Deck 9: Earnings Management

Question 1

Which of the following components of managerial compensation are thought to most encourage earnings management?

A)Shares or share options.
B)Their base salary.
C)Their cash bonuses.
D)Various perquisites.

Answer 1

C

Question 2

Which of the following methods is NOT commonly used to manipulate earnings:

A)Incorrect classification of current liabilities as non-current.
B)Accounting policy choice.
C)Accelerating expenses.
D)Aggressive accounting for accruals.

Answer 2

A

Question 3

Which of the following is NOT an accrual accounting technique that could be used to manage earnings?

A)Adjusting closing inventory valuations.
B)Under-provisioning for bad debts.
C)Delaying asset impairments.
D)None of the above,they could all be used to manage earnings.

Answer 3

D

Question 4

Why does income smoothing generally lead to a higher share value?

A)It is perceived as increasing the chance of insolvency.
B)It reduces the perceived risk of the company.
C)It leads to higher perceived income.
D)None of the above.

Question 5

Which of the following earning management reasons would NOT be viewed as a positive for shareholders?

A)To meet analysts' expectations.
B)To accurately convey private information.
C)To increase short term profits.
D)To avoid violating debt covenants.

Question 6

Which of the following is NOT likely to be interested in earnings information?

A)Customers.
B)Shareholders.
C)Lenders.
D)None of the above,i.e.they are all interested in earnings information.

Question 7

Research into IPOs and earnings management have indicated:

A)The market does discover upwards earning management.
B)Investors expect upwards earning management.
C)Firms do not engage in upwards earnings management.
D)None of the above.

Question 8

Earnings are important because:

A)Earnings assist in predicting future cash flows.
B)Increased earnings signal an increase in equity value.
C)Earnings are used to assess management performance.
D)All of the above.

Question 9

With regards to inventory which of the following would be classed as conservative accounting?

A)Consistently and quickly applying the lower of cost and net realisable value rule.
B)Being slow to write down slow-moving inventory.
C)Still recording obsolete inventory as an asset.
D)Overstating inventory by including non-existent inventory in accounts.

Question 10

Which of the following is NOT an example of real activities management that could be used to manage earnings?

A)Accelerating sales.
B)Reducing discretionary spending.
C)Adjusting loan loss provisions.
D)Delaying research and development.

Question 11

Researchers examining share price reactions to evidence of fraudulent reporting have concluded that:

A)Markets are generally surprised by the information.
B)Markets are highly efficient.
C)Markets interpret the discovery as good news.
D)Share prices are generally unaffected.

Question 12

An entity can change its accounting policy:

A)Never once the decision is made.
B)Provided it can argue that the new method provides better information for users.
C)Only with the approval of its auditors.
D)As often as it likes.

Question 13

Big bath accounting is generally used to drop earnings when:

A)When the economy is poor.
B)There is a change in management team.
C)When operations are restructured.
D)All of the above.

Question 14

Which of the following is NOT thought to reflect earnings quality?

A)Operating/non-operating mix.
B)Trend in profit results.
C)Total income tax expense for the period.
D)Earnings base.

Question 15

Which of the following board characteristics are likely to reduce earnings management?

A)The existence of an audit committee.
B)A mix of monitoring and expertise skills.
C)More independent directors.
D)All of the above.

Question 16

Earnings management:

A)Has a range of meanings.
B)Is illegal.
C)Is considered to always be harmful to shareholders.
D)None of the above.

Question 17

Which of the following techniques is NOT generally useful to smooth income?

A)Using fair value accounting.
B)Varying the provision for warranties.
C)Hedging of financial instruments.
D)None of the above,they could all be used to smooth income.

Question 18

Research into income smoothing has concluded that:

A)The findings are mixed with regards to earnings quality.
B)Smoothed income indicates high earnings quality.
C)Smoothed income indicates low earnings quality.
D)There is no relationship between income smoothing and earnings quality.

Question 19

Which of the following is most likely to be true?

A)An incoming CEO would prefer to manage earnings downward in their first year.
B)An existing CEO facing removal is likely to manage earnings downwards.
C)An incoming CEO following a forced departure will find it easier to manage earnings upwards.
D)None of the above.

Question 20

Which of the following would be considered fraudulent accounting?

A)Liberal credit terms and estimation of provision for doubtful debts.
B)Recognising revenue when services are prepaid but only partially performed.
C)Capitalising advertising costs.
D)Restating useful life and residual value of non-current assets upwards.