Secret reserves are created when a company undervalues its assets or liabilities on its balance sheet. This can be done for a number of reasons, such as to avoid paying taxes, to make the company appear more profitable, or to hide losses from investors.
Option A is correct. Undervaluing fixed assets is one way to create a secret reserve. For example, a company might depreciate its assets at a slower rate than the actual rate of depreciation. This would reduce the company’s taxable income and create a secret reserve.
Option B is also correct. Treating revenue expenses as capital expenses is another way to create a secret reserve. For example, a company might classify the cost of advertising as a capital expense, rather than a revenue expense. This would reduce the company’s taxable income and create a secret reserve.
Option C is not correct. Undervaluing liabilities is not a way to create a secret reserve. Liabilities are debts that a company owes to its creditors. If a company undervalues its liabilities, it will have to pay more taxes in the future.
Option D is correct. Secret reserves can be created by both undervaluing assets and treating revenue expenses as capital expenses.
It is important to note that creating secret reserves is not illegal. However, it can be misleading to investors and creditors. Companies that create secret reserves should disclose this information in their financial statements.