Deck 5: Return on Equity, Value Creation, and Firm Value Earnings Management

Question 1

An analyst assessed a company and determined the company to have reported a "high quality of earnings." This implies that

A) management issued a press release indicating it was not aware of any fraud during the current year.
B) the company's management exercised little or no discretionary influence in reporting financial statement information to shareholders.
C) management has used its influence in determining the dollar amounts reported on financial statements.
D) income statement items reported during the current period can be expected to reflect future income levels.

Answer 1

the company's management exercised little or no discretionary influence in reporting financial statement information to shareholders.

Question 2

Give three examples of how management can engage in "real" earnings management to achieve the desired reporting of higher net income.

Answer 2

Cutting back or delaying expenditures for advertising would boost reported earnings in the current period by reducing expenses.Cutting back or delaying expenditures for research and development would boost reported earnings in the current period by reducing expenses.
Offering special incentives to increase sales right before year end may increase profits temporarily

Question 3

Accounting numbers are useful in that they

A) are easy to manipulate by management and help predict a company's future earnings and cash flows.
B) allow users to see management's predictions of future profits and help predict a company's future cash flows.
C) help investors and creditors influence and monitor management's business decisions and help predict a company's future earnings and cash flows.
D) help investors and creditors influence, manipulate, and monitor management's business decisions so that future profits are high.

Answer 3

help investors and creditors influence and monitor management's business decisions and help predict a company's future earnings and cash flows.

Question 4

True value of a company is determined by

A)Adding adjustments for the business environment, unrecorded events, and types of shareholders to the book value of a company.
B)Adding adjustments for the business environment, unrecorded events, and cumulative profits to the book value of a company.
C)Adding adjustments for the business environment, management bias, and cumulative profits to the book value of a company.
D)Adding adjustments for the business environment, unrecorded events, and management bias to the book value of a company.

Question 5

Indicate three reasons why reported book value and true value may differ.