Question 1

Relevance, one of the desirable qualities of accounting information, implies:

Accepted Answer

A) the capacity of information should be based on five-year average historical data. 
B) the capacity of information to affect a decision. 
C) the capacity of information should be based on market expectations. 
D) that all companies should use same valuation methods such as LIFO and FIFO. 
A) the capacity of information should be based on five-year average historical data. 
B) the capacity of information to affect a decision. 
C) the capacity of information should be based on market expectations. 
D) that all companies should use same valuation methods such as LIFO and FIFO. B

Question 2

Accounting standards are:

Accepted Answer

A) the result of a political process among groups with diverse interests. 
B) presentation standards mandated by the Securities and Exchange Commission. 
C) the state-of-the-art presentation of the science of accounting. 
D) standards measuring the quality of safeguarding assets. 
A) the result of a political process among groups with diverse interests. 
B) presentation standards mandated by the Securities and Exchange Commission. 
C) the state-of-the-art presentation of the science of accounting. 
D) standards measuring the quality of safeguarding assets. A

Question 3

Accounting distortions arise from the nature of accrual accounting.

Accepted Answer

A) True 
 B)False  True

Question 4

ABC Co. starts its business raising $110,000 in cash; $60,000 from issuing equity and $50,000 from issuing 6% bonds at par. ABC used the whole amount of cash to buy a building, which it rents out for $10,000 per year. Given below is the opening balance sheet of ABC Co. for the first year of operations.$\begin{array}{ll}&\text { Year } 1\
\underline{\text { Assets }}&\
\text { Cash } & \$\quad0 \
\text { Building } & 110,000\
&110,000\
\underline{\text { Liabilities and Shareholder's equity }}\
\text { Long-term debt } & 50,000 \
\text { Shareholders' equity } & 60,000\
&110,000
\end{array}$
At the end of Year 1, the building is valued at $150,000. Also, the market value of bonds has fallen to $49,000. Assume the useful life of the building is 30 years, and its salvage value is $50,000 at the end of that period. The rental income is received on the last day of the year. Interest on bonds is also paid on this day.
Prepare the year-end balance sheet and income statement of ABC Co. based on Fair value. Compare the historical and fair values at year-end.

Accepted Answer

11edc637_9666_be62_aeda_efc827d661a5_efc8

Question 5

Audits are designed and implemented with the objective of detecting fraud.

Accepted Answer

A) True 
 B)False

Question 6

For a going concern, company value can be expressed by:

Accepted Answer

A) dividing permanent income by the cost of capital. 
B) multiplying permanent income by the cost of capital. 
C) dividing permanent income by the market value per share. 
D) multiplying permanent income by the market value per share. 
A) dividing permanent income by the cost of capital. 
B) multiplying permanent income by the cost of capital. 
C) dividing permanent income by the market value per share. 
D) multiplying permanent income by the market value per share.

Question 7

SFAS prescribes that information about the level of inputs used for determining fair values must be reported in the:

Accepted Answer

A) balance sheet. 
B) director's letter. 
C) footnotes. 
D) MD&A. 
A) balance sheet. 
B) director's letter. 
C) footnotes. 
D) MD&A.

Question 8

External auditors provide "reasonable", as opposed to "absolute" assurance that the financial statements provide no material misstatement.

Accepted Answer

A) True 
 B)False

Question 9

There are many ways in which the management of a company can manage the reported earnings. Give three reasons why management may want to manage earnings being sure to explain your answer in full.

Accepted Answer

Motivation

Question 10

Under the fair value model, income is determined by matching costs to recognized revenues, which have to be realized and earned.

Accepted Answer

A) True 
 B)False

Question 11

The primary responsibility for fair and accurate financial reporting rests with the:

Accepted Answer

A) shareholders. 
B) SEC. 
C) management. 
D) auditors. 
A) shareholders. 
B) SEC. 
C) management. 
D) auditors.

Question 12

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?

I. Change in accounting principles
II. Disposition of segment of business
III. Restructuring expenses
IV. Change in auditors

Accepted Answer

A) I and II 
B) I and III 
C) I, II, and III 
D) I, III, and IV 
A) I and II 
B) I and III 
C) I, II, and III 
D) I, III, and IV

Question 13

The development of the financial statements is management's responsibility, and the auditor is not concerned with the process of development.

Accepted Answer

A) True 
 B)False

Question 14

Primary responsibility for fair and accurate financial statements rests with the auditors.

Accepted Answer

A) True 
 B)False

Question 15

______ are secondary qualities of accounting information that make it useful for decision making.

Accepted Answer

A) Consistency and comparability 
B) Relevance and reliability 
C) Materiality and comparability 
D) Full disclosure and relevance 
A) Consistency and comparability 
B) Relevance and reliability 
C) Materiality and comparability 
D) Full disclosure and relevance

Question 16

When analyzing financial statements, it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct?

Accepted Answer

A) Accounting distortions can arise as management may deliberately manipulate financial statements. 
B) Accounting distortions arise often through application of (correct) accounting principles. 
C) Accounting distortions can affect the quality of earnings. 
D) Accounting distortions arise if the stock market is not efficient. 
A) Accounting distortions can arise as management may deliberately manipulate financial statements. 
B) Accounting distortions arise often through application of (correct) accounting principles. 
C) Accounting distortions can affect the quality of earnings. 
D) Accounting distortions arise if the stock market is not efficient.

Question 17

One step in assessing the quality of earnings is to look for red flags. An example of a red flag is a significant increase in accounts receivable without commensurate growth in sales (that is, accounts receivable turnover decreases). List five other red flags an astute analyst might look for. Also, provide the reason for it being a red flag, and identify where the analyst might find this information.

Accepted Answer

Identifyin

Question 18

GAAP stands for General American Accounting Principles, and must be adhered to by publicly traded companies when preparing their financial statements.

Accepted Answer

A) True 
 B)False

Question 19

To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as:

Accepted Answer

A) core earnings. 
B) transitory earnings. 
C) basic earnings. 
D) operating earnings. 
A) core earnings. 
B) transitory earnings. 
C) basic earnings. 
D) operating earnings.

Question 20

Income shifting is not one of the earnings management mechanics.

Accepted Answer

A) True 
 B)False

Relevance, one of the desirable qualities of accounting information, implies:

Accounting standards are:

Accounting distortions arise from the nature of accrual accounting.

Audits are designed and implemented with the objective of detecting fraud.

For a going concern, company value can be expressed by:

SFAS prescribes that information about the level of inputs used for determining fair values must be reported in the:

External auditors provide "reasonable", as opposed to "absolute" assurance that the financial statements provide no material misstatement.

There are many ways in which the management of a company can manage the reported earnings. Give three reasons why management may want to manage earnings being sure to explain your answer in full.

Under the fair value model, income is determined by matching costs to recognized revenues, which have to be realized and earned.

The primary responsibility for fair and accurate financial reporting rests with the:

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next? I. Change in accounting principles II. Disposition of segment of business III. Restructuring expenses IV. Change in auditors

The development of the financial statements is management's responsibility, and the auditor is not concerned with the process of development.

Primary responsibility for fair and accurate financial statements rests with the auditors.

______ are secondary qualities of accounting information that make it useful for decision making.

When analyzing financial statements, it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct?

GAAP stands for General American Accounting Principles, and must be adhered to by publicly traded companies when preparing their financial statements.

To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as:

Income shifting is not one of the earnings management mechanics.

Overview of Financial Statement Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Equity Analysis and Valuation

Filters

Exam 2: Financial Reporting and Analysis

Relevance, one of the desirable qualities of accounting information, implies:

Accounting standards are:

Accounting distortions arise from the nature of accrual accounting.

Audits are designed and implemented with the objective of detecting fraud.

For a going concern, company value can be expressed by:

SFAS prescribes that information about the level of inputs used for determining fair values must be reported in the:

External auditors provide "reasonable", as opposed to "absolute" assurance that the financial statements provide no material misstatement.

There are many ways in which the management of a company can manage the reported earnings. Give three reasons why management may want to manage earnings being sure to explain your answer in full.

Under the fair value model, income is determined by matching costs to recognized revenues, which have to be realized and earned.

The primary responsibility for fair and accurate financial reporting rests with the:

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next? I. Change in accounting principles II. Disposition of segment of business III. Restructuring expenses IV. Change in auditors

The development of the financial statements is management's responsibility, and the auditor is not concerned with the process of development.

Primary responsibility for fair and accurate financial statements rests with the auditors.

______ are secondary qualities of accounting information that make it useful for decision making.

When analyzing financial statements, it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct?

GAAP stands for General American Accounting Principles, and must be adhered to by publicly traded companies when preparing their financial statements.

To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as:

Income shifting is not one of the earnings management mechanics.

Overview of Financial Statement Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Return on Invested Capital and Profitability Analysis

Prospective Analysis

Credit Analysis

Equity Analysis and Valuation

Filters