Question 1

The concept that earnings management might align with conservative versus aggressive reporting is known as the:

Accepted Answer

A)  Earnings judgment 
B)  Earnings accruals 
C)  Earnings continuum 
D)  Earnings manipulations 
A)  Earnings judgment 
B)  Earnings accruals 
C)  Earnings continuum 
D)  Earnings manipulations C

Question 2

Which of the following partnerships that Enron created eventually lead to its demise?

Accepted Answer

A)  JEDI 
B)  Cactus 
C)  Chewco 
D)  Ironman 
A)  JEDI 
B)  Cactus 
C)  Chewco 
D)  Ironman C

Question 3

Motivations to smooth net income over time include each of the following except:

Accepted Answer

A)  Maximize bonuses and stock option values 
B)  Steady increase in earnings each year 
C)  Minimize overall taxes 
D)  Make it appear managers are doing better than they really are 
A)  Maximize bonuses and stock option values 
B)  Steady increase in earnings each year 
C)  Minimize overall taxes 
D)  Make it appear managers are doing better than they really are C

Question 4

Kelly and Jordan are writing a term paper together on the concept of "faithful representation" in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description?

Accepted Answer

A)  Good faith attempt to gather evidence to support the amount 
B)  Clear disclosure of an amount as an estimate 
C)  The nature and limitations of the estimating process 
D)  Error free procedures in selecting and applying an appropriate process for developing the estimate 
A)  Good faith attempt to gather evidence to support the amount 
B)  Clear disclosure of an amount as an estimate 
C)  The nature and limitations of the estimating process 
D)  Error free procedures in selecting and applying an appropriate process for developing the estimate

Question 5

The Blackswan PetFood case deals with:

Accepted Answer

A)  Using non-GAAP measures of earnings 
B)  Acceptability of recording unpaid severance accruals 
C)  Using EBITDA to obscure earnings 
D)  All of the above. 
A)  Using non-GAAP measures of earnings 
B)  Acceptability of recording unpaid severance accruals 
C)  Using EBITDA to obscure earnings 
D)  All of the above.

Question 6

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

Accepted Answer

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)  Management uses "cookie-jar reserves each year" 
D)  Executives manipulate the earnings in order to match their predetermined target 
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)  Management uses "cookie-jar reserves each year" 
D)  Executives manipulate the earnings in order to match their predetermined target

Question 7

Accruals are potentially troublesome because:

Accepted Answer

A)  They can lead to giving an unmodified audit opinion when it should have been modified 
B)  They provide an opportunity to manage earnings through aggressive or more conservative estimations 
C)  They always lead to fraud in financial statements 
D)  They provide an opportunity to shift debt off the books by setting up an SPE 
A)  They can lead to giving an unmodified audit opinion when it should have been modified 
B)  They provide an opportunity to manage earnings through aggressive or more conservative estimations 
C)  They always lead to fraud in financial statements 
D)  They provide an opportunity to shift debt off the books by setting up an SPE

Question 8

Which of the following has NOT been found to be a measure of a non-GAAP financial metric?

Accepted Answer

A)  Earnings before depreciation and amortization 
B)  Operating income before certain non-recurring expense or revenue items 
C)  EBITDA 
D)  GAAP earnings 
A)  Earnings before depreciation and amortization 
B)  Operating income before certain non-recurring expense or revenue items 
C)  EBITDA 
D)  GAAP earnings

Question 9

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?

Accepted Answer

A)  Egoism 
B)  Act utilitarianism 
C)  Rule utilitarianism 
D)  Virtue 
A)  Egoism 
B)  Act utilitarianism 
C)  Rule utilitarianism 
D)  Virtue

Question 10

Which of the following is NOT an earnings management technique?

Accepted Answer

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 
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

Question 11

March 26, 2015, A San Francisco federal judge allowed Zynga Inc. shareholders to proceed with their class-action lawsuit alleging the online gaming company failed to disclose slumping revenue growth before its market value declined by several billion dollars in 2012. According to the plaintiffs, Zynga concealed declining user activity, masked how changes in a Facebook platform for its games would affect demand, and inflated its 2012 revenue forecast. The shares fell from a peak of $15.91 on March 2, 2012 to below $3 on July 26, 2012, when Zynga posted disappointing earnings and cut its outlook.
Zynga says it recognizes revenue after it determines that a service has been provided to a player and the collection of fees is "reasonably assured." But determining that a service has been provided seems a little more complicated than it would appear, because Zynga needs to differentiate between the types of goods it sells its players.
Zynga, which makes games like FarmVille and Mafia Wars for social networking platforms like Facebook, classifies the game items it sells to players as either "consumable" or "durable" goods. The former category is for goods that players can immediately use, like energy in the game CityVille; the latter is for goods that players buy and keep for the duration of the game, such as tractors in FarmVille.
The company recognizes revenue for the consumable goods as soon as they are consumed. The durable goods present a problem, however, because things like virtual tractors don't depreciate, but potentially live forever, and the company is obligated to ensure that the virtual game pieces continue to exist in the game world. That's forced Zynga to come up with a system of determining how long that may be.
Discuss the challenges of recognizing revenue for the online products/services Zynga provides to its customers. Draw an analogy between how Zynga should go about recognizing revenue and when gift cards are sold to be used at a later date.

Accepted Answer

The issue is whether revenue should be r

Question 12

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

Accepted Answer

The principle of materiality underscores

Question 13

Auditors need to be attuned to the red flags that fraud may exist because:

Accepted Answer

A)  Materiality judgments are based on red flags identifying possible material misstatements 
B)  Audit opinions must be withdrawn when red flags indicate fraud may exist 
C)  Overly-aggressive accounting and outright manipulation of earnings may exist 
D)  All of the above 
A)  Materiality judgments are based on red flags identifying possible material misstatements 
B)  Audit opinions must be withdrawn when red flags indicate fraud may exist 
C)  Overly-aggressive accounting and outright manipulation of earnings may exist 
D)  All of the above

Question 14

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?"

Accepted Answer

A)  Dechow and Skinner 
B)  Healy and Wahlen 
C)  Schipper 
D)  Thomas E. McKee 
A)  Dechow and Skinner 
B)  Healy and Wahlen 
C)  Schipper 
D)  Thomas E. McKee

Question 15

Which of the following was not a technique used by Enron to manage earnings?

Accepted Answer

A)  Used reserves to increase earnings when reported amounts were too low 
B)  Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years 
C)  Used mark-to-market estimates to inflate earnings in violation of GAAP 
D)  Selected which operating assets to "sell" to the SPEs, affecting the gain on transfer and earnings effect 
A)  Used reserves to increase earnings when reported amounts were too low 
B)  Deliberately overstated the allowance for uncollectibles and adjusted it downward in future years 
C)  Used mark-to-market estimates to inflate earnings in violation of GAAP 
D)  Selected which operating assets to "sell" to the SPEs, affecting the gain on transfer and earnings effect

Question 16

All of the following are examples of "Recording revenue too soon or of questionable quality" except:

Accepted Answer

A)  Recording sales that lack economic substance 
B)  Recording revenue when future services remain to be provided 
C)  Recording revenue before shipment or before the customer's unconditional acceptance 
D)  Recording revenue even though the customer is not obligated to pay 
A)  Recording sales that lack economic substance 
B)  Recording revenue when future services remain to be provided 
C)  Recording revenue before shipment or before the customer's unconditional acceptance 
D)  Recording revenue even though the customer is not obligated to pay

Question 17

Explain why a company's reported earnings may not necessarily be an objective measure of economic reality. Give examples of when this might occur.

Accepted Answer

For one thing, "generally accepted accou

Question 18

Analyze and discuss when earnings management may be an ethical practice and when it is an unethical practice.

Accepted Answer

Earnings management that is motivated by

Question 19

Who distinguished between earnings manipulation and earnings management?

Accepted Answer

A)  Hopwood et al. 
B)  Thomas E. McKee 
C)  Arthur Levitt 
D)  Belverd Needles 
A)  Hopwood et al. 
B)  Thomas E. McKee 
C)  Arthur Levitt 
D)  Belverd Needles

Question 20

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:

Accepted Answer

A)  North Face accounted for barter transactions with full normal margin recognized 
B)  Crawford devised the 1997 barter transaction so that it was just beneath the materiality threshold 
C)  Crawford followed the GAAP methods that Deloitte suggested 
D)  Deloitte proposed an adjusting entry for the 1997 barter transaction, but "passed" on it as immaterial 
A)  North Face accounted for barter transactions with full normal margin recognized 
B)  Crawford devised the 1997 barter transaction so that it was just beneath the materiality threshold 
C)  Crawford followed the GAAP methods that Deloitte suggested 
D)  Deloitte proposed an adjusting entry for the 1997 barter transaction, but "passed" on it as immaterial

The concept that earnings management might align with conservative versus aggressive reporting is known as the:

Which of the following partnerships that Enron created eventually lead to its demise?

Motivations to smooth net income over time include each of the following except:

Kelly and Jordan are writing a term paper together on the concept of "faithful representation" in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description?

The Blackswan PetFood case deals with:

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

Accruals are potentially troublesome because:

Which of the following has NOT been found to be a measure of a non-GAAP financial metric?

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?

Which of the following is NOT an earnings management technique?

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

Auditors need to be attuned to the red flags that fraud may exist because:

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?"

Which of the following was not a technique used by Enron to manage earnings?

All of the following are examples of "Recording revenue too soon or of questionable quality" except:

Explain why a company's reported earnings may not necessarily be an objective measure of economic reality. Give examples of when this might occur.

Analyze and discuss when earnings management may be an ethical practice and when it is an unethical practice.

Who distinguished between earnings manipulation and earnings management?

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Fraud in Financial Statements and Auditor Responsibilities

Legal, Regulatory, and Professional Obligations of Auditors

Ethical Leadership and Decision-Making in Accounting

Filters

Exam 7: Earnings Management

The concept that earnings management might align with conservative versus aggressive reporting is known as the:

Which of the following partnerships that Enron created eventually lead to its demise?

Motivations to smooth net income over time include each of the following except:

Kelly and Jordan are writing a term paper together on the concept of "faithful representation" in the financial statements. Kelly is assigned the task of defining it in the context of an amount being an estimate. Which of the following statements should NOT be used by Kelly in her description?

The Blackswan PetFood case deals with:

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

Accruals are potentially troublesome because:

Which of the following has NOT been found to be a measure of a non-GAAP financial metric?

Your professor asks you to consider whether earnings management can be justified by arguing that the net benefits of managing earnings exceeds any harms that may occur. The professor is asking you to apply what reasoning methods to make the analysis?

Which of the following is NOT an earnings management technique?

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

Auditors need to be attuned to the red flags that fraud may exist because:

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?"

Which of the following was not a technique used by Enron to manage earnings?

All of the following are examples of "Recording revenue too soon or of questionable quality" except:

Explain why a company's reported earnings may not necessarily be an objective measure of economic reality. Give examples of when this might occur.

Analyze and discuss when earnings management may be an ethical practice and when it is an unethical practice.

Who distinguished between earnings manipulation and earnings management?

The North Face case deals with materiality and how auditors employ that metric in an audit. The following are all true except:

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Fraud in Financial Statements and Auditor Responsibilities

Legal, Regulatory, and Professional Obligations of Auditors

Ethical Leadership and Decision-Making in Accounting

Filters