Earning Management Quiz

what tools do managers have at their disposal to manage net income?

• a) Accruals and discretionary accruals

• b) Fraud and "under-the-table" transactions

• c) Discretionary accruals and accounting policy

• d) Inventory sell-offs and accounts receivable write-downs

• e) Discretionary accruals and corporate bonus bonuses tied to net income.

Which of the following is not a reason that management would use earnings management to decrease net income?

• a) Net income has exceeded management's bonus cap.

• b) Net income is significantly lower than management's bonus bogey.

• c) A firm under investigation for monopolistic practices.

• d) Net income is slightly below management's bonus bogey.

Which of the following is an example of an earnings management pattern?

• a) Taking a bath

• b) Taking a shower

• c) Income manipulation

• d) Juggling the books

• e) Income balancing

Earnings management is:

• a) The decision to pay dividends or not.

• b) Marketing during slow periods to try and increase sales.

• c) A financial ratio used to better understand the relationship between earnings and sales.

• d) The choice by manager of accounting policies as to achieve some specific objective.

• e) Predicting the effects of new accounting standards on earnings.

Why does earnings management still persist if it allows managers to manipulate earnings?

• a) It is not cost effective to eliminate.

• b) It provides investors with insider information.

• c) It allows investors to choose between honest and dishonest companies.

• d) Both a) and b)

• e) All of the above

Research has found that stock markets do not react to earnings management.

• True

• False

One would expect that the changes to GAAP regarding extraordinary items (Jan 1990) would increase the use of earnings management.

• True

• False

Earnings management is irrelevant for taxation purposes because taxation authorities impose their own accounting rules for calculation of taxable income.

• True

• False

The "iron law" surrounding earnings management suggest that managing current earnings upwards will lead to higher future net income.

• True

• False

The market would better reflect insider information if earnings management was eliminated through standardization.

• True

• False