CFA Practice Question

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CFA Practice Question

If a CEO concludes that the minimum earnings targets can't be made in a given year, he/she will have an incentive to move earnings from the present to the future, since the CEO's compensation doesn't change whether he/she misses the targets by a little or a lot. By shifting profits forward - by prepaying expenses, taking write-offs and/or delaying the realization of revenues - the CEO increases the chances of getting a large bonus the following year. Which biased accounting practice could be used by the CEO to achieve this?

A. Cookie jar reserves
B. Income boosting
C. Big bath
Correct Answer: C

Definition of big bath: A company incurring a serious loss seeks to maximize the reported loss in that year so that future years will appear better.

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