Question 1

Under FASB rules, if a lease term is over 75% of the expected useful life of the leased asset, the lessee must classify this as an "operating" lease.

Accepted Answer

Under FASB rules, if a lease term is over 75% of the expected useful life of the leased asset, the lessee must classify this as a "finance" lease, not an "operating" lease.

Question 2

Under FASB rules, if the present value of the minimum lease payments is over 90% of the fair value of the leased property, the lessee must classify this as an "operating" lease.

Accepted Answer

Under FASB rules, if the present value of the minimum lease payments is over 90% of the fair value of the leased property, the lessee must classify this as a "capital" lease (or "finance lease" under newer terminology), not an "operating" lease.

Question 3

In economics, the term for the situation where buyers and sellers have different information is "asymmetric information."

Accepted Answer

Asymmetric information refers to a situation where one party in an economic transaction has more information than the other party. This can lead to market failures and inefficiencies.

Question 4

People have criticized accounting measurement and control systems for
A) Encouraging businesses to focus on short-term results
B) Discouraging innovation
C) Stimulating manipulation of data
D) All of the above

Accepted Answer

Accounting measurement and control systems have been criticized for encouraging businesses to focus on short-term results, discouraging innovation, and stimulating manipulation of data. By prioritizing short-term results, companies may neglect long-term goals and sustainability. Moreover, a focus on meeting predetermined targets can discourage innovation and creativity. Finally, if rewards and incentives are tied to meeting certain performance metrics, there may be a temptation to manipulate data to meet those targets.

Question 5

A car dealership decides to rank its salespeople based on the number of cars that they sell during a month, in the hopes of making more money by making more sales. One salesman reacts by offering very generous deals to customers, in order to make sales, even though the dealership will not make any profits at these prices. This behavior can best be characterized as:
A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Accepted Answer

The salesman is focusing on improving his sales numbers to look good according to the measurement system (number of cars sold), even though the deals he offers are not profitable for the dealership, which was the ultimate goal of the measurement system.

Question 6

A car dealership decides to rank its salespeople based on the number of cars that they sell during a month, in the hopes of making more money by making more sales. One salesman reacts by working harder, and being more welcoming to customers, and increased the number of sales he made. This behavior can best be characterized as
A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Accepted Answer

The salesman is reacting to the measurement system by working harder and being more welcoming to customers in order to increase the number of sales he makes. This is a response to being measured and trying to improve his rankings.

Question 7

Research on company business practices finds that it is only a minority of companies that rigidly compare company performance to pre-established budgets, without making any allowances for changes that occurred during the year.

Accepted Answer

The statement suggests that only a minority of companies strictly adhere to pre-established budgets without considering any changes that may have occurred during the year.

Question 8

Judging employees by a "balanced scorecard" is one approach that management can use to try to prevent the dysfunctional behavior that arises when employees focus too much on a single performance measure.

Accepted Answer

A balanced scorecard approach involves evaluating employees based on multiple performance measures, not just one, which can help prevent the problem of tunnel vision on a single metric.

Question 9

A company's decision to postpone some maintenance costs from December until January in order to meet profit targets would be an example of "accruals management."

Accepted Answer

The answer of A company's decision to postpone some maintenance...

Question 10

"Off -balance sheet financing" can help a company look better on solvency and liquidity measures.

Accepted Answer

Off-balance sheet financing allows a company to keep certain assets and liabilities off its balance sheet, which can make the company appear more solvent and liquid than it actually is. Therefore, it can help a company to look better on solvency and liquidity measures. However, it can also be a risky practice if not disclosed properly.

Question 11

The practice of leasing, rather than buying, necessary equipment can be a source of "off-balance sheet financing."

Accepted Answer

Leasing allows a company to use equipment without owning it, and the lease payments are not recorded as a liability on the balance sheet. This can provide a source of off-balance sheet financing.

Question 12

Research indicates that earnings management techniques are always used to make companies more profitable, and never to make them look less profitable.

Accepted Answer

Research has found that companies may use earnings management techniques to make themselves appear less profitable in certain circumstances, such as when they want to reduce tax liabilities or signal to investors that they have room for improvement. However, the primary use of earnings management techniques is to boost reported profits and meet or exceed analysts' earnings expectations.

Question 13

An example of a pressure to commit financial reporting fraud might be a CEO's desire to avoid violating loan covenants.

Accepted Answer

This statement is true. A CEO who is concerned about violating loan covenants may feel pressure to manipulate financial statements in order to appear more financially stable and avoid triggering the violation. This pressure to commit financial reporting fraud is an example of an external pressure.

Question 14

If a company fraudulently overstates its sales, no other account will be affected by this overstatement.

Accepted Answer

If a company fraudulently overstates its sales, it will have an impact on multiple accounts such as accounts receivable, inventory, and revenue. The overstatement of sales will also affect financial ratios and the overall financial health of the company.

Question 15

Companies who wish to misstate earnings can never just misstate a single account, but must misstate at least two accounts.

Accepted Answer

Companies who wish to misstate earnings cannot just misstate a single account as it would be easier to detect, hence they have to misstate at least two accounts to make it difficult to detect the fraud. This technique is commonly known as "cooking the books".

Question 16

One sign that might indicate a company is fraudulently overstating its sales on credit is a lower accounts receivable turnover.

Accepted Answer

A lower accounts receivable turnover ratio suggests that customer payments are not being collected as quickly as they should be, which could be a red flag for overstated sales on credit.

Question 17

One sign that might indicate a company is fraudulently understating its cost of goods sold is a higher inventory turnover.

Accepted Answer

A higher inventory turnover typically indicates that a company is selling its products more quickly, which could indicate efficiency or strong demand. It is not necessarily a sign of fraudulently understating cost of goods sold.

Question 18

A car dealership decides to give a monthly prize to the salesperson who makes the most sales during a month, in the hopes of making more money by making more sales. One salesman reacts by getting another salesman to give him credit for cars sold by the other man, in order to come in first in the contest. This behavior can best be characterized as
A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Accepted Answer

The behavior of getting another salesman to give credit for cars sold by the other man is essentially lying to manipulate the measurement system in order to win the monthly prize.

Quiz 6: Doing Business Day to Day