Question 1

Which of the following is not considered a monitoring mechanism?

Accepted Answer

A) The Securities and Exchange Commission (SE
C)  
B) Top level management 
C) The board of director's audit committee 
D) The external auditors

Question 2

The fair value of an asset is the hypothetical price at which a business can sell the asset (exit price).

Accepted Answer

A) True 
 B)False

Question 3

Which of the following would require the filing of Form 8-K? 
I. Major acquisition
II. Audited financial statements
III. Bankruptcy
IV. Change in management control

Accepted Answer

A) I and III 
B) II and IV 
C) I, III, and IV 
D) I, II, III, and IV

Question 4

Under GAAP accounting, a company has the choice of using cash or accrual accounting in preparing its financial statements.

Accepted Answer

A) True 
 B)False

Question 5

Net income is usually higher than free cash flows.

Accepted Answer

A) True 
 B)False

Question 6

Accrual income is a better predictor of future cash flows than current cash flows.

Accepted Answer

A) True 
 B)False

Question 7

Accrual accounting overcomes both the timing and the matching problems that are inherent in cash accounting.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following information would not be filed with the SEC by a publicly traded company?

Accepted Answer

A) 10-K report 
B) Prospectus 
C) Proxy statement 
D) Tax return

Question 9

10-K reports are:

Accepted Answer

A) the quarterly reports to stockholders. 
B) quarterly filings made by a company with the SEC. 
C) annual filings made by a company with SEC. 
D) filings made by a company with SEC when a company changes its auditors.

Question 10

Income smoothing is a form of earnings management.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is considered part of GAAP?

Accepted Answer

A) Statements of Financial Accounting Standards (SFAS) 
B) International Accounting Standards (IAS) 
C) International Financial Reporting Standards (IFRS) 
D) Internal Revenue Services (IRS)

Question 12

Byfort Company reports the following in its financial statements:
$$\begin{array} { | l | c | c | } 
\hline & \underline { 2005 } & \underline { 2006 } \
\hline \text { Accounts receivable, net } & \$ 34,289 & \$ 29,678 \
\hline \text { Net sales* } & \$ 360,007 & \$ 450,000 \
\hline
\end{array}$$
*All sales are on credit. 
-How much did the company collect in cash from customers during 2006?

Accepted Answer

A) $445,389 
B) $454,611 
C) $484,289 
D) $488,900

Question 13

The relevance of reported asset values is linked (with few exceptions like cash, held-to-maturity investments, and land) with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. For each of the following give an example and explain its impact upon cumulative earnings.a. An overstated asset
b. An understated asset
c. An overstated liability or provision
d. An understated liability or provision

Accepted Answer

The answer of The relevance of reported asset values is...

Question 14

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

Accepted Answer

A) qualified. 
B) unqualified. 
C) clean. 
D) disclaimed.

Question 15

FASB has recognized the conceptual superiority of the historical value concept and has, in principle, decided to eventually move to a model where all asset and liability values are recorded at fair value.

Accepted Answer

A) True 
 B)False

Question 16

Byfort Company reports the following in its financial statements:
$$\begin{array} { | l | c | c | } 
\hline & \underline { 2005 } & \underline { 2006 } \
\hline \text { Accounts receivable, net } & \$ 34,289 & \$ 29,678 \
\hline \text { Net sales* } & \$ 360,007 & \$ 450,000 \
\hline
\end{array}$$
*All sales are on credit. 
-How much sales would have been reported by the company in 2006 if Byfort used cash accounting and not accrual accounting?

Accepted Answer

A) $445,389 
B) $454,611 
C) $484,289 
D) $488,900

Question 17

Which one of the following is not an example of a red flag to one should be aware of when evaluating earnings quality?

Accepted Answer

A) Qualified audit report 
B) Net income this year is higher than net income from last year 
C) Reported earnings consistently higher than operating cash flows 
D) Frequent or unexplained changes in accounting policies

Question 18

Accounting income attempts to capture elements of both permanent income and economic income, but with measurement error.

Accepted Answer

A) True 
 B)False

Question 19

By using earnings management, managers always try to increase income.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is required to be filed with the SEC, if a company changes its auditors?

Accepted Answer

A) 10-K 
B) 10-Q 
C) 8-K 
D) S-1

Exam 2: Financial Reporting and Analysis

Which of the following is not considered a monitoring mechanism?

The fair value of an asset is the hypothetical price at which a business can sell the asset (exit price).

Which of the following would require the filing of Form 8-K? I. Major acquisition II. Audited financial statements III. Bankruptcy IV. Change in management control

Under GAAP accounting, a company has the choice of using cash or accrual accounting in preparing its financial statements.

Net income is usually higher than free cash flows.

Accrual income is a better predictor of future cash flows than current cash flows.

Accrual accounting overcomes both the timing and the matching problems that are inherent in cash accounting.

Which of the following information would not be filed with the SEC by a publicly traded company?

10-K reports are:

Income smoothing is a form of earnings management.

Which of the following is considered part of GAAP?

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

FASB has recognized the conceptual superiority of the historical value concept and has, in principle, decided to eventually move to a model where all asset and liability values are recorded at fair value.

Which one of the following is not an example of a red flag to one should be aware of when evaluating earnings quality?

Accounting income attempts to capture elements of both permanent income and economic income, but with measurement error.

By using earnings management, managers always try to increase income.

Which of the following is required to be filed with the SEC, if a company changes its auditors?