Mintz Chpt 7 HW – Flashcards

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question
"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
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Overstating or understating allowances and reversing amounts in the future to smooth out net income over time
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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
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Crawford followed the GAAP methods that Deloitte suggested
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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
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Used channel stuffing to accelerate the recording of revenue into earlier periods
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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
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Shifting current revenue to a later period
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The concept that earnings management might align with conservative versus aggressive reporting is known as the: Earnings judgment Earnings accruals Earnings continuum Earnings manipulations
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Earnings continuum
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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
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Healy and Wahlen
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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
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A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported
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Accruals that are based on estimated changes in fundamental economic performance of the firm are: Discretionary accruals Nondiscretionary accrual Operating accruals Cookie jar accruals
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Nondiscretionary accrual
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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
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Act utilitarianism
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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
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Fastow developed the concept of buying up oil and gas companies to establish SPEs
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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
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Used non-GAAP measures to meet EPS estimates
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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
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She tried to alert Ken Lay about the accounting scandal at Enron
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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
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Creating an allowance for uncollectible accounts and adjusting it at year end
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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
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Manipulating asset net valuation amounts to minimize operating expenses for a period
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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
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Using accrual of operating expenses and future adjustments
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Which of the following partnerships that Enron created eventually lead to its demise? JEDI Cactus Chewco Ironman
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Chewco
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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
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It depends on whether the misstatements were made deliberately
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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
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Manipulating operating decisions
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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
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Comparing the validity of the amounts to pre-tax GAAP income
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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
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Discretionary accruals are items that management has full control over
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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
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They provide an opportunity to manage earnings through aggressive or more conservative estimations
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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
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Recording sales that lack economic substance
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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
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Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A
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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
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Existence of assets
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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
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The use of simplistic numerical thresholds and rules of thumb
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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
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Ethical Dissonance
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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
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Minimize overall taxes
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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
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Good faith attempt to gather evidence to support the amount
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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
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Premature revenue recognition and hidden cash reserves
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Each of the following is a common revenue recognition device to manage earnings except: Multiple deliverables Channel stuffing Buy and hold Round tripping
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Buy and hold
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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
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Xerox top management overrode the internal control to manipulate earnings
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Which of the following was not an accounting issue in the Sunbeam case? Cookie jar reserves Channel stuffing Bill and hold sales Swap transactions
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Swap transactions
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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
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Earnings before depreciation and amortization
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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
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Recording revenue from roundtrip transactions prematurely
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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
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Acceptability of recording unpaid severance accruals
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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
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All of the above
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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
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CVS did not account for its use of Long's assets to generate revenue after the acquisition date
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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
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Thomas E. McKee
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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
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Arthur Levitt
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Who distinguished between earnings manipulation and earnings management? Hopwood et al. Thomas E. McKee Arthur Levitt Belverd Needles
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Hopwood et al.
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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
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A large variance in an accounting estimate compared with the actual determined amount
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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
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Assess each internal control deficiency's impact on the audit report
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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
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It should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment
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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
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To establish a mechanism to encourage companies to invest in needed assets while keeping related debt of its books
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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
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Dechow and Skinner
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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
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It brings into question the quality of earnings
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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
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Related-party transactions require disclosure in the notes
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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
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The possibility that a material misstatement will occur within the reporting company's accounting information system
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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
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CFOs estimate that income increasing and income decreasing devices to manage earnings show a 50:50 split
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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
answer
To maximize employee bonuses
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