Question 1

Which of the following is true?

Accepted Answer

A) Cash flow data is superior to earnings under the accrual basis in predicting long-term performance of an entity. 
B) Earnings under the accrual basis is superior to cash flow data in predicting short-term performance of an entity. 
C) Earnings under the accrual basis is superior to cash flow data in predicting long-term performance of an entity. 
D) Cash flow data is superior to earnings under the accrual basis in predicting both short- and long-term performance of an entity. 
A) Cash flow data is superior to earnings under the accrual basis in predicting long-term performance of an entity. 
B) Earnings under the accrual basis is superior to cash flow data in predicting short-term performance of an entity. 
C) Earnings under the accrual basis is superior to cash flow data in predicting long-term performance of an entity. 
D) Cash flow data is superior to earnings under the accrual basis in predicting both short- and long-term performance of an entity. C

Question 2

Earnings management through strategic matching is best exemplified by

Accepted Answer

A) changing the useful life of a depreciable asset. 
B) timing transactions such that large one-time gains and losses occur in the same quarter. 
C) changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. 
D) capitalizing as assets expenditures that have no future economic benefit. 
A) changing the useful life of a depreciable asset. 
B) timing transactions such that large one-time gains and losses occur in the same quarter. 
C) changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. 
D) capitalizing as assets expenditures that have no future economic benefit. B

Question 3

Recording as an asset expenditures that have no future economic benefit is an example of

Accepted Answer

A) strategic matching. 
B) change in methods or estimates with full disclosure. 
C) a fictitious transaction. 
D) non-GAAP accounting. 
A) strategic matching. 
B) change in methods or estimates with full disclosure. 
C) a fictitious transaction. 
D) non-GAAP accounting. D

Question 4

Managers of many companies frequently provide a pro forma earnings amount in conjunction with their annual or quarterly earnings calculated in accordance with GAAP.Managers claim that pro forma earnings numbers more fairly reflect a company's performance.
Required:
1.Explain the meaning of the term "pro forma earnings".
2.Discuss the advantages and disadvantages of reporting pro forma earnings numbers.

Accepted Answer

1.Pro forma earnings are the regular GAA

Question 5

You are auditing a company whose management has intentionally made adjustments to various financial statement items that are not in accordance with generally accepted accounting principles.This behavior has occurred over a number of accounting periods.None of the individual adjustments by itself is material and the aggregate effect on the financial statements taken as a whole is immaterial.Top management of the client are aware of these misstatements and consider them part of their strategic management of earnings.
Explain how you as the independent auditor should respond to this situation.

Accepted Answer

The fact that the client's records conta

Question 6

Which of the following is NOT a function of a financial analyst?

Accepted Answer

A) Providing buy recommendations on a company's stock 
B) Providing sell recommendations on a company's stock 
C) Generating forecasts of company earnings 
D) Serving as an investment banker for a company for which the analyst is providing research coverage 
A) Providing buy recommendations on a company's stock 
B) Providing sell recommendations on a company's stock 
C) Generating forecasts of company earnings 
D) Serving as an investment banker for a company for which the analyst is providing research coverage

Question 7

Which of the following organizations has recommended that entities provide a reconciliation to GAAP net income whenever reporting proforma numbers?

Accepted Answer

A) Auditing Standards Board 
B) Financial Executives International 
C) Financial Accounting Standards Board 
D) Accounting Standards Executive Committee 
A) Auditing Standards Board 
B) Financial Executives International 
C) Financial Accounting Standards Board 
D) Accounting Standards Executive Committee

Question 8

Which of the following accounts would NOT be affected if a company failed to report returns of merchandise sold?

Accepted Answer

A) Sales returns 
B) Sales allowances 
C) Cost of goods sold 
D) Inventory 
A) Sales returns 
B) Sales allowances 
C) Cost of goods sold 
D) Inventory

Question 9

The cost of capital is defined as the

Accepted Answer

A) simple average of the interest rates of all debt outstanding. 
B) simple average of the cost of debt and equity. 
C) weighted average of the interest rates of all debt outstanding. 
D) weighted average of the cost of debt and equity. 
A) simple average of the interest rates of all debt outstanding. 
B) simple average of the cost of debt and equity. 
C) weighted average of the interest rates of all debt outstanding. 
D) weighted average of the cost of debt and equity.

Question 10

Which of the following is NOT correct?

Accepted Answer

A) The after-tax cost of debt for a firm with losses is equal to the interest rate on the debt. 
B) Firms always pay dividends on their common stock issues because of the ease with which common shareholders can assume control of the firm. 
C) Flotation costs for preferred stock are higher than for debt. 
D) Most debt is placed privately and thus there is no flotation cost. 
A) The after-tax cost of debt for a firm with losses is equal to the interest rate on the debt. 
B) Firms always pay dividends on their common stock issues because of the ease with which common shareholders can assume control of the firm. 
C) Flotation costs for preferred stock are higher than for debt. 
D) Most debt is placed privately and thus there is no flotation cost.

Question 11

Recent accounting scandals suggest the need for care on the part of an independent auditor in accepting new clients.The independent auditor needs to know both the business of and the personnel employed by a prospective client.All other control procedures are fruitless if a CPA chooses to serve an undesirable client.The damage suffered as a result of associating with an undesirable client can be irreparable.
Discuss some key issues an independent auditor should consider in the client acceptance decision.

Accepted Answer

The following issues are relevant to the

Question 12

Which of the following typically is NOT associated with a change in estimate for accounting purposes?

Accepted Answer

A) Return on pension fund 
B) Useful life of a depreciable asset 
C) Bad debt expense 
D) Change in calculating depreciation from straight-line to sum-of-the-years'-digit 
A) Return on pension fund 
B) Useful life of a depreciable asset 
C) Bad debt expense 
D) Change in calculating depreciation from straight-line to sum-of-the-years'-digit

Question 13

Excessive earnings management typically begins as a result of

Accepted Answer

A) a regulatory investigation. 
B) pressure to meet the expectations of stakeholders. 
C) a downturn in business. 
D) a violation of generally accepted accounting principles. 
A) a regulatory investigation. 
B) pressure to meet the expectations of stakeholders. 
C) a downturn in business. 
D) a violation of generally accepted accounting principles.

Question 14

One of the four factors that motivate managers to manage reported earnings is meeting external expectations.Which external stakeholders have an interest in a company's financial performance,and why?

Accepted Answer

Employees are interested in the long-ter

Question 15

The cost of capital is the cost a company bears to obtain external financing.A company's cost of capital is critical because it determines which long-term projects are profitable for the entity to undertake.The higher the cost to obtain funds,the fewer the long-term projects are profitable for a company to pursue.
Required:
Explain the role of financial statements generally and the roles of the FASB,the AICPA,the SEC,and the IASB in lowering the cost of capital.

Accepted Answer

The more risk associated with a company,

Question 16

The GAAP Oval best represents the

Accepted Answer

A) fact that only one true earnings number exists. 
B) flexibility managers have within GAAP to report one earnings number from among many possibilities. 
C) philosophy that earnings management within limits is ethical. 
D) fact that GAAP is not subject to interpretation. 
A) fact that only one true earnings number exists. 
B) flexibility managers have within GAAP to report one earnings number from among many possibilities. 
C) philosophy that earnings management within limits is ethical. 
D) fact that GAAP is not subject to interpretation.

Question 17

Trashbin is a waste disposal company.Explain the effect the following actions of the management of Trashbin Company might have in managing earnings:
1.Management assigned unsupported and inflated salvage values and extended the useful lives of company garbage trucks.
2.Management assigned arbitrary salvage values to other assets that previously had not salvage value.
3.Management did not record expenses required to write off the costs of unsuccessful and abandoned landfill development projects.
4.Management recorded inflated environmental liabilities in connection with acquisitions of other companies.
5.Management improperly capitalized a variety of expenses.
6.Management did not establish sufficient liabilities for income taxes and other expenses.

Accepted Answer

1.Unsupported and inflated salvage value

Question 18

Recent accounting scandals have raised concerns over the quality and transparency of financial accounting and reporting in the United States.Critics of what is termed the "rules-based" system currently used in the U.S.cite the increasingly detailed and complex nature of rule-driven accounting pronouncements.These critics suggest that the United States should adopt a principles-based system similar to that of the International Accounting Standards Board.
Explain what is meant by a principles-based system and the advantages and disadvantages of such a system.

Accepted Answer

Under a principles-based approach,the pr

Question 19

One of the five techniques of earnings management identified by the Securities and Exchange Commission relates to materiality.Independent auditors have traditionally used arbitrary quantitative benchmarks to define how large an amount must be to be considered material.
During the course of auditing the financial statements of a company,an auditor finds some misstatements in the client's financial statements.When combined,the misstatements,result in a 4% overstatement of net income and a $.02 (4%)overstatement of earnings per share.The auditor's materiality threshold is 5%,that is,an item in the financial statements must be misstated by more than 5% to be considered a material deviation from generally accepted accounting principles.On the basis of the established materiality threshold,the auditor concludes that the deviation from GAAP is immaterial and the accounting is permissible.
Define the term "materiality" and explain whether the auditor is justified in the conclusion that the accounting proposed by the client is permissible.

Accepted Answer

Materiality is defined by the FASB in it

Question 20

Recognizing more bad debt expense in a year than is necessary in order to have flexibility in recognizing bad debt expense in a future year is an example of

Accepted Answer

A) a big bath charge. 
B) creative acquisition accounting. 
C) a cookie jar reserve. 
D) premature recognition of revenue. 
A) a big bath charge. 
B) creative acquisition accounting. 
C) a cookie jar reserve. 
D) premature recognition of revenue.

Which of the following is true?

Earnings management through strategic matching is best exemplified by

Recording as an asset expenditures that have no future economic benefit is an example of

Which of the following is NOT a function of a financial analyst?

Which of the following organizations has recommended that entities provide a reconciliation to GAAP net income whenever reporting proforma numbers?

Which of the following accounts would NOT be affected if a company failed to report returns of merchandise sold?

The cost of capital is defined as the

Which of the following is NOT correct?

Which of the following typically is NOT associated with a change in estimate for accounting purposes?

Excessive earnings management typically begins as a result of

One of the four factors that motivate managers to manage reported earnings is meeting external expectations.Which external stakeholders have an interest in a company's financial performance,and why?

The GAAP Oval best represents the

Recognizing more bad debt expense in a year than is necessary in order to have flexibility in recognizing bad debt expense in a future year is an example of

Financial Reporting

A Review of the Accounting Cycle

The Balance Sheet and Notes to the Financial Statements

The Income Statement

Statement of Cash Flows and Articulation

The Revenuereceivablescash Cycle

Revenue Recognition

Inventory and Cost of Goods Sold

Investments in Noncurrent Operating Assets-Acquisition

Investments in Noncurrent Operating Assets-Utilization and Retirement

Debt Financing

Equity Financing

Investments in Debt and Equity Securities

Leases

Income Taxes

Employee Compensation-Payroll,pensions, Other Compissues

Earnings Per Share

Derivatives, contingencies, business Segments, and Interim Reports

Accounting Changes and Error Corrections

Statement of Cash Flows Revisited

Accounting in a Global Market

Analysis of Financial Statements

Filters

Exam 6: Earnings Management

Which of the following is true?

Earnings management through strategic matching is best exemplified by

Recording as an asset expenditures that have no future economic benefit is an example of

Which of the following is NOT a function of a financial analyst?

Which of the following organizations has recommended that entities provide a reconciliation to GAAP net income whenever reporting proforma numbers?

Which of the following accounts would NOT be affected if a company failed to report returns of merchandise sold?

The cost of capital is defined as the

Which of the following is NOT correct?

Which of the following typically is NOT associated with a change in estimate for accounting purposes?

Excessive earnings management typically begins as a result of

One of the four factors that motivate managers to manage reported earnings is meeting external expectations.Which external stakeholders have an interest in a company's financial performance,and why?

The GAAP Oval best represents the

Recognizing more bad debt expense in a year than is necessary in order to have flexibility in recognizing bad debt expense in a future year is an example of

Financial Reporting

A Review of the Accounting Cycle

The Balance Sheet and Notes to the Financial Statements

The Income Statement

Statement of Cash Flows and Articulation

The Revenuereceivablescash Cycle

Revenue Recognition

Inventory and Cost of Goods Sold

Investments in Noncurrent Operating Assets-Acquisition

Investments in Noncurrent Operating Assets-Utilization and Retirement

Debt Financing

Equity Financing

Investments in Debt and Equity Securities

Leases

Income Taxes

Employee Compensation-Payroll,pensions, Other Compissues

Earnings Per Share

Derivatives, contingencies, business Segments, and Interim Reports

Accounting Changes and Error Corrections

Statement of Cash Flows Revisited

Accounting in a Global Market

Analysis of Financial Statements

Filters