Question 1

When analyzing financial statements, it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct?

Accepted Answer

Accounting distortions are caused by factors such as differences in accounting policies and estimates, accounting errors and fraud. The efficiency of the stock market does not play a role in causing these distortions. Therefore, statement D is incorrect.

Question 2

10-K reports are:

Accepted Answer

10-K reports are annual filings made by a company with the SEC. They provide a comprehensive summary of a company's financial performance and include information such as audited financial statements, risk factors, and management discussion and analysis.

Question 3

Which of the following is a change in accounting principle?

I. A change from LIFO to FIFO
II. A change in estimated salvage value of depreciable asset
III. A change from an accelerated depreciation method to straight-line depreciation
IV. Recording depreciation for the first time on machinery purchased five years ago

Accepted Answer

Changes I (from LIFO to FIFO) and III (from an accelerated depreciation method to straight-line depreciation) are considered changes in accounting principles. II is a change in accounting estimate, and IV is a correction of an error.

Question 4

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

Accepted Answer

The auditor's opinion should be qualified because the statement of cash flows is a required financial statement under GAAP and its absence affects the completeness of the financial statements. A qualified opinion indicates that the financial statements taken as a whole are fairly presented except for a specific matter, in this case, the absence of the statement of cash flows.

Question 5

Economic income includes:

Accepted Answer

Economic income includes both recurring and nonrecurring components. Recurring components refer to regular income received from employment or investments, while nonrecurring components include one-time gains or losses, such as selling an asset or receiving a bonus. Economic income considers both types of income to measure an individual's or company's overall financial well-being.

Question 6

Which one of the following is not an example of a red flag to one should be aware of when evaluating earnings quality?

Accepted Answer

Net income increasing from one year to the next can be a positive sign of earnings quality, particularly if it is accompanied by other positive indicators. The other options (A, C, and D) are all red flags that may suggest lower earnings quality.

Question 7

Accounting standards are:

Accepted Answer

Accounting standards are developed through a political process involving various stakeholders such as regulators, standard-setting bodies, accounting professionals, and industry representatives, among others. The process involves consultations, debates, and negotiations aimed at arriving at accounting rules that are in the public interest and meet the needs of different users of financial information. The political nature of accounting standard-setting is reflected in the fact that different groups may have conflicting interests and priorities, and thus the standards may be subject to compromises and trade-offs.

Question 8

Accounting income consists of all the following components except:

Accepted Answer

The answer of Accounting income consists of all the following...

Question 9

Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure?

Accepted Answer

Increased demands by labor unions would not result in an increased disclosure by managers as labor unions typically represent employees and not investors. The other choices (A, B, and C) are all valid reasons for increased disclosure by managers. Protection under Safe Harbor Rules provides managers with legal protection when disclosing forward-looking information, managing investors' expectations is important for maintaining investor confidence, and communicating information to investors is necessary for transparency and meeting regulatory requirements.

Question 10

Which of the following information would not be filed with the SEC by a publicly traded company?

Accepted Answer

While a publicly traded company may file its tax return with the Internal Revenue Service (IRS), it is not required to file it with the Securities and Exchange Commission (SEC). The other choices, including the 10-K report, prospectus, and proxy statement, are all documents that a publicly traded company must file with the SEC.

Question 11

Economic income measures change in:

Accepted Answer

The answer of Economic income measures change in:
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Question 12

Which of the following is not a source of industry information?

Accepted Answer

Cash budget is an internal financial document and does not provide information about the industry or market. Standard and Poor's, Trade journals, and Value line are all external sources of industry information.

Question 13

Which of the following is incorrect? When using the 10-Q, the analyst should be aware that the usefulness of the quarterly financial statements might be affected by:

Accepted Answer

The 10-Q uses accrual accounting rather than cash accounting, so choice C is incorrect. Choices A, B, and D are all correct potential factors that could impact the usefulness of the quarterly financial statements.

Question 14

______ are secondary qualities of accounting information that make it useful for decision making.

Accepted Answer

Consistency and comparability are considered secondary qualities of accounting information. Consistency refers to the use of the same methods for the same items, either from period to period within a company or across companies, which allows for meaningful comparisons. Comparability allows users to identify and understand similarities and differences among items, enhancing the decision-making process.

Question 15

Which of the following is required to be filed with the SEC, if a company changes its auditors?

Accepted Answer

The answer of Which of the following is required to...

Question 16

Which of the following is a change in an accounting estimate?

I. A change from straight-line depreciation to declining balance method
II. A change in estimated salvage value of depreciable asset
III. A change in estimated useful life of an asset
IV. Recording depreciation for the first time on machinery purchased five years ago

Accepted Answer

The answer of Which of the following is a change...

Question 17

The matching principle requires that:

Accepted Answer

The answer of The matching principle requires that:
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Question 18

The primary responsibility for fair and accurate financial reporting rests with the:

Accepted Answer

The answer of The primary responsibility for fair and accurate...

Question 19

For a going concern, company value can be expressed by:

Accepted Answer

The answer of For a going concern, company value can...

Question 20

Which of the following statements is incorrect?

Accepted Answer

The answer of Which of the following statements is incorrect?
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Quiz 2: Financial Reporting and Analysis