Chapter 1 - Financial Numbers Game
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1.
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Income smoothing is a form of earnings management designed to remove peaks and valleys from a normal earnings series, including steps to reduce and "store" profits during good years for use during slower years.
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2.
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The "Financial Numbers Game" can also be labeled as:
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  Aggressive accounting
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Earnings management
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Fraudulent financial reporting
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All of the above
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3.
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A forceful and intentional choice and application of accounting principles done in an effort to achieve desired results, typically in the form of higher current earnings is called:
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Aggressive accounting
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GAAP
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Financial accounting
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Income smoothing
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4.
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A "Big Bath" is a write down of assets and accrual of liabilities in an effort to make the balance sheet particularly conservative.
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5.
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Increased profit-based bonuses is one reward for playing the financial numbers game.
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6.
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The following is (are) a potential reward for playing the financial numbers game:
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Tax avoidance
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Lower borrowing costs
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Higher share price
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All of the above
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7.
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Markets can be very unforgiving when news of accounting gimmickry becomes widely known.
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8.
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A company's ability to generate a sustainable, and likely growing, stream of earnings that provide cash flow is known as it's:
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Generation capability
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Cash flow
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Earnings power
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Capitalization
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9.
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Loan covenants expressing minimum and maximum financial measures that must be met by the borrower are known as:
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Negative loan covenants
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Positive load covenants
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Neutral loan covenants
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Expressive loan covenants
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Chapter 2 - How the Game is Played
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10.
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LIFO vs. FIFO is a good example of the flexibility in GAAP.
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11.
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Reporting flexibility should be removed from Generally Accepted Accounting Principles (GAAP).
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12.
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The General Accounting Standards Board (GASB) is the primary body for establishing accounting principles that guide accounting practice in the United States.
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13.
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Today, at a minimum, software companies must have shipped their software products before recognizing revenue.
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14.
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To a significant extent, financial statements are a collection of estimates.
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15.
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According to GAAP, charges for corporate restructuring should be recognized in the year in which they are incurred. Any anticipated charges should not be recognized until they are actually incurred.
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16.
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Misstatements that render prior year financial statements to be in error are handled with restatements of those prior year financial statements.
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17.
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Fraudulent financial reporting is used to describe aggressive accounting practices only after a regulatory body or court alleges fraudulent intent in an administrative, civil or criminal hearing.
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18.
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An overly aggressive accrual of operating expenses and the creation of liability accounts done in an effort to reduce future year operating expenses is known as:
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Stockpiling
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Honey reserves
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Nest egging
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Cookie jar reserves
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19.
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FIFO assumes the cost of goods sold is comprised of older goods, first purchased or manufactured by the firm.
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20.
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The excess of the purchase price paid for an acquired firm in excess of the fair market value of the acquired firm's identifiable assets is known as:
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Excess assets
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Cookie jar reserves
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Amortizable premium
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Goodwill
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Chapter 3 - Earnings Management: A Closer Look
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21.
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Earnings management often must have a stealth quality to be effective.
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22.
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Changing depreciation methods is a potential earnings management technique.
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23.
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The following is (are) potential earnings management techniques:
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Estimating environmental obligation accruals
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Changing estimates of salvage value used for depreciation purposes
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Estimating write-downs required for certain investments
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All of the above
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24.
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AAER's are Accounting and Auditing Enforcement Releases issued by the SEC that entail accounting or audit related violations.
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25.
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The market value of shares outstanding as well as the book value of current and noncurrent long-term debt is known as:
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Market capitalization
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Net market value
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Fair market value
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Market realization
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26.
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The recognition of premature or fictitious revenue represents the most common form of abusive earnings management in cases cited by the SEC in its AAERs.
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27.
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Scanter is a mental state in which no deception is implied.
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28.
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The desire to avoid declining stock prices is an incentive to employ earnings management techniques.
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29.
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Operating earnings refers to earnings after the removal of the effects of nonrecurring or nonoperating items.
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Chapter 4 - The SEC Responds
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30.
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Enhancing outside auditing should have a significant effect on the public's confidence in financial reporting.
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31.
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Revenue recognition was identified by the chairman of the SEC as an objectionable creative accounting practice.
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32.
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The SEC Chairman's nine point action plan was designed to return this to financial reporting in the US:
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Trust
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Anonymity
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Reliability and transparency
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Professionalism and honesty
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33.
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Some market participants believe the SEC has gone too far and has involved itself too greatly in accounting minutiae.
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34.
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Strengthening the audit committee process should have no effect on the public's confidence in financial reporting.
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35.
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Collectively, the Securities Act of 1933 and the Securities Exchange Act of 1934 provide for:
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Registration of issuers of securities
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Standardized disclosure of financial and other information
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Oversight and compliance enforcement
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All of the above
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36.
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The SEC's Division of Enforcement is responsible for investigating potential violations of the Securities Acts.
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37.
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What term describes a financial statement items effect on a company's overall financial condition and operations.
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Scalability
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Gross Negligence
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Materiality
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Vulnerability
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38.
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Financial reports are considered to be fraudulent when they violate:
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GAAP
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The antifraud provisions of the Securities Acts
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State and local law
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All of the above
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39.
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The largest listing section of NASDAQ which has more stringent listing requirements is known as:
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The national market system
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The international market system
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The prime market
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The NASDAQ 100
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Chapter 5 - Financial Professional Speak Out
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40.
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An example of an earnings management revenue recognition technique is:
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Premature booking of revenue
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Keeping year end open through the first few days of the following year
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Bill and hold sales
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All of the above
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41.
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Trend analysis is ineffective in detecting earnings management.
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42.
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Days statistics is a technique used to detect earnings management.
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43.
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Earnings management is viewed as more likely to be harmful than helpful.
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44.
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Channel stuffing involves the shipments of products to distributors who are encouraged to overbuy under the short term offer of deep discounts.
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45.
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An absolute right of return means that goods may be returned to the seller by the purchaser without restrictions.
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46.
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Reducing LIFO inventory quantities and, as a result, including older and lower costs in the computation of cost of sales (resulting in an increase of revenue) is know as:
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FIFO dipping
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LIFO management
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LIFO dipping
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None of the above
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47.
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A consignee is defined as a party to whom goods are shipped under a consignment agreement from a consignor.
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48.
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A field representative is a company employee who negotiates sales transactions on behalf of their employer.
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Chapter 6 - Recognizing Premature or Fictitious Revenue
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49.
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Fictitious revenue reporting entails:
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Recognizing revenue for a legitimate sale in a period prior to that called for by GAAP
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Recording of revenue for a nonexistent sale
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Recognizing revenue for a legitimate sale in a period later than that called for by GAAP
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All of the above
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50.
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Premature revenue is revenue that is recognized for a legitimate sales in a period prior to that accepted by GAAP.
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51.
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Revenue recognized for goods ordered by not shipped is an example of:
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Fictitious revenue recognition
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Pre GAAP revenue recognition
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Premature revenue recognition
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None of the above
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52.
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Revenue recognized for products shipped without an actual order from a customer is likely to be considered fictitious revenue.
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53.
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In its most elemental form, revenue should be recognized:
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When it is earned
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When it is realized
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As determined by the auditors
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When it is earned and realized or realizable
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54.
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There is no relationship between revenue and accounts receivable.
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55.
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Revenue should not be recognized for bill and hold transactions arranged at the request of the seller.
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56.
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Side letters are often used to negate the terms of a sale.
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57.
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FOB destination means title passes when the goods reach their destination.
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58.
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Service fees can be recognized before the related services are performed.
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59.
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A related party is defined as:
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A cousin
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A subsidiary of a parent corporation
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An entity whose management or operating policies can be controlled or significantly influenced by another party
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None of the above
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Chapter 7 - Aggressive Capitalization and Extended Amortization Policies
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60.
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Extended amortization periods carry beyond an asset's economic useful life.
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61.
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The financial numbers game includes aggressive cost capitalization and extended amortization policies.
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62.
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Restructuring charges can be taken only when pursuant to an officially approved plan.
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63.
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In detecting extended amortization policies, one should be particularly alert if:
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The company's industry is experiencing price deflation
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The company is in an industry that is experiencing rapid technological change
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The company has shown evidence in the past of employing extended amortization periods
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All of the above
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64.
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Extended amortization periods are equal or less than an asset's economic useful life.
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65.
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In detecting aggressive capitalization policies, one should:
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Carefully consider a company's capitalization policies
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Evaluate what capitalized costs represent
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Look for evidence of aggressive capitalization policies in the past
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All of the above
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66.
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An accounting principle that ties expense recognition to revenue recognition is known as:
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Materiality
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Matching
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Timing
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None of the above
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67.
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In software design, a detailed step by step plan for completing the software is known as a "Detailed Program Design".
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Chapter 8 - Misreported Assets and Liabilities
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68.
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Inventory may be misreported through an overstatement of a physical count.
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69.
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The comparison of the percentage rate of change in accounts receivable to the percentage rate of change in revenue may help to detect overvalued assets.
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70.
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Companies that use LIFO run a greater risk that inventory costs may exceed replacement costs.
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71.
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Accounts receivable may be overstated due to:
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The recognition of premature revenue
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The recognition of fictitious revenue
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An improper assessment of future collectibility
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All of the above
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72.
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Misreported assets and liabilities also result in a misstatement of net income and shareholders' equity.
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73.
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An understatement of accounts payable typically is tied to an understatement of inventory purchases and cost of goods sold.
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74.
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FIFO liquidations may boost reported results temporarily by charging to cost of goods sold older, lower cost purchases.
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75.
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A contingent liability is an obligation that is dependent on the occurrence or nonoccurence of one or more future events to confirm the existence of an obligation, the amount owed, the payee, or the date payable.
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76.
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Gross profit margin is revenue less cost of goods sold.
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Chapter 9 - Getting Creative with the income Statement: Classification and Disclosure
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77.
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Triple step is an income statement design.
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78.
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Errors or misstatements may remain uncorrected if materiality standards are not applied properly.
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79.
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A discontinued operation involves the disposition of a business segment.
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80.
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A business segment has the following characteristic(s):
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It engages in business activities from which it may earn revenues and incur expenses
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It's operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance
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Discrete financial information is available
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All of the above
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81.
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Items termed other comprehensive income is a fairly recent additions to the measurement of income.
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82.
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Companies may use terminology such as "restructuring" for items in the income statement to put a good spin on an otherwise bad item.
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83.
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A change in reporting entity refers to a change in outside auditors.
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84.
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Transparency is the full and fair disclosure of all material items that have implications for the analysis of both earnings and financial position.
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Chapter 10 - Getting Creative with the Income Statement: Pro-Forma Measures of Earnings
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85.
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The income statement is the premier playground of those who engage in the financial numbers game.
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86.
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EBBS refers to earnings before the bad stuff
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87.
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EBITA is earnings before interest, taxes, and allocations.
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88.
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Pro-forma measures of financial performance are developed by removing selected cash revenues, gains, expenses, and losses from GAAP net income.
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89.
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Selected adjustments to the bottom line can provide a measure of earnings that is a better indicator of sustainable financial performance.
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90.
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Core earnings is a measurement of earnings that includes only the results of the primary operating activities of the firm.
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Chapter 11 - Problems with Cash Flow Reporting
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91.
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A useful ratio in the detection of creative accounting practices is the adjusted cash flow to income ratio.
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92.
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A complete examination for creative accounting practices requires a careful study of a company's cash-generating ability.
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93.
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The direct method format of the cash flow statement is used more frequently than the indirect format method.
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94.
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Cash flow from investing activities includes:
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Purchases and sales of property, plant, and equipment
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Purchases and sales of investments
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Purchases and sales of other assets
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All of the above
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95.
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Cash used in the payment of dividends is included with investing activities.
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96.
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Cash equivalents are highly liquid, fixed income investments with original maturities of three months or more.
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97.
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Factoring is defined as the discounting , or sale at a discount, of receivables on a nonrecourse, notification basis.
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98.
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To enhance its effectiveness in the detection of creative accounting practices, operating cash flow should be adjusted for nonrecurring cash inflow and outflow.
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99.
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Securitization is the pooling and repackaging of similar items into marketable securities that can be sold to investors.
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100.
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Working capital is current assets minus current liabilities.
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