Question 1

The wide use of accounting-based incentives is controversial because earnings growth does not automatically translate into increased shareholder value.

Accepted Answer

Accounting-based incentives, such as bonuses tied to earnings growth, may encourage managers to manipulate financial statements or focus on short-term gains rather than long-term strategic planning. This can result in increased earnings but may not necessarily lead to sustainable growth or increased shareholder value.

Question 2

Under RAP,loan charge-offs decrease bank capital and reduce bank net income.

Accepted Answer

The answer of Under RAP,loan charge-offs decrease bank capital and...

Question 3

In the banking industry,the ratio of invested capital/gross assets,as defined by RAP,is the capital asset ratio.

Accepted Answer

The ratio of invested capital to gross assets is not specifically defined as the capital asset ratio by RAP (Risk-Adjusted Performance). The capital asset ratio typically refers to a bank's capital divided by its assets, used to assess a bank's financial strength, not the ratio of invested capital to gross assets.

Question 4

IRS regulations govern the computation of net income for the SEC.

Accepted Answer

IRS regulations are not directly applicable to the computation of net income for the SEC. The SEC has its own rules and regulations for computing net income.

Question 5

RAP sometimes shows up in a company's GAAP financial statements.

Accepted Answer

RAP (Regulatory Adjustment Process) adjustments can sometimes be required for companies that operate in regulated industries, such as utilities or telecommunications. These adjustments are made to reflect the impact of regulatory decisions on the company's financial statements and may be included in the company's GAAP financial statements.

Question 6

Information about a company's executive compensation practices can be found in the company's annual report.

Accepted Answer

The answer of Information about a company's executive compensation practices...

Question 7

Accounting-based incentive plans can encourage managers to adopt a long-term business focus.

Accepted Answer

Accounting-based incentive plans often encourage managers to focus on short-term financial performance to meet specific targets, potentially at the expense of long-term strategic goals.

Question 8

In industries that are subject to unwanted attention from politicians,managers sometimes use accounting methods to make the company seem less profitable than it really is.

Accepted Answer

This is a common practice known as "income smoothing" or "earnings management" where companies manipulate their financial statements to present a smoother and more consistent picture of their earnings over time, in order to avoid fluctuations that may attract government intervention or investor skepticism. While not always illegal, these practices can be unethical and deceptive, and may lead to legal and reputational risks if discovered.

Question 9

Firms are required to disclose executive retirement and other postemployment compensation,generally for the ten most highly paid executives serving as corporate officers.

Accepted Answer

Firms are generally required to disclose executive compensation for their top five highest-paid executives, not ten.

Question 10

Stock options provide a set of "golden handcuffs" for retaining executives during the restriction period.

Accepted Answer

The answer of Stock options provide a set of "golden...

Question 11

Critics of stock options as a form of compensation argue that stock options encourage managers to cater to Wall Street's short-term earnings expectations.

Accepted Answer

Stock options typically have a vesting period and an expiration date, incentivizing managers to focus on short-term performance to boost the stock price and their own compensation. This can lead to decisions and actions that prioritize short-term gains over long-term growth and stability.

Question 12

Firms now must provide a compensation discussion and analysis in the proxy statement which describes the specific items of corporate performance that are taken into account when making compensation decisions.

Accepted Answer

This statement is true. The Securities and Exchange Commission (SEC) requires firms to provide a compensation discussion and analysis in their proxy statement, which includes information on the specific items of corporate performance considered when making compensation decisions. This is intended to increase transparency and accountability in executive compensation practices.

Question 13

Since 2002,stock options have become a smaller component of long-term incentive pay due to a fundamental change in the tax treatment that options receive.

Accepted Answer

The decline in stock options as a component of long-term incentive pay is more attributed to changes in accounting rules and corporate governance practices rather than a change in tax treatment.

Question 14

A bank's estimated bad debt expense associated with its loan receivables is the loan loss provision.

Accepted Answer

The loan loss provision is the amount of money a bank sets aside to cover potential losses from bad debts associated with its loan receivables. It is an estimate of the amount of bad debt expense the bank expects to incur in the future.

Question 15

Research shows that managers sometimes use accounting flexibility to evade contract constraints in order to gain bonus benefits.

Accepted Answer

Research studies have found evidence of managers using accounting flexibility to manipulate financial reporting in order to avoid contract constraints and achieve bonus benefits. This behavior is known as earnings management or financial reporting fraud.

Question 16

Decreasing discretionary spending for such items as research and development is a popular technique for meeting earnings targets.

Accepted Answer

Decreasing discretionary spending, such as research and development, is a common tactic for companies to meet their earnings targets.

Question 17

A factor that can reduce managers' short-term focus is the fact that incentive compensation plans are administered by a compensation committee that can intervene when circumstances warrant modification of the scheduled incentive award.

Accepted Answer

The option states correctly that intervention by the compensation committee can reduce managers' short-term focus, as it allows for modifications to the scheduled incentive award.

Question 18

The methods and procedures that must be followed for financial statements that are utilized by regulatory agencies are known as RAP.

Accepted Answer

RAP stands for regulatory accounting principles, which are the methods and procedures required by regulatory agencies for financial reporting.

Question 19

Some companies have adopted formal "compensation recovery" policies whereby executives forfeit various incentive payments if it is later discovered that they engaged in conduct detrimental to the company.

Accepted Answer

Some companies have indeed adopted such formal "compensation recovery" policies.

Question 20

Banks and other financial institutions are required by federal and state regulatory agencies to meet minimum capital requirements.

Accepted Answer

This statement is true. Regulatory agencies such as the Federal Reserve and the FDIC require banks and financial institutions to maintain a minimum level of capital as a buffer against unexpected losses and to ensure stability in the financial system. The specific capital requirements vary depending on the type and size of the institution.

Quiz 7: The Role of Financial Information in Contracting