Deck 3: Judgment and Applied Financial Accounting Research

Question 1

________ occurs when managers manipulate financial information and misrepresent the firm's financial position and performance.

A) Earnings management
B) GAAP
C) Judgment
D) Decision-making

Answer 1

A

Question 2

The footnote outlining the portfolio of accounting choices is one of the first footnotes in the financial statements.

Answer 2

True

Question 3

Explain why allowing management and their accountants to choose between various accounting methods when applying accounting standards is a good thing as opposed to requiring strict compliance with the application of specific methods.

Answer 3

The flexibility afforded in the selection and application of accounting standards permits managers and accountants to choose those methods and assumptions that best reflect the economic reality of their transactions. Therefore, the financial information provided and user decisions based on that information may be enhanced by not requiring all companies to use certain accounting methods that may not be appropriate based on the unique circumstances of the situation and the entity.

Question 4

When accountants use judgment to interpret standards, it often detracts from the usefulness of the financial statements.

Question 5

Earnings management occurs when managers manipulate financial information and misrepresent the firm's financial position.

Question 6

Accountants must often use judgment when deciding when to recognize revenue.

Question 7

When compared to U.S. GAAP, IFRS requires that companies disclose additional information about assumptions and estimates made at the end of the reporting period.

Question 8

Your classmate, Marla Smith, tells you that she likes accounting because it provides a clear-cut set of methods and rules to follow. As a result, it should be an easy job to get the hang of. Explain to her why accountants frequently need to use their judgment. Give specific examples.

Question 9

An example of a judgment in accounting for Accounts Receivable is ________.

A) the percentage of credit sales that may be uncollectible
B) the amount a customer paid during the previous month
C) the decision whether to extend credit to a new customer
D) the percentage that may be deducted to calculate a sales discount

Question 10

Very few amounts reported on the financial statements are based upon assumptions.

Question 11

The process by which an accountant reaches a decision in situations with multiple alternatives is referred to as ________.

A) earnings management
B) GAAP
C) judgment
D) financial reporting

Question 12

An example of a judgment in accounting for product warranties is ________.

A) the items sold that are subject to warranty coverage
B) whether a product warranty should be for one year or two years
C) the cost of a specific replacement part
D) the amount of warranty expense to be accrued as a percent of sales

Question 13

Accountants use judgment when ________.

A) researching and interpreting standards
B) recognizing and contemplating standards
C) estimating and recording economic events
D) All of the above

Question 14

Accounting standards allow financial statement preparers to use judgement in a manner that best represents ________.

A) earnings management
B) estimated reality
C) a firm's financial position
D) economic reality

Question 15

In practice, accountants frequently use ________ to prepare and audit financial statements.

A) clear-cut methods
B) judgment
C) strict rules
D) imagination

Question 16

IFRS and U.S. GAAP have the same disclosure requirements regarding the estimates made at the end of the accounting period.

Question 17

Accounting judgment occurs when managers manipulate financial information and misrepresent the firm's financial position.

Question 18

Management is afforded a certain amount of latitude and must exercise judgment when selecting accounting methods. Discuss why this could be problematic for users of financial statements. Provide examples.

Question 19

Which of the following is true with regards to judgement and flexibility in selecting accounting methods and applying accounting standards?

A) Flexibility makes it difficult if not impossible to prepare financial statements that allow users to compare the results of operations of similar companies in the same industry.
B) Accounting standards allow very little flexibility in the choice of methods as accounting rules tend to be strict and clear minimizing the opportunity for management judgement.
C) Flexibility in the selection of methods and application of accounting standards allows management to best reflect the economic realities of a company.
D) Financial statement information is not enhanced by allowing flexibility in the choice of accounting methods used.

Question 20

Financial statement users rely on the accounting policies footnote information to compare a company to other firms in the same industry.

Question 21

Cognitive biases can impede an accountant's use of good judgment.

Question 22

Is it possible to know where management applied judgment in the financial statements?

A) No, this information is only available to company accountants.
B) Yes, upon written request to the company.
C) No, although auditors are provided with a supplement explaining accounting policies.
D) Yes, the accounting policies footnote in the disclosures will provide some of this information.

Question 23

Which part of an asset is based on an estimate?

A) cost of getting the asset ready for use
B) cost of the asset
C) pattern of use
D) Both A and B

Question 24

In addition to disclosing judgments involving estimates and assumptions, ________ requires that companies disclose judgments made when determining appropriate accounting treatments for amounts reported on the financial statements.

A) U.S. GAAP
B) IFRS
C) Both A & B
D) Neither A nor B

Question 25

A statement that a company reported inventory at the lower-of-cost-or-market and valued inventory using the first-in, first-out method would be found ________.

A) within the balance sheet in the 10K
B) within the income statement in the annual report
C) within the auditor's report as part of an annual report
D) within the description of the portfolio of accounting policies in a footnote

Question 26

Give two examples of when accountants use estimates to derive the reported values of assets and briefly explain how those estimates are derived.

Question 27

List five issues that are typically addressed in a company's accounting policy footnote.

Question 28

Which of the following is most likely based on assumptions?

A) Revenue
B) Depreciation expense
C) Rent expense
D) Dividends declared

Question 29

Which of the following balances is most likely based on an estimate?

A) Net accounts receivable
B) Net accounts payable
C) Notes payable
D) Stockholders' equity

Question 30

Briefly explain how IFRS disclosures about accounting-related issues differ from U.S. GAAP disclosures.

Question 31

The ________ is generally one of the first notes to the financial statements.

A) accounting policies footnote
B) contingencies footnote
C) employee benefits footnote
D) intangibles explanation footnote

Question 32

The accounting policies footnote is ________.

A) optional
B) required by U.S. GAAP
C) required by auditors
D) an internal management document

Question 33

Financial statement users can look to the ________ to determine whether a company uses income-increasing or income-reducing accounting policies.

A) revenue policies footnote
B) contingencies footnote
C) accounting policies footnote
D) intangibles explanation footnote

Question 34

After deciding to record a business event, accountants use assumptions and estimates for what purpose?

Question 35

Which of the following is most likely based on an assumption?

A) how to record petty cash transactions
B) decision about which method of depreciation to use
C) the balance in the cash account
D) the value of the accounts payable account

Question 36

Based on an analysis of annual reports from 175 companies, the asset or liability with the most companies using estimates is for ________.

A) environmental liabilities
B) taxation
C) impairment of property, plant, and equipment
D) impairment of goodwill and other intangible assets

Question 37

Depreciation expense is based on estimates of ________.

A) the value of the asset
B) the use and purpose of the asset
C) the life and pattern of the asset's use
D) the warranty that comes with the asset

Question 38

Explain how an accountant would use assumptions and estimates when accounting for property, plant, and equipment.

Question 39

Which of the following is most likely based on an assumption?

A) accounting for the holding period of an investment
B) accounting for sales tax
C) accounting for land
D) both A & C

Question 40

The accounting policies footnote would be a good place to look if you want to know ________.

A) the inventory costing method used by a company
B) the depreciation method used by a company
C) the lives a company uses to depreciate plant assets
D) how the bad debt expense is estimated
E) All of the above

Question 41

________ are systematic deviations from rationality which can impact judgments on a daily basis.

A) Cognitive biases
B) Relational biases
C) Emotional biases
D) Subjective biases

Question 42

Failing to adequately weigh information which is inconsistent with an individual's initial beliefs is known as ________.

A) the anchoring bias
B) the overconfidence bias
C) the groupthink bias
D) the confirmatory bias

Question 43

Being more confident than your abilities or experience level warrant is an example of ________.

A) the overconfidence bias
B) the availability bias
C) the confirmatory bias
D) the anchoring bias

Question 44

Weighting one piece of information more heavily than others is an example of ________.

A) the overconfidence bias
B) the anchoring bias
C) the availability bias
D) the groupthink bias

Question 45

Failing to consider all relevant data, and just using the information most readily available or easily recalled is known as ________.

A) the groupthink bias
B) the anchoring bias
C) the availability bias
D) the confirmatory bias

Question 46

Which of the following situations might influence management to intentionally bias estimates for the financial statements and impede the use of good judgment?

A) Earnings are on track to surpass analysts' forecasts.
B) Management's bonuses are tied to net income.
C) Employees work for commission.
D) All of the above

Question 47

Bill Smith is on assignment for his first audit, when he runs into an accounting practice he's never dealt with before. Rather than asking a more experienced colleague for advice, Bill decides he knows enough to handle it. After all, he passed the CPA exam, didn't he? Bill is exhibiting ________.

A) arrogance bias
B) overconfidence bias
C) anchoring bias
D) poor judgment

Question 48

Documenting the rationale for decisions made can help mitigate cognitive biases.

Question 49

The tendency to agree to an answer or choice based on an attempt to avoid conflict represents the overconfidence bias.

Question 50

Riley Watson, lead salesperson for Bowman Industries, begins customer negotiations by proposing an unusually high price. Riley is hoping her customer will exhibit which cognitive bias in the negotiations?

A) arrogance bias
B) overconfidence bias
C) anchoring bias
D) confirmatory bias

Question 51

Auditors should exercise ________ to minimize management bias.

A) common sense
B) ratio analysis
C) professional skepticism
D) interrogation techniques

Question 52

Emily Bradly is part of a team at work that has been charged with the responsibility of researching differences between IFRS and U.S. GAAP. The team reaches a consensus on a given topic that Emily does not agree with. Not wanting to enter into a conflict, Emily agrees with the group. What type of bias is represented in the in the above scenario?

A) availability bias
B) overconfidence bias
C) confirmatory bias
D) groupthink bias

Question 53

Failure to consider all reasonable alternatives when reaching a group consensus, in an attempt to avoid conflict is an example of ________.

A) the availability bias
B) the overconfidence bias
C) the groupthink bias
D) the confirmatory bias

Question 54

Caesar Company needs to purchase a new delivery truck. Rather than taking the time to research which truck would best fit the company's needs, the manager calls his friend to ask which truck he would recommend. The manager is exhibiting ________.

A) bad judgment
B) overconfidence bias
C) availability bias
D) anchoring bias

Question 55

Joe Woods is a first-year accountant. When asked to provide data regarding where to purchase new computers for the office, without doing any research, he suggests buying the computers at a store where his friend works. His friend tells him the computers will do what the company needs. In addition, his friend will get a good commission if Joe diverts the purchase in his direction. What type of bias is represented in the above scenario?

A) overconfidence bias
B) confirmatory bias
C) groupthink bias
D) availability bias

Question 56

Cognitive bias is an attitude that includes a questioning mind and critical assessment of evidence.

Question 57

Ann Byer is a first-year accountant who always did well academically. She is asked by her employer to estimate the amount of the accounts receivable balance that might not be paid by the customers. Although she remembers discussing the concept, she cannot quite remember how to go about estimating the amount. She does what she thinks is correct without double-checking. After all, she always received "A"s in class so she must be correct. What type of bias is represented in the above scenario?

A) availability bias
B) overconfidence bias
C) confirmatory bias
D) groupthink bias

Question 58

The confirmatory bias is the tendency to use the data that is most readily available or most easily recalled to make a decision.

Question 59

To mitigate cognitive biases, accountants must be as ________ as possible.

A) intelligent
B) clever
C) objective
D) subjective

Question 60

An attitude that includes a questioning mind and a critical assessment of audit evidence is known as ________.

A) anchoring bias
B) groupthink
C) unprofessional behavior
D) professional skepticism

Question 61

The Basis for Conclusions are found in the Statements of Financial Accounting Standards.

Question 62

Terry Fowler is a firm believer in traditional accounting software. Bob Fossey just gave a presentation touting the benefits of cloud accounting software, but Terry wants nothing to do with it. He didn't really listen to the presentation. Terry is exhibiting ________.

A) stubborn behavior
B) overconfidence bias
C) anchoring bias
D) confirmatory bias

Question 63

Numerical references to the Accounting Standards Codification are structured as Section-Paragraph-Topic-Subtopic.

Question 64

Complete the following table. Identify the bias indicated in the definition.
$$\begin{array} { | l | l | } \hline \text { Definition } & \text { Cognitive Bias } \\\hline \text { In an attempt to avoid conflict, members reach a consensus without } & \\\text { considering all alternatives. } & \\\hline \text { The tendency to be more confident than your abilities and experience } \\\text { level would warrant. }\\\hline \text {One piece of information is weighted more heavily than other pieces}\\\text { when the decision maker focuses on just that data.}\\\hline \text {The tendency to use the most readily available or easily recalled data }\\ \text {to make a decision.}\\\hline \text {The decision maker under-weighs information that is inconsistent }\\ \text {with their initial beliefs.}\\\hline\end{array}$$

Question 65

List the techniques accountants can use to mitigate cognitive biases.

Question 66

The highest level of authoritative guidance for U.S. GAAP is the Accounting Standards Codification.

Question 67

Unlike U.S. GAAP, the Basis for Conclusions discussion is not included in the IFRS but is published separately.

Question 68

The Codification subtopics are generally distinguished by accounting area or scope.

Question 69

Complete the following table. Give a definition and example of each of the cognitive biases listed (be original).
$$\begin{array} { | l | l | } \hline \text { Cognitive Bias } & \text { Definition and Example } \\\hline \text { anchoring bias } & \\\hline \text { overconfidence bias } & \\\hline \text { Confirmatory bias } & \\\hline \text { availability bias } & \\\hline \text { groupthink bias } & \\\hline\end{array}$$

Question 70

________ is the systematic investigation into an issue.

A) Interpretation
B) Judgment
C) Research
D) Analysis

Question 71

The Basis for Conclusions found in accounting pronouncements is found in the Codification for U.S. GAAP.

Question 72

In the Accounting Standards Codification, the subtopic numbers under each topic are uniform throughout the Codification.

Question 73

This technique to mitigate cognitive biases allows you to be more objective in your decision-making process.

A) Delay final judgement until you have gathered all the facts and information and have considered the alternatives.
B) Speak with as many people as possible to ensure your decision represents a well-rounded opinion.
C) Make decisions swiftly, based on gut instinct.
D) None of the above

Question 74

In the Accounting Standards Codification, the section numbers under each subtopic are uniform throughout the Codification.

Question 75

Complete the following table. Identify which cognitive bias is represented in each example.
$$\begin{array} { |l | l| } \hline \text { Example } & \text { Cognitive Bias } \\\hline \text { The new manager at Danio Fisheries makes several investments on the } & \\\text { company's behalf. Even though he has no experience related to } & \\\text { investments, he is sure that he has made a smart move for the company. } & \\\hline \text { The audit team Bob, Chris, and Belle, are deciding which sampling } & \\\text { methods to use on their current audit. Belle is bossy, and Bob and Chris } & \\\text { defer to her choice without fully exploring the options. } & \\\hline \text { The manager at Betta Co. needs to determine the useful life for the new } & \\\text { equipment used to filter water for the fish tanks. The owner has asked } & \\\text { that he research the topic, but he decides to just use the useful life based } & \\\text { on the claims made by the salesperson. } & \\\hline\end{array}$$

Question 76

Robert and Francis Associates, Inc. had a board meeting to discuss future investment opportunities. Edward was a loud proponent of investing in Excel-o-rator Corporation, so much so that nobody else got a word in edgewise. Many board members didn't really think investing in Excel-o-rator was a good idea, but agreed to invest in Excel-o-rator in order to keep Edward happy, and get the meeting over with. The board is exhibiting ________.

A) availability bias
B) anchoring bias
C) groupthink bias
D) confirmatory bias

Question 77

With regard to U.S. GAAP, basis for Conclusions are considered to be authoritative.

Question 78

Numerical references to the Accounting Standards Codification are structured as Topic-Subtopic-Section-Paragraph.

Question 79

Auditors should exercise professional skepticism, which means that ________.

A) auditors should have questioning minds and make a critical assessment of audit evidence
B) auditors should assume that management is dishonest until proven otherwise
C) auditors should assume that management has incentives to bias information in the financial statements
D) auditors should believe that there is biased information in the financial statements and work to extract that type of information

Question 80

Complete the following table. Identify which cognitive bias is represented in each example.
$$\begin{array} { | l | l | } \hline\text { Example } & \text { Cognitive Bias } \\\hline \text { Wolf Co. is looking to purchase a new computer. The manager noticed } & \\\text { pne model that advertised free maintenance for one year. He appears to } & \\\text { be more focused on the free maintenance than the specs of the model. } & \\\hline \text { Sydney, Inc. needs new copiers. The manager was asked to research the } & \\\text { latest models, but instead purchased the same model as they did last year. } & \\\hline \text { S \& C Company needs to upgrade the office computers. The salesperson } & \\\text { demonstrated how Brand A (which the staff prefer) will run all the } & \\\text { required software and provide increased functionality. However, the } & \\\text { manager in charge of decision making for the purchase prefers Brand B - } \\\text { and only 'listened' to the presentation to be polite. }\\\hline\end{array}$$