Contemporary Issues Of Accounting : Take Home Final Exam

1179 Words Aug 14th, 2015 5 Pages
Samah Alshaikh
ACC680- contemporary Issues in Accounting
Take Home Final Exam

1. Managers use cookie jar reserves to smooth earnings by creating excessive reserves in good periods so that they can use them to offset losses in bad periods. In order to determine whether this practice is considered an ethical violation or not, an ethical decision model should be used.
Graham Tucker offers five-question approach for ethical decision-making. The model can be used to examine and challenge a proposed decision in order to reach a clear decision. All of the five questions should be asked to consider the proposed question. The answer should be positive for all of the five questions, and any negative answer means that the decision maker should review the proposed decision in order to reach an ethical decision (Cargill, 2006).
The first question, which is “Is it profitable?” would be answered with a positive answer. Adjusting reserves to smooth earning could be profitable if it is used to accomplish the company continuity. Since not meeting expectation would have significant consequences on the company’s share prices, using reserves to help achieving the expectation would reduce this impact and reach the required profitability. Asking the second question, “Is it legal?” would give a negative answer. Under U.S. GAAP, companies are not allowed to maintain any cookie jar reserves for income smoothing purpose. Any company using this type of reserves to manipulate its earnings might be…

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