Question 1

Accounting standards issued by the SEC are applicable to all US companies being audited.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements about directors of a company is true?

Accepted Answer

A) Directors are elected by management of a company. 
B) Directors only get paid if the company increases its profitability that year. 
C) Directors are shareholders' representatives. 
D) All directors of a company are senior managers in that company.

Question 3

Under accrual accounting, a company will recognize expenses as they are paid.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements about accruals is true?

Accepted Answer

A) Accrual income is less relevant than cash flow. 
B) Accruals cannot be manipulated. 
C) Accruals are less reliable than cash flows. 
D) All accrual accounting adjustments are value irrelevant.

Question 5

Earnings management can be defined as the "purposeful intervention by management in the earnings process, usually to satisfy selfish objectives" (Schipper, 1989).Earnings management techniques can be separated into those that are "cosmetic" (without cash flow consequences) and those that are "real" (with cash flow consequences).The management of a company wishes to increase earnings this period.List three "cosmetic" and three "real" techniques that can be used to achieve this objective and explain why they will achieve the objective.

Accepted Answer

The answer of Earnings management can be defined as the...

Question 6

Discretionary expenditures are outlays that management can vary across periods to conserve resources and/or manage earnings. Give three examples and explain their potential impact on earnings quality when analyzing a company.

Accepted Answer

The answer of Discretionary expenditures are outlays that management can...

Question 7

Which of the following is an example of judgments made in the accounting reporting process?

I. Useful life of machinery
II. Allowance for doubtful accounts
III. Obsolescence of assets
IV. Interest payment on bonds

Accepted Answer

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

Question 8

The Securities and Exchange Commission (SEC) has the power to issue accounting standards, but generally defers this responsibility to the Financial Accounting Standards Board (FASB).

Accepted Answer

A) True 
 B)False

Question 9

Economic income includes:

Accepted Answer

A) recurring components only. 
B) nonrecurring components only. 
C) both recurring and nonrecurring components. 
D) neither recurring nor nonrecurring components.

Question 10

Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure?

Accepted Answer

A) Protection under Safe Harbor Rules 
B) To manage investors' expectations 
C) To communicate information to investors 
D) To respond to increased demands by labor unions

Question 11

FASB stands for Financial Accounting Service Bureau, and is a sub-division of the Securities and Exchange Commission (SEC).

Accepted Answer

A) True 
 B)False

Question 12

Operating earnings includes all revenue and expense components that pertain to the company's operating business, regardless of whether they are recurring or nonrecurring.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is incorrect?

Accepted Answer

A) Under GAAP, statements are prepared using accrual accounting. 
B) Under GAAP, all assets are marked to market each accounting period. 
C) Under GAAP, it is necessary to make certain estimates. 
D) Annual statements submitted to the SEC (10-K) must be prepared using GAAP.

Question 14

SFAS 157 defines fair value as the:

Accepted Answer

A) entry price. 
B) exchange price. 
C) net asset value. 
D) real value.

Question 15

Accounting information is "material" if its omission would cause a reasonable person to make a different decision if the information was included.

Accepted Answer

A) True 
 B)False

Question 16

Accounting income consists of all the following components except:

Accepted Answer

A) permanent component. 
B) transitory component. 
C) value irrelevant component. 
D) realized component.

Question 17

The "big bath" strategy is often used in conjunction with an income-increasing strategy for other years.

Accepted Answer

A) True 
 B)False

Question 18

Accounting or reported income is same as economic income.

Accepted Answer

A) True 
 B)False

Question 19

All of the following are basic approaches to valuation except:

Accepted Answer

A) market approach. 
B) book value approach. 
C) income approach. 
D) cost approach.

Question 20

Under cash accounting, a company must recognize revenues in financial statements when the revenues are earned or realized.

Accepted Answer

A) True 
 B)False

Exam 2: Financial Reporting and Analysis

Accounting standards issued by the SEC are applicable to all US companies being audited.

Which of the following statements about directors of a company is true?

Under accrual accounting, a company will recognize expenses as they are paid.

Which of the following statements about accruals is true?

Discretionary expenditures are outlays that management can vary across periods to conserve resources and/or manage earnings. Give three examples and explain their potential impact on earnings quality when analyzing a company.

Which of the following is an example of judgments made in the accounting reporting process? I. Useful life of machinery II. Allowance for doubtful accounts III. Obsolescence of assets IV. Interest payment on bonds

The Securities and Exchange Commission (SEC) has the power to issue accounting standards, but generally defers this responsibility to the Financial Accounting Standards Board (FASB).

Economic income includes:

Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure?

FASB stands for Financial Accounting Service Bureau, and is a sub-division of the Securities and Exchange Commission (SEC).

Operating earnings includes all revenue and expense components that pertain to the company's operating business, regardless of whether they are recurring or nonrecurring.

Which of the following statements is incorrect?

SFAS 157 defines fair value as the:

Accounting information is "material" if its omission would cause a reasonable person to make a different decision if the information was included.

Accounting income consists of all the following components except:

The "big bath" strategy is often used in conjunction with an income-increasing strategy for other years.

Accounting or reported income is same as economic income.

All of the following are basic approaches to valuation except:

Under cash accounting, a company must recognize revenues in financial statements when the revenues are earned or realized.