Question 1

Which of the following is NOT considered "earnings management"?
A) "Earnings management" is done to project smoother earnings from year to year.
B) Management emphasizes achieving long-term results to meet financial goals.
C) A Management uses "cookie-jar reserves each year."
D) The executives manipulate the earnings in order to match their predetermined target.

Accepted Answer

Emphasizing achieving long-term results to meet financial goals is not considered "earnings management" as it is a legitimate strategic objective. The other options are all examples of earnings management.

Question 2

Which of the following author(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings."?
A) Dechow and Skinner
B) Healy and Wahlen
C) Schipper
D) Thomas
E) McKee

Accepted Answer

Healy and Wahlen focus on management's intent to deceive stakeholders by using accounting devices to positively influence reported earnings, which is a key aspect of earnings management.

Question 3

Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox's case?
A) Xerox misled investors by polishing its reputation on Wall Street and to boost the company's stock price.
B) Xerox top management overrode the internal control to manipulate earnings.
C) Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues.
D) Xerox recognized a greater amount of revenue on leases in early years than warranted and didn't break out revenues that should have been deferred and recognized in future years.

Accepted Answer

The SEC did point to the override of internal controls by Xerox's top management as a motivation for fraud, so this was not something they did not point to.

Question 4

In surveys of managers, which technique to manage earnings was considered most acceptable?
A) Changing inventory valuation in order to influence earnings
B) Accounting manipulation
C) Manipulating operating decisions
D) Establishing cookie jar reserves

Accepted Answer

Manipulating operating decisions was considered the most acceptable technique to manage earnings in surveys of managers. This may include delaying certain expenses, accelerating revenue recognition, or implementing cost-cutting measures. This technique is seen as less deceptive than accounting manipulation or establishing cookie jar reserves, and is less likely to raise ethical concerns or legal issues. Changing inventory valuation can also be a legitimate accounting practice, but it is not generally considered a technique to manage earnings.

Question 5

Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options."?
A) Dechow and Skinner
B) Healy and Wahlen
C) Schipper
D) Thomas
E) McKee

Accepted Answer

The answer of Which of the following author(s) emphasize(s) a...

Question 6

The SEC Advisory Committee on Improvements in Financial Reporting identified each of the following as a view of equity and credit analysts about investor's views on materiality and financial statement restatements except for:
A) Bright line rules are useful in making materiality judgments
B) Bright line rules are not really useful in making materiality judgments
C) The disclosure provided on restatements is not adequate
D) One of the major costs of restatements is the amount of time between the restatement announcement and the final resolution of the restatement

Accepted Answer

The SEC Advisory Committee noted that analysts generally do not find bright line rules useful in making materiality judgments, thus option A is the exception.

Question 7

Which of the following earnings management techniques were not used in the Lucent Technologies, Inc.'s case?
A) Shifting Current Revenue to a later period
B) Boosting income with one-time gains
C) Recording revenue too soon or of questionable quality
D) Shifting current expenses to a later or earlier period

Accepted Answer

Lucent Technologies was involved in recording revenue too soon or of questionable quality, boosting income with one-time gains, and shifting current expenses to a later or earlier period, but not in shifting current revenue to a later period.

Question 8

Who said "the ethics issue might possibly be mitigated by clearly disclosing aggressive accounting assumptions in the financial statement disclosures?"
A) Hopwood et al
B) Thomas
C) Arthur Levitt
D) Belverd Needles
E) McKee

Accepted Answer

Hopwood et al. suggested that the ethics issue might possibly be mitigated by clearly disclosing aggressive accounting assumptions in the financial statement disclosures.

Question 9

Which of the following is NOT a motivation to manage earnings?
A) Companies try to meet or beat Wall Street earnings projections in order to grow market capitalization and increase the value of stock options
B) Companies try to accelerate as much revenue as possible into early periods regardless of the effects on later periods
C) To smooth net income over time
D) To maximize compensation including bonuses

Accepted Answer

Accelerating revenue into early periods regardless of the effects on later periods would actually be a motivation for managing earnings, so this cannot be the answer. The other three choices do represent motivations for managing earnings - meeting or beating earnings projections to boost stock value, smoothing net income over time, and maximizing compensation including bonuses.

Question 10

Which technique was used by both WorldCom and Waste Management to manage earnings?
A) Manipulating asset net valuation amounts to minimize operating expenses for a period
B) Accelerating the recording of revenue into an earlier period
C) Delaying needed repairs to a later period
D) All of these were used

Accepted Answer

Both WorldCom and Waste Management manipulated asset net valuation amounts to minimize operating expenses, which is a common technique used to manage earnings.

Question 11

Which of the following is NOT an earnings management technique?
A) Failing to write down or write off impaired assets
B) Releasing questionable reserves into income
C) Failing to record expenses and related liabilities when future obligations remain
D) Creating an allowance for uncollectible accounts and adjusting it at year end

Accepted Answer

Creating an allowance for uncollectible accounts and adjusting it at year end is a legitimate accounting practice and not considered an earnings management technique. The other options listed involve manipulating accounting entries to artificially inflate earnings.

Question 12

The SEC requires stealth restatements to be
A) Disclosed only in periodic reports.
B) Disclosed only in an 8-K report or amended 10-K/A or 10-Q/A.
C) Increased to more 50 % of restatements.
D) Disclosed in ten business days after determination of need for restatement.

Accepted Answer

According to SEC rules, stealth restatements (which are corrections made outside of the regular financial reporting process) must be disclosed in an 8-K report or an amended 10-K/A or 10-Q/A within four business days of the determination that a restatement is necessary. This ensures prompt and transparent disclosure to investors.

Question 13

Which of the following is NOT a qualitative factor when assessing materiality?
A) A misstatement that changes a loss into income or vice versa
B) The existence of statutory or regulator reporting requirements that affect materiality thresholds
C) The potential effect of the misstatement on trends, especially trends in profitability
D) The use of simplistic numerical thresholds and rules of thumb

Accepted Answer

Qualitative factors when assessing materiality relate to the nature of the misstatement and its context rather than to the size of the misstatement. Choices A, B, and C all describe qualitative considerations that affect how materiality is judged based on the nature and context of the misstatement. Choice D, however, refers to quantitative approaches, which rely on numerical thresholds and rules of thumb, and does not represent a qualitative factor.

Question 14

SAS No. 107 identifies the following aspects of disclosure amounts deemed to be material except for:
A) Disclosing an item in one year but not in the next year
B) Qualitative aspects of the disclosure
C) Quantitative significance of the disclosure
D) Professional judgment

Accepted Answer

SAS No. 107 identifies qualitative and quantitative aspects of disclosure as material, as well as the professional judgment of the auditor. However, disclosing an item in one year but not in the next year is not identified as a specific aspect of disclosure materiality in SAS No. 107.

Question 15

Which of the following author(s) define(s) earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results."?
A) Dechow and Skinner
B) Healy and Wahlen
C) Schipper
D) Thomas
E) McKee

Accepted Answer

Thomas E. McKee defines earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results."

Question 16

The best definition of a financial restatement is:
A) A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information that was previously reported
B) A company, either voluntarily or under prompting by its auditors or regulators, revises its public financial information for the current period
C) An adjustment of financial information due to an error correction
D) All are part of the definition

Accepted Answer

A financial restatement is the revision of previously issued financial statements to correct an error or to reflect changes in accounting principles. This is usually done voluntarily by a company, but it can also be required by auditors or regulators. The restatement results in a new set of financial statements that replace the original statements.

Question 17

Vorhies identities four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act including:
A) An internal control deficiency caused by accounting manipulations
B) A large variance in an accounting estimate compared with the actual determined amount
C) A misstatement that changes a loss into income or vice versa
D) All were identified

Accepted Answer

The answer of Vorhies identities four perspectives to help CPAs...

Question 18

If a company is managing its earnings, which of the ethical theories are they most likely following?
A) Rights
B) Fairness
C) Egoism
D) Virtue

Accepted Answer

Companies that manage their earnings are most likely following the ethical theory of egoism, which is the belief that individuals should act in their self-interest. In this case, the company is manipulating its financial statements to make the company appear more profitable to investors and stakeholders, which ultimately benefits the company's bottom line and executive compensation. This behavior is not driven by a concern for the rights or fairness of others, nor by a desire to embody virtuous behavior.

Question 19

Which of the following author(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?
A) Dechow and Skinner
B) Healy and Wahlen
C) Schipper
D) Thomas
E) McKee

Accepted Answer

Dechow and Skinner have extensively researched and written on earnings management and distinguish between acceptable accounting estimates and deliberate fraudulent practices.

Question 20

Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud except for:
A) Created cookie jar reserves of advertising revenue to smooth net income
B) Engaged in round trip transactions whereby Gemstar paid money to a third party to advertise its services and capitalized that cost while the third party used Gemstar's funds to buy advertising from Gemstar, and the company recorded 100% of that amount as revenue while capitalizing the cost of its advertising payments
C) Used channel stuffing to accelerate the recording of revenue into earlier periods
D) Inflated advertising revenue from nonmonetary and barter transactions

Accepted Answer

Channel stuffing was not one of the techniques used by Gemstar TV Guide International in its accounting fraud.

Quiz 7: Earnings Management and the Quality of Financial Reporting

Which of the following is NOT considered "earnings management"?

Which of the following author(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings."?

Which of the following was not pointed to by the SEC as a motivation for fraud in the Xerox's case?

In surveys of managers, which technique to manage earnings was considered most acceptable?

Which of the following author(s) emphasize(s) a "purposeful act by management in pursuit of its own self-interests as might be the case when earnings are manipulated to get the stock price up in advance of the exercise of stock options."?

The SEC Advisory Committee on Improvements in Financial Reporting identified each of the following as a view of equity and credit analysts about investor's views on materiality and financial statement restatements except for:

Which of the following earnings management techniques were not used in the Lucent Technologies, Inc.'s case?

Who said "the ethics issue might possibly be mitigated by clearly disclosing aggressive accounting assumptions in the financial statement disclosures?"

Which of the following is NOT a motivation to manage earnings?

Which technique was used by both WorldCom and Waste Management to manage earnings?

Which of the following is NOT an earnings management technique?

The SEC requires stealth restatements to be

Which of the following is NOT a qualitative factor when assessing materiality?

SAS No. 107 identifies the following aspects of disclosure amounts deemed to be material except for:

Which of the following author(s) define(s) earnings management as "reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results."?

The best definition of a financial restatement is:

Vorhies identities four perspectives to help CPAs identify key internal control exceptions under the Sarbanes Oxley Act including:

If a company is managing its earnings, which of the ethical theories are they most likely following?

Which of the following author(s) link earnings management to choices made in determining earnings that may comprise aggressive, but acceptable, accounting estimates and judgments, as compared to fraudulent practices that are clearly intended to deceive others?

Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud except for: