The correct answer is: D. over valuation of liabilities and under valuation of assets.
A secret reserve is a reserve that is not disclosed in the financial statements of a company. It can be created by overvaluing liabilities or undervaluing assets.
Overvaluing liabilities means that a company reports its liabilities at a higher value than their actual value. This can be done by overestimating the amount of money that a company owes to its creditors. Undervaluing assets means that a company reports its assets at a lower value than their actual value. This can be done by underestimating the value of a company’s property, plant, and equipment, or by overestimating the amount of depreciation that has been taken on those assets.
Secret reserves can be created for a variety of reasons. One reason is to manage earnings. A company may create a secret reserve in order to smooth out its earnings over time. This can be done by creating a reserve in one year and then releasing it in another year. Another reason to create a secret reserve is to avoid paying taxes. A company may create a reserve in order to reduce its taxable income.
Secret reserves can also be created for fraudulent purposes. A company may create a secret reserve in order to hide its true financial condition from investors and creditors. This can be done by overstating liabilities or understating assets.
Secret reserves are not illegal, but they can be misleading to investors and creditors. Companies are required to disclose all of their reserves in their financial statements. However, secret reserves can be difficult to detect, as they are not always disclosed in the financial statements.
If you are an investor or creditor, you should be aware of the possibility of secret reserves. You should carefully review a company’s financial statements to see if any secret reserves are being disclosed. If you are not sure whether a company is disclosing all of its reserves, you should consult with an accountant or financial advisor.