What may be the effect on a company's financial statement in the year a company sets up a cookie jar reserve?

Question

Quizplus · Accepted Answer

Setting up a cookie jar reserve typically involves recognizing expenses earlier than they might otherwise be incurred. This action reduces net income in the period the reserve is established because expenses are recognized without the offsetting revenue that might be recognized in future periods. Additionally, establishing a reserve increases liabilities (as it represents a future obligation) and decreases assets (due to the reduction in net income and potentially setting aside cash or other assets to cover the reserve), making net income and total assets lower than they might otherwise be without the reserve.

What May Be the Effect on a Company's Financial Statement