Financial Shenanigans Ch. 6-

Question 1

3 warning signs of improperly capitalizing normal operating expenses

Answer 1

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

Question 2

Watch out for improper capitalization of…2

Answer 2

Marketing and solicitation costs

Question 3

Investors must strive to understanding impact of any accounting change on earnings because…

Answer 3

Any earnings growth will not recur

Question 4

A new or unusual asset account that is increasing rapidly may signal…

Answer 4

Improper capitalization

Question 5

If management decides to lengthen the amortization period, that should…

Answer 5

Raise a loud warning signal

Question 6

Be wary of companies that depreciate assets…

Answer 6

Too slowly

Question 7

Projecting too slow revenue will cause a company to amortize inventory…

Answer 7

Too slowly, eventually resulting in a large write off

Question 8

Always question a cash receipt from a…

Answer 8

Vendor

Question 9

A company can reduce expenses by selling a business at a discount and paying a premium for the businesses inventory, expenses are reduced by…

Answer 9

Setting up a cookie jar liability account to write off against inventory purchases

Question 10

Watch for warranty expense being…

Answer 10

Too small an estimate

Question 11

Be alert for companies that fail to accrue expenses for…

Answer 11

Loss contingencies

Question 12

Changes in life expectancy for a pension plan from 12 years to 18 years will…

Answer 12

Reduce the pension expense

Question 13

A change in measurement date on a pension plan to a later time will…

Answer 13

Reduce pension expenses

Question 14

Companies can increase the residual value on leased equipment and this will…

Answer 14

Decrease depreciation expense boosting profits

Question 15

Liability reserves in the balance sheet to be released against earnings in the future include…3

Answer 15

1 allowance for doubtful accounts

2 allowance for loan losses

3 inventory obsolescence reserves

Question 16

Many liability reserves are grouped into the following 2 accounts…

Answer 16

1 other current liabilities

2 accrued expenses

Question 17

Deferred revenue is a way that management can…

Answer 17

Boost revenue for future periods

Question 18

Inflating revenue can occur after…

Answer 18

Closing an acquisition

Question 19

Be alert for lower revenue at a target company…

Answer 19

Just before it is acquired

Question 20

Another shenanigan is taking expenses early usually through charging depreciation and amortization items through…

Answer 20

Restructuring costs or onetime items

Question 21

Investors should become concerned when cash flow from operations…

Answer 21

Lags behind net income

Question 22

High net income along with low cash flow from operations signals…

Answer 22

Presence of earnings manipulation

Question 23

Factoring receivables on the statement of cashflows should be a…

Answer 23

Financing activity (but accounting rules report it as an operating activity)

Question 24

In the 10-k investors should try to identify changes in the…

Answer 24

Risk factor section

Question 25

For Netflix, acquisition of a DVD library would be…

Answer 25

Cash flow from operations

Not investing as the company classified

Question 26

Companies shift acquisitions to the financing activities cash flow section by…

Answer 26

Taking a loan out on the acquisitions

Question 27

Postponing expenses on the balance sheet, what to look for?

Answer 27

Look for accounting change

Capitalizing expenses as assets on the balance sheet