Question : Learning Objective 11-3 1) How can you tell if a company : 1253086

Learning Objective 11-3

1) How can you tell if a company is taking big bath charges this year?

A) Compare this year’s accounts receivable with last year’s. If this year’s accounts receivable are much bigger, there must have been many charges.

B) Compare this year’s income statement with several previous years’, looking for unusual expenses or write-offs.

C) Compare this year’s cash flow from operating activities with several previous years’. If this year’s cash flow from operating activities is much smaller, there must have been many charges.

D) Look for a note titled “Big Bath Charges” in the annual report.

2) Which of the following may indicate a company is setting up a cookie jar reserve this year?

A) The current year’s estimated warranty liability is significantly larger than prior years’.

B) The current year’s warranty expense is significantly smaller than several previous years’.

C) The current year’s cash flow from operating activities is significantly larger than previous years’.

D) There is a note titled “Cookie Jar Reserves” in the annual report.

3) What may be the effect on a company’s financial statements in the year a company sets up a cookie jar reserve?

A) Net income and total assets may be too high.

B) Net income and total liabilities may be too low.

C) Net income may be too high and total assets may be too low.

D) Net income may be too low and total liabilities may be too high.

4) What may be the effect on a company’s financial statement in the year a company sets up a cookie jar reserve?

A) Net income and total assets may be too high.

B) Net income and total assets may be too low.

C) Net income may be too high and total assets may be too low.

D) Net income and total liabilities may be too high.

5) Out of Africa, a multi-national corporation, had a very bad year. Management decided to write off a large amount of its long-term assets because they might lose value in future years. Management is ________.

A) acting ethically and being conservative

B) recording big bath charges

C) recognizing revenue too early

D) setting up a cookie jar reserve

6) RH Company shipped goods to a customer on December 31, 2011 that the customer had not ordered. RH Company recorded a credit sale of $75,000. What is the effect of recording this sale on RH Company’s 2011 financial statements?

A) Net income and total assets are too high.

B) Net income and total assets are too low.

C) Net income is too high and total assets are too low.

D) Net income is too low and total assets are too high.

7) RH Company shipped goods to a customer on December 31, 2011 that the customer had not ordered. RH Company recorded a credit sale of $75,000. As a result of recording this sale, which of the following will be overstated on RH Company’s 2011 financial statements?

A) sales

B) accounts receivable

C) earning per share

D) all of these

8) Trading Places, a multi-national corporation, had a very successful year and was more than meeting analyst’s expectations. Management decided to increase the amount of its warranty expense to more than was needed. Management is ________.

A) acting ethically and being conservative

B) recording big bath charges

C) recognizing revenue too late

D) setting up a cookie jar reserve

9) GB Company had a very bad year in 2011. The controller knew that the company already had a significant loss for the year, so he put the paperwork in his bottom drawer for some of the shipments made in the last two weeks of 2011. As a result, $100,000 of sales were not recorded and the customers weren’t billed until 2012. The controller is ________.

A) acting ethically and being conservative

B) recording big bath charges

C) recognizing revenue too late

D) setting up a cookie jar reserve

10) GB Company had a very bad year in 2011. The controller knew that the company already had a significant loss for the year, so he put the paperwork in his bottom drawer for some of the shipments made in the last two weeks of 2011. As a result, $100,000 of sales were not recorded and the customers weren’t billed until 2012. What is the effect of omitting these sales from GB Company’s 2011 financial statements?

A) Net income and total assets are too high.

B) Net income and total assets are too low.

C) Net income is too high and total assets are too low.

D) Net income is too low and total assets are too high.