Practice Midterm Quiz 9b

Question 1

5. As discussed in class, how should financial statement users view the financial statements?
   a. From a financial perspective
   b. From a managerial perspective
   c. In a skeptical light
   d. In a leveraged light
   e. In a forecasting light

Answer 1

5. Solution = C. See the in-class slides and your personal notes for In Class 9.

Question 2

6. In class we discussed the disadvantages of an earnings-based bonus plan. Which ONE of the following is one of those disadvantages?

a. Makes it much more difficult to report a smooth pattern of earnings
b. Makes the financial statement numbers less reliable
c. Makes it much more difficult to engage in the strategic timing of transactions
d. Because of the negative public relations impact, does not allow for the maximization of shareholder value
e. Because such plans are in violation of SEC regulations, the CEO is in danger of being convicted of federal securities laws and sent to prison.

Answer 2

6. Solution = B. See the in-class slides and your personal notes for In Class 9.

Question 3

7. As discussed in class, what personal concerns should a company accountant have when that accountant is asked to make accounting assumptions in order to turn a loss into a profit?

a. The accountant might not have enough time to compute the fluctuating values for both bad debt expense and depreciation expense.
b. The accountant might not have enough time to compute the fluctuating values for both warranty expense and environmental cleanup expense.
c. The accountant might become personally liable for additional income tax payments that have to be made by the corporation.
d. The accountant might become personally liable for additional costs associated with guiding financial analysts to produce a reachable earnings forecast.
e. The accountant might develop a reputation as being someone who is willing to interpret the accounting rules “flexibly” in order to help the company meet profit targets.

Answer 3

7. Solution = E. See the in-class slides and your personal notes for In Class 9.

Question 4

8. Which ONE of the following statements is FALSE with respect to a financial statement AUDITOR?

a. Protected from lawsuits by U.S. federal “safe harbor” laws
b. Must be a certified public accountant (CPA)
c. Hired to provide an independent check of the assumptions made in preparing the financial statements
d. Hired and paid by the company being audited

Answer 4

8. Solution = A. See the in-class slides and your personal notes for In Class 9.

Question 5

9. As discussed in class, which ONE of the following is NOT one of the examples of audit work that could have been conducted to verify the existence of Tino’s $300 million in vegetable oil?

a. Examine Tino’s shipping records.
b. Check the quality of a sample of the oil.
c. Physically inspect the oil to make sure it is there.
d. Do some general calculations to determine whether it is reasonable that there could be $300 million in vegetable oil in one tank farm.
e. Inspect Tino’s general ledger to determine whether both CLOSING and adjusting entries had been properly made.

Answer 5

9. Solution = E. See the in-class slides and your personal notes for In Class 9.