6/6/2020


Correct Answers 0
Total Questions 100
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Course # 141002
Financial Shenanigans
based on the book:

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports
by: Howard Schilit ( 2010 )

20 CPE Credit Hours
Auditing

A P E X C P E . C O M  . . . . .  1.877.317.9047  . . . . .  support@apexcpe.com


Chapter 1 - As Bad as it Gets

1.    In the Creative Accounting Award category, the award for "Most shameless heist by senior management" goes to:   3
Enron
Informix
Tyco
WorldCom
2.    Even though Enron made the 2000 list of largest companies ranked by sales, it's reported profits paled in comparison to the others.   5
TRUE
FALSE
3.    The first signs of a massive fraud were revealed when an Enron audit committee & the firm's auditor reviewed the accounting for several unconsolidated "off-balance sheet" partnerships.   7
TRUE
FALSE
4.    WorldCom embarked on aggressive shenanigans by moving ordinary business expenses from it's Statement of Income to its Balance Sheet.   9
TRUE
FALSE
5.    WorldCom moved expenses from its Income Statement to its Balance sheet by:   10
Backdating license sale agreements
Expensing line costs which are required to be capitalized
Recognizing amounts due under software maintenance agreements as software license revenues
Capitalizing line costs, fees paid to third party telecommunication network providers for the right to lease their networks
6.    Frequent acquisitions allowed Tyco to show strong operating cash flow, even though it merely resulted from an accounting loophole.   14
TRUE
FALSE
7.    Adjusting the free cash flow calculation for acquisitions would make a company's true performance even more difficult to identify,   16
TRUE
FALSE
8.    Symbol would record bogus adjustments to the company's financial statements at the end of each quarter to align its results with Wall Street expectation.   18
TRUE
FALSE


Chapter 2 - Just Touch Up the XRays

9.    Financial shenanigans trick investors into believing:   24
the company's earnings are stronger
the company's cash flows are more robust
the company's Balance Sheet position is more secure
All of the above
10.    One technique for shifting revenue to a later period is to create reserves and release them into income in a later period.   
TRUE
FALSE
11.    The following is (are) Earnings Manipulation (EM) Shenanigan:   25
Recording bogus revenue
Shifting current income to a later period
shifting future expenses to an earlier period
All of the above
12.    Shifting current expenses to a later period is an example of a Cash Flow Shenanigan.   25
TRUE
FALSE
13.    The following is NOT a Cash Flow Shenanigan:   26
Shifting financial cash inflows to the operating section
Inflating operating cash flow using acquisitions or disposals
Boosting operating cash flow using unsustainable activities
Showing misleading metrics that overstate performance
14.    Management teams devoid of checks and balances can encourage financial shenanigans.   28
TRUE
FALSE
15.    Adelphia is a good example of a single family dominating management and the board.   29
TRUE
FALSE
16.    Investors should be skeptical of:   30
Senior executives who push for winning at all costs
Boastful or promotional management
Boards lacking competence or independence
All of the above
17.    Boards should challenge management on related-party transactions,   32
TRUE
FALSE
18.    The following recipient(s) of CFO magazine's respected Excellence Awards has served jail time:   32
WorldCom's Scott Sullivan
Enron's Andrew Fastow
Tyco's Mark Schwartz
All of the above
19.    Astronomical fees can conflict auditor independence.   35
TRUE
FALSE
20.    Italian regulations concerning auditor change precipitated the discovery of:   36
the booking of fictitious sales at Kanebo
fraud at Parmalat
lack of competence at WorldCom
All of the above
21.    Regulators are not a line of defense for investors.   37
TRUE
FALSE
22.    Investors should never give an investment manager their money when the manager's performance seems "too good to be true".   39
TRUE
FALSE
23.    An extended streak of meeting or beating Wall Street expectations is a warning sign of Financial Shenanigans.   40
TRUE
FALSE
24.    The following is NOT a warning sign for a Financial Shenanigan breeding ground:   41
inappropriate members placed on the board of directors
An unqualified auditing firm
A third party custodian to safeguard cash and securities for investors
An inappropriate compensation structure that encourages aggressive financial reporting


Chapter 3 - Earnings Manipulation Shenanigan No 1: Recording Revenue Too Soon

25.    Recording revenue before a buyer's final acceptance of the product is a technique used to manipulate earnings.   48
TRUE
FALSE
26.    According to accounting guidelines, this condition must be met in order for revenue to be recognized:   50
Evidence of an arrangement exists
Delivery of the product or service has occurred
The price is fixed or determinable and the collectability of the proceeds is reasonable assured
All of the above
27.    An investor should be wary of companies that extend their quarter end date.   50
TRUE
FALSE
28.    A sharp jump in accounts receivable, especially long-term and unbilled ones is a red flag that a company may be inappropriately recognizing revenue before work is completed on a contract.   51
TRUE
FALSE
29.    A change in a company's revenue recognition policy can falsely appear to be growth in revenue.   52
TRUE
FALSE
30.    Cash flow from operations materially preceding net income is a warning of premature revenue recognition.   53
TRUE
FALSE
31.    Seller-Provided financing could be a way for companies to accelerate revenue by enabling customers to pay for their products.   69
TRUE
FALSE
32.    Companies that are found to be recognizing revenue prematurely must restate the beginning retained earnings on the Balance Sheet.   71
TRUE
FALSE
33.    Investors should take note when a company changes accounting principles for no apparent reason.   65
TRUE
FALSE
34.    Changes to more aggressive revenue recognition policies should be a red flag for detecting financial shenanigans.   65
TRUE
FALSE
35.    One common sign of aggressive revenue recognition is when Cash Flow From Operations (CFFO) starts to materially lag behind reported net income.   53
TRUE
FALSE
36.    A jump in long-term receivable could indicate:   54
A company has overstated expenses
A company has recorded revenue when future services remain to be provided.
A company has understated liabilities
All of the above
37.    A key warning sign for improper or aggressive accounting is when unbilled receivables grows substantially faster than billed receivables.   53
TRUE
FALSE
38.    Revenue can properly be recognized for customers who lack the wherewithal to pay on seller-financed deals.   67
TRUE
FALSE
39.    Service companies, whose projects generally a short-term, may appropriately use Percentage of Completion to recognize revenue.   56
TRUE
FALSE
40.    Revenue is considered bogus if the customer has no obligation to keep the product or to pay for the product.   65
TRUE
FALSE


Chapter 4 - Earnings Manipulation Shenanigan No 2:  Recording Bogus Revenue

41.    Cash flow from investment income should be recorded as revenue from sales.   76
TRUE
FALSE
42.    It would be improper to record cash from asset sales and other investment income as revenue.   76
TRUE
FALSE
43.    Bogus reserves will often lead to bogus revenue or income.   79
TRUE
FALSE
44.    Credits received from suppliers for returns should be recorded:   86
As revenue
As a purchase return
As a reduction of an expense
None of the above
45.    A prudent investor would question revenue recorded when cash is received in lending transactions.   85
TRUE
FALSE
46.    Unlike principles, agents recognize revenue:   89
at the net amount (sales price paid by customer less cost)
at the gross amount (cost of product plus markup)
at the minimum amount (the lesser of sales price and cost plus markup)
as disclosed in the agent contract


Chapter 5 - Earnings Manipulation Shenanigan No 3:  Boosting Income Using One-Time or Unsustainable Activities

47.    Transactions that commingle the sale of a business with the sale of products to customers create opportunities for financial shenanigans.   96
TRUE
FALSE
48.    On the Statement of Income, income from operations is often referred to as "above-the-line".   101
TRUE
FALSE
49.    A one time charge to write-off inventory shifts operating expenses above the line.   102
TRUE
FALSE
50.    Frequent one time or re-structuring charges on a company's Statement of Income should be investigated further.   102
TRUE
FALSE
51.    Under the equity method of accounting for investments, if an investor possesses the "ability to exercise significant influence", it's share of profits should be reported as nonoperating investment income and not as revenue.   105
TRUE
FALSE
52.    Classifying equity holdings as "trading securities" as opposed to "available for sale" allows a company to mark the securities up to a higher market value.   107
TRUE
FALSE
53.    Under GAAP, one time income should be separated on the financial statements from income that stemmed from ordinary continuing operations.   109
TRUE
FALSE


Chapter 6 - Earnings Manipulation Shenanigan No 4:  Shifting Current Expenses to a Later Period

54.    Normally, advertising expenses are capitalized.   114
TRUE
FALSE
55.    Improperly capitalizing normal operating expenses allows a company to shift current expenses to a later period.   112
TRUE
FALSE
56.    Repair and maintenance expenses are normal operating costs and should be charged against income.   113
TRUE
FALSE
57.    An enterprise should expense costs incurred that produce a future benefit and capitalize those that produce no such benefit.   113
TRUE
FALSE
58.    Investors should be alert for companies that capitalize a disproportionately large amount of their software costs or companies that change their accounting policies and begin to capitalize costs.   117
TRUE
FALSE
59.    Capitalizing training costs and other operating costs associated with opening a new store is generally considered aggressive accounting.   116
TRUE
FALSE
60.    Failure to establish sufficient reserves on accounts receivable would overstate expenses and inflate profits.   131
TRUE
FALSE
61.    A quick calculation of Coldwater Creek's Days' Sales of Inventory (DSI) would have revealed that inventory growth exceeded recent business growth signifying future diminished profits.   128
TRUE
FALSE
62.    Allowance for obsolescence is an inventory contra account.   129
TRUE
FALSE
63.    According to the author, when all reserve accounts are moving in the wrong direction (i.e. declining), a wise investor should head for the hills.   130
TRUE
FALSE


Chapter 7 - Earnings Manipulation Shenanigan No 5:  Employing Other Techniques to Hide Expenses or Losses

64.    An enterprise has incurred a liability if it is obligated to make future sacrifices.   138
TRUE
FALSE
65.    Existing obligations that have resulted from past transactions must be reported as liabilities with a corresponding charge to an expense.   139
TRUE
FALSE
66.    Loss contingencies should be accrued when:   147
There is a probable loss
The amount of the loss can be reasonable estimated
Both a and b exist
The loss is identified
67.    Changes in self-insurance assumptions can be used to manipulate earnings.   153
TRUE
FALSE
68.    Creating reserves allows a company to shift revenue to a future period.   154
TRUE
FALSE
69.    Sunbeam used a large restructuring plan to create improper restructuring and "cookie jar" reserves to allow for later reversal into income, thereby inflating profit margins and creating the illusion of a successful reorganization.   155
TRUE
FALSE


Chapter 8 - Earnings Manipulation Shenanigan No 6:  Shifting Current Income to a Later Period

70.    Smoothing income is not an uncommon strategy as Wall Street rewards solid and predictable profit growth.   162
TRUE
FALSE
71.    Investors should be alert for lower revenue at a Target Company just before it is acquired.   170
TRUE
FALSE


Chapter 9 - Earnings Manipulation Shenanigan No 7:  Shifting Future Expenses to An Earlier Period

72.    Improperly writing off inventory as obsolete would allow a company to show deflated profit margins in the future.   178
TRUE
FALSE


Chapter 10 - Cash Flow Shenanigan No. 1: Shifting Financing Cash Inflows to Operating Section

73.    Information included in the Operating section of the Statement of Cash Flows can be used as an alternative performance measure to the accrual based net income on the Statement of Income.   190
TRUE
FALSE
74.    A company could shift Financing Cash Inflows to the Operating section by:   198
Improperly capitalizing normal operating expenses
Purchasing less inventory
Selling receivables before the collection date
None of the above
75.    Enron used Enron-controlled special purpose entities to borrow money to buy Enron commodities which strengthened its Cash Flow from Operations by moving the cash inflow from the Financing section to the Operations section.   201
TRUE
FALSE
76.    Cash received from the sale of receivables is an Operating inflow not a Financing inflow.   203
TRUE
FALSE


Chapter 11 - Cash Flow Shenanigan No. 2: Shifting Normal Operating Cash Outflows to the Investing Section

77.    Improperly capitalizing normal operating expenses allows a company to shift operating cash outflows to the investing cash outflows.   214
TRUE
FALSE
78.    Boomerang transactions:   215
Occur when a company improperly capitalizes normal operating expenses
Occur when a company sells products or services to a customer and simultaneously buys the same amount of products or services FROM the same customer.
Should be reported as an investing outflow
None of the Above
79.    Improperly capitalizing normal operating expenses not only embellishes earnings, it inflates operating cash flow as well.   218
TRUE
FALSE
80.    As of this writing, Netflix records the purchase of DVDs as Cost of Goods Sold, but does not report the cash outflow as Operating, but instead reports the cash outflow as Investing.   221
TRUE
FALSE


Chapter 12 - Cash Flow Shenanigan No. 3: Inflating operating Cash Flow Using Acquisitions or Disposals

81.    Paying for an acquisition with cash is recoded as an Investing outflow on the Statement of Cash Flows.   229
TRUE
FALSE
82.    The collection of cash from "acquired" receivables must be reported as an Investing inflow.   230
TRUE
FALSE
83.    Gaining customers through an acquisition provides a benefit to Cash Flow from Operations as compared to growing a customer base organically.   230
TRUE
FALSE
84.    By selling everything but the receivables when Tenet Healthcare sells hospitals, it is able to boost Operating inflows.   239
TRUE
FALSE


Chapter 13 - Cash Flow Shenanigan No. 4: Boosting Operating Cash Flow Using Unsustainable Activities

85.    Paying vendors more quickly allows a company to boost operating cash flow.   242
TRUE
FALSE
86.    Collecting from customers more quickly boosts operating cash flow and could easily be confused with increasing sales.   242
TRUE
FALSE
87.    In order to more accurately understand a company's operating cash flow a prudent investor should:   247
Watch for new disclosures about prepayments
Watch for elaborate strategies to influence the timing of cash flow
Be wary of dramatic improvements in Cash Flow from Operations
All of the above
88.    Taxes, interest and one-time events are considered to be part of operating cash flow but not of operating income.   251
TRUE
FALSE


Chapter 14 - Key Metrics Shenanigan No. 1: Showcasing Misleading Metrics That Overstate Performance

89.    The calculation of the same store sales metric is defined by GAAP.   263
TRUE
FALSE
90.    An accelerating Same Store Sales and a shrinking Revenue per Store could indicate that the company has changed its definition of Same Store Sales.   264
TRUE
FALSE
91.    An investor should be alarmed if a key metric suddenly goes missing from a company's financials.   265
TRUE
FALSE
92.    The Book-to-Bill disclosure compares current period bookings to current period revenue.   269
TRUE
FALSE
93.    The following types of orders should be included in a Book-to-Bill calculation:   269
Cancelable orders
Orders with longer term service or construction contracts
Orders of noncore operations
None of the above as each company defines how they calculate bookings.


Chapter 15 - Key Metrics Shenanigan No. 2: Distorting Balance Sheet Metrics to Avoid Showing Deterioration

94.    Selling Accounts Receivable lowers the Days' Sales Outstanding reported to investors.   283
TRUE
FALSE
95.    Investors typically view an unexpected rise in inventory as a sign of upcoming margin pressure through markdowns or write offs or a falling product demand.   287
TRUE
FALSE
96.    New Century Financial Corp grouped its loan loss reserve with an allowance for real estate owned reserve in order to:   290
Show that asset quality was deteriorating
Tidy up the look of the financial statement disclosures
More accurately report earnings
Trick investors into thinking its charge offs were steady
97.    Financial shenanigans are at play when a company distorts debt metrics to hide liquidity problems.   292
TRUE
FALSE


Chapter 16 - Shenanigans Recap and Recommendations

98.    The following is (are) a breeding ground for financial shenanigans:   300
Absence of checks and balances among senior management
Presence of related-party transactions
Inappropriate members placed on the board of directors
All of the above
99.    Investors can sniff out Earnings Manipulation shenanigans by scrutinizing the Balance Sheet and Statement of Cash Flows.   299
TRUE
FALSE
100.    Investors can detect signs of misleading operating cash flow by identifying unusual or troubling changes on the Statement of Income and the Balance Sheet.   299
TRUE
FALSE

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