Chapter 7 - Extra Questions

Which of the following are allowed by the SEC in order for a corporation to disseminate financial information? (Select all that apply) A form 8-K filing Local news outlet Company website Executive's Facebook page An earnings call Company Facebook page

A form 8-K filing Company website An earnings call Company Facebook page

Results of the CFO study of earnings management indicates that: (Check all that apply). Earnings management is not controllable because of management pressure Accruals are necessary to align reported earnings with cash flows A large majority of earnings misrepresentations are due to pressure to hit earnings benchmarks Earnings misrepresentations are due to a failure of internal controls A large majority of earnings misrepresentations are due to a desire to influence stock price

A large majority of earnings misrepresentations are due to pressure to hit earnings benchmarks A large majority of earnings misrepresentations are due to a desire to influence stock price

Results of the CFO study of earnings management indicate which of the following red flags of possible earnings misrepresentations by responding CFOs? (Check all that apply). Earnings and underlying cash flows being in tandem with each other Absence of consistent reporting methods Absence of unexplained accruals Presence of various long-term estimates

Absence of consistent reporting methods Presence of various long-term estimates

What method of ethical reasoning might be used to rationalize earnings management? Justice Act-utilitarianism Rule-utilitarianism Rights Theory

Act-utilitarianism

What should be done when companies meet or beat earnings by manipulating earnings and analysts' earnings expectations? The company should improve relations with the capital markets Boards need to take accountability for integrity of the corporate reporting system The company should always meet or beat analysts' earnings expectations Boards need to intervene in the earnings expectations process

Boards need to take accountability for integrity of the corporate reporting system

When analyzing earnings management, who should be most responsible for the integrity of the corporate system? Internal audit department Boards of Directors Upper management External audit firm

Boards of Directors

Which of the following are red flags of earnings management? (Select all that apply) Change in auditors Change in members of upper management Short-term borrowing at year end Reduction in reserves Decrease in accounts receivable Change in accounting policies toward more conservative application

Change in auditors Change in members of upper management Short-term borrowing at year end Reduction in reserves

Which of the following devices can be used to smooth net income? (Check all that apply). Channel stuffing Cookie-jar reserves Accelerating the recognition of expense Failing to record revenues

Channel stuffing Cookie-jar reserves Accelerating the recognition of expense

A corporation may communicate financial information using which of the following outlets? (Select all that apply) An employee's Twitter account Company Twitter account A form 10-K filing A press release

Company Twitter account A form 10-K filing A press release

How did the lack of strong controls contribute to the fraud at Enron? (Check all that apply). Culture of fear within the organization Board actions were blocked by management Failure to establish a code of ethics Oversight of the internal controls by the board was inadequate or nonexistent Top management overrode or ignored existing controls

Culture of fear within the organization Oversight of the internal controls by the board was inadequate or nonexistent Top management overrode or ignored existing controls

What motivated the actions by management of Enron? (Check all that apply). Conflicts of interest Ethical behavior Enhance stock option values Increase profits

Enhance stock option values Increase profits

What are the effects of income smoothing on earnings? Erosion in the quality of earnings Creating an earnings stream with wide fluctuations Representational faithfulness of accounting information is enhanced

Erosion in the quality of earnings

Earnings management can occur by: (Check all that apply). Altering cash flows Reason: Cash flow changes are a byproduct of altered operating decisions Establishing or altering estimates Manipulating stock prices to enhance earnings Using aggressive accounting techniques Altering operating decisions

Establishing or altering estimates Using aggressive accounting techniques Altering operating decisions

Under ASC Topic 850-10-50-6 Related Party Disclosures, if the reporting entity and another entity are under management control that would result in significantly different operating results if they were autonomous, which statement is correct? Even if there are no transactions between the entities, the relationship should be disclosed If there are no significant transactions between the entities, the relationship need not be disclosed

Even if there are no transactions between the entities, the relationship should be disclosed

Why were Fastow's actions with regard to Chewco misleading? (Check all that apply). Failed to mention he owned a majority of the stock of Chewco Failed to mention that one of his protégés managed Chewco Had no relationship with Chewco Failed to mention there was virtually no outside ownership of Chewco

Failed to mention that one of his protégés managed Chewco Failed to mention there was virtually no outside ownership of Chewco

Each of the following was an accounting violation at Enron: (Check all that apply). Failure to disclose adequately the related party activities with SPEs Failure to consolidate the results of Chewco with Enron Overstating earnings from mark-to-market accounting Reporting one-time gains from asset sales in operating income Recording realized gains using market values

Failure to disclose adequately the related party activities with SPEs Failure to consolidate the results of Chewco with Enron Overstating earnings from mark-to-market accounting

Why was the quality of Enron's financial reports poor? (Check all that apply) Lack of independence of Andersen Gains from sales of assets to SPEs masked true earnings Inadequate explanations for the use of reserves Used SPEs to hide debt Accelerated the recording of gains from sales of assets Failed to adequately disclose related-party transactions

Gains from sales of assets to SPEs masked true earnings Inadequate explanations for the use of reserves Used SPEs to hide debt Failed to adequately disclose related-party transactions

Which of the following are red flags of earnings management? (Select all that apply) Growth in revenue that does not line up with inventory One-time sources of income Reserving for possible future losses Continuous sources of income Frequent acquisition of businesses

Growth in revenue that does not line up with inventory One-time sources of income Frequent acquisition of businesses

What are the consequences of earnings management on debt covenants in long-term lending contracts? Enhances accountability of the financial reporting system Motivates managers to move toward violating debt covenant policies Increases the flexibility to choose accounting policies Minimizes choice in accounting policies

Increases the flexibility to choose accounting policies

How did Watkins characterize the environment at Enron? Unethical tone at the top Excessive competition motivated improper actions It was a risky place to work Inattentive board of directors

It was a risky place to work

How did the structured partnerships help Enron to enhance its financial results? (Check all that apply). Kept debt off the books Increased debt obligations Recorded gains on sales of operating assets Increased equity ownership

Kept debt off the books Recorded gains on sales of operating assets

Which of the following points were raised by Dechow and Skinner in characterizing earnings management? (Check all that apply). Managerial intent influences how earnings are managed Purposeful intervention in the external reporting process Difficult to operationalize earnings management Fraudulent accounting practices may be acceptable Aggressive accounting may be acceptable

Managerial intent influences how earnings are managed Difficult to operationalize earnings management Aggressive accounting may be acceptable

What was the finding identified by Bruns and Merchant about how managers view the ethics of earnings management? Managers believe earnings management is an ethical practice Managers disagreed on whether earnings management was acceptable Managers believe the use of operating decisions to manipulate earnings could be misleading to users of the statements Managers believe that manipulation by accounting methods was more acceptable than using operating decisions

Managers disagreed on whether earnings management was acceptable

Why do companies manage earnings? (Check all that apply). Maximize stock option values Meet earnings expectations Avoid agreeing to debt covenants Maximize bonuses Make managers look bad

Maximize stock option values Meet earnings expectations Maximize bonuses

In his statement on earnings management, Levitt links the practice to: (Select all that apply) Meeting or exceeding financial analysts' expectations Culture of gamesmanship Material misstatements in the financial statements Smoothing net income Reporting higher earnings each year

Meeting or exceeding financial analysts' expectations Culture of gamesmanship Smoothing net income

The underlying technique used to carry out accounting shenanigans is: Misapplication of accounting principles Improper auditing techniques Improper audit report Misreporting of financial disclosures

Misapplication of accounting principles

When decisions are altered to affect cash flows and net income for a period of time, the company has engaged in Accounting earnings management Operating earnings management Using cookie-jar reserves Smoothing net income

Operating earnings management

Results of the CFO study of earnings management indicate which of the following red flags of possible earnings misrepresentations by responding CFOs? (Check all that apply). Persistent deviations between earnings and underlying cash flows Earnings management can be exposed from the outside Large and unexplained accruals and changes in accruals Performance-signaling motivations Firm culture that allows earnings management

Persistent deviations between earnings and underlying cash flows Large and unexplained accruals and changes in accruals Firm culture that allows earnings management

Which of the following are criteria for revenue recognition? (Select all that apply) Persuasive evidence of an arrangement exists Collection is absolutely assured The seller's price to the buyer is negotiable Delivery has occurred or services have been provided Collection is reasonably assured

Persuasive evidence of an arrangement exists Delivery has occurred or services have been provided Collection is reasonably assured

What operating issue was raised by Watkins in her warning letter to Ken Lay? Lawyers did not exercise due diligence in approving the SPEs Skilling's resignation Enron was about to collapse Problems with Enron's partnerships

Problems with Enron's partnerships (Watkins letter described detailed problems with Enron's partnerships that would cause financial upheavals at the company in as little as one year)

Which of the following could a vendor providing cloud computing services use to overstate their revenues? Provide a cloud product for free allocating revenues to other modules Sell a cloud subscription to a pilot population but book it as if it were for the whole company Allocate no revenues to cloud computing an book all revenues for other modules Lump all services together and record them all as cloud services

Provide a cloud product for free allocating revenues to other modules Sell a cloud subscription to a pilot population but book it as if it were for the whole company Lump all services together and record them all as cloud services

Which of the following amounts might be restated because of errors in reserve or provisions? (Check all that apply). Lease liabilities Provision for loan losses Bad debt expense Inventory Unrealized gains and losses from investments

Provision for loan losses Bad debt expense Inventory

Which of the following best describes the topside lease accounting techniques used by Xerox to accelerate reported lease revenue? Pulled forward a portion of finance income and recognized it immediately as equipment revenue Delayed reporting lease expenses to a later period Altered value determinations for both financial reporting and internal operating purposes Recorded bogus lease revenue

Pulled forward a portion of finance income and recognized it immediately as equipment revenue

Which of the following is the example given by Bruns and Merchant of using operating decisions to manipulate earnings? Purposefully delaying making needed repairs to a subsequent period Using cookie jar reserves to smooth net income Never recording needed repairs Purposefully accelerating the making of discretionary repairs to an earlier period

Purposefully delaying making needed repairs to a subsequent period

Which of the following indicates shareholders should no longer rely on past financial statements? Reissuance restatements All financial restatements Revision restatements

Reissuance restatements

How was Enron able to establish control over the partnership entities and keep its operations off their books? Showed that it had a majority interest in the partnerships Established the economic logic of how the partnerships were formed Owned 100% of the partnerships Showed that at least 3% of the equity was owned by outside interests

Showed that at least 3% of the equity was owned by outside interests

The objective of using cookie-jar reserves is Implement creative acquisition accounting Make big-bath charges Smooth net income over time Find ways around the materiality guidelines

Smooth net income over time

The device used by Enron to engineer the results of the partnerships was called Independent partnerships Special-purpose assets Independent equity ownership Special-purpose entities

Special-purpose entities

True or false: Under accounting rules at the time, control over the partnership entities by Enron was established by exercising management rights over the entity's operations.

TRUE NOT false b/c Independent third-party investors needed to own at least 3% to establish the control

The theme of Levitt's statement on earnings management can best be described as The Earnings Game Fraudulent financial reporting The Numbers Game The emphasis on long-term earnings

The Numbers Game

How did Oracle use their "cloud credits" to record bogus revenue? They offered cloud products at significant discounts They recorded traditional software licenses as cloud subscriptions They underestimated their allowance for bad debts

They recorded traditional software licenses as cloud subscriptions

Which of the following are reasons why a company might accelerate the recording of revenues? (Select all that apply) To avoid future losses To improve the share price To decrease stock options owned by executives To increase year-end bonuses To meet earnings projections

To improve the share price To increase year-end bonuses To meet earnings projections

Which of the following are reasons why a company might accelerate the recording of revenues? (Select all that apply) To decrease stock options owned by executives To meet earnings projections To improve the share price To increase year-end bonuses To avoid future losses

To meet earnings projections To improve the share price To increase year-end bonuses

True or false: A disclosure in the financial statements may be used to rationalize an unethical action with respect to earnings management.

True! NOT false b/c: A disclosure may be nothing more than a rationalization for an unethical action with respect to earnings management, thereby closing the Fraud Triangle.

How did the board's actions violate Enron's code of ethics with regard to Fastow? Waived the ownership interest requirement Prohibited outside ownership of the entity Waived the conflict of interest requirement Prohibited Fastow from becoming involved with a related-party entity

Waived the conflict of interest requirement

Victor Alston, CEO of Ixia, misled investors by: understating allowance for doubtful accounts and bad debts expense accelerating revenue recognition from multiple-element arrangements understating liabilities concealing related party transactions

accelerating revenue recognition from multiple-element arrangements

Collection must _____ for revenue recognition to occur. have already occurred be absolutely assured be reasonably assured

be reasonably assured

Improper accounting for other ____________ _______________ (OCI) transactions is an accounting error and can trigger financial statement restatement.

comprehensive income

David Fuselier, the CEO of Integrated Freight Corporation, misled investors by: concealing related party transactions understating liabilities overstating expenses understating allowance for doubtful accounts

concealing related party transactions

What is a legitimate reason to establish an SPE? increase the amount of debt on the books control risk decrease transparency manage earnings

control risk

From a cultural perspective, it could be said that Enron's actions reflected a(n) _______________ of ____________.

culture; greed

Under GAAP, revenue from a multiple-element arrangement must be allocated based on (select all that apply): fair value a consistent price paid by customers vendor-specific objective evidence separating products onto different purchase orders

fair value a consistent price paid by customers vendor-specific objective evidence

Actions or omissions intended to hide or distort the real financial performance or financial conditions are known as ____________ ____________.

financial shenanigans

If fraudulent activity is suspected or has been detected, a(n) _______________ accountant may be brought in to assess the magnitude of the fraudulent activity.

forensic

UTi Worldwide Inc. misled investors by: concealing related party transactions improperly disclosing changes in financial condition improperly recognizing revenue from multiple-element arrangements understating allowance for doubtful accounts

improperly disclosing changes in financial condition

The purposes of forward-looking statements are to (select all that apply): increase transparency provide earnings guidance about past events ensure that GAAP is followed provide earning guidance about the future guide investors

increase transparency provide earning guidance about the future guide investors

Earnings management: (Select all that apply) is unethical if the primary motivation is to deceive users of the true result of operations. is often used to tell the company's side of the story rather than strictly adhere to GAAP. does not always result in fraud. is always viewed as fraudulent. is fraudulent if management uses sales incentives for its sales team to accelerate sales.

is unethical if the primary motivation is to deceive users of the true result of operations. is often used to tell the company's side of the story rather than strictly adhere to GAAP. does not always result in fraud.

The underlying reason earnings may be manipulated is because estimates and ___________ are inherent on the accounting process.

judgments, judgment, judgements, or judgement

The original motivation by FASB for creating SPEs was to establish a mechanism to encourage companies to invest in needed assets while increasing transparency keeping the SPE independent from the parent company keeping related debt off the books increasing earnings

keeping related debt off the books

Regulation S-K requires issuer's of quarterly filings to discuss material changes in external auditor executive management and board members liquidity and financial resources revenue recognition policies

liquidity and financial resources

Under General Motors internal accounting controls, during the period from 2012 to 2014, employees failed to: provide recall estimates when probable estimate the allowance for doubtful accounts recognize revenue from multi-element arrangements properly account for potential product recalls

properly account for potential product recalls

The new revenue recognition standard: (Select all that apply) is more rules-based. requires separate allocation of revenue recognition when multiple obligations within one contract exist. specifies a five step process to recognize revenue requires extensive disclosures allows full revenue recognition when more than 50% of obligations within one contract are fulfilled.

requires separate allocation of revenue recognition when multiple obligations within one contract exist. specifies a five step process to recognize revenue requires extensive disclosures

To increase earnings when reported amounts were too low, Enron used _____________.

reserves

So-called ________ restatements have been fairly steady while ___________ of 2 restatements have been declining

revision; reissuance

Xerox's fraudulent accounting policies are referred to as ____________ lease accounting devices.

topside

The purpose of forward-looking statements is to improve responsibility oversight transparency

transparency

During the period from 2012 to 2014, General Motors misled investors by: overstating expenses understating allowance for doubtful accounts understating liabilities concealing related party transactions

understating liabilities