Exam 6: Accounting Quality

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?

Motor Corporation's income statements for the years ended December 31,2012 and 2011 included the following information before adjustments: On January 1,2012,Motor Corporation agreed to sell the assets and product line of one of its operating divisions for $1,600,000.The sale was consummated on December 31,2012,and it resulted in a gain on disposition of $450,000.This division's pre-tax net losses were $320,000 in 2012 and $250,000 in 2011.The income tax rate for both years was 30%. Required: Starting with operating income (before tax),prepare revised comparative income statements for 2012 and 2011 showing appropriate details for gain (loss)from discontinued operations.

Earnings that are high quality would:

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

All of the following are criteria that financial reporting requires before recognizing an obligation as a liability except:

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

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:

The Orbus Company has a 30,000 unrealized gain and a 10,000 unrealized loss.Where would Orbus Company report these transactions?

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

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?

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.

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

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)?

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

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.

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

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

Firm's choices and estimates within U.S.GAAP should be determined by:

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.