Question 1

Goodwill is considered to be impaired if the market value of the acquired business is greater than the carrying amount on the balance sheet.

Accepted Answer

A) True 
 B)False  False

Question 2

How do companies use accounts receivables for earnings management and why?

Accepted Answer

The main effects of uncollectibles on the financial statements occur as a result of estimation, not the eventual write-off. The amount and timing of the allowances are at the discretion of management. Though a company's auditors must approve the reasonableness of the allowance from uncollectible accounts, they do not possess the inside knowledge of management and are therefore at an information disadvantage in determining the accuracy of allowance estimates. As a result, management can use the estimates to shift income from one year to another. If management underestimates the provision, expense is reduced in the current year, which increases current income. In the future when write-offs do occur which had not been accounted for earlier, the future provision must be increased, thus reducing income in that future period. Hence, income has been shifted from the future into the current period. Companies do this to meet certain current targets which they fear they may fall short of, or to meet current obligations they may be in danger of defaulting on. On the other hand, companies may overestimate the provision for uncollectibles in order to create a cookie jar reserve to use current income to offset tougher times in the future. Companies may opt to take a "big bath" by using an overestimated allowance for uncollected accounts. This reserve can, then, be used to increase future earnings.

Question 3

Secured debt holders have a preferred position over other creditors.

Accepted Answer

A) True 
 B)False  True

Question 4

You have been asked to write a financial analysis report for Companies Y and Z. Company Y has a debt-to-equity ratio that is much lower than the industry average, with Company Z having a debt-to-equity ratio much higher than industry average. The times interest earned ratio for Company Y is much higher than the industry average, and the ratio for Company Z is much lower.
Which one of the following statements will not be part of your financial analysis report for these two companies?

Accepted Answer

A)   Company Y is a less leveraged company than Company Z
B)   Company Y generates a larger amount of income compared to its obligatory payments to creditors than Company Z
C)   Company Y is a less risky company than Company Z
D)   Company Z's lower times interest earned means that it may experience more difficulties than Company Y in obtaining attractive financing terms on new borrowings.

Question 5

Why must amounts received in advance from customers be deferred?

Accepted Answer

A)   The customer may not pay the entire balance due
B)   The company receiving payment has not earned the amount
C)   The customer has a right of return
D)   All of the above are reasons to defer

Question 6

Natural resource assets, such as oil reserves or timberlands, as often referred to as wasting assets.

Accepted Answer

A) True 
 B)False

Question 7

Identify the following items numbered as 1 through 5 below as either of the following:
A. Current operating liability
B. Current non-operating liability

Accepted Answer

The answer of Identify the following items numbered as 1...

Question 8

Companies should recognize inventory as an expense when purchased.

Accepted Answer