Explain the meaning of the statement: “A combination of increasing earnings and decreasing operating cash flow may indicate aggressive reporting of earnings” (page 2 of section). Explain the meaning of the statement “Using loopholes or bright lines in accounting principles” (page 2 of section 2). Discuss this in the context of the extensive use of long-term non-cancellable operating leases.
Question 1.2 (4 marks)
Question 1.3 (5 marks)
Discuss three “red flags” or early warning signs of the collapse of Enron that were available in the 2000 Form 10K filed in early April 2001 or in other publicly available reports at that time.
Question 2 – 8 marks (400 words)
Read the article “Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators” by Dechow and Skinner (2000) and answer the following questions:
Question 2.1 (4 marks)
Discuss the role of management incentives in earnings management practices. Give two examples.
Question 2.2 (4 marks)
Explain the meaning of the statement: “there is a clear conceptual distinction between fraudulent accounting practices and those judgements and estimates that fall within GAAP and which may comprise earnings management depending on managerial intent”. (page 239)
Question 3 – 6 marks (400 words)
In the article published in The CPA Journal “Accounting Shenanigans on the Cash Flow Statement” by Marc Siegel (March 2006), explain the following statements:
Question 3.1 (3 marks)
Why is it a misconception that “cash cannot be manipulated” (page 1 of section 2)? Discuss in the context of the World Com bankruptcy.
Question 3.2 (3 marks)
Explain this statement: “Certain complex situations can arise that cause reported cash flow from operations to appear higher than it would have otherwise” (page 2 of section 2). Give an example.
Question 4 – 7 marks (600 words)
Using the 2015 Rio Tinto annual report answer the following questions concerning performance measures.
Question 4.1 (2 marks)
Within that annual report, there are various performance measures reported:
- underlying earnings, which is reported as (US millions) $4,540 (p.107)
- (Loss)/Profit after tax for the year (US millions) ($1,719). (p.108)
Explain clearly what these two measures of performance represent?
Question 4.2 (2 marks)
Another performance measure in that annual report is total comprehensive (loss)/income for the year of (US millions) ($3,749). (p.109).
Discuss what this performance measure represents and why it is so different from the above two measures.
Question 4.3 (3 marks)
Which do you think is the most important measure of performance and why? Use recent research to support your conclusion.
Please refer to the following criteria for the report:
- Use a report format with sub-headings.
- It is important to use short paragraphs to give clarity to your answer – clarity and succinctness * are what distinguishes the very good from the average reports (* succinctness means explaining the answer completely but concisely, i.e. in a relatively small number of words).
- Referencing: Ensure that this complies with the required format of a reference list.
- Please ensure the submission is typed, with line spacing of 1.5 lines.
- Maximum 2,000 words
- Harvard referencing style
Question 1 – 12 marks (600 words)
Refer to the article “Financial Reporting Quality: Red Flags and Accounting Warning Signs” by Robinson and Munter (2004) and answer the above questions.
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