Exam 9: Accounting Quality

When evaluating the quality of accounting information the user should consider the _____________________________________________ of the measurements made.

First Bank recognized an extraordinary loss from the settlement of a lawsuit with Fifth Street Bank that it had impeded on a processing patent. The extraordinary loss was in the amount of $3,250,000 and First Bank Corporation has an effective tax rate of 35%. First Bank paid the settlement immediately and recognized the tax benefit as a receivable to offset the current period's taxes. Instructions: a. Prepare the extraordinary it em poition of First Bank Corporationstinancal statement. b. Using the analytical framework discussed in the text and reprinted below show the effect of following event on First Bank Corporation's Analytical Framework:

Quality accounting information should be informative as to both the __________________________________________________ of the current period's earnings and the long-run sustainability of profits.

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

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

A ______________________________ is accounted for by spreading the effect of the prior year's misstatement over the current and future periods.

The best measure of a firm's sustainable income is

Banks Corp. reported net income of $390,000 in 2012. During 2012 Banks reported a loss of $72,000 from a peripheral activity. The loss was included as part of income from continuing operations. Assuming that the loss is a one-time event and that Banks has an effective tax rate of 35% calculate Banks' adjusted net income. Show all of your calculations for credit.

On July 15, 2009 Time Services decided to sell its agricultural business and focus on its landscape equipment business. The sale of the agricultural business qualifies for discontinued operations accounting treatment. On November 11, 2009 Time Services signs a firm contract to sell the agricultural business to Acme Inc. on March 10, 2010. For each of the situations listed discuss how Time Services would report the discontinued operations in its December 31, 2009 income statement. (You may disregard tax issues with respect to the sale.) Situation 1: For the period January 1, 2009 to July 15, 2009 Time Services reports that the agricultural business lost $3.2M. From July 16, 2009 to November 11, 2009 Time Services reports that the agricultural business loses an addition $1.4 million dollars. At the end of the 2009 Time estimates that it will lose an additional $800,000 on the sale of the agricultural business when it is finally completed in 2010. Situation 2: For the period January 1, 2009 to July 15, 2009 Time Services reports that the agricultural business had a profit of $1.5M. From July 16, 2009 to November 11th, 2009 Time Services reports that the net income from the agricultural business was $600,000 dollars. At the end of the 2009 Time estimates that the sale of the agricultural business will result in a gain of $1.7 million dollars when it is finally completed in 2010. Situation 3: For the period January 1, 2009 to July 15, 2009 Time Services reports that the agricultural business lost $3.2M. From July 16, 2009 to November 11th, 2009 Time Services reports that the agricultural business loses an addition $1 million dollars. However, at the end of the 2009 Time estimates that the sale of the agricultural business will result in a gain of $1.3 million dollars when it is finally completed in 2010.

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

Which of the following is not considered a motive to manage earnings?

The _________________________ is the date on which a firm commits itself to a formal plan to dispose of a business segment.

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 income of $200,000 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)?

Penny Corp. manufactures telecommunication equipment and has been profitable each year for the past ten years. During 2010 the company saw its core market decline sharply when a competitor introduced a significant new product technology. In response to the decline in business Penny Corp. announced a major restructuring of its operations. The restructuring plan which would be implemented in 2010 would involve the following changes (all of the charges are material): a. Severance payments to rechice work force \9 million b. Write-down of inventory \ 13 million c. Penalty payment for termination of lease on manufacturing facility \ 6 million d. Wite-down of equipment associated with manufacturing facility Total 2010 restructuring charge \ 40 million Penny Corp. has never previously restructured its operations and believes that it can return to profitability within two years based on its current research and development activity. Required: 1. $\text {Discuss whether or not you would elininate the restructuring charge from the 2010 income statement of Permy Corp. when using}$ $\text {earnings to forecast future profitability}$ 2. $\text {Penty Corp.'s restructuring charges cover a wide range of different cost categories, iclentify those that ent ail a cash payment and thos:}$ $\text {that donot require a cash payment. For those charges not requiring a cash payment how would they be treated in the Statement of}$ $\text { Cash Flowers?}$

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

When evaluating the quality of accounting information the user should consider the ____________________ of the firm's disclosures.

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

A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively. In these cases the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable. List four conditions which might suggest that a company is recognizing revenues too early?

Quality accounting information seeks to maximize relevance and economic faithfulness, subject to the constraints of the ____________________ of the measurements.

Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company. Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss five motives that encourage managers to practice earnings management.