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Durable Competitive Advantage > Financial Shenanigans Ch 1-5 > Flashcards

Financial Shenanigans Ch 1-5 Flashcards

(63 cards)

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1
Q

Enron used what kind of accounting to give the illusion that it had larger sales than in reality?

A

Mark to market accounting

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2
Q

When reported sales growth far exceeds any normal patterns…

A

Revenue recognition shenanigans may likely have fueled the increase

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3
Q

Earnings manipulation shenanigans…4

A

1 recording revenue too soon
2 recording bogus revenue
3 boosting income using one time/unsustainable activities
4 use techniques to hide expenses or losses

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4
Q

Cash flow shenanigans:

Shifting financing cash inflows…

A

To operating section

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5
Q

Cash flow shenanigans:

Shifting normal operating cash outflows to…

A

The investing section

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6
Q

Cash flow shenanigans:

Inflating operating cash flow using…2

A

1 acquisitions or

2 disposals

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7
Q

Cash flow shenanigans:

Boosting operating cash flow using…

A

Unsustainable activities

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8
Q

Key metrics shenanigans 2

A

1 showcasing misleading metrics that overstate performance

2 distorting balance sheet metrics to avoid showing deterioration

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9
Q

Acquisition driven companies offer investors some of the…

A

Greatest challenges and risks

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10
Q

Aggressive accounting by worldcom involved…4

A

1 making acquisitions
2 writing off much of the costs immediately
3 creating reserves
4 releasing reserves into income as needed

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11
Q

Acquisition driven companies often lack internal engined of growth such as…3

A

1 product development

2 sales

3 marketing

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12
Q

On the statement of cash flows line costs were placed in…

Instead of…

A

The investing section

Operating section

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13
Q

Free cash flow equation

A

Free cash flow =

cash flow from operations - capital expenditures

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14
Q

When free cash flow suddenly plummets…

A

Expect big problems

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15
Q

Red flag is companies profits do not…

A

Do not grow in proportion to company’s sales

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16
Q

Operating cash flow is inflated when acquisitions are…

A

Recorded in the investing section of statement of cash flows

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17
Q

Financial shenanigans

A

Actions taken by management to mislead investors about financial performance or economic health

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18
Q

Management is devoid of checks and balances 2

A

Good when members of management disagree

Bad when one manager runs the show

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19
Q

It is bad, when company management consists of…

A

Family and friends

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20
Q

CEOs who push a culture of win at all costs can lead to…

A

Aggressive accounting

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21
Q

It’s bad when management…

A

Boasts about continuously beating earnings

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22
Q

You should question the auditor’s opinion when…

A

Auditor’s fees are astronomical

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23
Q

How can management avoid the regulatory scrutiny of going public?

A

By merging into an already public company

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24
Q

Red flag when management boasts about being…

A

Ethical

Ethical people rarely brag about such virtues

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25
Madoff's investment firm did not have a...
Third party custodian to safeguard cash and securities | For investors to prevent theft
26
Warning signs: breeding ground for shenanigans Absence of checks and balances...
Among senior management
27
Warning signs: breeding ground for shenanigans An extended streak of...
Meeting or beating Wall Street expectations
28
Warning signs: breeding ground for shenanigans Single family dominating...3
1 management 2 ownership or 3 board of directors
29
Warning signs: breeding ground for shenanigans Presence of...
Related party transactions
30
Warning signs: breeding ground for shenanigans Inappropriate compensation structure that encourages...
Aggressive financial reporting
31
Warning signs: breeding ground for shenanigans Inappropriate members placed on...
Board of directors
32
Warning signs: breeding ground for shenanigans Inappropriate business relationships between...
Company and board members
33
Warning signs: breeding ground for shenanigans An unqualified...
Auditing firm
34
Warning signs: breeding ground for shenanigans An auditor lacking...
Objectivity and independence
35
Warning signs: breeding ground for shenanigans Attempts of management to avoid...2
Regulatory or legal scrutiny
36
4 requirements for revenue recognition that must be met
1 evidence of an arrangement exists 2 delivery of product or service has occurred 3 price is fixed or determinable 4 collectibility of proceeds is reasonably assured
37
For capital leases, by using a low discount rate management could...
Aggressively accelerate revenue recognition
38
Be aware of acceptable accounting methods that are meant for different industries, ex.
Mark to market used by Enron for premature rev recognition Percentage completion used for premature rev recognition
39
Bill and hold is considered... Where can it be found if the company used bill and hold?
Premature revenue recognition Found in the 10-K foot note for revenue
40
Consignment arrangements can be used for...
Prematurely recording revenue
41
Sell in 2) sell through
Sell in = manufacturer sells to distributor Sell through = products are purchased by the end user
42
When a company switches from a sell in to a sell through model this is a...
More aggressive way to recognize revenue
43
Be mindful of sellers recording revenue before the lapse of the...
Right to return
44
Look for revenue recognition changes in...
The footnotes
45
Watch for an increase in...
Seller provided financing
46
A company is riskier when they have looser...
Financing plans
47
Record revenue from transactions that lack economic substance
Customer is under no obligation to pay for product
48
For legitimate insurance contracts there must be...
A transfer of risk
49
Bogus reserves will often lead to...
Bogus revenue or income
50
A rapid increase in accounts receivable is often an indication of...
Deteriorating financial health
51
Most related party transactions and joint ventures that lack an arms length exchange produce...
Phony revenue
52
If a company has 36 employees, chances are the company is committing fraud by stating...
$300 million in revenue
53
If you spot signs of a questionable accounting approach test it by...
Comparing results and practices to a similar larger company
54
A principal (owner of inventory) should recognize revenue using... 2) an agent should recognize revenue using...
The gross method 2) the net method (fee only)
55
Turning a sale of a business into a recurring revenue stream (ex. Technology companies commonly do this)
Company Sells a business unit and agrees to buy it back
56
When a company sells a business unit that it will use future services from, a common shenanigan is...
Under reporting the gain from sale in order to over report revenue
57
Companies often try to over report... How?
Operating income By shifting nonrecurring income to operating income and operating expenses to nonrecurring expenses
58
If an investor possesses significant influence of a company (over 20% ownership), it's proportionate share of profits should be included as...
Non operating income (not as revenue)
59
Switching from the equity method to the available for sale method means...
Periodic results of the subsidiary would not affect earnings of the parent
60
If an investment is designated as trading security, changes in fair value are...
Reflected on the statement of income
61
If an investment is designTed at available for sale, changes in fair value are...
Presented as an offset to equity with no impact to earnings
62
Under the equity method for an investment, a company reports...
Proportional share of investment's earnings on income statement
63
For an over 50% ownership investment in a company...
The parent consolidates sub's financial statements into its own

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