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The legal practice of earnings management versus fraud.

Earnings Management Vs. Fraud

Answer: False, misleading financial statement are never acceptable

T/F Misleading financial statements are acceptable as long as the numbers are explained in footnotes

Answer: T –Under GAAP, two economically identical firms can report different earnings amounts if they make different choices about their accounting method and application

T/F The essential problem of earnings management is that two identical firms can report different earnings amounts depending on their accounting methods

Answer: making a conservative estimate. all other options are intentionally misleading actions under earnings management

Which of the following is not an example of an intentionally misleading action?

Answer: F. Not acceptable as you cannot defer an expense for convenience sake if the expense was incurred in one period it must be recorded in that period.

T/F This is an acceptable earnings management practice: A hospital hires a landscaping company to do some work around the hospital in 2014. The work is completed in 2014, but the hospital tells the landscaping company to delay billing until 2015

Answer: Both the operating choices and the accounting choices will impact net income

Which of the following have an effect on the income statement?

False. Measurement Error is non deliberate therefore not fraud

T/F Measurement Error is always considered a type of fraud.

Answer: Releasing bad news all at once. This typically has a lower impact on a public company's stock price in the long run

The Big Bath technique involves:

True. By spinning off a subsidiary you do not have to include it in your financial statements

One way to effectively manage earnings would be to spin off a poorly performing subsidiary

EPS will increase as you are dividing earnings by fewer shares. This is earnings management not fraud as it is legal to buy back shares

By buying back shares, a company:

Always fraud. Omission of material facts is considered fraud

Omission of material facts is:

all the answers are ways to improve your GAAP numbers

Which of the following are options for changing GAAP?

Perfect earnings have a correlation coefficient of 1

Which of the following correlation (current earnings/future earnings) would indicate perfect earnings?

Earnings management is NOT synonymous with “Cooking the Books” or “Fraud”. Earnings management is legal where as fraud is not

Earnings management is synonymous with “Cooking the Books” or “Fraud”

all of these are examples of cookie jar reserves

Cookie jar reserves include:

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Earnings Management Vs. Fraud

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