Question 1

Which of the following might be considered as a Big Bath technique?

Accepted Answer

The Big Bath technique involves taking as many write-offs as possible in one period to make future periods more profitable. Writing down the value of an intangible asset (choice C) fits this description, as it involves recognizing a large expense now to potentially benefit future periods by reducing amortization expenses.

Question 2

Why would management manage earnings to decrease income?

Accepted Answer

Management might manage earnings to decrease income to avoid attracting competitors by making the industry appear less profitable.

Question 3

When might a company use a Big Bath?

Accepted Answer

A Big Bath is typically used by new management who wants to write off as many losses as possible in order to start with a clean slate and show the company's financials in a better light going forward.

Question 4

Which of the following is not a reason that management might be tempted to manage earnings to increase income?

Accepted Answer

Management earnings are managed to increase income for a variety of reasons, such as meeting the terms of a debt agreement, influencing stakeholders' perceptions, and increasing the likelihood of receiving a loan. However, receiving a government grant is not one of the reasons why management might be tempted to manage earnings to increase income.

Question 5

Why would a company adopt a minimum compliance financial reporting objective?

Accepted Answer

The answer of Why would a company adopt a minimum...

Question 6

Nappanee Inc.has a provision in its loan from the local bank that it must maintain a current ratio above 1.75.Which of the following would be one of their objectives of financial reporting?

Accepted Answer

The provision in the loan from the local bank that Nappanee Inc. must maintain a current ratio above 1.75 is a contractual obligation, thus one of the objectives of financial reporting would be to monitor contract compliance.

Question 7

Which of the main objectives of financial reporting requires more information than is available in financial statements prepared according to IFRS?

Accepted Answer

Cash flow prediction requires more information than is available in financial statements prepared according to IFRS because it involves forecasting future cash flows, which requires additional assumptions and estimates beyond the information provided in the financial statements.

Question 8

Which of the following best describes earnings management?

Accepted Answer

Earnings management refers to the process of selecting accounting policies that satisfy the objectives of the managers, often with the intent of manipulating financial results to meet or exceed certain expectations. It can involve legitimate activities such as choosing between alternative accounting methods, but can also involve unethical practices such as intentional misrepresentation of financial data. A and B involve fraudulent activities, whereas D refers to maintaining policies preferred by stakeholders, and is not necessarily related to earnings management.

Question 9

When solving an accounting alternative choice problem, you should prepare a framework for the analysis.Which of the following is not part of that framework?

Accepted Answer

While understanding the personal objectives of management can be helpful in analyzing a decision, it is not a necessary part of the framework for solving an accounting alternative choice problem. The other options (B, C, and D) are essential components of the framework.

Question 10

The Laugh-Out-Loud festival is a popular two-week summer festival in Laneville.The festival has been operating successfully for four years, and this year they are applying for a provincial grant in order to offer more activities at the festival.Which one of the following earnings management techniques might Laugh-Out-Loud be using?

Accepted Answer

The answer of The Laugh-Out-Loud festival is a popular two-week...

Question 11

If a manager selects an accounting policy to ensure that the company does not violate the debt-to-equity ratio requirement of its bank loan, which of the following would be their objective of financial reporting?

Accepted Answer

Choosing an accounting policy to avoid violating loan covenants by affecting the debt-to-equity ratio aligns with earnings management, as it involves making financial decisions to influence perceived company performance.

Question 12

Why would management manage earnings to smooth income?

Accepted Answer

The answer of Why would management manage earnings to smooth...

Question 13

The Robert's Resort chain of hotels needs to renegotiate the union contract with the powerful Hotel Workers of Canada Union every other year.Although the hotels in the chain are all successful, labour costs are a major expense for the business, and management wants to ensure that the company remains profitable.Which one of the following earnings management techniques might the Robert's Resort management be using?

Accepted Answer

Managing earnings to decrease income could be a strategy used by Robert's Resort management during the period of renegotiating the union contract. By showing lower profits, the company might aim to negotiate more favorable terms with the union by arguing that high labor costs could harm the company's financial health.

Question 14

If you were to ask the management to justify the accounting choice they made, how would they prefer to justify it?

Accepted Answer

The answer of If you were to ask the management...

Question 15

Petawawa Producers Inc.has been experiencing declining sales and earnings for the past three years.The Board of Directors have replaced the top management team in hope of turning the company around, and the new managers will be paid a bonus based on how quickly they can reverse the trend.Which one of the following earnings management techniques might the new management be using?

Accepted Answer

Taking a Big Bath is a technique in which a company intentionally takes large write-offs or expenses in a current year to make future earnings look better. This technique could be used by the new management team to quickly decrease income, making it easier for them to show a significant improvement in earnings in the near future and earn their bonus.

Question 16

The professional soccer team in Rinaldo is trying to get the local government to exempt the stadium from property taxes.They claim that other teams in the league do not pay property taxes and it is causing them to lose money.Which one of the following earnings management techniques might the soccer team be using?

Accepted Answer

The soccer team is trying to decrease expenses by requesting exemption from property taxes. This is an example of managing earnings to decrease income, which is an earnings management technique.

Question 17

Which of the following best describes a minimum compliance objective?

Accepted Answer

A minimum compliance objective refers to a company's goal to report only the essential amount of information required to meet legal and regulatory standards, without going beyond what is necessary.

Question 18

Which of the following statements is true concerning accounting choices?

Accepted Answer

To be considered an acceptable recommendation based on objectives, an alternative must indeed align with the given constraints and facts. This ensures that the chosen accounting method is not only theoretically sound in achieving the set objectives but also practical and feasible within the existing limitations and realities.

Question 19

Which are the three factors that affect the accounting choices made by management?

Accepted Answer

Constraints such as resources and time available, facts such as the nature of the business, and objectives like profitability and growth, all affect the accounting choices made by management. GAAP, IFRS, and legislation may also be factors to consider, but they are not the only ones. Choice B includes the most relevant factors that typically influence accounting choices.

Question 20

Which of the following statements about accounting estimates is true?

Accepted Answer

Accounting estimates are necessary because economic events and transactions are not known with certainty. Estimates may include items such as the useful life of a fixed asset, the amount of bad debt that is likely to occur, or the fair value of an investment. Though estimates are significant and can have a material impact on financial statements, they are inherently uncertain due to the dependencies upon business and economic events that are yet to occur. The accounting estimates are required to be disclosed in the notes to the financial statements, but GAAP does not specifically cover acceptable accounting estimates.

Quiz 4: Income Measurement and the Objectives of Financial Reporting