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Testbank

to accompany

Contemporary Issues in
Accounting

Michaela Rankin, Patricia Stanton,


Susan McGowan, Matthew Tilling,
Kimberly Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012


Chapter 13 Corporate Failure

Chapter 13 Corporate Failure

Multiple Choice Questions

1. The definition of corporate failure is:

a. When a company becomes bankrupt or insolvent


b. 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 full
c. 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 technology
b. Economic recession
*c. Management inadequacies
d. 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. Overexpansion
b. Dominant CEO
c. 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


Testbank to accompany Contemporary Issues in Accounting

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

a. Statement of Comprehensive Income Falling revenues


b. Statement of Financial Position Increasing liabilities
*c. Statement of Cash Flows Poor operating cash flows
d. 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 reputation


b. Loss of key employees
*c. Additional interest on debt that cannot be paid off
d. 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 use
c. To date there has been no success in predicting corporate failure
d. 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 Altmans Z-score one financial accounting measure appears in 4 of the 5 ratios
used, what is it?

a. Sales Revenue
b. Operating Cash Flow
*c. Total Assets
d. Number of Independent Directors

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

John Wiley & Sons Australia, Ltd 2012 13.2


Chapter 13 Corporate Failure

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

a. Useless, being no better than guessing


*b. Below Altmans original study
c. Above Altmans original study
d. 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 information


b. More on accrual information than cash flow information
*c. More on cash flow information than accrual information
d. 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 procedures


b. Judgement debts
c. 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 plans


b. Entering into instalment arrangements to pay debts
*c. Decreased monitoring by financier
d. 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

John Wiley & Sons Australia, Ltd 2012 13.3


Testbank to accompany Contemporary Issues in Accounting

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 roles
c. Also manage the company
d. 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 company
c. Directors should always meet with management present
d. 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 1980s were thought to be a
result of:

a. Poor corporate governance


*b. Inadequate accounting disclosures
c. Economic downturn
d. 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 clients


b. 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 disclosed
d. 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

John Wiley & Sons Australia, Ltd 2012 13.4


Chapter 13 Corporate Failure

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

*a. Deficiencies in the audit process


b. Over reliance on complex financial instruments
c. Lack of board independence
d. 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 components
c. Are generally much higher
d. 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. Shares
b. Precious metals
c. 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 worlds financial system to sub-prime debt


b. Decline in US demand for imports
c. 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.

John Wiley & Sons Australia, Ltd 2012 13.5