Module 29.2 and 29.3 Accounting Choices & Warning Signs Flashcards
Explain how choosing FOB shipping point or FOB destination can affect the financial statements?
you can recognize revenue earlier if you use FOB shipping point.
What is channel stuffing?
overloading a distribution channel more than usual to recognize more revenue
What is bill-and-hold transaction?
When a customer buys the goods and receives an invoice but requests the firm keep the goods at their location for a period of time. This will decrease future revenue, but increase in current period.
How can a change in the estimate of credit losses affect the financial statements?
What other accounts can be changed in a similar way?
a decrease in the reserve for uncollectible accounts will increase net receivables, reduce expenses on the income statement, and increase net income.
reserve for warranty expense, and valuation allowance can also be changed by management to smooth earnings.
How can management decisions on depreciation affect earnings?
useful life and salvage value upon disposal can affect net income and the carrying value of an asset. greater the both are, the less depreciation expense will be.
How can management use goodwill to smooth earnings?
management can chose to delay an impairment on goodwill to a later period.
How can management use inventory accounting to smooth earnings?
FIFO, LIFO , and weighted average cost will have different effect on COGS and ending inventory depending on the inflationary environment.
How can management use related party transactions to smooth earnings?
if a public firm does business with a private related party, price can be changed so the value accretes to the public company.
What is stretching payables?
taking longer to pay suppliers to boost cash flow from operations.
what happens to the cash flow statement when interest expense is capitalized?
CFOA increase and CFI will decrease
What are some warnings signs under revenue recognition that can show a firm is smoothing earnings?
1) Changes in rev rec methods
2) use of bill and hold transactions
3) use of barter transactions
4) use of rebate programs
5) lack of transparency
6) revenue growth out of line with peer companies
7) receivables turnover is decreasing over multiple periods
8) decreases in total asset turnover
9) inclusion of nonoperating items in revenue
What are some warnings signs under inventory that can show a firm is smoothing earnings?
1) declining inventory turnover ratio
2) LIFO liquidations - drawing down inventory levels when LIFO inventory costing is used so that COGS reflects the lower items.
What are other warning signs to consider when analyzing financial statements?
1) depreciation methods are out of line with peers
2) fourth quarter earnings show a pattern
3) firm has significant transaction with related parties
4) certain expenses are classified as nonrecurring but are
5) gross or operating profit margins are higher than peers
6) management typically provides minimal financial reporting
7) management typically emphasized non GAAP earnings
8) growth by purchasing a large number of business can provide many opportunities to manipulate asset value.
