These two run the machine in reverse by understating today's profit. That confuses beginners until they see the purpose. A manipulator wants control of the path, not just the level.
How does cookie jar accounting work?
Profit in a jar: shifting today's income to later (the cookie jar). In a too-good year, overbuild provisions (Dr Expense / Cr Provision) or over-defer revenue (Dr Revenue / Cr Deferred revenue), and bank the surplus. In a lean year, release it (the third move under cost hidden) and glide over consensus. Microsoft settled SEC cease-and-desist proceedings (2002, no penalty) over hundreds of millions of dollars of undisclosed reserves used across 1995–98. W.R. Grace parked a health-care unit's excess earnings in reserves the same way in the early 1990s. GE's 2009 settlement included derivative-accounting smoothing.
There's an acquisition-time variant. Force the target to defer revenue and prepay expenses pre-close, so the acquirer's first post-deal quarters "beat." That spring-loads the merger model. Residue and tests: deferred revenue or provisions that balloon in great years and deflate in bad ones, uncannily counter-cyclical margins, the provision roll-forward again, and deferred-revenue movements that de-link from billings (billings = revenue + Δ deferred revenue). Learn that identity. It comes back in SaaS work in the sector playbooks.
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What is the big bath?
The big bath: shifting tomorrow's expenses into today. Say a quarter is already ruined by a new CEO's arrival, a crisis, or a pandemic. Throw in everything. Impair assets that merely might be impaired. Provision restructurings generously and write down inventory hard. Dr Impairment & restructuring charges / Cr Assets & provisions, all labeled "exceptional." Markets forgive the kitchen-sink quarter in a day.
Then the payoff stream begins. Written-down assets carry lower future depreciation, an instant margin tailwind. Real future costs are charged against the provision instead of the P&L. Any over-provision is released on demand (cost hidden again). WorldCom did the reserve version at scale with its MCI merger reserves, booked huge and released as needed, alongside its capitalization fraud.
New-CEO baths are so routine they have a base rate. Expect one, and discount the "turnaround" that follows until you've decomposed it (Worked Example 4 does the arithmetic). Tests: the size and composition of "exceptional" charges vs any plausible operating cause; margin bridges in recovery years, asking how much improvement is depreciation relief and provision release vs price/volume/mix; and the roll-forward, always.