Test Your Knowledge Every Week!


Earnings Management Accounting Quiz
This week's quiz brought to you by:
Professor Diane Roberts, University of San Francisco





1 - Earnings management is defined as:
active manipulation of accounting results for the purpose of creating an altered impression of company performance.
choice of accounting policies by management to maximize their own utility and/or the market value of the firm.
use of techniques that utilize the flexibility inherent in GAAP in order to achieve a desired financial result.
all of the above.

2 - Rewards for manipulation of the financial results include:
improved credit quality.
reduced stock price volatility.
increased profit-based incentive compensation.
all of the above.

3 - Earnings management and income smoothing strategies are:
acceptable if the company operates in a highly volatile industry.
important to disclose the long run expected earnings trend of the company.
never acceptable under US GAAP as they obscure the true operating results and financial position of the company.
none of the above

4 - Which of the following is an example of channel stuffing?
The company ships units to customers at year end even though customers did not place orders.
Due to poor current year earnings management reduces the amount of bad debt expense.
Plant expansion is not working out as well as expected but the project receives additional funding. The head of the division applies for a transfer to an affiliated company.
The new head of the division increases the bad debt estimate and directs the accountant to examine the records for other items that are over valued.

5 - Cookie jar reserves are:
an acceptable practice under US GAAP to enhance earnings predictability.
used to increase transparency about the company’s long-term growth rate in earnings.
"used to store earnings in the good years and then decreased in future, slow years to maintain the target rate of growth."
an asset that is only disclosed in the specialized industry of food processing.

6 - Big bath strategies are:
used to increase transparency about the company’s long-term growth rate in earnings.
large write offs taken when top management changes.
used to increase reported profits by increasing reported revenues at year end.
the large first quarter returns of items shipped during the fourth quarter’s channel stuffing.

7 - A company could achieve income smoothing in a year of stronger than expected earnings by selecting the following practice(s).
making a conservative estimate of future warranty obligations.
decreasing the estimated useful lives of depreciable assets.
reducing the percent complete estimated on a long term contract.
all of the above.

8 - Earnings management when a firm is preparing for an initial public offering (IPO) of the firm is due to the following incentive to:
avoid a potentially sharp drop in share price.
cause earnings to remain at a level to maximize bonus compensation.
present the best possible earnings picture to maximize share price.
minimize the political costs of industry membership.

9 - Relocation of a portion of the business occurs in one accounting period. Over estimation of a relocation reserve in the initial year and selective write off in later years is an example of which earnings management strategy?
Big bath charges.
Premature revenue recognition.
Use of cookie jar reserves.
This is acceptable accounting practice and not an earnings management strategy.

10 - Earnings management in the oil and gas industry that reduced reported profits to counter claims of price gouging and calls for windfall profit taxes are an example of which incentive for earnings management?
Increased value of stock options.
Avoidance of the political costs associated with industry membership.
Less strict financial covenant terms.
Lower cost of equity capital.

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