Exam 11: Quality of Earnings, corporate Governance, and Ifrs

Name two characteristics of good corporate governance.

What are some of the new responsibilities of management required by the Sarbanes-Oxley Act of 2002?

X Company began selling appliances this year.The company president has decided not to record any warranty expense or estimated warranty liability because the company's products are so good that he does not expect to have to make any warranty repairs.This accounting choice would be considered ________.

Discuss the difference between U.S.GAAP and IFRS in terms of rule-based versus principle-based approaches to accounting.

$\bold{\text{Team Instructions:}}$ Divide the class into teams of three or four people.Each team member should work the following problem separately outside of class.Then give the students time in class to compare answers with their teammates and put together a final correct copy of the problem.Each team should turn in only one copy of the problem for grading,along with a copy of the annual report that it used.All team members will receive the same grade. Provide students with copies of real merchandising companies' annual reports,or give students the Web addresses of real merchandising companies and ask them to print out and submit the annual reports.All team members should work with the same company's annual report. Answer the following questions using the annual report assigned to your team: 1.What is the name of your company? 2.Which of the notes to the financial statements describes the company's revenue recognition policy? 3.Does anything seem unusual about the company's revenue recognition policy? If yes,describe it. 4.Perform a horizontal analysis for your company's revenue,using the earliest year shown as the base year. 5.Does the amount of revenue reported seem unusually high or unusually low in any of these years? If yes,which one? 6.Calculate total operating expenses as a percentage of sales for each of the three years shown. 7.Does the amount of total operating expense seem unusually high or unusually low in any of these years? If yes,which one? 8.Does your company report any non-operating gains or losses? If yes,describe them. 9.Calculate net income as a percentage of sales for each of the three years shown. 10.Does the amount of net income seem unusually high or unusually low in any of these years? If yes,which one? 11.Calculate accounts receivable as a percentage of sales for the current year. 12.Calculate accounts receivable as a percentage of sales for the prior year. 13.Does accounts receivable as a percentage of sales seem consistent for the two years? 14.Which of the notes to the financial statements describes the method your company uses to value its inventory? 15.Does your company use LIFO? 16.Describe how the choice of LIFO in a time of rising prices affects the quality of a company's earnings. 17.Does the company have any treasury stock? 18.Did the company purchase any treasury stock during the most recent year? 19.Which of the notes to the financial statements describes your company's purchase of treasury stock? 20.Does your company seem to have a legitimate reason for repurchasing its own stock? What is the reason? 21.What effect does purchasing treasury stock have on a company's earnings per share? Why? 22.Look in the management discussion and analysis portion of your annual report to find management's comments about "Forward-looking information and risk factors." (If you aren't sure that you have found the right pages, ask your instructor for help.) Does your company seem to operate in a particularly risky environment? 23.Describe the relationship between risk and quality of earnings.

What is the purpose of the PCAOB and why was it established?

Unlike U.S.GAAP,IFRS do not allow for alternative accounting methods.

Who is responsible for giving an opinion on whether or not a company's financial statements fairly present the company's financial position and results of operations?

The big bath theory is the type of manipulation where management maximizes a current loss to get rid of expenses that belong on future income statements.

The quality of earnings is considered to be higher when ________.

RH Company shipped goods to a customer on December 31,2011 that the customer had not ordered.RH Company recorded a credit sale of $75,000.As a result of recording this sale,which of the following will be overstated on RH Company's 2011 financial statements?

IFRS are more ________.

Who must swear that they have reviewed a company's financial statements and that,based on their knowledge,the report does not contain any false statements and does not omit any significant facts?

Out of Africa,a multi-national corporation,had a very successful year and more than met analysts' expectations.Management decided to increase the amount of its allowance for uncollectible accounts by more than what is needed.Management is ________.

The SOX Act requires ________.

Earnings per share equals ________.

Corporate governance ________.

Tom's Ware donated 100 T-shirts to the local high school.The company will record the donation as an operating expense.The shirts cost Tom's Ware $6.00 each and the company usually sells them for $10.50.If Tom's Ware reports a charity expense of $600,this accounting choice would be considered ________.

Describe some of the lessons learned from the business failures of the past decade.

Using a smaller salvage value when calculating depreciation expense for long-term assets ________.