Question 1

Which of these increases in variables would NOT increase the available accounting discretion?&#10;A)A decrease in the risk of litigation,degree of buyer protection and degree of enforcement&#10;B)An increase in the number of board members who are also internal company members&#10;C)An increase in audit quality&#10;D)An increase in ownership concentration

Accepted Answer

An increase in audit quality would decrease the available accounting discretion as there would be more scrutiny and regulation in the accounting practices. A decrease in the risk of litigation, degree of buyer protection, and degree of enforcement would also decrease accounting discretion as there would be fewer opportunities for companies to manipulate their financial statements without consequences. An increase in the number of board members who are also internal company members and an increase in ownership concentration could potentially increase accounting discretion as there would be more control and power within the company.

Question 2

High quality accounting standards when taken alone guarantee high quality financial reporting

Accepted Answer

High quality accounting standards are important, but they are not the only factor in ensuring high quality financial reporting. Other factors such as the competence and integrity of the preparers and auditors, as well as the effectiveness of internal controls, also play a role.

Question 3

High quality internal auditing constrains earnings management

Accepted Answer

High quality internal auditing involves independent and objective assessment of the organization's financial reporting and control processes. This can help prevent earnings management practices, such as manipulating accounting policies or misrepresenting financial information, as internal auditors are trained to identify and report such activities. Thus, high quality internal auditing can act as a constraint on earnings management.

Question 4

The impact of methods of earnings management is limited to the statement of comprehensive income

Accepted Answer

The impact of methods of earnings management can extend beyond the statement of comprehensive income, affecting other financial statements such as the balance sheet and cash flow statement. It can also impact the overall financial health and sustainability of a company.

Question 5

Industry analysis is used to provide benchmarking data to compare a company with competitors in the same industry

Accepted Answer

Industry analysis is a tool used to gather information about an industry in order to gain insight into what makes it successful and to identify potential areas for improvement. It can also be used to compare a company's performance and strategies with those of its competitors in the same industry. This information can then be used to develop effective business strategies that leverage the strengths of the company and address its weaknesses, as well as to make informed decisions about investment, expansion, and other business activities.

Question 6

Which of these statements about incentives is matched to the correct type of incentive?&#10;A)investors and analysts view an investment with volatile earnings as risky- DEBT CONTRACT&#10;B)top management compensation often includes a bonus plan linked to measures of success- EMPLOYMENT CONTRACTS&#10;C)a CEO is removed for poor performance,and the following year the new CEO uses big bath accounting- SHAREHOLDER CONTRACTS&#10;D)tax authorities use accounting data to determine the tax base of an entity- SHAREHOLDER CONTRACTS

Accepted Answer

Top management compensation, including bonus plans linked to measures of success, is typically part of employment contracts. These contracts often include incentives designed to align the interests of the management with those of the company and its shareholders.

Question 7

Most methods of available accounting management have a reversal effect,decreasing income in future periods

Accepted Answer

Many accounting methods, such as deferred revenue recognition or accelerated depreciation, can lead to a decrease in income in future periods. This is because they shift the recognition of revenue or expenses from one period to another, altering the overall financial picture over time.

Question 8

Which of these would NOT be an accounting estimate choice for account management?&#10;A)Choice of residual values of fixed assets&#10;B)choice of inventory valuation&#10;C)Change in bad debt allowances&#10;D)Choice of exchange rate for foreign currency translation

Accepted Answer

The choice of exchange rate for foreign currency translation is not an accounting estimate; it is determined by the prevailing market rates or specific guidelines, whereas the other options involve management judgment and estimation.

Question 9

What is the purpose of entity analysis?&#10;A)To gain a true picture of the financial position of individual entities within a group or corporation&#10;B)To gain a true picture of individual entities as if they were not part of the group or corporation&#10;C)to gain a true picture of the entity as a whole&#10;D)to gain a true picture of the parent organisation as if it had not involvement with the other entities.

Accepted Answer

The answer of What is the purpose of entity analysis?&#10;A)To...

Question 10

A major factor in industry analysis is the level of competition in an industry.Which of these is not correct?&#10;A)As competition increases,prices increase&#10;B)In perfect competition,there are a high number of substitute products and high price elasticity of demand&#10;C)In monopoly,there are no substitute products or services&#10;D)In a monopoly,prices are higher than any situation of competition

Accepted Answer

As competition increases, prices typically decrease as companies vie for customers. This is due to the principle of supply and demand - as supply increases, prices typically decrease.

Deck 31: Interpretation of Financial Statements