Questions and Answers of Accounting Financial Analysis

LDDS suffered from high fixed costs coupled with a lack of technical knowledge and expertise in optimizing the configuration of circuits, which resulted in high line costs.True/False
WorldCom overstated its sales by holding its books open at the close of a reporting period.True/False
LDDS continued to publicly report increasing profits and sales in the financial statements, which allowed it to acquire more companies with no limit to the growth of its stock price.True/False
WorldCom overstated its earnings by improper accounting for multiple element contracts.True/False
If a company overstates merger reserves at the time of acquiring another company, it can release the surplus reserves into earnings in a later period without decreasing net income at the time of the
Ebbers and Grubman had no knowledge of the technicalities of the Internet, the Internet traffic, or the workings of the telecom industry, which led them to overestimate the demand for the Internet
WorldCom prepared its financial statements to meet the expectations of securities analysts despite needing to report actual earnings and accurate financial results.True/False
If the notes to the financial statements indicate that a company is capitalizing costs that other companies in the same industry recognize as expenses, it is a signal that the company is capitalizing
Special charges in the income statement that write off previously capitalized costs are always a sign that a company has become conservative in recognizing earnings and that the quality of its
If a parent company discovers that the assets of an acquired company are worth less than it believed at the time of the acquisition, it is appropriate to increase goodwill because this means that the
The opportunity for the creation of WorldCom was the court-ordered breakup of ________________, which was then forced to lease long-distance phone lines.
WorldCom’s Bankruptcy Examiner alleged that WorldCom’s ________________ was the fuel that kept its acquisition engine running.
After all the acquisitions, many companies had been added to WorldCom’s collection without any ________________. There was little liaison between the companies, and much of the work was
When a company overstates reserves at the time of acquisition, in later periods, it can release the ________________ reserves back into earnings.
Adjustments that increase ________________ in a later period, with respect to an earlier acquisition, are further signs that a company may be creating false reserves.
Investors should be wary of large ________________ - ________________ charges in the income statement around the acquisition period because these are often signals that the company could be creating
The misallocation of expenses as assets is known as the improper ________________ of expenses.
WorldCom was a collection of out-of-focus ________________ of companies in which Ebbers was controlling every minute detail without any plan for all the acquisitions.
After WorldCom acquired UUNet, it had broadband and networks all over the world and had become a ________________ provider of Internet access and data transmission.
As a result of acquiring MCI, WorldCom had two billing systems, so employees would switch existing customers to the other system and get ________________ commission for the new account.
WorldCom is presented in this textbook as an illustration of overstating earnings by:(a) Holding books open after the close of a reporting period.(b) Misuse of multiple element contracts.(c) Improper
Which of the following is not a signal of overstatement of earnings by improper use of merger reserves?(a) When goodwill on acquisition relates to a company that does not have or is unlikely to have
WorldCom passed journal entries after the close of each quarter:(a) To reduce line costs incurred.(b) To overstate the property, plant, and equipment.(c) Without any supporting documents and
WorldCom gave Arthur Andersen misleading special “MonRevs” to:(a) Conceal the top-side journal-entry adjustments.(b) Close any gaps between targeted and projected actual earnings.(c) Spread the
Which of the following reserve accounts was not examined by WorldCom’s Bankruptcy Examiner?(a) Bad debt reserves.(b) Tax reserves.(c) Legal reserves.(d) Cooperative advertising reserves.
If a company overstates the reserves of a company that it acquires and increases goodwill by a corresponding amount in the period of the acquisition in order to release the reserves in a later
Arthur Andersen, as the external auditor to WorldCom,(a) Had restricted access to the accounting records.(b) Was oblivious of the top-side transfers from expenses to assets.(c) Was not conscientious
WorldCom improperly accounted for its line cost expense by:(a) Allocating line-cost expense to PPE in its first recording of the line-cost transactions.(b) Initially properly debiting the line-cost
Early in 2002, WorldCom suffered a decline in business as a result of:(a) The decline of acquisitions to falsify profits.(b) The fall of stock price.(c) Ebber’s loans, which were eating cash.(d)
With which of the following gatekeepers did WorldCom’s Bankruptcy Examiner find fault?(a) The board of directors.(b) The investment banking company.(c) Both (a) and (b).(d) None of the above.
Signal #1 for the scheme of improper use of acquisition or merger reserves is a parent company allocating large amounts to goodwill when acquiring other companies. Explain why this could be a signal
Signal #4 for the scheme of improper use of merger reserves is the occurrence of large, one-time charges in the income statement around the time of the acquisition period.Compare the use of one-time
When Company A acquires Company B, does the fact that Company A paid more for Company B than its net asset value mean that “goodwill” has been acquired?Explain.
Why is a decreasing sales-to-PPE ratio a signal of possible overstatement of assets?
Explain why the overstatement of a reserve for accumulated depreciation of an acquired company at the time of acquisition would cause an overstatement of goodwill.
How was WorldCom able to continue to acquire so many companies and overstate goodwill by so much?
Action Co. has agreed to pay $$45,000$ to acquire 100 percent of the shares of Sub Co.Action Co. believes that the fair value of Sub Co.’s assets, liabilities, and reserves at the date of
At the time of Big Company’s acquisition of Small Company, Big Company believed that Small Company’s reserve for doubtful debts was correctly stated at $$30,000.$ Big Company purposely
Extracts for Zeddy Company’s quarterly income statements and balance sheets for quarters 1–4 are as follows:Calculate selling and administrative expenses as a percentage of sales for quarters
Extracts from Zee’s quarterly income statements and balance sheets for the four quarters of year 1 are as follows:Requireda. Calculate the sales/PPE ratio for quarters 1–4.b. Calculate the
One of the signals of the understatement of expenses is the increase in expenses as a percentage of sales.True/False
An increase in current liabilities as a percentage of current assets or of sales is a sign of an understatement of expenses.True/False
Unusually long periods for depreciation of assets is a sign of fictitious reporting in Livent’s case.True/False
One of the methods that Rite Aid used to reduce its cost of goods sold was to pass journal entries that decreased cost of goods sold and decreased accounts payable by a corresponding amount.True/False
One must be alert enough to note the aggressive capitalization of costs when a company writes off costs that were formerly capitalized.True/False
If a company capitalizes costs that other companies in the industry do not, it could be an alert that the company may be aggressive in capitalizing expenses.True/False
AHERF’s failure to increase its reserve for bad debts caused it to understate its expenses and overstate its income.True/False
Lockheed’s accounting tale is the classic case of misstating earnings by failing to write off an impaired asset.True/False
The decline of a company’s asset-turnover ratio is an indication that assets are impaired.True/False
There is a possibility that a company will be aggressive in trying to overstate the value of assets when it has a policy to write-off assets that is slower than those of other companies in the
The SEC’s enforcement action against Livent alleged that senior company officials had a special computer program designed that would enable accounting personnel to __________ the accounting system
At the end of each quarter, Livent simply ____________ certain expenses and the related liabilities from the general ledger.
In order to defer expenses, Livent moved expenses from one asset account to another where the __________ could be delayed.
According to the SEC, one of the methods that Rite Aid used to understate its cost of goods sold was to recognize vendor __________ on sales that had not yet occurred.
Rite Aid failed to write down its inventory amount for the full amount of the __________ that it suffered.
Livent also transferred __________ costs for shows, such as those for construction of theaters, to fixed asset accounts.
In the case of AHERF, the misstated reports went beyond annual financial statements and included municipal securities disclosure reports known as Nationally Recognized Municipal ____________
Instead of writing off its uncollectible amounts immediately, AHERF decided to write off its uncollectible accounts receivable in __________ installments.
Lockheed had an accounting policy in which it capitalized TriStar’s development costs with the intention of writing them off as the planes were __________.
Livent arranged for outside associates to purchase approximately $381,000 of tickets on personal __________ and make future ticket purchases using personal __________.
Which of the following methods of overstating earnings was not identified in the SEC’s Enforcement Action against Livent?(a) Understating expenses via the release of cookie-jar reserves.(b)
In what ways did Livent understate the expenses in the financial statements?(a) It erased expense invoices from the accounting system.(b) It deferred expenses by transferring costs from a current
Which of the following methods of fictitious accounting were used by Rite Aid to understate its cost of goods sold?(a) Overstatement of ending inventory values.(b) Adjusting gross profit entries to
To test for the lack of accrual in Livent’s case,(a) It is compulsory to check which regular vendor is not on the accounts payable list.(b) Choose a known vendor and trace the vendor to the list of
Which of the following methods of fictitious accounting was not identified by the SEC in its Enforcement Action against Rite Aid?(a) Understatement of bad debt expense.(b) Failure to write off
Allegheny (AHERF) is presented in this chapter mainly as an example of understating expenses via:(a) Improper capitalization of expenses.(b) Understatement of cost of goods sold.(c) Understatement of
Which of the following would not be a signal that a company may have understated its reserve for doubtful debts?(a) Accounts receivable increases as a percentage of sales.(b) The reserve for bad
Lockheed is presented in this chapter mainly as an example of:(a) Failure to record asset impairments.(b) Overstatement of sales.(c) Understatement of reserve for bad debts.(d) Improper use of
In the first quarter of the fiscal year, Brace Company discovers that an asset is impaired and the asset will need to be written down by $$4$ million. Which of the following statements is
If the value of a company’s beginning inventory is overstated but its ending inventory is correctly stated, then:(a) Its cost of goods sold expense will be understated.(b) Its gross margin will be
Describe and compare Lockheed’s capitalized development costs and Livent’s capitalized preproduction costs.
How did the development costs at Lockheed and the preproduction costs at Livent differ from preproduction costs related to long-term supply arrangements?
Explain how Livent’s improper deferral of expenses and Rite Aid’s improper recognition of vendor rebates shifted the recognition of expenses from one period to a later period.
Explain why Rite Aid’s failure to write down its ending inventory amount—to agree with values determined by physical inventory counts—caused it to overstate its income.
Explain why sudden unexplained increases in gross margin as a percentage of sales could be an indication that a company is understating its cost of goods sold.
What balance sheet item did AHERF misstate, and what effect did this have on its reported income?
Explain how Lockheed’s treatment of its development costs overstated its reported income.
LivePlay Company has incurred $$300,000$ in scenery production costs for the play Cat Trap. It estimates that Cat Trap will run for three years, beginning January 1, 2012. However, to the
Brite Company’s ending inventory values and its cost of goods sold (COGS) amounts for Q1–Q4 are listed below.Requireda. Calculate Brite’s inventory turnover ratio for Q2, Q3, and Q4.b.
Aerial, Inc., an airplane manufacturing company, incurred $$1$ million in development costs during the design and manufacture of a new airplane. Aerial estimates no further development costs, and
Enron used off-balance-sheet entities to overstate earnings via related-party sales and loans disguised as sales.True/False
Mark-to-market accounting refers to the revaluation of an asset or a liability on an entity’s balance sheet to its market or fair value.True/False
Securitization refers to the pooling of loans and the trading of portions of these loans on securities markets in the form of collateralized debt obligations.True/False
According to GAAP, a company is allowed to recognize a profit in its financial statements in respect of the increase in the price of its own shares.True/False
Enron’s SPE Whitewing was used to borrow money that was paid to Enron for Whitewing’s purchase of Enron assets, and Enron recorded the cash received as cash flow from operating
Enron’s Bankruptcy Examiner concluded that the “Prepay Transactions” may have been Enron’s single largest source of cash during the four-year period prior to Enron’s filing for
Enron’s energy trading, especially its gas trading and its trading on the manipulated California electricity market, generated profits that staved off the inevitable crash caused by fictitious
The birth of the “weather derivative” grew out of Enron’s attention to fundamental weather information for its gas trading.True/False
At Enron Energy Services, many of the contracts were overvalued, as the energy loads required by its customers were based on guesswork and excessively optimistic assumptions.True/False
When a company guarantees the debt of its unconsolidated affiliates, it is a signal that these entities may be used to raise debt without recording it on the sponsoring company’s balance
In order to finance Chewco as an SPE that did not have to become consolidated into Enron’s consolidated financial statements, it had to have a minimum of 3 percent of its equity ______________
In respect of Enron’s SPEs Chewco and Jedi, the Powers Report identified three sources of fictitious income streams: a ______________ fee, management fees, and revenue recognized on Enron’s own
Enron used LJM1 to create a false ______________ option hedge for its investment in Rhythms NetConnections.
In 2000, Enron Broadband’s revenues were way behind predictions. However, the accounting and financial problems were“solved” with the help of Andrew Fastow’s SPE named ______________ .
The electricity fiasco in California was concocted by Enron by transmitting energy into a fictional world ______________ of transmission schedules and ______________ congestion in power lines.
In a contrived sale to its SPE LJMI, Enron used what it referred to as the ______________ price to justify a mark-to-market revaluation of its ownership in the Cuiaba Power Plant.
Enron would ______________ a contract to a financial institution for the amount of the total future cash selling price, and it would get the cash up front. This solution is called ______________ .
In Enron’s Annual Report, the note titled “Unconsolidated Equity Affiliates”reflected the ______________ of unconsolidated affiliates in billions of dollars, which were then removed from the
A company’s being late in publishing its balance sheet and statement of cash flows is a signal that the company is taking time to ______________ the statements as it has something to ______________
It was a signal that Enron’s debt was understated when its notes to the financial statements titled “Commitments” stated that Enron also ______________ the performance of certain of its

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