ECON 106F Chapter Notes - Chapter 2: Inventory Turnover, Sarbanes–Oxley Act, Asset Turnover

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26 Apr 2016

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Financial statements are accounting reports with past performance information that a firm issues periodically (usually quarterly and annually) U. s. public companies are required to file their financial statements with the u. s. securities and. Exchange commission (sec) on a quarterly basis on form 10-q and annually on form 10-k. They must also send an annual report with their financial statements to their shareholders each year. Generally accepted accounting principles (gaap) provide a common set of rules and a standard format for public companies to use when they prepare their reports. Corporations are also required to hire an auditor to check the annual financial statements and make sure that they are reliable and follow gaap. The balance sheet (statement of financial position) lists the firm"s assets and liabilities, providing a snapshot of the firm"s financial position at a given point in time.

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Problem

WorldCom Corporation began as a small company in the 1980s. Under the direction of CEO and cofounder Bernie Ebbers, it quickly grew to become one of the largest telecom companies in the world. Ebbersâs success resulted in his theory that survival in the telecommunications industry would come only through company growth and expansion. Therefore, during the next two decades, WorldCom grew through acquisitions, purchasing more than 60 different firms in the latter half of the 1990s alone. In 1997, World- Com acquired MCI in a transaction that cost the company roughly $37 billion, and it would have purchased Sprint if it had not been prevented by federal antitrust regulations.

In less than two decades, WorldCom had grown from a small telephone company to a corporate giant, controlling about half of the U.S. Internet traffic and handling at least half of the e-mail traffic throughout the world. The value of WorldCom stock followed the companyâs growth, eventually reaching more than $60 per share. However, corporate scandal and falsified financial statements soon led the company down the dreaded spiral until, in 2002, it filed for the largest Chapter 11 bankruptcy in U.S. history.

In 1998, WorldCom experienced a sudden and unexpected halt in its formerly increasing revenues. WorldComâs stock immediately took a hit. As its stock continued to drop, WorldCom became unable to reach Wall Street expectations, and in a desperate effort to maintain investor confidence, the company resorted to dishonesty.

WorldCom had established a large reserve account, which was initially maintained to cover the liabilities of companies it purchased. However, when revenues from operations continued to decrease, the company decided to use these reserve funds to boost its numbers. In total, WorldCom illegally converted $ 3.8 billion of reserve funds into revenues from operations.

However, these fictitious revenues were not enough to help WorldCom meet its expected level of revenue. So, in December 2000, CFO Scott Sullivan ordered accountants at the companyâs Texas division to reclassify many of the companyâs expenses. Members of the accounting staff were to reclassify operating expenses (an income statement account) as capital expenses (a long-term asset account). For example, lease expenses and computer expenses would become lease assets and computer assets.

This reclassification of expenses did two things. First, by greatly decreasing operating expenses on its income statement, WorldCom increased its net income. Second, by converting operating expenses into capital assets, the company increased its long term asset account. The idea was that a huge increase in both retained earnings (from an increase in net income) and assets would inevitably lead to an increase in the value of WorldCom and its stock. Overall, nearly $3.85 billion of operating expenses were misclassified as capital assets.

Other fraudulent activity dug the companyâs fraud deeper and deeper until the schemes were eventually detected and investigated by the companyâs own internal audit department and the SEC. In the end, it was discovered that more than $11 billion had been defrauded from a company that was soon forced to file the largest Chapter 11 bankruptcy ever recorded. As a result of the fraud, thousands of employees lost not only their jobs, but also their entire retirement savings. The fraud cost investors billions of dollars as the company quickly went from a multibillion dollar franchise to bankruptcy. Several company executives were indicted on counts of conspiracy and security fraud. The main perpetrator, Scott Sullivan (CFO), received a sentence requiring him to pay as much as $25 million in fines and serve up to 65 years in prison. Other executives received similar sentences. In essence, the WorldCom fraud left those involved in the company with nearly nothing. It proved a prominent example of the age-old adage âcheaters never prosper.â

Questions

1. Suppose you are an accountant for pre-fraud WorldCom. You have just been instructed by the CFO to alter specific company accounts in order to boost the companyâs numbers before fourthquarter disclosures. You know the actions are unethical, but you fear that refusing to comply with executive orders may result in punishment and possible termination of your job. What would you do?

2. Although it usually doesnât involve physically stealing money, financial statement fraud is commonly considered the most expensive type of fraud. Why is this true?

3. The Sarbanes-Oxley Act of 2002 has, in many ways, changed the role of financial statement auditors. In addition to ensuring financial statement accuracy, independent auditors are now required to review a companyâs internal controls and report their assessments in the companyâs annual report. How might these new policies help prevent financial statement fraud from occurring?

Q3. The assumption of rational self-interest implies that people will choose to enrich themselves even if doing so violates the rights or property of others.

a. true

b. false

Q4. If you can earn $10 an hour as a retail clerk, $12 an hour as an office assistant, $16 an hour as a house painter, and $20 an hour repairing bicycles, what is your opportunity cost of working to repair bicycles?

a. $12 an hour

b. $10 an hour

c. $20 an hour

d. $16 an hour

Q5. In the graph of a production possibilities curve, both the horizontal and vertical axes measure the annual quantities of goods produced.

a. true

b. false

Q6. Scarcity arises because

a. international companies are slow to explore for new resources.

b. resources are finite and unable to meet all human wants and needs.

c. many countries waste goods because of inefficient political systems.

d. import taxes retard production.

Q7. A production possibilities curve with clothing and food on the axes shows which of the following?

I. A society cannot have an unlimited amount of each good.

II. For an efficient society, an increase in clothing production will necessitate a decrease in food production.

III. A society will always produce the maximum amount of both clothing and food.

a. II only

b. I only

c. III only

d. both I and II

Q8. All points on the production possibilities curve are efficient.

a. true

b. false

Q9. Economic growth can be pictured in a production possibilities curve diagram by

a. shifting the production possibilities curve out.

b. moving from right to left along the curve.

c. moving from left to right along the curve.

d. shifting the production possibilities curve in.

Q10. Suppose the current unemployment rate is 15 percent. If it rises to 20 percent,

a. the production possibilities curve will shift inward.

b. the economy will move closer to the production possibilities curve.

c. the economy will operate further inside the production possibilities curve.

d. the economy will move up along the production possibilities curve.

Q11. Clean air is a scarce resource.

a. true

b. false

Q12. Which of the following statements is FALSE?

a. A good is anything that gives satisfaction or happiness to individuals.

b. Wants may include humanitarian and altruistic goals.

c. Wants are unlimited and include all material and nonmaterial desires.

d. Economic goods are available in desired quantities at a zero price.

Q13. The current size of the U.S. labor force is less than 100 million workers.

a. true

b. false

Q14. The factors of production are

a. never as useful as people expect them to be.

b. valuable only because they are owned by corporations seeking to make a profit from them.

c. scarce resources.

d. abundant without limit on the planet.

Q15. Why do firms seek to use the least-cost combination of inputs?

a. because they won't be able to stay in business if they don't

b. because that is the combination that their employees prefer

c. because managers and supervisors find their jobs are easiest when the least-cost combination is used

d. because they want to keep costs low in order to appear to the media as a well-run business

Q16. Which one of the following best describes how economists view prices?

a. Low prices are good; high prices are bad.

b. High prices are good; low prices are bad.

c. The best price is a fair price.

d. Prices are signals of relative scarcity.

Q17. The person who creates a product innovation and brings it to market is providing the resource of

a. labor.

b. land.

c. entrepreneurship.

d. capital.

Q18. Gifts of nature used in the production process are considered

a. entrepreneurship.

b. labor.

c. land.

d. capital.

Q19. In a free market economy,

a. government decides what is produced, and producers decide who gets to consume it.

b. as a good becomes relatively more scarce, its price declines.

c. firms choose only to produce the most fashionable goods, regardless of the cost of production.

d. goods and services are allocated by a price system.

Q20. Resources are also known as

a. stocks, bonds, and other financial instruments.

b. minerals.

c. factors of production.

d. factories.

Q21. The size of the U.S. labor force has declined over the past 20 years as many jobs have been outsourced from the United States to other countries.

a. true

b. false

Q22. Which one of the following is TRUE?

a. The growth of the U.S. population over the next several decades will come from immigration.

b. Population growth makes a country poorer, because there are more mouths to feed.

c. Real per capita GDP can increase only if there is inflation.

d. Real per capita GDP can increase only if there is no inflation.

Q23. Which one of the following is FALSE?

a. The U.S. labor force will continue to grow through immigration.

b. Inflation stops economic growth.

c. Increased availability of reliable communication channels at lower and lower costs have led to companies relocating their manufacturing operations offshore.

d. The size of the U.S. labor force continues to grow despite many jobs being moved off-shore.

Q24. What is the purpose of a market system?

a. to facilitate efficient exchange

b. to encourage consumers to buy goods on credit

c. to ensure an equal distribution of income

d. to ensure that everyone is treated fairly

Q25. The market system is also called the price system because

a. people pay money in markets.

b. everything has a price tag.

c. rising prices are the signal to producers to make more of a particular good.

d. inflation is a disturbing problem.

Q26. Production refers to

a. any activity that causes a material conversion of an object.

b. any activity that results in the conversion of resources into goods and services that can be consumed.

c. any activity carried on by a firm, whether a corporation, partnership, or sole proprietorship.

d. physically producing material goods only.

Q27. An increase in the price of coffee, holding other things constant, will

a. decrease the demand for coffee.

b. increase the demand for coffee.

c. decrease the quantity of coffee demanded.

d. decrease the supply of coffee.

Q28. The supply curve shifts when the firm experiences a change in its production technology.

a. true

b. false

Q29. A surplus results when the quantity supplied exceeds the quantity demanded.

a. true

b. false

Q30. Table 3.1

Price per Constant-Quality Unit Quantity Demanded of Constant-Quality Units per Year Quantity Supplied of Constant-Quality Units per Year

$1.00 1,000 200

2.00 800 400

3.00 600 600

4.00 400 800

5.00 200 1,000

What condition characterizes a surplus?

a. Quantity supplied exceeds quantity demanded.

b. Quantity demanded exceeds quantity supplied.

c. Consumers are unhappy with the price.

d. Producers are unhappy with the price.

Q31. An increase in quantity demanded is caused by

a. an increase in income.

b. a decrease in the price of a complement.

c. a change in expectations about price in the future.

d. a decrease in the price of the good.

Q32. The demand curve is downward sloping because

a. price and quantity have a direct relationship.

b. price is always constant.

c. demand is based on supply.

d. price and quantity have an inverse relationship.

Q33. An increase in the price of one good will decrease the demand for a substitute good.

a. true

b. false

Q34. The market demand curve is the vertical summation of the demand curves of all the individuals in the market.

a. true

b. false

Q35. The equilibrium price of a good is a price that everyone is happy with.

a. true

b. false

Q36. Which one of the following would cause a rightward shift of the supply curve?

a. A new tax is imposed on production of the good.

b. Some firms that have been producing the good go out of business.

c. Firms producing the good find ways of lowering their production costs.

d. There is an increase in demand for the good.

Q37. Which of the following is a determinant of demand?

a. cost of production

b. number of suppliers

c. technology of production

d. income

Q38. The market demand curve for a particular good

a. will not be affected by any of the determinants of individual demand.

b. is the horizontal sum of each individual demand curve for the good.

c. will show a direct relationship between price and quantity demanded.

d. may be less than an individual demand curve for the good.

Q39. Table 4.4

Quantity of CDs Purchased Total Utility Marginal Utility

1 75

2 135

3 185

4 35

5 25

6 15

According to Table 4.4, what is the total utility when six CDs are purchased?

a. 65

b. 260

c. 120

d. 220

Q40. A rational consumer will never purchase a product when its

a. marginal utility is decreasing.

b. total utility is decreasing.

c. marginal utility is slightly positive.

d. marginal utility is negative.

Q41. The price elasticity of demand becomes relatively greater as more substitutes are easily available.

a. true

b. false

Q42. Which of the following statements is true with respect to total utility and marginal utility?

a. Marginal utility is always equal to total utility.

b. Total utility will always be negative when marginal utility is positive.

c. Total utility is minimized when marginal utility is zero.

d. Marginal utility can decline as total utility rises.

Q43. Table 4.3

Quantityof Soda Marginal Utility of Soda Quantityof Pizza Marginal Utility of Pizza

1 50 1 100

2 25 2 80

3 0 3 60

4 -25 4 40

After consuming what quantity of soda does the consumer in Table 4.3 experience diminishing marginal utility?

a. 2

b. 3

c. 1

d. 4

Q44. If the price elasticity of demand is 0.5, a 10 percent increase in the price will cause

a. the quantity demanded to decrease by 20 percent.

b. the quantity demanded to decrease by 50 percent.

c. the quantity demanded to increase by 50 percent.

d. the quantity demanded to decrease by 5 percent.

Q45. Which one of the following would make the demand for satellite subscription TV relatively less elastic?

a. The cost of administering the satellite service is lowered.

b. Cable TV service becomes less widely available.

c. Other networks of wireless entertainment become more widely available.

d. The cost of transmitting satellite signals is lowered.

Q46. A price increase will cause a relatively large drop in quantity demanded when

a. demand is perfectly inelastic.

b. the price elasticity of demand is 0.

c. there is very little time allowed for consumers to react.

d. the consumer has easy access to a number of substitute goods.

Q47. Table 4.6

Price Quantity Demanded

$20 90

$16 110

$12 130

$ 8 150

According to the data in Table 4.6, what is the elasticity of demand between a price of $20 and a price of $16?

a. 0.60

b. 0.75

c. 0.90

d. 1.25

Q48. Price elasticity of demand is the responsiveness

a. of the quantity demanded to changes in supply.

b. of the quantity demanded to changes in income.

c. of the quantity demanded to changes in price.

d. of the quantity demanded to changes in quantity.

Q49. Everyone who views the latest adventure movie in theaters will derive the same utility from seeing it.

a. true

b. false

Q50. The law of diminishing marginal utility asserts that total utility becomes negative when marginal utility begins to diminish.

a. true

b. false

1. In closing a request for a recommendation, you should include

a. an expression of appreciation.

b. an indication that youï¿½ve enclosed a stamped, preaddressed envelope.

c. the full name and address of the person to whom the letter should be

sent.

d. all of the above.

2. When writing a claim letter, the best way to begin is by

a. complimenting the company for past service.

b. providing a detailed description of the faulty merchandise.

c. providing a straightforward statement of the problem.

d. threatening legal action if you do not receive a favorable

adjustment.

3. When making a claim or requesting an adjustment, your closing should usually

a. clearly state how angry and disappointed you are.

b. explain the specific details of the problem.

c. request a specific action or express your desire to find a solution.

d. do all of the above.

4. Routine, positive messages should do all of the following except

a. leave your reader with a good impression.

b. use an indirect approach.

c. provide all required details.

d. communicate the information or good news.

5. In a positive message, the main idea is presented

a. in the first sentence of the middle paragraph.

b. at the end of the middle paragraph.

c. right at the beginning of the letter.

d. in the last sentence of the letter.

6. The longest part of a positive message is typically the

a. introduction.

b. body.

c. close.

d. Noneï¿½all parts are usually the same length.

7. ï¿½If the figures are in by the end of the month we will hopefully be able to begin

planning for the upcoming yearï¿½s budget, but if they are not then the plan

ning process will most definitely have to wait until laterï¿½ is an example of

a. a comma splice.

b. an overly long sentence.

c. an indefinite pronoun starter.

d. an awkward pointer.

8. Which of the following is an example of a hedging sentence?

a. The report seems to be incomplete.

b. The deadline is next Tuesday.

c. The financial statement needs to have two sections.

d. None of the above is hedging.

9. What is wrong with the following sentence? ï¿½To waste time and missing dead

lines are bad habits.ï¿½

a. Similar ideas are not parallel.

b. It contains a dangling modifier.

c. It contains a split infinitive.

d. Nothingï¿½it is grammatically correct as written.

10. What is wrong with the following sentence? ï¿½Driving to the office, a police

officer stopped me for speeding.ï¿½

a. It lacks parallelism.

b. It contains a dangling modifier.

c. It contains an awkward pointer.

d. Nothingï¿½it is grammatically correct as written.

11. ï¿½Government task force report recommendationsï¿½ is an example of

a. redundancy.

b. a dangling modifier.

c. a dependent clause.

d. a long noun sequence.

12. Which of the following sentences contains a camouflaged verb?

a. Some do; others donï¿½t.

b. She is a marketing manager but also serves as ad manager.

c. It is Johnï¿½s recommendation that she be hired.

d. He slowly, deliberately added the numbers.

13. Roughly ___ percent of U.S. employers have terminated employees for

misuse of company e-mail systems.

a. 1

b. 10

c. 25

d. 80

14. E-mail hygiene refers to

a. the absence of slang and informal language in e-mail messages.

b. a nationwide movement to do away with information overload.

c. all the efforts companies make to keep e-mail clean and safe.

d. none of the above

15. E-mails should include all of the following except:

a. information about attachments

b. inside address

c. e-mail addresses of sender and receiver

d. contact information

16. When it comes to monitoring incoming and outgoing e-mail,

a. most companies do not make the effort.

b. only about 10 percent of U.S. employers do it.

c. most employers view it as an invasion of employee privacy.

d. about 50 percent of U.S. employers regularly do so.

17. When it comes to legal issues,

a. e-mails mean nothingï¿½only printed documents can be used in court.

b. e-mail and other electronic documents have the same weight as printed

ones.

c. your e-mail messages are off limitsï¿½using them in court would violate

your privacy.

d. none of the above are correct.

18. According to a recent study, workers exposed to a constant barrage of

e-mail, IM, and phone calls

a. increased their productivity by 20 percent.

b. were 50 percent more likely than their peers to be promoted.

c. experienced an average 10-point drop in their functioning IQ.

d. experienced none of the above

19. One important element of basic e-mail etiquette is to

a. be careful about using the ï¿½ccï¿½ function.

b. use bullets and lists.

c. include headings on all e-mails.

d. capture your readersï¿½ attention.

20. A good opening for a negative message would be

a. Iï¿½m sorry to say I have some bad news.

b. This letter is in reply to your application.

c. Your rï¿½sumï¿½ clearly shows why you are interested in becoming a

management trainee with our company.

d. We have no openings at this time.

21. In a negative message, the reasons for the decision

a. are so obvious that you donï¿½t need to mention them.

b. come directly after the buffer and follow naturally from it.

c. should be glossed over quickly.

d. should be long and roundabout to cushion the negative aspects.

22. In the reasons section of a negative message, you should

a. present enough detail for the audience to understand your reasons.

b. explain what your decision is before you explain why you have reached it.

c. apologize for the negative decision.

d. do all of the above.

23. A way to be tactful when giving your reasons for bad news is to

a. explain why the decision is good for you and your company.

b. highlight, if possible, how your negative decision benefits your readers.

c. explain that the decision is based on company policy.

d. apologize for having to be the bearer of bad news.

24. Using the indirect approach, the bad news comes

a. immediately after the buffer.

b. immediately before the reasons.

c. immediately after the reasons.

d. at the very end.

25. A good way to make bad news less painful is to

a. maximize the space devoted to it.

b. say, ï¿½I trust our decision is satisfactory.ï¿½

c. avoid stating it and hope that the reader understands what you mean.

d. de-emphasize it by embedding it in the middle of a sentence or paragraph

ECON 106F Chapter Notes - Chapter 2: Inventory Turnover, Sarbanes–Oxley Act, Asset Turnover

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