71. When might a company use a Big Bath?
A. When they have had several successful years of operation and are about to issue shares.
B. When they are going to the bank to increase their borrowing limit.
C. When there has been a change in the major shareholder of the company.
D. When new management has been hired to "turn the company around."
72. Petawawa Producers Inc. has been experiencing declining sales and earnings for the past three years. The Board of Directors have replaced the top management team in hope of turning the company around, and the new managers will be paid a bonus based on how quickly they can reverse the trend. Which one of the following earnings management techniques might the new management be using?
A. Managing earnings to increase income.
B. Managing earnings to decrease income.
C. Managing earnings to smooth income.
D. Taking a Big Bath.
73. Which of the following is not a reason that management might be tempted to manage earnings to increase income?
A. To increase the likelihood of receiving a loan.
B. To increase the likelihood of receiving a government grant.
C. To meet the terms of a debt agreement.
D. To influence the stakeholders' perceptions.
74. Why would management manage earnings to smooth income?
A. To make the company appear less risky to investors.
B. To influence stakeholder's perceptions about how well the entity is performing.
C. To convince workers to accept lower wage settlements.
D. To increase the EPS of a public company.
75. Why would management manage earnings to decrease income?
A. The manager's bonus plan is based on reported earnings.
B. They need to meet the terms of a debt agreement.
C. To avoid attracting competitors to the industry.
D. To influence the stock price if the company is planning on going public.
76. Why would a company adopt a minimum compliance financial reporting objective?
A. The managers' bonus plan is based on reported earnings.
B. They need to meet the terms of a debt agreement.
C. To avoid attracting competitors to the industry.
D. They do not want to provide information to competitors.
77. Which of the following best describes a minimum compliance objective?
A. The company selects accounting policies to minimize earnings.
B. The company reports the minimum amount of information necessary to comply with legislation.
C. The company selects accounting policies to comply with contracts or loan agreements.
D. The company reports to the minimum number of stakeholders possible.
78. Which of the following statements about accounting estimates is true?
A. Accounting estimates are disclosed in the notes to the financial statements.
B. Acceptable accounting estimates are covered by GAAP.
C. Accounting estimates are necessary because economic events and transactions are not known with certainty.
D. Accounting estimates do not have a significant impact on reported earnings.
79. Which are the three factors that affect the accounting choices made by management?
A. Constraints, facts, GAAP, IFRS
B. Constraints, facts, objectives
C. IFRS, facts, legislation
D. Facts, objectives, legislation
80. Which of the following statements is true concerning accounting choices?
A. Management always gets to select the alternative that best meets their objective.
B. Management always uses objectives to solve their accounting choice problems.
C. To be an acceptable recommendation based on facts, the alternative must also have been acceptable in meeting objectives and constraints.
D. To be an acceptable recommendation based on objectives, the alternative must also have been acceptable given the constraints and facts.