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Mintz Chpt 7 HW

“Cookie jar reserves” can best be described as:

Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach

Overstating or understating allowances and reversing amounts in the future to smooth out net income over time

Accelerating the recording of revenues into an earlier year than is warranted

Delaying the recording of expenses to a later year to boost income in the current year

Overstating or understating allowances and reversing amounts in the future to smooth out net income over time
The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:

North Face accounted for barter transactions with full normal margin recognized

Crawford devised the 1997 barter transaction so that it was just beneath the materiality threshold

Crawford followed the GAAP methods that Deloitte suggested

Deloitte proposed an adjusting entry for the 1997 barter transaction, but “passed” on it as immaterial

Crawford followed the GAAP methods that Deloitte suggested
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
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
The concept that earnings management might align with conservative versus aggressive reporting is known as the:

Earnings judgment

Earnings accruals

Earnings continuum

Earnings manipulations

Earnings continuum
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
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 information that was previously reported
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
Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?

Egoism

Act utilitarianism

Rule utilitarianism

Virtue

Act utilitarianism
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
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
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 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
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
A common method used to smooth net income over time is:

Accelerate revenue into earlier periods

Delay expenses into later periods

Using accrual of operating expenses and future adjustments

Using nonrecurring items to increase earnings in one year and reduce it later on

Using accrual of operating expenses and future adjustments
Which of the following partnerships that Enron created eventually lead to its demise?

JEDI

Cactus

Chewco

Ironman

Chewco
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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 was not an accounting issue in the Sunbeam case?

Cookie jar reserves

Channel stuffing

Bill and hold sales

Swap transactions

Swap transactions
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 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
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
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
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 revenue after the acquisition date
Which of the following author(s) define(s) earnings management as “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results?”

Dechow and Skinner

Healy and Wahlen

Schipper

Thomas E. McKee

Thomas E. McKee
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
Who distinguished between earnings manipulation and earnings management?

Hopwood et al.

Thomas E. McKee

Arthur Levitt

Belverd Needles

Hopwood et al.
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
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
In the Matrixx Initiatives v. Siracusano case, the Supreme Court adopted the position about materiality that:

It should always be determined only through qualitative evaluations

It should always be determined through quantitative evaluations

It should always be determined by considering whether the amount affects past financial statements

It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment

It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment
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
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
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
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
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
Each of the following is a finding of a survey of CFOs about their perceptions of earnings quality except:

CFOs believe that earnings are high quality when they are sustainable and backed by actual cash flows

CFOs believe that reporting discretion has declined over time, and that current standards somewhat restrain reporting high quality earnings

CFOs estimate that roughly 20 percent of firms manage earnings and the typical misrepresentation for such firms is about 10 percent of reported EPS

CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split

CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split
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

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