Question 1

According to the SEC,any breach of a loan covenant that existed at the balance sheet date that has not subsequently been cured should

Accepted Answer

A) be recorded as an adjustment to the financial statements. 
B) be disclosed in the notes to the financial statements. 
C) be disclosed in the audit report. 
D) not be discloseD.

Question 2

A covenant that specifies a required minimum level of net worth and working capital is a compliance covenant.

Accepted Answer

A) True 
 B)False

Question 3

In a study of discretionary accounting accruals,it was found that abnormal accruals in the year prior to reporting covenant violations

Accepted Answer

A) significantly decreased the company's current ratio but significantly increased the company's reported earnings. 
B) significantly decreased the company's net worth. 
C) significantly increased reported earnings and increased working capital. 
D) significantly increased reported earnings but decreased working capital.

Question 4

As a general rule,the proportion of pay "at risk" falls off for executives on the higher rungs of the corporate ladder.

Accepted Answer

A) True 
 B)False

Question 5

Many loan agreements have financial covenants that rely on

Accepted Answer

A) floating GAAP. 
B) fixed GAAP. 
C) flexible GAAP. 
D) regulatory accounting procedures (RAP).

Question 6

The events of default section of a loan agreement describes circumstances in which the creditor has the right to terminate the lending relationship.

Accepted Answer

A) True 
 B)False

Question 7

Covenants that place direct restrictions on managerial decisions are called

Accepted Answer

A) affirmative restrictions. 
B) affirmative covenants. 
C) negative restrictions. 
D) negative covenants.

Question 8

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

A) True 
 B)False

Question 9

The widespread use of accounting-based incentives for executive compensation is controversial for which one of the following reasons?

Accepted Answer

A) Earnings growth does not automatically increase shareholder value. 
B) Accounting-based incentive plans can encourage managers to adopt a long-term business focus. 
C) Executives cannot use their discretion over the accounting policies. 
D) Managers do not have accounting flexibility.

Question 10

A covenant that specifies a required minimum level of net worth and working capital is a/an

Accepted Answer

A) compliance covenant. 
B) financial covenant. 
C) implicit covenant. 
D) negative covenant.

Question 11

The prevalence of stock options in executive pay packages

Accepted Answer

A) eliminates managers' incentives to engage in short-term earnings management. 
B) is frowned upon by the SEC. 
C) may actually contribute to,rather than moderate,managers' short-term focus. 
D) has been widely cited as the main cause of the financial system meltdown that occurred in 2008.

Question 12

The section of a loan agreement that describes circumstances in which the creditor obtains additional rights is called the

Accepted Answer

A) events of compliance section. 
B) certificate of compliance section. 
C) events of termination section. 
D) events of default section.

Question 13

Managers believe it is important to meet earnings benchmarks.When a number of executives were asked-within the parameters of GAAP-which choices your company might make to hit an earnings target,the most popular choice was to

Accepted Answer

A) decrease discretionary spending. 
B) alter accrual assumptions (such as allowances). 
C) postpone taking an accounting charge. 
D) draw down on reserves previously set aside.

Question 14

Negative covenants tend to be less significant than affirmative covenants because they place direct restrictions on the actions lenders can take.

Accepted Answer

A) True 
 B)False

Question 15

One low-cost,effective way of eliminating or reducing conflicts of interest in business relationships is to

Accepted Answer

A) only deal with related parties. 
B) carefully specify mutual expectations in contract terms. 
C) use lawyers to negotiate all terms. 
D) use an arbitrator for all negotiations.

Question 16

Commercial lending agreements may contain provisions that are designed to protect the lender from a deterioration of the borrower's creditworthiness.

Accepted Answer

A) True 
 B)False

Question 17

Management tends to make accounting changes and to manipulate discretionary accruals that increase income in order to avoid violating debt covenants.

Accepted Answer

A) True 
 B)False

Question 18

A technical default occurs when the borrower violates one or more loan covenants but has not missed any interest or principal payments.

Accepted Answer

A) True 
 B)False

Question 19

In many contracts,the rights and obligations conferred by the contract will depend on data in financial statements that are issued after the contract is executed.

Accepted Answer

A) True 
 B)False

Question 20

Differences between reported EPS and analysts' expectations only matter to investors when the differences are relatively large.

Accepted Answer

A) True 
 B)False

Exam 7: The Role of Financial Information in Contracting

According to the SEC,any breach of a loan covenant that existed at the balance sheet date that has not subsequently been cured should

A covenant that specifies a required minimum level of net worth and working capital is a compliance covenant.

In a study of discretionary accounting accruals,it was found that abnormal accruals in the year prior to reporting covenant violations

As a general rule,the proportion of pay "at risk" falls off for executives on the higher rungs of the corporate ladder.

Many loan agreements have financial covenants that rely on

The events of default section of a loan agreement describes circumstances in which the creditor has the right to terminate the lending relationship.

Covenants that place direct restrictions on managerial decisions are called

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.

The widespread use of accounting-based incentives for executive compensation is controversial for which one of the following reasons?

A covenant that specifies a required minimum level of net worth and working capital is a/an

The prevalence of stock options in executive pay packages

The section of a loan agreement that describes circumstances in which the creditor obtains additional rights is called the

Managers believe it is important to meet earnings benchmarks.When a number of executives were asked-within the parameters of GAAP-which choices your company might make to hit an earnings target,the most popular choice was to

Negative covenants tend to be less significant than affirmative covenants because they place direct restrictions on the actions lenders can take.

One low-cost,effective way of eliminating or reducing conflicts of interest in business relationships is to

Commercial lending agreements may contain provisions that are designed to protect the lender from a deterioration of the borrower's creditworthiness.

Management tends to make accounting changes and to manipulate discretionary accruals that increase income in order to avoid violating debt covenants.

A technical default occurs when the borrower violates one or more loan covenants but has not missed any interest or principal payments.

In many contracts,the rights and obligations conferred by the contract will depend on data in financial statements that are issued after the contract is executed.

Differences between reported EPS and analysts' expectations only matter to investors when the differences are relatively large.