Question 1

Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings are not sustainable?

Accepted Answer

A

Question 2

On the income statement,income from discontinued operations is shown:

Accepted Answer

D

Question 3

Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?

Accepted Answer

C

Question 4

The assessment of earnings quality is best accomplished through the use of which one of the following?

Accepted Answer

The assessment of earnings quality is best accomplished through the use of multi-step income statement, balance sheet, and cash flow statement. The multi-step income statement provides information on the components of revenue and expenses, which can help in evaluating the quality of earnings. The balance sheet and cash flow statement provide additional information to assess the financial health and cash flow position of the company, which can also impact the quality of earnings. Therefore, D is the best choice.

Question 5

In a restructuring it is possible that managers may use the opportunity to write down assets that do not even relate directly to the restructuring action.Why might a manager decide to write down an asset that is not included in the restructuring action?

Accepted Answer

The answer of In a restructuring it is possible that...

Question 6

During July 2012,Ralston Company decides to dispose of one of its subsidiaries,which qualifies for accounting as a discontinued operation.At the July 2012 measurement date,Ralston Company estimates that it will report net losses of $1,500,000 dollars from the measurement date until the disposal date,which is expected to be in April 2013.In addition,Ralston estimates that it will lose $300,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?

Accepted Answer

To calculate the gain or loss on discontinued operations, we need to consider the net loss from the measurement date until the disposal date and the loss on the sale of the segment. The net loss from July 2012 until April 2013 is $1,500,000. Since the disposal date is after the end of the current fiscal year, we need to accrue this amount as a liability and recognize it as an expense in the income statement. The loss on the sale of the segment is $300,000, which will also be recognized in the income statement.

Therefore, the total loss from discontinued operations is $1,500,000 + $300,000 = $1,800,000. This amount is reported as a separate line item on the income statement, net of income taxes. Therefore, the correct answer is C, $1,800,000 loss.

Question 7

Firms' choices and estimates within U.S.GAAP or IFRS should be determined by all of the following except:

Accepted Answer

Firms' choices and estimates within U.S.GAAP or IFRS should not be determined by accelerated management efforts to meet earnings projections. The other options (A, B, and C) are valid factors that can influence a firm's choices and estimates.

Question 8

Examples of poor earnings quality that hinder the forecasting of expected future earnings include all of the following except:

Accepted Answer

Adding equipment to reduce carbon emissions and increase production efficiency is a positive indicator of the company's commitment to good corporate citizenship and improving operations, and is not an example of poor earnings quality. A, B, and C are examples of items that would negatively affect earning quality and hinder the forecasting of future earnings.

Question 9

The best measure of a firm's sustainable income is:

Accepted Answer

The answer of The best measure of a firm's sustainable...

Question 10

Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings is sustainable?

Accepted Answer

Choice D indicates that there has been a successful research and development of new products, which has resulted in a large jump in sales and earnings. This suggests that the current performance is strong, and the sustainable level of current earnings is also high. This information is consistent with earnings being informative about current performance and informing the analyst that the level of current earnings is sustainable. The other choices either involve unexpected gains or losses or one-time expenses that may not be indicative of the firm's ongoing performance.

Question 11

Users of financial statements should consider which of the following when evaluating the quality of accounting information?

Accepted Answer

All of these factors should be considered when evaluating the quality of accounting information. The economic faithfulness of accounting measurements and classifications ensures that the financial statements accurately represent the company's economic activity. The reliability of measurements ensures that the financial statements are free of errors and bias. Reasonableness of estimates made in applying GAAP or IFRS ensures that the financial statements are prepared in accordance with the relevant accounting standards.

Question 12

All of the following are true regarding a high quality balance sheet except:

Accepted Answer

The balance sheet should be realistic and unbiased, therefore it should not be overly optimistic in terms of accounting numbers.

Question 13

During July 2013,Ralston Company decides to dispose of one of its subsidiaries,which qualifies for accounting as a discontinued operation.At the July 2013 measurement date,Ralston Company estimates that it will report net income of $300,0000 dollars from the measurement date until the disposal date,which is expected to be in April 2014.In addition,Ralston estimates that it will lose 100,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?

Accepted Answer

The answer of During July 2013,Ralston Company decides to dispose...

Question 14

Which one of the following is an example of sustainable earnings?

Accepted Answer

Sustainable earnings are those that a company can continue to generate over a long period of time. Earnings from repeat customers indicate that the company is producing products or services that are in demand, and are likely to continue to be in demand in the future. Options A, B, and C are not examples of sustainable earnings as they are one-time gains or losses, and do not necessarily indicate that the company will continue to generate similar profits in the future.

Question 15

Which of the following items is consistent with earnings being informative about current performance but not informative about future earnings?

Accepted Answer

The answer of Which of the following items is consistent...

Question 16

Under new accounting standards passed in 2006 firms must report changes in accounting principle in the current and prior years as if the new accounting principle had been applied all along.The rationale for this change was:

Accepted Answer

The rationale for requiring firms to report changes in accounting principle as if the new principle had been applied all along is to enhance the comparability and information content of reported earnings in forecasting future earnings. This ensures consistency in financial reporting over time, which in turn improves the usefulness of financial statements for investors and analysts.

Question 17

Income or loss from discontinued operations would best be regarded by an analyst as:

Accepted Answer

Income or loss from discontinued operations is not expected to continue in future periods and is therefore considered transitory earnings.

Question 18

When a company makes a change in an estimate that it has used in its financial statements,it should account for the change by:

Accepted Answer

The answer of When a company makes a change in...

Question 19

Which of the following does not describe an extraordinary gain or loss?

Accepted Answer

Extraordinary gains or losses are infrequent, unusual in nature, and material in amount, but they are not necessarily peripheral to the company's core business.

Question 20

As transitory components become a more important part of a firm's reported earnings,the reported earnings:

Accepted Answer

Transitory components are by definition temporary or non-recurring, which means they are not a reliable indicator of a firm's sustainable cash flows. As the transitory components become a more important part of a firm's reported earnings, the reported earnings become a less reliable indicator of sustainable cash flows.

Quiz 6: Accounting Quality