土豆妮

Jane Kilgore, a stock analyst, is concerned about Maxwell Research’s organizational structure. To investigate the stability of that structure, Kilgore would be best served by looking at:

A) management turnover.

B) the amount of judgment calls used in company accounting.

C) accounting-department turnover.

---

All of the factors listed above are of concern to an analyst looking at the possibility of fraudulent accounting. But to assess the stability of the organizational structure, the best option is a look at management turnover. High turnover rates in the accounting department may be indicative of deficient internal controls, but are too localized to be a true indicator of organizational stability. Excessive judgment calls in accounting are worrisome, but is not likely to be a direct reflection of an unstable organizational structure, as much as poor operational policies.

土豆妮

Charger Corporation offers extended payment terms to its customers. In order to finance its accounts receivable, Charger is considering two alternatives. The first alternative is to borrow against the receivables. The second alternative is to securitize the receivables through a special purpose entity. Which alternative would result in lower operating cash flow and lower financing cash flow?

Lower operating cash flow

Lower financing cash flow

A) Securitize Securitize

B) Borrow Securitize

C) Securitize Borrow

---

The cash received from borrowing would be reported as a financing inflow. The cash received from securitizing the receivables would be reported as an operating inflow. So, borrowing would result in lower operating cash flow and higher financing cash flow. Securitizing would result in lower financing cash flow and higher operating cash flow.

土豆妮

Glenmark Blades and Propellers has set up special purpose entities to handle its manufacturing. The company does not consolidate those entities. Glenmark is most likely obeying:

A) neither the spirit of the law nor the letter of the law.

B) the letter of the law but not the spirit of the law.

C) the spirit of the law but not the letter of the law.

---

Rules regarding special purpose entities (SPE) are quite broad, leaving companies with substantial leeway in interpretation. Separating capital-intensive manufacturing operations from the parent company’s books could give Glenmark a more appealing debt or asset picture. While companies can often opt not to consolidate SPEs, the goal of such entities is not to allow a company to manipulate its financial ratios.

土豆妮

Samson Therapeutics records all leases as operating leases. The company most likely wanted to reduce:

A) expenses.

B) leverage.

C) inventory.

---

Finance (capital) leases are recorded on the balance sheet, and by recording all leases as operating leases, the company can reduce its leverage. Lease accounting has no effect on inventory. "Expenses" is not the best answer as operating leases will result in higher expenses in the later years relative to the finance (capital) lease.

土豆妮

Joe Carter, CFA, believes Triangle Equipment, a maker of large, specialized industrial equipment, has overstated the salvage value of its equipment. This would:

A) overstate earnings.

B) overstate liabilities.

C) understate earnings.

---

Overstating the salvage value reduces depreciation expense, which in turn increases earnings.

土豆妮

Which of the following measures is least affected by the use of estimates in the financial statement preparation process?

A) Cash flow.

B) Net income.

C) Net equity.

---

Net income is easily manipulated because of accrual accounting and the many estimates involved. On the other hand, cash flow is unaffected by estimates. However, firms can still manipulate the cash flow statement by misclassifying cash flows, ignoring cash flows, and managing cash flows.

As a result of its relationship to the income statement, net equity (which is generally an accumulation of earnings and losses less dividend payments to shareholders) is directly affected by the estimates used to determine the level of earnings.

土豆妮

Which of the following statements about cash flow is (are) CORRECT?

Statement #1:	The cash effects of decreasing accounts payable turnover are unlimited.
Statement #2:	The tax benefits from employee stock options can result in a significant source of investing cash flow.

Statement #1

Statement #2

A) Incorrect Incorrect

B) Correct Incorrect

C) Incorrect Correct

---

Statement #1 is an incorrect statement. The cash effects of decreasing accounts payable turnover are limited. Suppliers will eventually stop extending credit because of delayed payments. Statement #2 is an incorrect statement. The tax benefits from employee stock options can result in a significant source of operating and financing cash flows. Tax benefits do not affect investing cash flows