Deck 1: The Economic and Institutional Setting for Financial Reporting

Question 1

Investors are uncertain about the quality of each company's debt or equity offerings because the ultimate return from the security depends on the company's past performance which is difficult to accurately measure.

Answer 1

False

Question 2

All financial statements provide a basis for what might occur in the future.

Answer 2

True

Question 3

Investors who follow a fundamental analysis approach determine the value the company's assets would yield if sold individually.

Answer 3

False

Question 4

The best source of information about a company's current health and prospects for the future is the company's financial statements.

Question 5

The SEC passed Regulation Fair Disclosure (Reg FD)to ensure that financial statement users have access to all the financial information they need to make decisions.

Question 6

All economic events and activities that affect a company are reflected in a company's financial statements.

Question 7

The ability to raise additional cash by selling assets,issuing stock,or borrowing more is financial flexibility.

Question 8

One factor that considerably affects the ease with which users employ financial reports is that accounting is an exact science.

Question 9

Because financial fraud is rare,investors and other users of financial statements can safely accept the numbers in financial statements at face value.

Question 10

Various trends and relationships that can be gleaned from a company's financial statements provide insights into a company's economic opportunities and risks.

Question 11

Regulators of industries granted monopoly privileges use financial statement data in setting allowable charges for the services these industries provide.

Question 12

Investors are uncertain about the quality of each company's debt or equity offerings because the ultimate return from the security depends on future events.

Question 13

The type of analysis that uses financial statements along with industry and macroeconomic data to forecast future stock movements is technical analysis.

Question 14

Taxing authorities sometimes use financial statement information as a basis for establishing tax rules to match accounting rules.

Question 15

Companies judged to be high credit risks may be subject to loan covenants.

Question 16

Security analysts are among the most important users of financial statements.

Question 17

Information symmetry means that management has access to more and better information about the business than do people outside the company.

Question 18

Sales value of a company's assets minus its debt owed is a company's liquidation value.

Question 19

Contracts often contain language that refers to financial statement numbers.

Question 20

Investors use financial statements as an analytical tool.

Question 21

Fundamental investors buy undervalued stocks and avoid buying overvalued stocks.

Question 22

Financial reports provide information that can reduce investors' uncertainty about the company's opportunities and risks,thereby raising the company's cost of capital.

Question 23

Financial information capable of making a difference in a decision is relevant.

Question 24

Suppliers monitor the financial statements of their customers to protect collection of their accounts receivable.

Question 25

All of the information needed by professional analysts to give a complete picture of a company is found in the published financial statements.

Question 26

Timeliness is a qualitative characteristic of accounting information that indicates that information should be provided to users before statutory deadlines.

Question 27

Management has a responsibility to ensure that the company's financial information is properly classified,characterized,and presented clearly and concisely in order to make it understandable.

Question 28

Accounting improprieties are sometimes designed to meet the expectations and financial targets of Wall Street analysts.

Question 29

Besides assessing the general reasonableness of reported numbers in relation to the company's activities,industry conditions,and business climate,when designing audit procedures the company's auditor must also assess fraud risk factors that may be present.

Question 30

The "quality of information" as applied to financial reporting refers to the degree to which financial statements are grounded in facts and sound judgments and thus are free from distortion.

Question 31

For information to be relevant it must possess either predictive value or confirmatory value.

Question 32

A mispriced security is a stock or bond that is selling for substantially more-or less-than it seems to be worth.

Question 33

Using the same accounting methods for a company to record and report similar events from period to period demonstrates faithful representation.

Question 34

Comparability across companies allows analysts to identify real economic similarities in and differences between underlying economic events because those similarities or differences are not obscured by accounting methods or disclosure practices.

Question 35

Financial statements are crucial in investment decisions that use fundamental analysis to identify mispriced securities (i.e.,securities selling for more or less than they seem to be worth).

Question 36

Managers are the stewards of the company's resources and thus responsible for their efficient use and for protecting them from adversity.

Question 37

An understanding of management's reporting incentives is sufficient to enable auditors to recognize vulnerable areas where financial reporting abuses are likely to occur.

Question 38

Owners and managers have an economic incentive to supply the amount and type of financial information that will enable the company to raise capital at the lowest cost.

Question 39

The role of financial accounting information is to facilitate economic transactions and to foster efficient allocation of resources among businesses and individuals.

Question 40

Highly profitable but politically vulnerable firms have an incentive to make themselves appear less profitable than they really are.

Question 41

The efficient markets hypothesis says that any new development is quickly reflected in a firm's stock price.

Question 42

Because financial disclosures are regulated,owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.

Question 43

Companies have an economic incentive to supply the information investors want.

Question 44

Executive compensation contracts seldom contain annual bonus and longer term pay components tied to financial statement results,but instead usually rely on stock options as a means to reward managers in a manner that is less subject to manipulation by management.

Question 45

Employees demand financial information to monitor the health of company-sponsored pension plans.

Question 46

The SEC issued regulation FD to help level the playing field between individual and institutional investors.

Question 47

Politically vulnerable firms with high earnings (like oil companies)are often attacked in the financial and popular media,which alleges that those earnings are evidence of anticompetitive business practices.

Question 48

Suppliers assess the financial strength of their customers to determine whether they will be paid for goods shipped.

Question 49

Firms weigh the benefits they may gain from financial disclosures against the costs they incur in making those disclosures.

Question 50

When earnings and share price fall below acceptable levels,dissident shareholders may launch a proxy contest to elect their own slate of directors at the next annual meeting.

Question 51

Some capital providers possess enough bargaining power to allow them to compel companies to deliver the financial information they need for analysis.

Question 52

When a company restates its financial statements due to some accounting irregularity,shareholder lawsuits are often filed against the company and its management.

Question 53

Lenders monitor financial statement data to ascertain whether borrowers are adhering to,or violating,loan covenants.

Question 54

To efficient market investors,financial statement data provide a basis for assessing risk,dividend yield,or other firm attributes that are important to portfolio selection decisions.

Question 55

Financial reporting regulatory requirements are designed to ensure that companies meet certain minimum levels of financial disclosure.

Question 56

Financial statement information can help customers monitor a supplier's manufacturing processes and thus evaluate the quality of its products.

Question 57

Because the supply of financial information is guided by the costs of producing and disseminating it and the benefits it will provide to the company,regulatory groups have little influence over the amount and type of financial information that companies disclose.

Question 58

When a company's financial instruments are perceived to be of low quality,there is a cost to the company in the form of lower proceeds from issuing stock or higher interest rates when it borrows funds.

Question 59

Broadly defined,the term "analyst" includes anyone who uses financial statements to make decisions as part of their job.

Question 60

According to the full disclosure principle,companies create a competitive advantage when they report:
• Details about the company's strategies,plans and tactics.
• Information about the company's technological and managerial innovations.
• Detailed information about the company's operations.

Question 61

The degree to which the accounting actually represents the underlying economic events is faithful representation.

Question 62

In the United States,the accounting rules that businesses use for external financial reporting purposes differ from the accounting rules required for taxation purposes.

Question 63

Generally accepted accounting principles are set by the Securities and Exchange Commission.

Question 64

The convention in accounting that strives to ensure business risks and uncertainties are adequately reflected in the financial statements is conservatism.

Question 65

Companies can change accounting methods,but the changes are restricted to situations where it can be persuasively argued that the newly adopted accounting method is preferable to the old one.

Question 66

Fair value accounting is widely touted as a means to avoid future financial crises as it will prevent banks from collapsing.

Question 67

The accounting standards codification was created by the IASB to harmonize U.S.and international GAAP.

Question 68

Accounting standard-setting in the U.S.is a technical process and thus little affected by political considerations.

Question 69

For years,two widely divergent financial reporting approaches existed in the world (the economic performance approach and the commercial and tax law approach).

Question 70

The network of conventions,rules,guidelines,and procedures used by the accounting profession is known as generally accepted auditing standards.

Question 71

Financial statements follow rigid guidelines that require adherence to specific procedures.

Question 72

Under certain circumstances,it is permissible to issue financial statements that contain a material departure from GAAP.

Question 73

Although the SEC has the legal authority to set accounting principles in the U.S.,it has looked to private-sector organizations (e.g.,the FASB)to establish and enforce these principles.

Question 74

While until recently accounting standards were developed by home-country organizations for use by domestic companies,countries in (at least)the European Union based their standards on a common philosophy and shared financial reporting objectives.

Question 75

Companies can smooth reported income by strategically timing the recognition of revenue and expenses to dampen the normal ups and downs of business activity.

Question 76

Some countries' philosophy of financial reporting differs from GAAP because their financial reports are required to conform to tax law.

Question 77

GAAP frequently requires financial statement users to accept a compromise that favors reliability over faithful representation.

Question 78

GAAP financial reports in the U.S.are intended to reflect the economic condition and performance of the reporting entity.

Question 79

Management has considerable discretion over the particular accounting procedures used in the statements and over the details contained in supplemental footnotes and related disclosures.

Question 80

The Financial Accounting Standards Board has the sole responsibility for setting generally accepted auditing standards.