Red Flags and A/cting Warning Signs Question receive, industrial, government, one

Mechanic

Jill Brown, CFA, is preparing a research report on Kendall Koatings, a maker of paint and industrial insulators. She has learned that Kendall is trying to avert a strike. Contentious labor talks have been ongoing for months. The company is also lobbying the federal government for a tax break in an effort to fend off foreign competition. Most Kendall executives own substantial blocks of stock, and all of them receive at least half of their compensation in the form of stock options. Lastly, one of Kendall’s lines of credit is up for renewal, and the company is trying to negotiate better terms. Several of Kendall’s top managers have a history of manipulating financial results. Based on her observations, which action is Kendall most likely to take?

A) Treat all leases as operating leases.

B) Assume that equipment has a useful life of eight years, rather than the five years currently assumed.

C) Recognize revenue early.

Answer is A,

Can someone explain?

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Question 2**Professor Paula King teaches accounting at South Central Coastal Idaho Polytechnic. In her lecture this morning, she passes out sheets containing facts about Consolidated Industries. From those fact sheets, she identifies four signs that could indicate financial fraud:

Executives have personally guaranteed some of the firm’s debt.
The company’s organizational chart is complex.
The company’s monopoly status allows it to charge any price it desires.
Turnover is high in the information-technology department.
After presenting those observations, King concludes that because of the four characteristics, executives at Consolidated have a greater opportunity than most to commit fraud. Student Mukesh Ghari believes one of King’s examples does not help her argument. Which of the four facts is least compelling in support of King’s argument?

A) The company’s monopoly status allows it to charge any price it desires.

B) Turnover is high in the information-technology department.

C) Executives have personally guaranteed some of the firm’s debt.


Answer is C,
Can Someone explain?
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Analyst Jane Kilgore is worried about the quality of Maxwell Research’s earnings for the following reasons:

Management turnover is high.
Technology systems are outdated.
The organizational structure is complex.
Maxwell uses the unit-of-production method.
Which of Kilgore’s concerns is least valid?

A) Maxwell uses the unit-of-production method.

B) Management turnover is high.

C) Technology systems are outdated


Answer is A,
Can someone explain?
I think both A and B are correct>



Edited 2 time(s). Last edit at Monday, October 26, 2009 at 02:24PM by varundarji.

disiz64

Question 1:

I think the idea behind management's executives are to lower their earnings so that they can get government to fend off foreign competitions, use as an excuse not to raise wage and to negotiate for better terms (Late payment is better than no payment). I would also think that the likelihood for stock price to rise is higher when public know of the tax break given and the company's success in winning the labour war.

Question 2:

I think answer should be A. B indicates opportunity while C indicates pressures in the fraud triangle.

Question 3:

In the book, it says that unit-of-production method will results in low quality of earning if depreciation expense is lower in the early years compared to the other 2 method, resulting in higher earning which is of low quality. I would have chosen C arguing that outdated technology system will probably end up with lower earning but its still of good quality.