Exam 6: Financing Activities

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 four reasons that discourage managers from practicing earnings management.

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)?

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.

For each of the following factors, determine if the given change or level of that factor would lead an analyst to believe that managers of a firm are more or less likely to engage in earnings manipulation:

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

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

A. Listed below are 12 accounting liabilities: 1.Insurance paid in advance 2. Interest payable 3. Unsettled lawsuits where a reasonable estimate of loss can be determined and the loss is probable 4. Accounts payable 5. Warranties payable 6. Bonds payable 7. Accrued liabilities 8. Taxes payable 9. Employment commitments 10. Notes payable 11. Purchase commitments 12. Salaries payable Place each of these accounting liabilities into one of the following six categories: a. Obligations with fixed payment dates and amounts b. Obligations with fixed payment amounts but estimated payment dates c. Obligations for which the firm must estimate both timing and amount of payment d. Obligations arising from advances from customers on unexecuted contracts and agreements e. Obligations under mutually executed contracts f. Contingent obligations B. In addition, determine which of the liabilities would be recognized on the balance sheet as liabilities and which would not be recognized. Suggestion: format your answer as follows (this is not a correct sample answer): a. Obligations with fixed payment dates and amounts (not generally recognized): 1. Rent Payable

____________________ represents the concept of being able to compare financial statement data across years for any particular firm.

Earnings are informative if they signal the portion of current period's due to a new product and the additional earnings in the future as a result of the ____________________ of this new earnings stream.

Accounting information should provide relevant information to forecast the firm's expected future earnings and _________________________.

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?

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

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?

Under current GAAP unrealized gains and losses from four balance sheet items are reported in ___________________________________________________________________________.

Creighton Corp., a textile manufacturer, reported net income of $258,000 in 2012. During 2012 Creighton reported a gain of $29,800 from the sale of three used delivery trucks. The gain was included as part of income from continuing operations. Assuming that the gain is a one-time event and that Creighton has an effective tax rate of 35% calculate Creighton's adjusted net income. Show all of your calculations for credit. In addition, discuss why analysts might make an adjustment of this type.

When evaluating the quality of accounting information the user should consider the reasonableness of the ____________________ made in applying GAAP.

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

Some firms attempt to maximize the amount of restructuring charge in a particular year; analysts refer to this as the _________________________ approach.

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

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)?