Exam 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data

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

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.

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

Geyser Corp. reported net income of $390,000 in 2007. During 2007 Geyser 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 Geyser has an effective tax rate of 35% calculate Geyser's adjusted net income. Show all of your calculations for credit. In addition, discuss why analysts might make an adjustment of this type.

During July 2007 Red Company decides to dispose of one of its subsidiaries which qualifies for accounting as a discontinued operation. At the July 2007 measurement date Red 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 2008. In addition, Red estimates that it will lose $300,000 on the sale of the segment. How much gain or loss on discontinued operations will Red report in its 2007 income statement (net of income taxes)?

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

Firm's choices and estimates within GAAP should be determined by

Gains and losses that appear in Other Comprehensive Income are the result of value changes

Which of the following is not a characteristic of an extraordinary item?

When a long-lived asset loses its ability to generate future benefits GAAP requires firms to write down the assets to their fair values and recognize an ______________________________ in income from continuing operations.

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

Many times a financial analyst may decide to make adjustments to the financial statements in order to make the statements more useful. Which of the following would not require an adjustment to the financial statement?

A ____________________ of operations differs from a discontinuation of operations because the firm continues to operate in the business segment.

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

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

Accounting information should provide a fair and complete representation about a number of a firm's characteristics, which of the following is not one of those characteristics?

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

An _________________________ occurs when the carrying amount of a company's long-lived assets are not recoverable.

Profit Corp. manufactures telecommunication equipment and has been profitable each year for the past ten years. During 2005 the company saw its core market decline sharply when a competitor introduced a significant new product technology. In response to the decline in business Profit Corp. announced a major restructuring of its operations. The restructuring plan which would be implemented in 2005 would involve the following changes (all of the charges are material): Profit 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:

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.