a. According to the case above, define cookie- jar and explain why did the manager of Microsoft practice cookie jar in their accounting practices. (10 marks)

SUBJECT : ACCOUNTING: THEORY AND EMERGING ISSUES

QUESTION 2 "Following the anti-trust investigation by the U.S. attorney general, Microsoft failed to recognize revenue as earned. This is perhaps an example of unacceptable highly conservative earnings management showing that not all earnings management practices involve overstatements. The Securities and Exchange Commission (SEC) alleged that Microsoft's accounting practices from July 1994 through June 1998 caused its income to be substantially misstated. Microsoft failed to accurately report its financial results, causing overstatements of income in some quarters and understatements of income during other quarters. The SEC said that Microsoft enhanced its financial results by setting aside artificially large reserves to reduce revenues, with the idea of reversing that procedure to record the revenues in less profitable times. The reserves totaled between $200 million and $900 million during the period in question. The SEC criticized the use of such so-called 'cookie jar' reserves, which can give investors an inaccurate picture of the company's current financial performance. Under a settlement with the Securities and Exchange Commission, Microsoft has agreed to refrain from accounting violations to settle federal regulators' allegations that it misrepresented its financial performance" (Source: Needles Jr. B Empowers M., Senyigit Y.B,2018) Required