Chapter 6
Earnings Management
MULTIPLE CHOICE QUESTIONS
1. Which of the following may be a limitation of financial statements?
a. Subject to biases of management
b. Provides no information on the company’s accounting methods
c. Typically reflects the view of inherently unethical managers
d. Communicates only market values and no historical information
2. A company would likely “take a bath”
a. in periods of extraordinary high net income.
b. just prior to creating hidden reserves.
c. when it has experienced an extremely poor year.
d. when its quality of earnings is very high.
3. An analyst assessed a company and determined the company to have reported a “high
quality of earnings.” This implies that
a. management issued a press release indicating it was not aware of any fraud during
the current year.
b. the company’s management exercised little or no discretionary influence in reporting
financial statement information to shareholders.
c. management has used its influence in determining the dollar amounts reported on
financial statements.
d. income statement items reported during the current period can be expected to reflect
future income levels.
6-2 Test Bank – Chapter 6 – Earnings Management
4. Managers that structure financing transactions and choose accounting methods that
exclude debt on the company’s balance sheet are using
a. hidden reserves.
b. fraudulent methods by default.
c. performance overstatement.
d. off-balance-sheet financing.
5. ‘Earnings management’ is described as deliberate managerial decisions and choices
that are solely designed to
a. increase selling prices of a company’s products.
b. reduce repair costs on the company’s equipment.
c. manipulate net income from one period to the next to boost the company’s stock
price.
d. increase working capital.
SHORT ESSAY QUESTIONS
1. Comment on the following news headline: “Van Buren, Inc. Takes a Bath in Current
Year.”
Test Bank – Chapter 6 – Earnings Management 6-3
2. Briefly explain how management may influence the quality of earnings of a company.
Solution:
6-4 Test Bank – Chapter 6 – Earnings Management
3. How might a company overstate performance? Why might this occur?
4. How does off-balance sheet financing make a company appear less risky?
5. Give three examples of how management can engage in “real” earnings management to
achieve the desired reporting of higher net income.