Financial Shenanigans Ch. 6- Flashcards
3 warning signs of improperly capitalizing normal operating expenses
1 unwarranted improvement in profit margins and a large jump in certain assets
2 big unexpected decline in free cash flow, with equally big increase
In cash flow from operations
3 big increase in capital expenditures
Watch out for improper capitalization of…2
Marketing and solicitation costs
Investors must strive to understanding impact of any accounting change on earnings because…
Any earnings growth will not recur
A new or unusual asset account that is increasing rapidly may signal…
Improper capitalization
If management decides to lengthen the amortization period, that should…
Raise a loud warning signal
Be wary of companies that depreciate assets…
Too slowly
Projecting too slow revenue will cause a company to amortize inventory…
Too slowly, eventually resulting in a large write off
Always question a cash receipt from a…
Vendor
A company can reduce expenses by selling a business at a discount and paying a premium for the businesses inventory, expenses are reduced by…
Setting up a cookie jar liability account to write off against inventory purchases
Watch for warranty expense being…
Too small an estimate
Be alert for companies that fail to accrue expenses for…
Loss contingencies
Changes in life expectancy for a pension plan from 12 years to 18 years will…
Reduce the pension expense
A change in measurement date on a pension plan to a later time will…
Reduce pension expenses
Companies can increase the residual value on leased equipment and this will…
Decrease depreciation expense boosting profits
Liability reserves in the balance sheet to be released against earnings in the future include…3
1 allowance for doubtful accounts
2 allowance for loan losses
3 inventory obsolescence reserves
Many liability reserves are grouped into the following 2 accounts…
1 other current liabilities
2 accrued expenses
Deferred revenue is a way that management can…
Boost revenue for future periods
Inflating revenue can occur after…
Closing an acquisition
Be alert for lower revenue at a target company…
Just before it is acquired
Another shenanigan is taking expenses early usually through charging depreciation and amortization items through…
Restructuring costs or onetime items
Investors should become concerned when cash flow from operations…
Lags behind net income
High net income along with low cash flow from operations signals…
Presence of earnings manipulation
Factoring receivables on the statement of cashflows should be a…
Financing activity (but accounting rules report it as an operating activity)
In the 10-k investors should try to identify changes in the…
Risk factor section
For Netflix, acquisition of a DVD library would be…
Cash flow from operations
Not investing as the company classified
Companies shift acquisitions to the financing activities cash flow section by…
Taking a loan out on the acquisitions
Postponing expenses on the balance sheet, what to look for?
Look for accounting change
Capitalizing expenses as assets on the balance sheet
