Deck 6: Doing Business Day to Day

Question 1

A manager who gets a bonus based on reported profits for the year decides to reduce the company's advertising and research expenditures in order to meet her bonus target, even though she believes that the advertising and research would have long-term benefits for the company. This is an example of what type of reaction to accounting measurement?

A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Answer 1

C

Question 2

A company is concerned that analysts will be disappointed that its earnings per share for 2017 will be $1.50. In the late part of 2017, the company tells analysts its earnings are only likely to be $1.45 per share, so that the analysts will see $1.50 as a pleasant surprise. This is an example of

A) Accruals management
B) Expectations management
C) Fraud
D) Real earnings management

Answer 2

B

Question 3

A reason that managers may manage earnings "downward" would be to

A) Meet a bonus target for the year
B) Minimize taxes
C) Meet a profit target in a loan agreement
D) Increase the value of the company stock

Answer 3

B

Question 4

A reason that managers may manage earnings "upward" would be to

A) Reduce the stock price, in advance of trying to buy out public shareholders, and to take the company private
B) Reduce political pressure on the company for charging high prices for its profits
C) "Save" some earnings to help meet budget targets in future years
D) Increase the stock price

Question 5

The earnings management technique that is being used when a company records an overly large liability for a potential lawsuit against it, during a year when profits are good, and later corrects this liability in a year with low profits, is

A) Taking a big bath
B) Real earnings management
C) Abusing materiality
D) Using a cookie jar reserve

Question 6

A taxpayer decides to cheat on taxes because she knows that the odds of being audited by the government are very low. Which element of the fraud triangle is most clearly involved?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 7

A company is concerned that its lenders will declare the loans in default if the company reports its true earnings, so management lies and reports high enough earnings to appear to comply with its loan agreements. Which element of the fraud triangle is most clearly involved?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 8

A company decides it should engage in aggressive "earnings management" because it feels that this will be in the interests of current shareholders, and "everybody else does it," so the company should not look bad in comparison. Which element of the fraud triangle is most clearly involved?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 9

A company controller starts stealing from the company, in order to pay her gambling debts, even though she knows that the company's auditors may catch her. Which element of the fraud triangle is most clearly involved?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 10

An employee feels underpaid, and starts stealing from the company, because she feels she is "just getting what the company really owes her." Which element of the fraud triangle is most clearly involved?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 11

A company decides to meet its profit target for 2016 by claiming that certain sales that it actually made and shipped in January of 2017 were made in December of 2016. This is an example of

A) Accruals management
B) Expectations management
C) Fraud
D) Real earnings management

Question 12

A company decides to meet its profit target for the year by using a relatively long life to depreciate a new asset it acquired, to keep the depreciation expense low. (There was a range of reasonable estimates for the life of the asset, and the company chose one of the longer lives in the range.) This is an example of

A) Accruals management
B) Expectations management
C) Fraud
D) Real earnings management

Question 13

What is the name of the following quotation? "The more any quantitative social indicator (or even some qualitative indicator) is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."

A) Tinkelman's Law
B) Campbell's law
C) Burke's law
D) Finagle's Law

Question 14

What is the name of the following quotation? "When a measure becomes a target, it ceases to be a good measure."

A) Goodhart's Law
B) Lee's Law
C) Burke's Law
D) Smith's Law

Question 15

An example of people acting in advance of a measurement being finalized, to try to ensure a favorable rule is adopted, would be

A) A manager deliberately undercounts the amounts of sales of liquor at a bar, by not counting any sales after midnight.
B) A company offering goods for sale in the last week of December at a major discount, in order to increase the year's sales total.
C) A chief executive seeking to take a public company private.
D) A company lobbying Congress to allow certain costs to be deducted from taxable income immediately, rather than over time.

Question 16

An example of people acting to look good on a measurement, while not actually doing what is desired, would be

A) A manager deliberately undercounts the amounts of sales of liquor at a bar, by not counting any sales after midnight.
B) A company offering goods for sale in the last week of December at such a major discount that it loses money on the sales, in order to increase the year's sales total.
C) A chief executive seeking to take a public company private.
D) A company lobbying Congress to allow certain costs to be deducted from taxable income immediately, rather than over time.

Question 17

An example of people trying to avoid measurement would be

A) A manager increases profits by selling lower quality merchandise, knowing that sales returns and warranty claims are likely to be reported in the next fiscal year.
B) A company decides to report using IFRS rather than GAAP.
C) A chief executive buys out the shareholders of a public company, so that the company will no longer need to report results to the SEC or the public.
D) A company writes a letter to the FASB asking it to allow research costs to be treated as assets, rather than as expenses.

Question 18

The Liu Corporation acquired the Chen Corporation by buying all of the Chen Corporation's stock. The management of Liu wants to use "acquisition accounting" to manage earnings. It wants to report high future earnings. Which of the following actions will help it report higher future earnings?

A) Record a very high value of the equipment of Chen that it bought
B) Record a very high value of the inventories of Chen that it bought
C) Record a very low liability for warranties on the products Chen sold before the acquisition
D) Record a very high value for contingent liabilities related to lawsuits against Chen

Question 19

Which of the following is not one of the FASB's objectives when setting accounting standards?

A) To make the allocation of investment capital in the U.S. more efficient
B) To allow investors to more accurately compare companies
C) To allow investors and creditors to make more accurate investment and lending decisions about particular companies
D) To promote a more equitable distribution of incomes in the U.S.

Question 20

Which of the following is not one of the bad effects sometimes cited for using budgets and variances from budgets to measure managers?

A) Managers become less flexible, and less willing to take actions that might make them miss monthly targets.
B) Managers become more likely to game the system by building in budgetary slack.
C) Managers adopt a short-term focus, and do not pay attention to actions that have long-term consequences, such as training.
D) Lower-level managers use the budget targets as an indication of top management's goals for the year.

Question 21

A company decides to meet its profit target for the year by selling a piece of land, for a gain, in December, even though it believes it could have made significantly more money by waiting two months to sell the land. This is an example of

A) Accruals management
B) Expectations management
C) Fraud
D) Real earnings management

Question 22

A division manager believes that if he fails to meet a very tight budget target, he will be fired. He starts pushing his employees to under-report their hours worked, in order to meet the target. Which element of the fraud triangle is most clearly involved in the division manager's behavior?

A) Pressures or incentives
B) Opportunities to commit fraud
C) Rationalizations
D) Sociopathic behavior

Question 23

Which of the following factors is, according to AICPA, an example of incentives and pressures to commit fraud?

A) Inappropriate ethical standards in the organization
B) Ineffective monitoring of management by the board of directors
C) Inadequate internal controls
D) Expectations of investment analysts and significant creditors for high earnings

Question 24

Which of the following factors is, according to the AICPA, an example of the rationalizations part of the fraud triangle?

A) The majority owner is also the manager of the company, and makes no distinction between his personal money and the business's money.
B) Measurement of certain assets involves estimates that are hard to double check.
C) Internal controls are deficient, due to ineffective accounting and information systems.
D) There is a high degree of competition in the company's industry.

Question 25

The text discussed the concept of "off-balance sheet financing."

Question 26

The text discusses something called the "fraud triangle."

Question 27

Which of the following factors is, according to AICPA, an example of opportunities to commit fraud?

A) There is excessive interest by management in maintaining the entity's trend of earnings.
B) Internal controls are deficient, due to ineffective accounting and information systems.
C) There is an increasing number of business failures in the company's industry.
D) Management has personally guaranteed certain debts of the company.

Question 28

Some companies use a "balanced scorecard" to judge managers' performance. The balanced scorecard includes financial measures as well as measures of customer satisfaction, productivity, and company training and innovation efforts. The use of a balanced scorecard can be seen as

A) A way for management to avoid measurement
B) Window dressing
C) A use of multiple measures to avoid the dysfunctional effects of focusing too much on financial measures
D) A response to government reporting requirements

Question 29

One sensible way that a company may increase investor faith in its profit reports is to

A) Hire an auditing firm with a strong reputation for competence and honesty to audit its statements
B) Go private
C) Provide only the minimum disclosures required by the SEC
D) Stop having conference calls with analysts

Question 30

The ways that companies try to reduce investors' skepticism about the credibility of the companies' financial reports include all of the following except

A) Voluntarily disclosing additional information
B) Hiring auditors with excellent reputations for competence and objectivity to audit their financial statements
C) Using accrual management techniques
D) Establishing a reputation for transparency in financial reporting

Question 31

An argument for a detailed, "rules-based" approach to standard-setting is

A) It is simple to come up with rules that cover all possible situations.
B) It discourages people from designing transactions that just meet, or just fail, the specific rules.
C) It will result in a very short list of accounting standards.
D) It gives accountants "safe harbors" for making particular decisions, since they will be able to point clearly to the specific rules.

Question 32

An argument for a broad, principles-based approach to standard-setting is that

A) It leaves specific accounting decisions to the professional judgment of the accountants involved.
B) There will be greater consistency in how different companies handle identical transactions.
C) Accountants who are challenged in how they handled a transaction will be able to point to a specific rule to justify their decision.
D) There will be detailed specific accounting guidance for each important industry and country.

Question 33

In the 1990s, the FASB considered making a new rule to count stock option awards by companies as expenses. Some companies protested to the FASB, and to Congress, and the FASB at that time decided not to make the new rule. This is an example of what type of reaction to accounting measurement?

A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Question 34

Business measurements often affect the behavior of the people or businesses being measured.

Question 35

One of the FASB's objectives in setting accounting standards is to allow investors to more accurately compare companies' performance.

Question 36

One of the FASB's objectives in setting accounting standards is to allow investors and creditors to make more accurate investment and lending decisions about particular companies.

Question 37

One purpose of a company's budgeting system is to influence the behavior of managers.

Question 38

Studies indicate that when managers are judged based on several different measures, managers will typically concentrate on the measures that are hardest to meet.

Question 39

Studies indicate that managers who are measured frequently tend to adopt a short-term orientation, and pay less attention to long-term matters.

Question 40

Judging people based on their individual performance has been found, in research, to help promote teamwork and cooperative behavior.

Question 41

Two strategies that companies use to "manage earnings" are "accruals management" and "real earnings management."

Question 42

"Budgetary slack" is an earnings management technique that involves recording excessive liability reserves when times are good, and correcting the excessive reserves in years with lower profits.

Question 43

"Accruals management" involves taking real actions, with real economic effects, primarily for accounting purposes.

Question 44

The FASB has repeatedly said that its objective, in setting standards, is to try to help move society toward certain particular goals, including a fairer allocation of resources.

Question 45

The term for the process of speaking to analysts, and getting them to reduce their predictions of company performance in advance of the company reporting its results, is called "earnings expectations management."

Question 46

A "game against nature" is a game where there are two parties, each of whom acts strategically.

Question 47

The accounting measurement system can be seen as a game with numerous players, taking place over numerous time periods.

Question 48

Even when people respond to an accounting measurement by taking the actions desired, there are sometimes unintended consequences.

Question 49

Goodhart's Law is sometimes expressed as "When a measure becomes a target, it ceases to be a good measure."

Question 50

The way that utility regulators define profits is completely unrelated to how utilities set prices.

Question 51

The FASB developed rules for accounting for pensions without making any compromises for managers' concerns about how changes in pension accounts would affect reported company performance measures.

Question 52

"Accruals management" involves purely accounting actions, such as changing to more favorable accounting policies, or changing accounting estimates in a way that achieves the desired accounting result.

Question 53

The difference between the budget targets managers ask for, and what they actually think they can achieve, is called "earnings management."

Question 54

Research indicates that there is no evidence of a relation between top management relying heavily on budget targets to judge performance and lower-level managers creating more slack in their budgets.

Question 55

A term for strategies that companies use to make their balance sheets look better is "window dressing."

Question 56

Forging documents, to make profits seem higher, is an example of "window dressing."

Question 57

A company's effort to pay off some payables before year end, to make its current ratio look better, is an example of "accruals earnings management."

Question 58

Historically, one reason the SEC has favored historical cost accounting is because this method is easy to verify.

Question 59

Historically, the SEC has tended to favor accounting methods that are less conservative, because the SEC wants U.S. companies to look highly profitable.

Question 60

Under FASB rules, if a lease transfers ownership to the lessee, it must be classified as a "capital lease" by the lessee.

Question 61

Under FASB rules, if a lease term is over 75% of the expected useful life of the leased asset, the lessee must classify this as an "operating" lease.

Question 62

Under FASB rules, if the present value of the minimum lease payments is over 90% of the fair value of the leased property, the lessee must classify this as an "operating" lease.

Question 63

In economics, the term for the situation where buyers and sellers have different information is "asymmetric information."

Question 64

People have criticized accounting measurement and control systems for

A) Encouraging businesses to focus on short-term results
B) Discouraging innovation
C) Stimulating manipulation of data
D) All of the above

Question 65

A car dealership decides to rank its salespeople based on the number of cars that they sell during a month, in the hopes of making more money by making more sales. One salesman reacts by offering very generous deals to customers, in order to make sales, even though the dealership will not make any profits at these prices. This behavior can best be characterized as:

A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Question 66

A car dealership decides to rank its salespeople based on the number of cars that they sell during a month, in the hopes of making more money by making more sales. One salesman reacts by working harder, and being more welcoming to customers, and increased the number of sales he made. This behavior can best be characterized as

A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying

Question 67

Research on company business practices finds that it is only a minority of companies that rigidly compare company performance to pre-established budgets, without making any allowances for changes that occurred during the year.

Question 68

Judging employees by a "balanced scorecard" is one approach that management can use to try to prevent the dysfunctional behavior that arises when employees focus too much on a single performance measure.

Question 69

A company's decision to postpone some maintenance costs from December until January in order to meet profit targets would be an example of "accruals management."

Question 70

"Off -balance sheet financing" can help a company look better on solvency and liquidity measures.

Question 71

The practice of leasing, rather than buying, necessary equipment can be a source of "off-balance sheet financing."

Question 72

Research indicates that earnings management techniques are always used to make companies more profitable, and never to make them look less profitable.

Question 73

An example of a pressure to commit financial reporting fraud might be a CEO's desire to avoid violating loan covenants.

Question 74

If a company fraudulently overstates its sales, no other account will be affected by this overstatement.

Question 75

Companies who wish to misstate earnings can never just misstate a single account, but must misstate at least two accounts.

Question 76

One sign that might indicate a company is fraudulently overstating its sales on credit is a lower accounts receivable turnover.

Question 77

One sign that might indicate a company is fraudulently understating its cost of goods sold is a higher inventory turnover.

Question 78

A car dealership decides to give a monthly prize to the salesperson who makes the most sales during a month, in the hopes of making more money by making more sales. One salesman reacts by getting another salesman to give him credit for cars sold by the other man, in order to come in first in the contest. This behavior can best be characterized as

A) Acting to modify the measurement system before it goes into effect
B) Doing what is desired in response to being measured
C) Doing what looks good on the measurement system, even though it was not what was actually desired
D) Lying