Question 1

Explain when earnings management may be an ethical practice.

Accepted Answer

The answer of Explain when earnings management may be an...

Question 2

Which of the following is NOT McKee's explanation of "earnings management"?
A)A smooth net income by choice does not reflect what investors and creditors need or want to know since it masks true performance.
B)It creates a more stable and predictable earnings stream by smoothing net income.
C)It is a reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.
D)Earnings management reflects a conscious choice by management to smooth earnings over time and it does not include devices designed to "cook the books."

Accepted Answer

McKee's explanation of earnings management does not include the idea that smoothing net income masks true performance, which is what choice A suggests.

Question 3

The legal issue in the CellCyte Genetics Corporation case was:
A)Making false and misleading statements in several SEC filings
B)Making false and misleading statements in a court trial
C)Privity
D)Scienter

Accepted Answer

The legal issue in the CellCyte Genetics Corporation case was that the company was accused of making false and misleading statements in several SEC filings. This means that choice A is the correct answer.

Question 4

Explain each of the seven financial shenanigans described by Schilit.Be sure to give an example of each one.

Accepted Answer

The answer of Explain each of the seven financial shenanigans...

Question 5

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?
A)Enron
B)Gemstar TV Guide
C)Xerox
D)WorldCom

Accepted Answer

The answer of The accounting issue in the Cubbies Cable...

Question 6

The accounting rule for deferring profit on a sale-leaseback agreement such as the one dealt with in the Florida Transportation case can best be described as:
A)The seller-lessee can defer profit on a sale-leaseback transaction if the seller gives up substantially all of the use of the property through the leaseback.
B)The seller-lessee can defer profit on a sale-leaseback transaction if the seller retains substantially all of the use of the property through the leaseback.
C)Profit can be deferred if the upfront costs exceed future revenues.
D)Profit can be deferred if initial revenue exceeds future costs.

Accepted Answer

The accounting rule allows deferring profit on a sale-leaseback transaction if the seller-lessee retains substantially all of the use of the property through the leaseback, as it indicates a continuing involvement with the asset.

Question 7

In the Xerox case, the leases Xerox had signed met the criteria under SFAS No.13 to be accounted for as:
A)Capital leases
B)Operating leases
C)Bargain purchase option leases
D)Sales-type leases

Accepted Answer

The answer of In the Xerox case, the leases Xerox...

Question 8

The former CEO of Vivendi Universal, Jean-Marie Messier, used as his defense in the case that:
A)His actions were protected by attorney-client privilege
B)While some of his actions may have turned out to be wrong, there never was an intent to defraud
C)While some of his actions may have turned out to be wrong, he did the best that he could to save the company from certain bankruptcy
D)He adhere to the business judgment rule and met his fiduciary obligations
Essay Questions

Accepted Answer

Jean-Marie Messier's defense was that while some of his actions may have turned out to be wrong, there was never any intent to defraud. This seems to be the most likely defense given the circumstances of the case, as Messier was not accused of intentionally committing fraud but rather of making poor business decisions.

Question 9

The main accounting issues in the Nortel Networks case were:
A)Premature revenue recognition and hidden cash reserves
B)Capitalization of operating expenses and hidden cash reserves
C)Premature revenue recognition and off-balance-sheet entities
D)Capitalization of operating expenses and off-balance-sheet entities

Accepted Answer

The Nortel Networks case primarily involved issues of premature revenue recognition and hidden cash reserves. These practices were part of the accounting fraud that led to the company's financial statements not accurately reflecting its financial status, misleading investors and regulators.

Question 10

Who identifies seven common financial shenanigans?
A)Schipper
B)Schilit
C)Levitt
D)McKee

Accepted Answer

Schilit identifies seven common financial shenanigans in his book "Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports."

Question 11

"Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate, reliable and transparent financial statements." This statement is from:
A)A virtue perspective
B)A utilitarian perspective
C)A rights perspective
D)A materiality perspective

Accepted Answer

The statement is from a rights perspective as it is emphasizing the rights of investors and creditors to receive accurate financial statements, which is an ethical obligation of companies. Virtue perspective focuses on moral character and integrity, utilitarian perspective considers the overall benefit to society, and materiality perspective determines the significance of financial information.

Question 12

Which of the following is NOT a motivation to manage earnings in the Lucent Technology case?
A)Realize revenue
B)Meet predictions of outside securities analysts
C)Meet internal sales target
D)Obtain sales bonus

Accepted Answer

The answer of Which of the following is NOT a...

Question 13

Which of the following was not an accounting issue in the Sunbeam case?
A)Cookie jar reserves
B)Channel stuffing
C)Bill and hold sales
D)Swap transactions

Accepted Answer

Swap transactions were not mentioned as an accounting issue in the Sunbeam case. The other three options (cookie jar reserves, channel stuffing, and bill and hold sales) were all accounting issues that were central to the case.

Question 14

Discuss all the factors an auditor should consider in making a materiality judgment.

Accepted Answer

The answer of Discuss all the factors an auditor should...

Question 15

The legal issue in the Altris Software v PricewaterhouseCoopers case that failed to be proved by the plaintiffs was:
A)Privity
B)Ordinary negligence
C)Scienter
D)Due care

Accepted Answer

The plaintiffs failed to prove "scienter," which refers to the intent or knowledge of wrongdoing, a necessary element for establishing fraud.

Question 16

In the Sweat Hog Construction case, the company tried to manipulate earnings through the use of which accounting technique?
A)Cookie jar reserves
B)Lease capitalization
C)Percentage of completion method
D)The Big Bath Theory

Accepted Answer

The Sweat Hog Construction case involved manipulating earnings through the percentage of completion method, which is an accounting technique used in the construction industry to recognize revenue over the life of a long-term project.

Question 17

Many of the cases discussed in the chapter address the issue of swap transactions.What is a swap transaction? What criteria should be used to determine how and when to record revenue on swap transactions? Describe the facts of any one case in the book with respect to proper recording for revenue in swap transactions.

Accepted Answer

The answer of Many of the cases discussed in the...

Question 18

The swap transactions used in the Solutions Network case to manage earnings can best be described as:
A)Going to a swap meet and capitalizing purchases instead of expensing them immediately against swap revenue
B)Recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period
C)Using a cookie jar reserve to delay the recording of revenue into a later period
D)Recording as operating revenue on onetime gains from the sale of underperforming assets

Accepted Answer

The swap transactions used in the Solutions Network case involved recording revenue on software system transactions in an earlier period than when the company was actually obligated to buy the same in a later period. This allowed the company to manage their earnings by recognizing revenue earlier, even though the costs associated with the transactions would be incurred at a later date.

Question 19

The amount and size of earnings restatements were relatively high in the early and mid-2000s.Explain the reasons that these instances were frequent and amounts high during that period of time.

Accepted Answer

The answer of The amount and size of earnings restatements...

Question 20

The element of the fraud triangle most directly dealt with in the Excello Telecommunications case is:
A)Pressure/Incentives
B)Opportunity
C)Rationalization
D)Materiality

Accepted Answer

Pressure/Incentives was the most directly dealt with element of the fraud triangle in the Excello Telecommunications case because the company's executives were under pressure to meet financial targets and had incentives to do so, which led them to engage in fraudulent activities.

Quiz 7: Earnings Management and the Quality of Financial Reporting

Explain when earnings management may be an ethical practice.

Which of the following is NOT McKee's explanation of "earnings management"?

The legal issue in the CellCyte Genetics Corporation case was:

Explain each of the seven financial shenanigans described by Schilit.Be sure to give an example of each one.

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?

The accounting rule for deferring profit on a sale-leaseback agreement such as the one dealt with in the Florida Transportation case can best be described as:

In the Xerox case, the leases Xerox had signed met the criteria under SFAS No.13 to be accounted for as:

The former CEO of Vivendi Universal, Jean-Marie Messier, used as his defense in the case that:

The main accounting issues in the Nortel Networks case were:

Who identifies seven common financial shenanigans?

"Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate, reliable and transparent financial statements." This statement is from:

Which of the following is NOT a motivation to manage earnings in the Lucent Technology case?

Which of the following was not an accounting issue in the Sunbeam case?

Discuss all the factors an auditor should consider in making a materiality judgment.

The legal issue in the Altris Software v PricewaterhouseCoopers case that failed to be proved by the plaintiffs was:

In the Sweat Hog Construction case, the company tried to manipulate earnings through the use of which accounting technique?

The swap transactions used in the Solutions Network case to manage earnings can best be described as:

The amount and size of earnings restatements were relatively high in the early and mid-2000s.Explain the reasons that these instances were frequent and amounts high during that period of time.

The element of the fraud triangle most directly dealt with in the Excello Telecommunications case is: