Class 02.

Question 1

how can you manipulate to boost earnings?

Answer 1

1. cut discretionary spending (ie marketing)
2. delay new projects
3. book revenue now
4. incentivize sales (ie cutting prices)
5. draw on reserves set aside
6. sell investments/assets
7. repurchase common shares

Question 2

why is earnings management legal?

Answer 2

it doesn’t violate GAAP

Question 3

what motivates earning management?

Answer 3

1. capital valuations (stock)
2. product + labor markets (what buyers + employees think matters)
3. contracts (don’t wanna lose bonus)

Question 4

what are common targets?

Answer 4

consistency in quarterly earnings + exec compensation + forecasted earnings

Question 5

when do managers likely manipulate?

Answer 5

at the beginning + end of their careers

Question 6

what’s a common method of revenue manipulation?

Answer 6

accounts receivable

Question 7

how to check AR manipulation?

Answer 7

1. usual seasonally adjusted trends (exempt seasonal industries)
2. unusual ratios
3. quarterly growth trends

Question 8

what does a large increase in days receivable indicate?

Answer 8

a spike in noncash revenue at the quarter end

Question 9

annual days receivable

Answer 9

(avg AR/revenue) x 365

Question 10

quarterly days receivable

Answer 10

(avg AR 5 quarters/trailing 12 mon. revenue) x 365

Question 11

what does a large increase in AR/Revenue indicate?

Answer 11

a spike in non-cash revenue

Question 12

AR/Revenue

Answer 12

AR/trailing 12 mon. revenue

Question 13

revenue per employee

Answer 13

trailing 12 mon. revenue/# employees

Question 14

revenue per PPE

Answer 14

trailing 12 mon. revenue/gross PPE

Question 15

what did you learn from the PawSome case study?

Answer 15

just in time inventory can manipulate revenue since it’s expensive to store inventory, so having it on hand cuts costs

Question 16

why is a delayed 10K/Q bad?

Answer 16

prevents investors from reviewing the company