even out earnings, a cookie jar reserve approach. Channel stuffing involves pushing sales to distributors early. Capitalizing costs moves expenses to the balance sheet, which is not described here.
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