Question

Secret reserves are designed to conceal the true financial position and earnings, which are different than shown on the balance sheet and income statement. The best statement of how secret reserves are related to fraud and ethics is____________.

Answer 1

The correct answer is Secret reserves often lead to smoothing net income over time.

The profit reserve are accounts formed by the profits that were generated by the company, but that were not distributed to its shareholders and partners. Accordingly, these undistributed profits are appropriated by the company and remain within the company's equity. Profits earned that are reserved must be earmarked for specific purposes, aiming to protect the share capital. In this way, profit reserves are normally formed to strengthen the company's financial and economic situation and provide additional security for its operation. However, since profit reserves can only be set up for specific purposes, from the moment these purposes cease to exist, the reversal of profit reserves occurs.