Chapter 1 - Profits You Can Trust - and the Profits You Can't
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1.
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Recent cases of fraudulent reporting bore warning signs missed by investors.
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2.
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Outright fraud (fiction) is far more difficult to detect than aggressive, self serving, or misleading accounting judgments.
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3.
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Fiduciaries, who have a responsibility to protect the investing public, include:
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  corporate directors
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legal and accounting professionals
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securities analysts and investment bankers
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all of the above
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4.
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Proforma profits have been referred to as "earnings with all the bad stuff taken out".
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5.
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Flexibility is both the genius and the greatest vulnerability of US accounting.
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6.
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Under the current system of accounting, many corporate managers, directors, lawyers, analysts, lenders, and auditors have powerful incentives to ignore or abet deceptive financial reporting.
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7.
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A manager may distort its company's financial results in order to:
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maintain the company's access to capital markets
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meet lending requirements
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gain an edge in recruiting
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all of the above
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8.
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Dishonest financial reporting drives investors away from the stock market.
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9.
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As long as there have been accounting systems, there have been accounting games.
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10.
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This type of company is more likely to push the accounting envelope and manipulate earnings:
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companies in extreme legal and regulatory environments
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companies with simple ownership and financial structures
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high profile glamour companies with extreme press coverage
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none of the above
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Chapter 2 - Landmines: Where to Look
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11.
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One revenue inflating trick of Enron was to report the entire amount of a trading transaction as revenue instead of reporting the actual commission.
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12.
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Accounting estimates should be based on:
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historical data available
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reasonable assessments of the future
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other relevant considerations
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all of the above
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13.
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A red flag to Enron investors was when accounts receivable increased by 65% while its allowance for doubtful accounts fell 50%.
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14.
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Mark to Market accounting is a reasonable way to value securities as long as there is an active market for the securities.
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15.
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A key factor supporting the legitimacy of an SPE is that it be independently managed.
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16.
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The existence of risk is a sign of a poorly run company.
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17.
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A vague and confusing discussion of a company's related party transactions could indicate that the company has something to hide.
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18.
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Changes in key financial ratios often signal accounting games going on beneath the surface.
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Chapter 3 - Revenue Recognition: What Is a Sale, And When Do You Book It?
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19.
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Manipulation of financial results usually begins with revenue recognition.
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20.
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The following is NOT a requirement for properly recognizing revenue:
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the revenue must be earned
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collection must be reasonably certain
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the transaction has been properly recorded
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all of the above are requirements for properly recognizing revenue
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21.
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Management discretion with regard to revenue recognition includes both 'when' to recognize revenue and 'what' amount to recognize.
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22.
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Priceline.com claimed that 'grossing up' sales properly recognized revenue as Priceline.com was the 'merchant of record' which meant they assumed all the risks of ownership.
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23.
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Aggressive revenue recognition practices employed by MicroStrategy violated which accounting principle:
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matching
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valuation
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full disclosure
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historical cost
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24.
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Xerox was able to overstate revenue and income for 1997 through 2000 by manipulating which calculation:
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amortization of intangible assets
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EBITDA
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contingent liability calculations
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present value calculations of leased equipment
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25.
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Capacity swaps are a 'sale' of unused fiber optic capacity between telecom companies.
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26.
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A game played by telecoms involves recording revenue for the sale of fiber optic capacity to other telecoms while capitalizing (i.e. not expensing) the offsetting purchase of capacity.
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27.
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Percentage of completion is an accounting practice which allows companies to recognize revenue gradually over the life of a long term project.
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28.
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One time gains, such as gains from the sale of real estate, should be segregated from recurring revenue on the income statement.
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Chapter 4 - Provisions and Reserves: When Revenue Games Aren't Enough
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29.
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In the banking world, the chances of a new merger or acquisition increase as a bank's merger reserve is depleted.
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30.
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As a general rule, companies are eager to highlight reserves as they are reversed, but are less eager to highlight reserves when created.
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31.
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Items that might be included in comprehensive income include:
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unrealized gains / losses on investments in financial securities
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gains / losses on derivative transactions used to hedge risk
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gains / losses incurred in translating the financial results of a subsidiaries from local currency to the parent company's currency
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all of the above
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32.
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Gains or losses from currency translation are reported on the income statement if the subsidiary's functional currency is the US dollar.
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33.
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Management determines if a subsidiary's functional currency is the local currency or the US dollar.
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34.
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Because pension accounting is so complex, management has great opportunity to 'tweak' the numbers.
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Chapter 5 - A Landscape of Hazard: The New World of Business Risk
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35.
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Financial risk is the risk that a company may become insolvent.
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36.
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The first step towards prudent management of financial risk is full disclosure and quantification of all financial obligations.
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37.
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The single biggest hazard with regard to risk for any corporation and its shareholders, creditors and employees is:
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off-balance sheet financing
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derivatives
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other forms of risk
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none of the above
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38.
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Green Tree's greatest sin was:
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making loans to shaky borrowers
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miscalculating customer prepayment and default rates
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failure to disclose clearly to investors that it remained liable for loans it had supposedly sold to the SPE
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none of the above
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39.
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A company's line of credit is a classic example of a contingent liability.
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40.
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Derivatives are likely to be used by:
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multinational companies
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manufacturing companies dependent on a steady stream of raw materials
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companies with borrowing costs subject to interest rate fluctuations
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all of the above
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41.
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The practice of marking energy derivatives to market as done by Enron is still acceptable practice in the US.
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42.
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Recent estimates put the pension fund shortfall in corporate America at hundreds of billions of dollars.
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43.
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The federal Pension Benefit Guaranty Corporation (PBGC) has the authority to conduct a pension plan audit on a corporation and demand immediate remedy of underfunding.
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Chapter 6 - Goodwill Hunting: How to Tell Hard Assets from Hot Air
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44.
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In order to be deemed an asset. A resource must meet this criteria:
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it must be of future value to the company
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the company must own the resource or at least have exclusive ownership privilege
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the resource must be measured, quantified, and expressed in some currency
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all of the above
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45.
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Generally, software development companies must capitalize and subsequently amortize software development costs until the point at which a workable prototype is produced. After that point, the development costs must be expensed.
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46.
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Management determines at what point software development costs can be capitalized, but auditors must agree.
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47.
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Goodwill is an intangible asset created when one company acquires another.
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48.
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Prior to the FASB interpretation released in 2001, no goodwill was recognized under the pooling of interests accounting for business combinations because the combination was considered a true merger rather than an acquisition.
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49.
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According to the 2001 FASB pronouncement, goodwill is only written down when 'impaired', that is, when its value has declined significantly.
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50.
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Trademarks, patents and copyrights must be valued as a part of goodwill and amortized over their estimated useful lives.
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51.
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In-process R&D should be capitalized and subsequently amortized.
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52.
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In-process R&D write offs are fertile ground for accounting mischief.
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53.
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The annual valuation and analysis of goodwill may result in an increase and 'write up' of the value of goodwill.
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54.
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Shamu (yes, the whale) has been depreciated over the remainder of his/her estimated lifespan.
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Chapter 7 - The (Inner) Circle Game: Ripping Off Shareholders with Related-Party Transactions
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55.
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Mechanisms used to avoid scandalous related party transactions may include:
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company control by a single person, group of persons or single entity
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a transparent cash management system
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a substantial number of directors with no ties to the company except their board memberships
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all of the above
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56.
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Red flags which may identify hidden related party transactions include:
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loans with no due date or formal terms of repayment
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non monetary exchanges of property for similar property
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purchases of assets at prices in excess of fair market value
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all of the above
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Chapter 8 - The Measure of Business Performance: Comparisons and Benchmarks
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57.
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The accounting treatment of goodwill is a good example of how International Accounting Standards (IAS) differ from Generally Accepted Accounting Principles (GAAP).
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58.
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The ratio of net income to sales is known as:
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return on equity
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asset turnover
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operating margin
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net profit margin
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Chapter 9 - Let's Make up Some Numbers: EBITDA, Pro Forma Earnings, and Stupid Cash Tricks
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59.
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EBITDA is an extremely accurate measure of cash flows.
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Chapter 10 - Fair Value Toward Trustworthy Corporate Reporting
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60.
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The International Accounting Standards Board (IASB) approach to accounting:
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is principle based
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adopts a 'less is more' attitude
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requires companies and auditors to consider whether the accounting contemplated is consistent with the spirit of a particular underlying principle
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all of the above
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