Question 1

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

Changes in accounting estimates are accounted for prospectively, meaning the effects are spread over the current and future periods, not retroactively.

Question 2

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

Accepted Answer

The addition of equipment that reduces carbon emissions in response to EPA requirements and increases production efficiency would be considered a positive development for the company and would likely improve earnings quality rather than hinder it. Therefore, this option does not fit the criteria of poor earnings quality that hinder the forecasting of expected future earnings. Option A, B, and C are all examples of poor earnings quality that could hinder the forecasting of expected future earnings.

Question 3

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

Accepted Answer

Accelerated management efforts to meet earnings projections should not influence a company's choice or estimation under US GAAP or IFRS as financial reporting should represent the economic reality of the company's operations and avoid manipulation or distortion of financial results. The other factors, such as underlying economic circumstances, industry conditions, and competitive strategy, may influence a company's accounting choices or estimates.

Question 4

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

Accepted Answer

An extraordinary gain or loss is defined as an event that is both unusual and infrequent in occurrence and not considered peripheral to the company's core business. Therefore, option B, which describes an event as being peripheral to the company's core business, does not describe an extraordinary gain or loss.

Question 5

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 this change was using the same accounting principle in current and prior periods enhances the information content of reported earnings in forecasting future earnings. This means that users of financial statements can more easily compare the financial results of different periods and make informed decisions.

Question 6

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 gain or loss on discontinued operations is calculated as the difference between the estimated net income from the measurement date to the disposal date and the estimated loss on the sale of the segment. In this case, the estimated net income is $300,000 and the estimated loss on the sale is $100,000, so the gain or loss on discontinued operations is $200,000.

Question 7

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

Accepted Answer

Transitory components are typically not sustainable and can lead to fluctuation in reported earnings, which makes them a less reliable indicator of sustainable cash flows.

Question 8

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 9

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

Accepted Answer

Income from discontinued operations is reported net of taxes and is shown after income from continuing operations on the income statement.

Question 10

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

Accepted Answer

Pre-opening costs are expenses incurred before a store opens and do not reflect current performance. However, they can indicate future earnings potential as they suggest expansion and potential future revenue growth.

Question 11

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 12

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

The option D indicates that the firm experiences a large jump in sales and earnings as a result of successful research and development of new products. This indicates that the current performance of the firm is good, and since it is a sustainable change, it informs the analyst about the level of current earnings being sustainable. Option A, B, and C may indicate changes in earnings but do not necessarily inform the analyst about the sustainability of the earnings. Either A or B may be interpreted as a one-time event that may not be sustainable, and Option C indicates additional expenses, which may be an indication of poor current performance.

Question 13

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

Accepted Answer

Sustainable earnings are recurring earnings that are expected to continue over the long-term. Earnings from repeat customers indicate that the company has a loyal customer base and can count on future revenue from those customers. Choices A, B, and C are all one-time events and do not indicate sustainable earnings.

Question 14

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

Accepted Answer

Income from continuing operations is considered the best measure of a firm's sustainable income because it excludes the effects of discontinued operations, extraordinary items, and changes in accounting principles, providing a clearer picture of ongoing profitability.

Question 15

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

Accepted Answer

A high quality balance sheet should not be optimistic in terms of accounting numbers, as this would lead to an overstatement of assets and an understatement of liabilities. It is important to provide a realistic portrayal of the firm's financial position to enable users of the balance sheet to make informed decisions. Choices A, B, and C are all true regarding a high quality balance sheet.

Question 16

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

Under Accounting Standard Codification (ASC) 205-20, a discontinued operation is a component of an entity that has been disposed of or is classified as held for sale. When a component is classified as a discontinued operation, any gain or loss resulting from its disposal is reported separately in the income statement after continuing operations.

In this case, Ralston Company has decided to dispose of one of its subsidiaries, which qualifies as a discontinued operation under ASC 205-20. The estimated net losses from the measurement date until the disposal date are $1,500,000, and the estimated loss on the sale of the segment is $300,000. Therefore, the total estimated loss on discontinued operations is $1,800,000 ($1,500,000 + $300,000).

The net of income taxes needs to be considered while calculating the gain or loss on discontinued operations, which is not given in the question. Therefore, the answer is $1,800,000 loss, as per the available information.

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 occur in the future and therefore cannot be regarded as sustainable earnings. It is also not impairments because impairments are related to a decrease in the value of an asset. The income or loss from discontinued operations is a one-time event and is therefore transitory in nature, not permanent.

Question 18

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

Unexpected gains are typically non-recurring and do not reflect the firm's ongoing operational performance, indicating that current earnings may not be sustainable.

Question 19

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

Accepted Answer

All the options listed (economic faithfulness, reliability, and reasonableness of estimates) are important factors that users of financial statements should consider when evaluating the quality of accounting information. Economic faithfulness ensures that the accounting measurements and classifications are in line with the underlying economic reality. Reliability ensures that the information is trustworthy, verifiable, and free from material errors or biases. Reasonableness of the estimates made in applying GAAP or IFRS ensures that the financial statements are not materially misstated due to differences in judgment and assumptions made by management. Therefore, all of these factors should be considered to assess the quality of accounting information.

Question 20

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

Accepted Answer

The multi-step income statement provides more detail about sources of revenue and expenses, allowing for a more accurate assessment of earnings quality. Additionally, examining the balance sheet and cash flow statement can provide further insight into the company's financial health and sustainability of earnings. Therefore, the use of all three financial statements (multi-step income statement, balance sheet, and cash flow statement) is the best choice for assessing earnings quality.

Quiz 6: Accounting Quality