Question 1

Which of the following is NOT mentioned in the Xerox's case?

Accepted Answer

A)  Xerox misled investors by polishing its reputation on Wall Street and to boost the company's stock price.
B)  The ethical tone at the top set by CEOs Allaire and Thomas, and CFO Romeril, which equated business success with meeting long-term earnings target.
C)  Xerox failed to disclose GAAP violations that led to acceleration in the recognition of approximately $3 billion in equipment revenues.
D)  Xerox recognized a greater amount of revenue on leases in early years than warranted and didn't break out revenues that should have been deferred and recognized in future years. B

Question 2

Which of the following earnings management techniques are NOT presented in Lucent Technologies, Inc.'s case?

Accepted Answer

A)  Shifting Current Revenue to a later period
B)  Boosting income with one-time gains
C)  Recording revenue too soon or of questionable quality
D)  Shifting current expenses to a later or earlier period A

Question 3

Who identifies seven common financial shenanigans?

Accepted Answer

A)  Schipper
B)  Schilit
C)  Levitt
D)  McKee B

Question 4

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?

Accepted Answer

A)  Enron
B)  Gemstar TV Guide
C)  Xerox
D)  WorldCom

Question 5

The best way to characterize the role of Sherron Watkins in the downfall of Enron is:

Accepted Answer

A)  She directed the internal auditors to examine numerous transactions that led to the discovery of the fraud
B)  She gave in to the pressure of Andy Fastow to go along with materially misstated financial statements
C)  She was sent to jail even though she cooperated with the government in its case against Enron
D)  She tried to alert Ken Lay about the accounting scandal at Enron

Question 6

Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud:

Accepted Answer

A)  Created cookie jar reserves of advertising revenue to smooth net income.
B)  Engaged in round trip transactions whereby Gemstar paid money to a third party to advertise its services and capitalized that cost while the third party used Gemstar's funds to buy advertising from Gemstar, and the company recorded 100% of that amount as revenue while capitalizing the cost of its advertising payments.
C)  Recorded revenue under expired, disputed, or non-existent agreements, and properly reported this as licensing and advertising revenue.
D)  Inflated advertising revenue by improperly recording and reporting revenue amounts from multiple-elements transactions.

Question 7

Which of the following partnership that Enron created eventually lead Enron to an end?

Accepted Answer

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

Question 8

"Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate, reliable and transparent financial statements." This statement is from:

Accepted Answer

A)  A virtue perspective
B)  A utilitarian perspective
C)  A rights perspective
D)  A materiality perspective

Question 9

"Cookie jar reserves" can best be described as:

Accepted Answer

A)  Buying a lot of chocolate chip cookies, storing them for when you have a hunger attack, and then releasing them into your stomach.
B)  Overstating or understating allowances and reversing amounts in the future to smooth out net income over time.
C)  Accelerating the recording of revenues into an earlier year than is warranted.
D)  Delaying the recording of expenses to a later year to boost income in the current year.

Question 10

The basic ethical principle violated by Andy Fastow in his role as Enron's CFO and involvement with SPEs was:

Accepted Answer

A)  He lied to top management about what he was doing for the SPEs
B)  He failed to exercise due care in setting up SPEs
C)  He had a conflict of interests in his dual roles
D)  All of the above

Question 11

Which technique was used by both WorldCom and Waste Management to manage earnings?

Accepted Answer

A)  Manipulating asset net valuation amounts to minimize operating expenses for a period
B)  Accelerating the recording of revenue into an earlier period
C)  Delaying needed repairs to a later period
D)  All of the above were used

Question 12

In the Xerox case, the leases Xerox had signed met the criteria under SFAS No.13 to be accounted for as:

Accepted Answer

A)  Capital leases
B)  Operating leases
C)  Bargain purchase option leases
D)  Sales-type leases

Question 13

Which of the following authors(s) contend(s) "earnings management can be acceptable if linked to the choice of alternative accounting principles and estimates that report higher earnings than other methods might report given the circumstances.Only outright fraud is an unacceptable earnings management action."?

Accepted Answer

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

Question 14

Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques.

Accepted Answer

The answer of Evaluate the ethics at Enron and by...

Question 15

The swap transactions used in the Solutions Network case to manage earnings can best be described as:

Accepted Answer

A)  Going to a swap meet and capitalizing purchases instead of expensing them immediately against swap revenue
B)  Recording revenue on software systems transactions in an earlier period than when obligated to buy the same in a later period
C)  Using a cookie jar reserve to delay the recording of revenue into a later period
D)  Recording as operating revenue on onetime gains from the sale of underperforming assets

Question 16

Which of the following authors(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings."?

Accepted Answer

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

Question 17

Which of the following is NOT an aggressive accounting practice?

Accepted Answer

A)  Non-GAAP method of capitalization interest on landfill development costs.
B)  Failure to properly accrue for tax and self-insurance expense.
C)  Under the accrual method, companies charge warranty costs to operating expense in the year of sale.
D)  Refusal to write-off permitting and/or project costs on impaired or abandoned landfills.

Question 18

If a company is managing its earnings, which of the ethical theories are they most likely following?

Accepted Answer

A)  Rights
B)  Fairness
C)  Egoism
D)  Virtue

Question 19

Which of the following is NOT McKee's explanation of "earnings management"?

Accepted Answer

A)  A smooth net income by choice does not reflect what investors and creditors need or want to know since it masks true performance.
B)  It creates a more stable and predictable earnings stream by smoothing net income.
C)  It is a reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.
D)  Earnings management reflects a conscious choice by management to smooth earnings over time and it does not include devices designed to "cook the books."

Question 20

The legal issue in the CellCyte Genetics Corporation case was:

Accepted Answer

A)  Making false and misleading statements in several SEC filings
B)  Making false and misleading statements in a court trial
C)  Privity
D)  Scienter

Exam 7: Earnings Management and the Quality of Financial Reporting

Which of the following is NOT mentioned in the Xerox's case?

Which of the following earnings management techniques are NOT presented in Lucent Technologies, Inc.'s case?

Who identifies seven common financial shenanigans?

The accounting issue in the Cubbies Cable case with respect to cable installations costs is closest to the accounting issue in which case?

The best way to characterize the role of Sherron Watkins in the downfall of Enron is:

Each of the following techniques was used by Gemstar TV Guide International in its accounting fraud:

Which of the following partnership that Enron created eventually lead Enron to an end?

"Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate, reliable and transparent financial statements." This statement is from:

"Cookie jar reserves" can best be described as:

The basic ethical principle violated by Andy Fastow in his role as Enron's CFO and involvement with SPEs was:

Which technique was used by both WorldCom and Waste Management to manage earnings?

In the Xerox case, the leases Xerox had signed met the criteria under SFAS No.13 to be accounted for as:

Evaluate the ethics at Enron and by those in top management with respect to its operations and accounting and financial reporting techniques.

The swap transactions used in the Solutions Network case to manage earnings can best be described as:

Which of the following authors(s) focus(es) on "management's intent to deceive the stakeholders by using accounting devices to positively influence reported earnings."?

Which of the following is NOT an aggressive accounting practice?

If a company is managing its earnings, which of the ethical theories are they most likely following?

Which of the following is NOT McKee's explanation of "earnings management"?

The legal issue in the CellCyte Genetics Corporation case was: