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Unformatted text preview: CHAPTER 5 DISCUSSION QUESTIONS 1. If a journal entry is for a legitimate expense, there will be an authentic document (e.g., a bill or invoice) from whoever was paid. If it is to cover up a theft of cash, either (1) there will be no source document to support the entry or (2) there will be a fictitious or forged document supporting the entry. 2. Revenues are usually overstated by creating fictitious receivables or by making an error that overstates receivables. When a receiv- able is debited, a revenue is created. Total assets will be overstated if revenues are overstated. 3. The Foreign Corrupt Practices Act is an amendment to the securities laws that was passed by Congress in 1977. It is important to financial reporting because it requires companies to maintain a system of internal controls that provide integrity in financial statements. 4. There are five elements of a system of in- ternal controls. Most important to account- ants are the (1) control environment and (2) control procedures. 5. Five different types of control procedures are (1) segregation of duties, (2) system of authorization, (3) documents and records, (4) physical safeguards, and (5) independ- ent checks. 6. The four factors that often motivate man- agers to attempt to manage earnings are (1) to meet internal targets, (2) to meet external expectations, (3) to smooth income, and (4) window dressing for an IPO or a loan. 7. a. The purpose of internal earnings targets is to motivate managers and employees to increase their efforts in producing sales and cutting costs. b. The risk with internal targets is that pressure to meet the targets may cause employees to make decisions that are not in the company’s best interest. 8. The term “income smoothing” refers to a firm managing its income to present a stable, steady increase in income rather than a volatile earnings pattern. Financial statement users prefer a steady earnings pattern. 9. Savvy transaction timing—Timing transac- tions to ensure that any gains or losses are disclosed in the period which most favors the company. Aggressive accounting—Changing account- ing methods or accounting estimates and fully disclosing those changes in the notes to the financial statements. Deceptive accounting—Changing account- ing methods or accounting estimates without disclosing the changes in the notes to the financial statements. Fraudulent reporting—Using accounting methods that are not acceptable alternatives according to GAAP. Fraud—Fabricating transactions or know- ingly recording transactions incorrectly. 10. Changing accounting estimates from one year to the next is acceptable as long as the change is fully disclosed in the notes to the financial statements....
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This note was uploaded on 02/02/2010 for the course FNEC 140 taught by Professor Clark during the Spring '08 term at Vanderbilt.
- Spring '08