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Chapter 7-ACCT 320

The Harrison Industries case deals with:

Using non-GAAP measures of earnings
Acceptability of recording unpaid severance accruals
Using EBITDA to obscure earnings
All of the above.

Acceptability of recording unpaid severance accruals
One result of earnings management is:

It brings into question the quality of earnings
It uses a non-GAAP financial measure to manipulate earnings
EBITDA does not reflect GAAP earnings
It improves shareholder returns over time

It brings into question the quality of earnings
The best way to characterize the role of Sherron Watkins in the downfall of Enron is:

She directed the internal auditors to examine numerous transactions that led to the discovery of the fraud
She gave in to the pressure of Andy Fastow to go along with materially misstated financial statements
She was sent to jail even though she cooperated with the government in its case against Enron
She tried to alert Ken Lay about the accounting scandal at Enron

She tried to alert Ken Lay about the accounting scandal at Enron
Which technique was used by both WorldCom and Waste Management to manage earnings?

Manipulating asset net valuation amounts to minimize operating expenses for a period
Accelerating the recording of revenue into an earlier period
Delaying needed repairs to a later period
All of the above were used

Manipulating asset net valuation amounts to minimize operating expenses for a period
Which of the following author(s) emphasize(s) a “purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options?”

Dechow and Skinner
Healy and Wahlen
Schipper
Thomas E. McKee

Schipper
Accruals are potentially troublesome because:

They can lead to giving an unmodified audit opinion when it should have been modified
They provide an opportunity to manage earnings through aggressive or more conservative estimations
They always lead to fraud in financial statements
They provide an opportunity to shift debt off the books by setting up an SPE

They provide an opportunity to manage earnings through aggressive or more conservative estimations
In surveys of managers, which technique to manage earnings was considered most acceptable?

Changing inventory valuation in order to influence earnings
Accounting manipulation
Manipulating operating decisions
Establishing cookie jar reserves

Manipulating operating decisions
The accounting shenanigan used in the Dell Computer case can best be described as:

Recording revenue from exclusivity payments too soon or of questionable quality
Shifting current revenue from exclusivity payments to a later period
Shifting future expenses to the current period as a special charge
Shifting current expenses to a later period

Shifting current revenue from exclusivity payments to a later period
Each of the following is a common revenue recognition device to manage earnings except:

Multiple deliverables
Channel stuffing
Buy and hold
Round tripping

Buy and hold
An unusual aspect of the Green Mountain case is it included:

Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud
Desire to meet or beat analysts’ earnings expectations led to manipulation of receivables balances
Company violated the Sarbanes-Oxley Act
PricewaterhouseCoopers knew about inflated inventory values

Conference calls that provided earnings guidance to shareholders and analysts were used to mask a financial fraud
Which of the following is NOT an earnings management technique?

Failing to write down or write off impaired assets
Releasing questionable reserves into income
Failing to record expenses and related liabilities when future obligations remain
Creating an allowance for uncollectible accounts and adjusting it at year end

Creating an allowance for uncollectible accounts and adjusting it at year end
You work for a company that always pushes the envelope with respect to reporting revenues and expenses. You often disagree with the company because its approach to reporting these amounts cannot be justified from a GAAP perspective. You are upset and are considering whether this is a company that has a culture you want to be part of. Which of the following best characterizes the ethical issues of concern?

Rights Theory
Moral blindness
Ethical Dissonance
Materiality

Ethical Dissonance
Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox case?

Xerox misled investors by polishing its reputation on Wall Street and to boost the company’s stock price
Xerox top management overrode the internal control to manipulate earnings
Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues
Xerox recognized a greater amount of revenue on leases in early years than warranted and didn’t break out revenues that should have been deferred and recognized in future years

Xerox top management overrode the internal control to manipulate earnings
Which of the following earnings management techniques were not used in the Lucent Technologies, Inc.’s case?

Shifting current revenue to a later period
Boosting income with one-time gains
Recording revenue too soon or of questionable quality
Shifting current expenses to a later or earlier period

Shifting current revenue to a later period
Which of the following is NOT a motivation to manage earnings?

Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options
Avoid the consequences of violating debt covenants
To smooth net income over time
To maximize employee bonuses

To maximize employee bonuses
Debbie and Steve are discussing a lecture given by their ethics professor after class one day. The professor said that misstatements of earnings are always unethical. Debbie agrees with this situation but Steve does not. What statement might Steve make to best support his point of view?

It depends on whether the misstatements were made deliberately
It depends on whether a user relied on the financial statements
It depends on whether the statements lead to a modified or unmodified opinion
All are valid statements for Steve to support his point of view

It depends on whether the misstatements were made deliberately
The main difference between a discretionary and nondiscretionary accrual is:

Discretionary accruals are items that management has full control over
Discretionary accruals are based on changes in the fundamental performance of the firm
Discretionary accruals arise from transactions considered normal for the firm
Discretionary accruals always lead to an increase in earnings

Discretionary accruals are items that management has full control over
Kelly and Jordan are writing a term paper together on the concept of “faithful representation” in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description?

Good faith attempt to gather evidence to support the amount
Clear disclosure of an amount as an estimate
The nature and limitations of the estimating process
Error free procedures in selecting and applying an appropriate process for developing the estimate

Good faith attempt to gather evidence to support the amount
Which of the following was NOT one of the schemes used by Beazer Homes to manipulate its earnings?
Improper recording of revenue on sale-leaseback transactions

Fraudulently increased land inventory expense accounts to reduce earnings
Over-reserving of house cost-to-complete expenses to increase reported earnings in earlier periods
Recording revenue from roundtrip transactions prematurely

Recording revenue from roundtrip transactions prematurely
There are several aspects of the Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. Which of the following is true?
SOX permitted the provision of internal audit service for audit clients

Off-balance-sheet financing activities were prohibited for all companies
Related-party transactions require disclosure in the notes
Cookie jar reserves must be disclosed in the notes

Related-party transactions require disclosure in the notes
Which of the following partnerships that Enron created eventually lead to its demise?

JEDI
Cactus
Chewco
Ironman

Chewco
Which of the following authors(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?

Dechow and Skinner
Healy and Wahlen
Schipper
Thomas E. McKee

Dechow and Skinner
In the CVS acquisition of Longs Drug, the SEC concluded that the purchase price accounting (PPA) was not in compliance with GAAP because:

The amount did not reflect current use of Longs personal property at the acquisition date
CVS used an overly-aggressive technique to value Longs
CVS did not account for its use of Long’s assets to generate revenue after the acquisition date
All of the above

CVS did not account for its use of Long’s assets to generate
Which of the following was not true according to the Enron case?

Fastow developed the concept of buying up oil and gas companies to establish SPEs
Fastow worked to structure ventures that met the conditions under GAAP to keep the partnership activities off Enron’s books and on the separate books of the partnership
Fastow created SPEs that borrowed money from banks and transferred it to Enron in a sale of an operating asset no longer need by Enron
The SPE created by Fastow enabled Enron to keep debt off its books while benefiting from transfer and use of the cash borrowed by the SPE

Fastow developed the concept of buying up oil and gas companies to establish SPEs
Which of the following was not an accounting issue in the Sunbeam case?

Cookie jar reserves
Channel stuffing
Bill and hold sales
Swap transactions

Swap transactions
Needles suggests that making judgments about what earnings management is becomes difficult because:

It depends on management’s intentions
There is no clear limit beyond which a choice is clearly unethical
A perfectly routine accounting estimate may be illegal and unethical
All of the above

There is no clear limit beyond which a choice is clearly unethical
Inherent risk refers to:

The possibility that a material misstatement will occur within the reporting company’s accounting information system
The possibility that a material misstatement that has occurred will not be detected on a timely basis by the company’s control system
The possibility that a material misstatement that has occurred will not be caught be the independent auditor’s testing
The possibility that a material misstatement will occur in the financial statements

The possibility that a material misstatement will occur within the reporting company’s accounting information system
The best definition of a financial restatement is:

A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported
A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information for the current period
An adjustment of financial information due to an error correction
All are part of the definition

A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial
Which of the following is NOT required of management under Section 302 of the SOX?

Review their disclosure controls and procedures quarterly
Identify key control exceptions and determine which are internal control deficiencies
Assess each internal control deficiency’s impact on the audit report
Identify and report significant control deficiencies on material weaknesses to the audit committee and independent auditor

Assess each internal control deficiency’s impact on the audit report
The SEC requires stealth restatements to be:

Disclosed only in periodic reports
Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A
Increased to more 50% of restatements
Disclosed in ten business days after determination of need for restatement

Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A
Who linked earnings management to an excessive zeal to project smoother earnings from year to year that casts a pall over the quality of the underlying numbers?

Warren Buffet
Arthur Levitt
Thomas E. McKee
Lynn Turner

Arthur Levitt
The Sino-Forest case centered around the:

Acceleration of revenue due to channel stuffing arrangements
Use of cookie jar reserves to manage earnings
Existence of assets
Contingent liabilities due to forestry fires

Existence of assets
All of the following are examples of “Boosting Income with One-Time Gains” except:

Recording sales that lack economic substance
Boosting profits by selling undervalued assets
Including investment income or gains as part of revenue
Including investment income or gains as a reduction in operating expenses

Recording sales that lack economic substance
The SEC’s complaint in its case against GE included a charge that the company:

Used off-balance sheet entities to manipulate earnings
Falsified inventory values to inflate earnings
Used non-GAAP measures to meet EPS estimates
Used EBITDA to obscure reported earnings

Used non-GAAP measures to meet EPS estimates
What is the SEC’s position on companies that communicate with investors on social media?

It is illegal to do so
It is legal so long as companies inform investors which outlets they intend to use
It is legal so long as the postings are restricted to Facebook
There are no limitations on companies communicating through social media

It is legal so long as companies inform investors which outlets they intend to use
Which of the following has NOT been found to be a measure of a non-GAAP financial metric?

Earnings before depreciation and amortization
Operating income before certain non-recurring expense or revenue items
EBITDA
GAAP earnings

Earnings before depreciation and amortization
Which of the following is NOT one of the techniques used by Gemstar TV Guide International in its accounting fraud?

Created cookie jar reserves of advertising revenue to smooth net income
Engaged in round trip transactions
Used channel stuffing to accelerate the recording of revenue into earlier periods
Inflated advertising revenue from nonmonetary and barter transactions

Used channel stuffing to accelerate the recording of revenue into earlier periods
Motivations to smooth net income over time include each of the following except:

Maximize bonuses and stock option values
Steady increase in earnings each year
Minimize overall taxes
Make it appear managers are doing better than they really are

Minimize overall taxes
The main accounting issues in the Nortel Networks case were:

Premature revenue recognition and hidden cash reserves
Capitalization of operating expenses and hidden cash reserves
Premature revenue recognition and off-balance-sheet entities
Capitalization of operating expenses and off-balance-sheet entities

Premature revenue recognition and hidden cash reserves
Which of the following authors(s) focus(es) on “management’s intent to deceive the stakeholders by using accounting devices to positively influence reported earnings?”

Dechow and Skinner
Healy and Wahlen
Schipper
Thomas E. McKee

Healy and Wahlen
What was the original motivation by FASB on SPEs?

To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books
To keep the large amount of debt off the books
To sell non-producing assets to the SPE
To select which assets to sell to the SPEs affecting the gain

To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books
Accruals that are based on estimated changes in fundamental economic performance of the firm are:

Discretionary accruals
Nondiscretionary accrual
Operating accruals
Cookie jar accruals

Nondiscretionary accrual
Which of the following is NOT a qualitative factor when assessing materiality?

A misstatement that changes a loss into income or vice versa
The existence of statutory or regulator reporting requirements that affect materiality thresholds
The potential effect of the misstatement on trends, especially trends in profitability
The use of simplistic numerical thresholds and rules of thumb

The use of simplistic numerical thresholds and rules of thumb
In the Hertz fraud, the company tried to explain its use of non-GAAP financial measures by:

Comparing them to aggressive but ethical measurements
Comparing the validity of the amounts to pre-tax GAAP income
Having a conference call with financial analysts to explain their position
Correcting problems in internal controls

Comparing the validity of the amounts to pre-tax GAAP income
All of the following are examples of “Recording revenue too soon or of questionable quality” except:

Recording sales that lack economic substance
Recording revenue when future services remain to be provided
Recording revenue before shipment or before the customer’s unconditional acceptance
Recording revenue even though the customer is not obligated to pay

Recording sales that lack economic substance
Which of the following was not a technique used by Enron to manage earnings?

Used reserves to increase earnings when reported amounts were too low
Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years
Used mark-to-market estimates to inflate earnings in violation of GAAP
Selected which operating assets to “sell” to the SPEs, affecting the gain on transfer and earnings effect

Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years
The auditors in the Tier One Bank case were investigated by the SEC because it:

Failed to obtain sufficient competent evidential matter to support audit conclusions
Failed to exercise the appropriate level of care in its audit
Failed to exercise the proper degree of professional skepticism
All of the above

All of the above
If a company is managing its earnings, which of the ethical theories are they most likely following?

Rights
Fairness
Egoism
Virtue

Egoism
Vorhies identities four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act (SOX) including:

An internal control deficiency caused by accounting manipulations
A large variance in an accounting estimate compared with the actual determined amount
A misstatement that changes a loss into income or vice versa
All were identified

A large variance in an accounting estimate compared with the actual determined amount
Sarah’s concern in the Solutions Network case is:

Expenses were delayed at year-end to manage earnings
Revenue was recorded at year-end before the agreement with the customer was finalized
Revenue was accelerated into an earlier period through channel stuffing
Off-balance sheet entities were not disclosed

Revenue was accelerated into an earlier period through channel stuffing

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