Ch13 tb rankin

Testbankto accompany

Contemporary Issues in Accounting

Michaela Rankin, Patricia Stanton, Susan McGowan, Matthew Tilling,

Kimberly Ferlauto & Carol Tilt

Prepared byMatt Tilling

© John Wiley & Sons Australia, Ltd 2012

Testbank to accompany Contemporary Issues in Accounting

Chapter 13 Corporate Failure

Multiple Choice Questions

1. The definition of corporate failure is:

a. When a company becomes bankrupt or insolventb. The appointment of a receiver or administrator*c. Unclear and ill-defined d. When a company delists and liquidates

Correct answer: c Learning Objective 13.1 ~ Outline what is understood by the term ‘corporate failure’

2. Companies in Australia may only enter voluntary administration under what circumstances?

a. Their creditors agree in a non-binding vote*b. They are able to pay all their debts in fullc. The court orders it d. At least 75% of the shareholders agree to it

Correct answer: b Learning Objective 13.1 ~ Outline what is understood by the term ‘corporate failure’

3. Though there are many potential causes of corporate failure what has been suggested as the common underlying problem?

a. Changes in technologyb. Economic recession*c. Management inadequaciesd. Changes in import protections

Correct answer: c Learning Objective 13.2 ~ Examine the causes of corporate failure

4. Which of the following has been identified as a major cause of corporate failure?

a. Overexpansionb. Dominant CEOc. Failure of internal controls*d. All of the above

Correct answer: d Learning Objective 13.2 ~ Examine the causes of corporate failure

© John Wiley & Sons Australia, Ltd 2012 13.1


5. Poor figures in which financial statement is usually the trigger of corporate failure?

a. Statement of Comprehensive Income – Falling revenuesb. Statement of Financial Position – Increasing liabilities*c. Statement of Cash Flows – Poor operating cash flowsd. Statement of Changes in Equity – Increasing retained losses

Correct answer: c Learning Objective 13.3 ~ Identify the costs of corporate failure

6. Which of the following is NOT an indirect cost of corporate failure?

a. Loss of corporate reputationb. Loss of key employees*c. Additional interest on debt that cannot be paid offd. None of the above, i.e. they are all indirect costs of corporate failure

Correct answer: c Learning Objective 13.3 ~ Identify the costs of corporate failure

7. Which of the following statements is most correct when it comes to predicting corporate distress:

a. The Altman Z-Score has been shown to be 90% accurate*b. There are many models in usec. To date there has been no success in predicting corporate failured. The majority of inputs in the majority of corporate distress models are

qualitative

Correct answer: b Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

8. In the Altman’s Z-score one financial accounting measure appears in 4 of the 5 ratios used, what is it?

a. Sales Revenueb. Operating Cash Flow*c. Total Assetsd. Number of Independent Directors

Correct answer: c Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure



9. One test of Altman’s Z-score in Australia found that its success at predicting financial distress was:

a. Useless, being no better than guessing*b. Below Altman’s original studyc. Above Altman’s original studyd. Excellent, almost perfect at predicting 1 year before failure

Correct answer: b Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

10. Research indicates that lenders making predictions of corporate failure relied:

a. Almost exclusively on accrual informationb. More on accrual information than cash flow information*c. More on cash flow information than accrual informationd. Almost exclusively on cash flow information

Correct answer: c Learning Objective 13.4 ~ Evaluate the factors used to predict corporate failure

11. Which of the following has ASIC identified as a practice that indicates risk of corporate insolvency?

a. Disorganised internal accounting proceduresb. Judgement debtsc. Loss of key management personnel*d. All of the above

Correct answer: d Learning Objective 13.5 ~ Assess the likely indicators of corporate failure

12. Which of the following has ASIC NOT identified as a practice that indicates risk of corporate insolvency?

a. Absence of corporate plansb. Entering into instalment arrangements to pay debts*c. Decreased monitoring by financierd. None of the above, i.e. they have all been identified by ASIC

Correct answer: c Learning Objective 13.5 ~ Assess the likely indicators of corporate failure



13. Corporate governance has been suggested to be at the heart of corporate failure. It has been suggested that companies are less likely to get in financial trouble if their boards:

a. Let management run the company with minimal oversight*b. Are active in their rolesc. Also manage the companyd. Have good political connections

Correct answer: b Learning Objective 13.6 ~ Evaluate the relationship between corporate governance and failure

14. Business Week considers which of the following to be good governance when rating boards?

a. Directors should do business with the company*b. Directors should own shares in the companyc. Directors should always meet with management presentd. None of the above

Correct answer: b Learning Objective 13.6 ~ Evaluate the relationship between corporate governance and failure

15. The corporate collapse in Australia that happened in the 1980’s were thought to be a result of:

a. Poor corporate governance*b. Inadequate accounting disclosuresc. Economic downturnd. Audit failures

Correct answer: b Learning Objective 13.7 ~ Evaluate how regulation has been used to alleviate the effects of corporate failure

16. Following a number of corporate failures in 2001 legislative changes in Australia:

a. Prohibited audit firms from providing other services to clientsb. Required the rotation of audit firms every 5 years*c. Required disclosure of the nature and value of non-audit services provided by

auditors to be disclosedd. Forced the Australian government to enact the Sarbanes-Oxley Act

Correct answer: c Learning Objective 13.7 ~ Evaluate how regulation has been used to alleviate the effects of corporate failure



17. A common factor identified as an issue in both the HIH and Enron collapses was:

*a. Deficiencies in the audit processb. Over reliance on complex financial instrumentsc. Lack of board independenced. None of the above

Correct answer: a Learning Objective 13.8 ~ Evaluate the anatomy of a corporate failure

18. It has been noted that remuneration packages for CEOs in failed companies:

a. Tend to include more options*b. Have a substantially lower proportion of ‘at risk’ componentsc. Are generally much higherd. Are generally much lower

Correct answer: b Learning Objective 13.8 ~ Evaluate the anatomy of a corporate failure

19. A bubble in which class of assets has generally been claimed as the trigger for the global financial crisis?

a. Sharesb. Precious metalsc. Consumables*d. Housing

Correct answer: d Learning Objective 13.9 ~ Critically evaluate the causes and consequences of the global financial crisis (GFC) and evaluate how governments have intervened to alleviate the effects of the GFC.

20. Which of the following mechanisms transferred the financial crisis from the US to the rest of the world?

a. Exposure of the world’s financial system to sub-prime debtb. Decline in US demand for importsc. Contagion of concerns about the housing market in other countries*d. All of the above

Correct answer: d Learning Objective 13.9 ~ Critically evaluate the causes and consequences of the global financial crisis (GFC) and evaluate how governments have intervened to alleviate the effects of the GFC.


Ch13 tb rankin

Economy & Finance

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