Question 9

The Moonshine Funding company has been reporting strong and continually growing earnings for the past several quarters, despite an economic recession and worsening results at its closest competitors. This exceptional financial performance has caused Moonshine stock to do well even in a poor market. Financial newscasters are beginning to talk about Moonshine corporate management like sports heroes. Moonshine’s CEO is viewed as a superstar.

Imre Dykes, a portfolio manager with a significant position in Moonshine stock, is becoming nervous. He has been an enthusiastic supporter of management, and believed for quite a while that Moonshine’s superior results were the consequence of Moonshine’s superior management, but he has started to have doubts. The continual, steady increases in Moonshine’s earnings per share (EPS) despite a recession seem dubious to him. He’s beginning to wonder what Moonshine is doing to keep EPS on track when the company has got to be suffering the same economic impact as its competitors.

Dykes has decided to have lunch with Donald Spindrift, a prominent financial reporter he has known for years. Spindrift has also become suspicious of Moonshine because of the surprising strength of its recent results. Dykes brings the firm’s most recent financial data to lunch.

Table 1
Moonshine Funding
Balance Sheet
(millions of dollars)

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2008 CFA Level 2 － Mock Exam 1 （PM）模考试题 Q9 (part 1 - Part 6)

2008-5-17 17:47

Dykes mentions to Spindrift that Moonshine uses a significant amount of off-balance sheet leasing, which he calculates has a present value of $125 million. He also calculates that Moonshine’s long-term debt, although listed at a book value of $400 million, has a market value of approximately $500 million because it carries very high coupon rates relative to current market conditions.

Spindrift acknowledged to Dykes, “I started to get suspicious that they might be overreporting earnings when I found out that Moonshine’s high-coupon debt has covenants about net income. Trying to meet debt covenants is a common incentive for management to overreport earnings.” Dykes said, “I’ve been wondering if they have been overreporting earnings because I think they have all three conditions of the fraud triangle: internal compensation incentives, lax internal controls, and outside pressure from analysts.”

Dykes also points out that he’s also been worried because operating cash flow has been negative. He reminds Spindrift, “One of the signs of earnings manipulation at Sunbeam was record earnings even though operating cash flow was negative.” Spindrift agrees, reminding Dykes, “Sales increasing faster than inventories and receivables was a sign of earnings manipulation at Sunbeam.”

Part 1)

Are Dyke’s and Spindrift’s statements about their suspicions that management is overreporting earnings correct with respect to:

Part 2)
After making the appropriate adjustments to equity, the value of owners’ equity at Moonshine is closest to:

A)   +$230 million.

B)   +$100 million.

C)   +$80 million.

D)   –$20 million.

Part 3)
Which of the following is least likely to be considered a warning sign of aggressive revenue recognition?

A)   Bill and hold arrangements.

B)   Capital-type leases.

C)   Recognizing revenue from barter transactions with third parties.

D)   Sales-type leases.

Part 4)

Are Spindrift’s and Dyke’s statements about earnings manipulation at Sunbeam correct?

Part 5)

The correct adjustments for PP&E and long-term debt would be closest to:

Part 6)

Which of the following was least important as a warning sign of earnings manipulation at Enron in its financial statements for the fiscal year 2000?

A)   Use of the equity method to account for investments and reporting pro-rata earnings of the investee in net income.

B)   Related party transactions in which an Enron employee served as general partner in limited partnerships engaging in transactions with Enron.

C)   Sales of securitized assets at inflated values to SPEs.

D)   Senior management’s compensation was based mostly on bonus and stock awards.

[此贴子已经被作者于2008-5-17 17:47:43编辑过]

答案和详解如下！

Part 1)

Are Dyke’s and Spindrift’s statements about their suspicions that management is overreporting earnings correct with respect to:

The correct answer was A) Correct           Incorrect

Spindrift is correct that trying to meet debt covenants is a common incentive for management to overreport earnings. Dykes is incorrect about the fraud triangle because the three components are incentive and/or pressure, opportunity, and attitudes and/or rationalizations. Internal compensation arrangements and outside pressure from analysts both fall under “incentives and/or pressure.” Dykes does not identify attitudes and/or rationalizations that would result in fraud.

This question tested from Session 7, Reading 30, LOS c

Part 2)

After making the appropriate adjustments to equity, the value of owners’ equity at Moonshine is closest to:

A)   +$230 million.

B)   +$100 million.

C)   +$80 million.

D)   –$20 million.

The correct answer was D) –$20 million.

Equity should be adjusted by:

Since owners’ equity is $200 million, the adjustment brings it down to –$20 million. Leases are not an adjustment to equity.

This question tested from Session 7, Reading 30, LOS c

Part 3)

Which of the following is least likely to be considered a warning sign of aggressive revenue recognition?

A)   Bill and hold arrangements.

B)   Capital-type leases.

C)   Recognizing revenue from barter transactions with third parties.

D)   Sales-type leases.

The correct answer was B) Capital-type leases.

Sales-type leases in which the lessor recognizes a sale at the inception of the lease can be used to book revenue too soon. Capital-type leases do not have this impact because they recognize revenue over the life of the lease. Bill and hold arrangements and recognizing revenue from barter transactions can also be used to manipulate revenue.

This question tested from Session 7, Reading 30, LOS c

Part 4)

Are Spindrift’s and Dyke’s statements about earnings manipulation at Sunbeam correct?

The correct answer was A)  Incorrect    Correct

Spindrift’s statement is incorrect. Receivables and inventories increasing faster than sales was a sign of earnings manipulation at Sunbeam. Sales increasing faster than receivables and inventories can be a sign of more efficient operations. Dykes’ statement is correct.

This question tested from Session 7, Reading 30, LOS c

Part 5)

The correct adjustments for PP&E and long-term debt would be closest to:

The correct answer was C) +$125    +$225

PP&E would be adjusted up by the $125 present value of long-term leases for a total value of $425 + $125 = $550. Long-term debt would be calculated at market value and adjusted up for the present value of long-term leases: $500 + $125 = $625 relative to a reported value of $400, for an adjustment of +$225.

This question tested from Session 7, Reading 30, LOS c

Part 6)

Which of the following was least important as a warning sign of earnings manipulation at Enron in its financial statements for the fiscal year 2000?

A)   Use of the equity method to account for investments and reporting pro-rata earnings of the investee in net income.

B)   Related party transactions in which an Enron employee served as general partner in limited partnerships engaging in transactions with Enron.

C)   Sales of securitized assets at inflated values to SPEs.

D)   Senior management’s compensation was based mostly on bonus and stock awards.

The correct answer was A) Use of the equity method to account for investments and reporting pro-rata earnings of the investee in net income.

In the equity methods, the pro-rata earnings of the investee are correctly reported in net income. Enron’s misuse of the equity method involved reporting the investments at fair value, not including pro-rata earnings in net income. The other statements are all examples of red flags in Enron’s fiscal year 2000 financial statements.

This question tested from Session 7, Reading 30, LOS c

[此贴子已经被作者于2008-5-17 17:49:37编辑过]

非常感谢！

晕，好麻烦，偶在国外啊

good

thanks

非常感谢！

thanks

many thanks

)

好贴，谢谢楼主！