Question

Desert Company's CFO has realized that this year their earnings are quite high. She wishes to create some "cookie jar reserves" and conserve the great earnings this! year for future period by managing earnings downward. How might she achieve this downward earnings management? Changing estimated bad debts from 3 percent to 2.5 percent of sales. Revising the estimated life of equipment from 10 years to 8 years. Not writing off obsolete inventory Reducing research and development expenditures

Answer 1

Answer is Option B) Revising the estimated life of equipment from 10 years to 8 years

This is because depreciation will increase when estimated life is reduced form 10 years to 8 years and thereby earnings will be reduced.

Other 3 options are not the answers because income will be further increased

• If estimated bad debts is reduced as percent of sales income will increase
• Not writing off obsolete inventory will also increase income
• Reducing research and development expenditure will increase income

Therefore answer is Option B)