CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

Which of the following are motivations to underreport earnings?

I. Negotiation of labor union contracts
II. Lower incentive compensation
III. Desire to appear more solvent
IV. Obtaining trade relief
A. I and II
B. II and III
C. I and IV

User Contributed Comments 7

User Comment
dimanyc Not sure why II is not right.
noonah dimanyc: incentive compensation is for the co employees and is proportionately linked to either earnings or the price of the stock. Hence, the lower the earnings, the lower compensation the co has to pay.
sushi82 Hello, what is the meaning of trade relief?
cong Noonah, I think you are right here. Incentive compension is paid to the executives. So there is almost no incentive for the company to lower incentive compensation.
serboc dimanyc: think about solutions for principle / agent problem in econ

sushi: getting better rates and terms on acct payable,etc.
dan1987 i&iv are both external influences on the company's bottom line. Trade Unions are outside of the company's powers, and trade relief is always a positive and therefore incentive to understate

It is up to the company if they pay bonus' and how much no need to under state earnings (might piss our employees of tho) and understating earning will not boost solvency
ascruggs92 cong - the question doesn't ask about reasons to lower incentive compensation, it asks about under-reporting earnings. Regardless of whether a company lowers, raises, or leaves incentive compensation the same, there is very little reason to under-report on that basis, as reporting too low of earning might forfeit the incentive comp altogether
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