Accounting Warning Signs

CFA Level II
#1
  1. Was change in inventory procedures a red flag: I said no: They made things more efficent, they didn’t play with the books. 2. What was the least likely red flag? I said the change in the pension discount rate: It made their penision expense higher which gave a better earnings quality… Am I right? At this point I don’t even know if I bubbled in my name correctly…
#2

I think they had a FIFO Liquidation- that would effect earnings quality, bringing older (cheaper) inventory into COGS

#3
  1. They lowered the LIFO reserve thereby artificially inflating their earnings. 2. Agree, pensions no problem
#4

Least like were pensions. I think they lowered the discount rate which made pensions expense more.

#5

1 was a red flag, dipping into old inventory to reduce cogs, agree with 2.

#6

^^ I’m with you here.

#7

the question asked if it was a warning sign, not actually manipulation - so i put yes for a warning sign. iforget the rest of the Q

#8

MarkvanOmmen Wrote: ------------------------------------------------------- > 1. They lowered the LIFO reserve thereby > artificially inflating their earnings. > 2. Agree, pensions no problem agreed

#9

If the cmpany had used the same Inventory accounting practices as the other company would the company have increased its inventory holdings by 15 million??

#10

it was 35M 15M would have been the change in LIFO reserve, which is used for COGS

#11

ravisank Wrote: ------------------------------------------------------- > If the cmpany had used the same Inventory > accounting practices as the other company would > the company have increased its inventory holdings > by 15 million?? I don’t think so. I believe it was they would increase by the LIFO reserve, which I think was like 35 million? It was tricky because they gave you the LIFO reserve and the change in the LIFO reserve as options in the answer choices. I think 15 million was the change in the LIFO reserve, but you would use the actual LIFO reserve to get the higher inventory. Anyone agree?

#12

i put 35

#13

whatz the final answers to those two: LIFO liquadation…increase the COGS then reduce the taxable income??

#14

yeah, 35 mil increase to inventory

#15

Damn… I should have read the question better and seen they were talking about the reserve and not the inventory…

#16

Me: 35

#17

I remember a question in qbank or in the fsa book that said something to the effect… A lifo liquidation it is not always manipulative. Say you changed your inventory strategy to better reflect current industry practices… you reduce inv and dip into the LIFO reserve a bit, but the intent was to improve efficiency not manipulate margin. So not really a red flag in that case.

#18

My chances are getting worse by the minute.

#19

slouis- what would’ve been a good answer there then? i don’t remember that q well at all.

#20

I feel the same, I have to get the f out of here.