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CHAPTER 12

INCENTIVE SYSTEMS

Questions, Exercises, Problems, and Cases: Answers and Solutions

1. See text or glossary at the end of the book.

2. The major characteristics of divisional compensation plans include: cash bonuses and profit sharing plans based on short-term performance, deferred compensation incentives for long-term performance, and special awards for particular actions or extraordinary performance.

3. Expectancy theory holds the view that people will act in ways that they expect will provide them with the rewards that they desire and prevent the penalties that they want to avoid.

4. Intrinsic rewards come from within the individual, whereas extrinsic rewards come from outside the individual. Intrinsic rewards include the sense of satisfaction from doing a good job or the satisfaction of doing a good deed. Extrinsic rewards include pay, promotions, praise from one’s boss, and praise from a customer.

5. The four basic perspectives of the balanced scorecard are (1) the learning and growth perspective, (2) the internal business process and production perspective, (3) the customer perspective and (4) the financial perspective.

6. Fraudulent financial reporting is intentional conduct that results in materially misleading financial statements. The two key concepts in the definition of fraudulent financial reporting are (1) the conduct must be intentional or reckless, and (2) the misstatement must be material to the financial statements.

7. Common examples of fraudulent financial reporting are failure to write down obsolete inventory and recognizing revenue before the sale has been made.

8. Separation of duties helps prevent financial fraud because it limits the opportunity to commit the fraud. To commit financial fraud when a separation of duties exists, two or more individuals must

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