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

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.

Under current GAAP unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss. Which of the following is not one of the balance sheet items?

Summarize how the following information about Clash Corp.s restructuring would affect the balance sheet and income statement summary chart below. Clash Corp.'s restructuring will take approximately 18 months and was announced on March 15, 2006:

On July 15, 2004 Ryan 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, 2004 Ryan Services signs a firm contract to sell the agricultural business to Alfalfa Inc. on March 10, 2005. For each of the situations listed discuss how Ryan Services would report the discontinued operations in its December 31, 2004 income statement. (You may disregard tax issues with respect to the sale.) Situation 1: For the period January 1, 2004 to July 15, 2004 Ryan Services reports that the agricultural business lost $3.2M. From July 16, 2004 to November 11th, 2004 Ryan Services reports that the agricultural business loses an addition $1.4 million dollars. At the end of the 2004 Ryan estimates that it will lose an additional $800,000 on the sale of the agricultural business when it is finally completed in 2005. Situation 2: For the period January 1, 2004 to July 15, 2004 Ryan Services reports that the agricultural business had a profit of $1.5M. From July 16, 2004 to November 11th, 2004 Ryan Services reports that the net income from the agricultural business was $600,000 dollars. At the end of the 2004 Ryan estimates that the sale of the agricultural business will result in a gain of $1.7 million dollars when it is finally completed in 2005. Situation 3: For the period January 1, 2004 to July 15, 2004 Ryan Services reports that the agricultural business lost $3.2M. From July 16, 2004 to November 11th, 2004 Ryan Services reports that the agricultural business loses an addition $1 million dollars. However, at the end of the 2004 Ryan estimates that the sale of the agricultural business will result in a gain of $1.3 million dollars when it is finally completed in 2005.

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 rational for this change was

Many times an analyst will have to make judgments as to whether to include unrealized gains and losses when assessing earnings persistence and predicting future profitability. Discuss the case for and the case against including unrealized gains and losses as part of sustainable earnings when examining earnings persistence and future profitability.

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

Gains and losses differ from revenues and expenses in that they are produced by ____________________ activities.

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

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

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

Achieving comparability in financial reporting is important to the analysis of multinational firm. However, the data from the reconciliation of foreign firms financial statement to U.S. GAAP must be careful interpreted. What types of things complicate the analysis of multinational firms?

When evaluating the quality of accounting information, an analyst should consider all of the following except:

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?

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

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 losses of $1,500,000 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)?

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

One definition of earnings management is that it occurs when managers use

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

The _________________________ is the date of closing the sale, if the firm intends to sell the segment, or the date operations cease, if the firm intends to abandon the segment.