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Chapter 8. Earnings Tricks and Games: Ma... > Red Flag 4: Companies Dipping In and...

Red Flag 4: Companies Dipping In and Out of Cookie Jar Reserves

One of the tried and tested ways of disguising bad performance in a particular period is the use and abuse of reserves. Most companies set some money aside for a rainy day to allow for bad debts, or to cover the costs of integrating an acquired business. Various assumptions go into deciding how much there should be in these reserves, such as how many customers go bankrupt in a typical year, an estimated cost for closing a factory following a takeover, and so on. The size of the reserves should be based on conservative assumptions, so there is more than is likely to be needed.


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