Post questions to get answer to each multiple choice question:

1. Warren Buffett has many great quotes. Which of the following is one of his quotes used in this chapter?

- Using multiples of EBITDA is one of the best measures of determining the future value of a company

- U.S. GAAP provides us with financial statements that are of little value in making investment decisions

- Earnings can be as pliable as putty when a charlatan heads the company reporting them

- I often invest in technology companies that I do not fully understand their business model but that I know from their financial statements prepared in conformity with U.S. GAAP and audited by a Big 4 CPA firm, that their earnings can be relied upon

- Earnings management is always unethical, investors should watch carefully for CEOs who manage earnings

2. Arthur Levitt, former SEC Chairman, said in a 1998 speech titled The Numbers Game

-Think about a bottle of wine. You wouldnt pop the cork on that bottle before it was ready. But some companies are doing this with their revenue recognizing it before a sale is complete.

-Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices.

-In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be wining the day over faithful representation.

-In speaking on earnings management to smooth net income over time, Levitt said, These practices lead to erosion in the quality of earnings and, therefore, the quality of financial reporting.

- All of the above are quotes from Levitt in his 1998 speech.

3. Based on the discussions on earnings management in your textbook, which of the following statements is true?

-Earnings management is never ethical

-Earnings management by operating decisions are more likely to be ethically acceptable than manipulation by accounting methods

-Earnings management by accounting methods is more likely to be ethically acceptable than manipulating earnings by operating decisions

- Earnings management is ethical if the tone at the top is ethical

- Earnings management is necessary and should be rewarded if a publicly held company is going to be successful

4. Which of the following is the best example of a Big-bath charge?

-Cleaning house by having large layoffs of employees and charging the expense in the period the layoff is announced

-Recognizing losses from the impairment of asset value when required by U.S. GAAP

-Washing away obsolete inventory by writing off the inventory in the period obsolescence is determined

-Taking huge losses based on overly aggressive estimates, like Al Dunlap did at Sunbeam, so these losses can be reversed to increase revenues in future periods making the CEO look like a very successful turnaround artist

-Illegally recording expenses as assets like WorldCom did

5. When might a company want to use cookie jar reserves to overestimate expense in a year?

-A company would never want to overestimate expenses

-A company may overstate expenses when it is concerned that it might exceed analysts earnings projections for the current year

-A company may overestimate expense in one year when it wants to create reserves to be used in future years to smooth earnings

-Management may overestimate expenses to cover up fraud that may be discovered if reported net income is too high

-Management may overestimate expenses if they are concerned auditors will look at an exceptionally large increase in net income for the year

6. What was one of the ways CVS used earnings management techniques in its acquisition of Longs Drug Stores?

- CVS used creative acquisition accounting to adjust the value of fixed assets acquired by $189.7 million charging that difference to Goodwill which is not depreciated rather than to depreciable fixed assets

- CVS overstated fixed asset values by $189.7 million to avoid charging this amount to acquisition expense

- CVS recorded revenues of $189.7 million by accounting for fixed assets acquired from Longs as assets sold

- CVS set up cookie-jar reserves of $20 million to be reversed in later years when revenue was needed to smooth earnings

- CVS overstated revenues and understated expenses by manipulating earnings using a variety of earnings management techniques

7. FASB and IASB jointly issued a new revenue recognition standard that will be effective for annual periods beginning after

- December 15, 2016 for all companies

- December 15, 2017 for all companies

- December 15, 2018 for all companies

- December 15, 2017 for publicly held companies and after December 15, 2018 for privately held companies

- December 15, 2017 for publicly held companies and after December 15, 2019 for privately held companies

8. Which of the following is a financial shenanigan as described by Howard Schilit in his book?

- Shifting future expenses to the current period as a special charge

- Shifting current revenue to a later period

- Failing to record or improperly reducing liabilities

- Recording revenue too soon or of questionable quality

- All of the above are shenanigans as described by Schilit

9. Enron used the rules-based approach in U.S. GAAP to justify keeping Special-Purpose Entities (SPEs) related liabilities off of Enrons balance sheet. As a result of Enrons use of SPEs, FASB did which of the following?

- Recognized it was nave in allowing SPEs to be kept off Enrons balance sheet acknowledging that there could never have been a legitimate reason for establishing the concept of variable interest entities

- Recognized that the prior rule did not fairly present economic reality by issuing FASB Interpretation 46(R) which requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved

- Recognized the prior rule did not need to be changed, it was Enrons interpretation of the prior rule that was the problem

- Recognized that it was the 3% outside risk of independent capital financing that was too low that was the problem and fixed that problem with FASB Interpretation 46(R) that raised the outside percentage to 10%

- Recognized by the adoption of FASB Interpretation 46(R) that SPEs should always be consolidated on any beneficiaries financial statements

- Hertz Form 10-K for December 31, 2014 was unique in that it

10.Discussed in detail the results of an internal investigation that disclosed material weaknesses in internal controls and changes made in top management, in effect providing evidence to plaintiffs who may sue the company for damages for prior fraudulent financial reporting for 2012 and 2013

- Included restated financial results for 2012 and 2013

- Included the auditors report on internal controls

- Included a management discussion and analysis of financial condition and results of operations

- All of the above made this 10-K unique