Corporate Financial Reporting & Valuation Flashcards

Under ASC 606, what is the fourth step of the five-step revenue recognition model?

Answer: Allocate the transaction price to the performance obligations

ASC 606 steps are: identify the contract, identify performance obligations, determine price, allocate price, then recognize revenue.

A company ships excess inventory to distributors at quarter-end with generous return rights to meet targets. Which accounts are most directly inflated?

Answer: Revenue and accounts receivable

Channel stuffing pulls future sales into the current period, inflating revenue and receivables.

Revenue grows 15% while days sales outstanding rises sharply from 45 to 80 days. What does a forensic analyst most likely suspect?

Answer: Aggressive or fictitious revenue recognition

Receivables growing much faster than sales suggests revenue being booked that is not being collected.

Under ASC 606, which condition must be met for a seller to recognize revenue on a bill-and-hold arrangement?

Answer: The product is identified separately as belonging to the customer

Bill-and-hold criteria include a substantive reason, separate identification, readiness for transfer, and inability to redirect the product.

WorldCom improperly capitalized line costs that should have been expensed. Which effect did this have on reported results?

Answer: Higher net income and higher operating cash flow

Capitalizing expenses removes them from the income statement and moves the cash outflow from operating to investing activities.

The Beneish M-Score model is primarily used by forensic accountants to:

Answer: Detect the likelihood of earnings manipulation

The Beneish M-Score uses eight financial ratios to flag companies likely to be manipulating earnings.

A company over-accrues restructuring reserves in a strong year and reverses them in later weak years. This practice is best described as:

Answer: Cookie jar reserves used for income smoothing

Cookie jar reserves store excess accruals in good periods to release later and smooth reported earnings.