Financial Statement Analysis and Security Valuations | Practice Exam with Detailed Q&A | 2025 – Brian Peter

Financial Statement Analysis and Security Valuations.   "Which financial statement reports elements that describe changes in assets and liabilities? BS IS A. Yes Yes B. Yes No C. No No D. No Yes a. A b. C c. D d. B - CORRECT ANSWER c. D" "Which of the following statements about the mixed attribute model is true? a. Relevance receives the primary emphasis. b. Representational faithfulness receives the primary emphasis. c. Obtaining an optimal mix of relevance and representational faithfulness is the primary objective. d. None of these statements are true. - CORRECT ANSWER c. Obtaining an optimal mix of relevance and representational faithfulness is the primary objective." "Financial accounting numbers are a function of several concepts that affect observed accounting numbers. Which of the following is not one of those concepts? a. Relevance b. Economics c. Bias d. Measurement error - CORRECT ANSWER a. Relevance" "Removing management discretion in accounting choice is more likely to maximize Rep faith Relevance a. Yes Yes b. No No c. No Yes d. Yes No a. C b. D c. A d. B - CORRECT ANSWER b. D" "Present value is most likely to be used as a valuation basis for a. property, plant, and equipment. b. inventory. c. long-term debt. d. accounts receivable. - CORRECT ANSWER d. accounts receivable." "Machinery is most likely valued using which basis? a. Historical cost b. Fair value c. Adjusted historical cost d. Net realizable value - CORRECT ANSWER c. Adjusted historical cost" "Which of the following is not possible under the double entry accounting system? a. Increase an asset and increase a revenue. b. Decrease a liability and increase a revenue. c. Increase an expense and increase a liability. d. All of these answer choices are possible - CORRECT ANSWER d. All of these answer choices are possible" "Which of the following is the definition of a Level 2 fair value? a. "Level 2" inputs for estimating fair values include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates. b. "Level 2" inputs for estimating fair values include a firm's own assumptions about the fair value of an asset or a liability, such as using various data about future cash flows and discount rates to estimate present values. c. "Level 2" inputs for estimating fair values are based on inputs that are readily available via prices for identical assets or liabilities in actively traded markets, such as securities exchanges. d. None of these answer choices are correct. - CORRECT ANSWER a. "Level 2" inputs for estimating fair values include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates." "The text discussed three approaches for income recognition: Approach 1. Recognize changes in economic value on the balance sheet andincome statement when they are realized in a market transaction. Approach 2. Recognize changes in economic value on the balance sheet and income statement when they occur, even though they are not yet realized in a market transaction. Approach 3. Recognize changes in economic value on the balance sheet when the value changes occur over time, but delay recognition in net income until the value changes are realized in a market transaction. Include the delayed value change in "other comprehensive income" and shift it out of other comprehensive income and into net income when it is realized in the market transaction. Which of the approaches is the closest match to fair value accounting on the income statement? a. Approach 1 b. Approach 2 c. Approach 3 d. Approaches 1 and 3 - CORRECT ANSWER b. Approach 2" "Which of the approaches matches historical cost accounting on the income statement (not to be confused with the statement of comprehensive income)? a. Approach 1 b. Approach 2 c. Approach 3 d. Approaches 1 and 3 - CORRECT ANSWER d. Approaches 1 and 3" "Which of the approaches is the strongest on relevance while not ignoring the importance of representational faithfulness? a. Approach 1 b. Approach 2 c. Approach 3 d. Approaches 1 and 2 - CORRECT ANSWER c. Approach 3" The text presents a six-step analysis and valuation framework. Place these steps in the most appropriate chronological order: A. Identify the strategies the firm pursues to gain and sustain a competitive advantage. B. Analyze the current profitability and risk of the firm. C. Value the firm. D. Identify the economic characteristics and competitive dynamics of the industry in which the firm participates. E. Assess the quality of the firm's financial statements and, if necessary, adjust them to more faithfully represent the underlying economics of the firm. F. Prepare forecasted financial statements. A. D, A, E, B, F, C B. A, B, C, D, E, F C. A, D, B, E, F, C D. A, D, B, E, C, F - CORRECT ANSWER A. D, A, E, B, F, C" "Porter's five forces framework suggests analyzing competition within an industry by focusing on the following five forces: a. demand, supply, manufacturing, marketing, investing, and financing. b. rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power. c. demand, supply, government regulations, barriers to entry, and switching costs. d. demand, supply, cyclicality, seasonality, and growth. - CORRECT ANSWER b. rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power." "To be considered high quality, accounting information should a. be a fair and complete representation of the firm's economic performance, financial position, and risk. b. provide relevant information to forecast the firm's expected future earnings and cash flows. c. both be a fair and complete representation of the firm's economic performance, financial position, and risk; and provide relevant information to forecast the firm's expected future earnings and cash flows. d. None of these answer choices are correct. - CORRECT ANSWER c. both be a fair and complete representation of the firm's economic performance, financial position, and risk; and provide relevant information to forecast the firm's expected future earnings and cash flows." "What is the effect on total assets of classifying "restricted cash" as "cash" on the balance sheet? a. Understated b. No effect c. Overstated - CORRECT ANSWER b. No effect" "What is the effect on total assets of recognizing an accounts receivable from a sale and also removing inventory from the books before the sale was completed and title to the inventory passed to the customer? a. Understated b. No effect c. Overstated - CORRECT ANSWER c. Overstated" "What is the effect on total assets of choosing too short of a useful life for building depreciation? a. No effect b. Understated c. Overstated - CORRECT ANSWER b. Understated" "On a common size basis, which of the following assets is normally largest for commerical bank? A. accounts and notes receivable B. Inventroy C. Property, plant, and equipment D. Cash and Marketable securities - CORRECT ANSWER A. accounts and notes receivable" "Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value? A. Inventory B. Marketable Securities C. Equipment D. Brand Name - CORRECT ANSWER D. Brand name" "The accrual basis of accounting recognizes: A. Revenue when cash is received from customers B. Expenses when paid C. Revenue when all or a substantial portion is performed D. Revenue when contracts are signed - CORRECT ANSWER C. Revenue when all or a substantial portion is performed" "What is the principal activity of security analysis? A. To assign credit ratings B. To apply IFRS adjustments C. To value firms D. To assess the need for audits - CORRECT ANSWER C. To value firms" "Which of the following is NOT considered to be a liability? A. Wages Payable B. Accounts Payable C. Notes Payable D. Cost of goods sold - CORRECT ANSWER D. Cost of goods sold" "On the statement of cash flows, depreciation would be classified as? A. A financing activity B. an operating activity C. an investing activity D. a noncash activity - CORRECT ANSWER B. an operating activity" "Which of the following assets appears on the balance sheet at Historical Cost? A. equipment B. Notes payable c. investments in marketable securities d. accounts payable - CORRECT ANSWER a. equipment" "the use of acquisition cost as a valuation method is justified on the basis that acquisition cost is: A. timely b. relevant c. subjective d. objective - CORRECT ANSWER d. objective" "permanent tax differences are revenues and expenses: a. that firms include in income tax returns, but do not appear in the income statement b. that are included in both the tax return and income statement, but in different accounting periods c. that firms include in the income statement, but do not appear in income tax returns d. that are not included in either the tax return or the income statement - CORRECT ANSWER c. that firms include in the income statement, but do not appear in income tax returns" "firms may not include all income taxes for a period on the line for income tax expense in the income statement. Other places that income tax expenses may occur include all of the following except: a. discontinued operations b. extraordinary items c. other comprehensive income d. common stock - CORRECT ANSWER d. common stock" "what level are inputs for estimating fair values based on a firm's own assumptions about the fair value of an asset or a liability, such as using various data to estimate present values? A. level 1 b. level 2 c. level 3 d. none of these - CORRECT ANSWER c. level 3" "which of the following is NOT one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows? a. non-cash items, such as depreciation and amortizations b. changes in working capital accounts c. gains and losses related to the sale of plant, property and equipment d. sale or repurchase of capital stock - CORRECT ANSWER d. sale or repurchase of capital stock" "Which of the following asset and liability measurement methods is not acceptable under U.S. GAAP or IFRS? a. Present value of future cash flows b. Historical cost c. Fair value based on current market value d. Whatever feels right - CORRECT ANSWER d. Whatever feels right" "GAAP and IFRS allow various treatments for revenue recognition. Which of the following correctly describes acceptable revenue recognition principles? a. Whenever cash is realized in a transaction with a customer (such as when a firm sells an asset to a customer) b. When value changes occur over time but are realized in a market transaction c. When the firm has completed all or substantially all of the revenue-generating processes by delivering goods or services to customers, and it is reasonable that it has generated an asset or satisfied a liability d. All of these answer choices are correct, depending on the circumstance. - CORRECT ANSWER c. When the firm has completed all or substantially all of the revenue-generating processes by delivering goods or services to customers, and it is reasonable that it has generated an asset or satisfied a liability" "Complete the following statement correctly. Cash flow a. always follows income. b. can arise from operating, investing, and financing activities. c. always precedes income. d. always equals income. - CORRECT ANSWER b. can arise from operating, investing, and financing activities" "The accrual method of accounting can be best described as a. the method that aligns revenues and expenses with the appropriate period in which resources are generated and consumed. b. the recording of transactions and events so that debits equal credits. c. the method that recognizes revenue when money is received. d. the method that equates assets with liabilities and owners' equity. - CORRECT ANSWER a. the method that aligns revenues and expenses with the appropriate period in which resources are generated and consumed." "Common-size financial statements are useful tools for a. analyzing profit margins. b. revealing relations between amounts for specific items in a financial statement and the relevant total for that statement. c. showing the proportion of debt and equity financing used to finance the total assets of the firm. d. All of these answer choices are correct - CORRECT ANSWER d. All of these answer choices are correct" "Percentage change financial statements are useful tools for a. left-handed analysts. b. highlighting relative growth rates in financial statement amounts from one period to the next. c. measuring profit margins. d. All of these answer choices are correct. - CORRECT ANSWER b. highlighting relative growth rates in financial statement amounts from one period to the next." "Empirical results in Nichols and Wahlen's 2004 study showed that a. an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead. b. analysts' forecasts of future earnings are optimistically biased. c. unexpected changes in earnings have a strong positive association with abnormal stock returns. d. the capital markets are inefficient with respect to earnings information because investors overreact to earnings surprises. - CORRECT ANSWER c. unexpected changes in earnings have a strong positive association with abnormal stock returns." "Income tax expense increases when: A. Income tax payable increases, deferred tax assets increases, deferred tax liabilities increases and cash increases B. Income tax payable increases, deferred tax assets decrease, deferred tax liabilities increases and cash decreases. C. Income tax payable decreases, deferred tax assets increases, deferred tax liabilities decreases and cash increases D. Income tax payable increases, deferred tax assets decreases, deferred tax liabilities increases and cash increases - CORRECT ANSWER B. Income tax payable increases, deferred tax assets decrease, deferred tax liabilities increases and cash decreases." "Which of the following is an example of a permanent difference? a. Bad debt expense recognized for financial reporting, but only write-offs of bad debts are deductible for tax reporting b. Interest income from municipal bond investments recognized for financial reporting, but not taxable for tax reporting c. Depreciation recognized using straight-line for financial reporting but using an accelerated method for tax reporting d. Prepaid rent that is recognized as an asset for financial reporting but tax deductible when paid - CORRECT ANSWER b. Interest income from municipal bond investments recognized for financial reporting, but not taxable for tax reporting" "An increase in the deferred tax asset valuation account a. increases income tax expense. b. decreases income tax expense. c. increases or decreases income tax expense, depending on the situation. d. has no effect on income tax expense. - CORRECT ANSWER a. increases income tax expense." "Large negative cash flows from operations a. can indicate a poorly run, unprofitable business. b. can reflect a business in the introduction phase, which is requiring large investments in working capital such as accounts receivable and inventory. c. cannot occur indefinitely. d. All of the answer choices are correct. - CORRECT ANSWER d. All of the answer choices are correct." "A company reports a net loss of $773 million, cash flows from operating activities of $(124) million, cash flows from investing activities of $(1,416) million, and cash flows from financing activities of $3,744 million. This company is likely in what stage of the business life cycle? a. Decline b. Introduction c. Maturity d. Growth - CORRECT ANSWER b. Introduction" "Why does depreciation appear as a positive adjustment in the operating section of an indirect statement of cash flows? a. Depreciation expense reduces net income, the starting point of the statement of cash flows, but does not require a cash outflow. b. A negative adjustment would reduce cash flows from operating activities. c. Depreciation expense needs to be included in the investing section. d. Long-lived assets are frequently financed with borrowings, which are a financing activity. - CORRECT ANSWER a. Depreciation expense reduces net income, the starting point of the statement of cash flows, but does not require a cash outflow." "A company has accounts receivable of $4,200 at the beginning of the year and $5,000 at the end of the year. Which of the following best describes the adjustment for accounts receivable that would appear in the indirect statement of cash flows? a. The adjustment would be for $800, indicating a source of cash. b. The adjustment would be for $800, indicating a use of cash. c. The adjustment would be for $(800), indicating a source of cash. d. The adjustment would be for $(800), indicating a use of cash - CORRECT ANSWER d. The adjustment would be for $(800), indicating a use of cash" "A company has accounts payable of $315,000 at the beginning of the year and $618,000 at the end of the year. Which of the following best describes the adjustment for accounts payable that would appear in the indirect statement of cash flows? a. The adjustment would be for $303,000, indicating a use of cash. b. The adjustment would be for $(303,000), indicating a source of cash. c. The adjustment would be for $303,000, indicating a source of cash. d. The adjustment would be for $(303,000), indicating a use of cash. - CORRECT ANSWER c. The adjustment would be for $303,000, indicating a source of cash." "A company overstates revenues by €1.2 million by overstating accounts receivable. The best characterization of the effect of this misstatement is a. overstated net income and no effect on operating cash flows. b. overstated net income and understated operating cash flows. c. no effect on the statement of cash flows. d. overstated net income and overstated operating cash flows. - CORRECT ANSWER a. overstated net income and no effect on operating cash flows" "Which of the following accurately describes the difference between basic and diluted EPS? a. Preferred stock dividends reduce the numerator of the EPS calculation for diluted EPS, but not basic EPS. b. Diluted EPS is always less than basic EPS. c. Diluted EPS reflects EPS under an extreme scenario where all convertible securities are assumed to have been converted as of the beginning of the year. d. Diluted EPS is not meaningful if a firm reports a net loss. - CORRECT ANSWER c. Diluted EPS reflects EPS under an extreme scenario where all convertible securities are assumed to have been converted as of the beginning of the year." "Which of the following is false regarding common-size analysis? a. Common-size analysis enables comparisons across firms and across time. b. On a common-size income statement, the net income line reflects the net profit margin. c. Common-size analysis is more useful when you understand a firm's economic environment and strategy. d. All numbers on the income statement and balance sheet are divided by total assets. - CORRECT ANSWER d. All numbers on the income statement and balance sheet are divided by total assets." "Which of the following best describes the relation between ROA and ROCE? a. ROA is susceptible to product life cycles, whereas ROCE is not. b. ROA measures the overall profitability of a firm, whereas ROCE measures the profitability of the firm after considering strategic use of nonequity financing. c. ROA can be negatively affected by changing interest rates, whereas ROCE is immune from financing costs. d. ROA measures asset productivity, whereas ROCE measures profitability. - CORRECT ANSWER b. ROA measures the overall profitability of a firm, whereas ROCE measures the profitability of the firm after considering strategic use of nonequity financing." "Total assets turnover can be better understood if a. you separately analyze receivables, inventory, and fixed assets turnovers. b. you prepare separate decomposition of ROA and ROCE. c. you prepare common-size and percentage change financial statements. d. you adjust net income for unusual or nonrecurring items. - CORRECT ANSWER a. you separately analyze receivables, inventory, and fixed assets turnovers." "Bianchi Inc. has ROA of 3.0% and ROCE of 11.2%. What must be true? a. Capital structure leverage is high. b. Profit margin for ROA is less than profit margin for ROCE. c. More information is required to know why ROA is less than ROCE. d. Total assets turnover is high. - CORRECT ANSWER a. Capital structure leverage is high." "Which of the following are limitations of profitability analysis? a. Acquisitions can trigger noncomparability across time. b. Different business strategies make direct comparisons between firms challenging. c. Unusual and nonrecurring items included within profitability can obscure comparisons across time. d. All of the answer choices are limitations - CORRECT ANSWER d. All of the answer choices are limitations" "Which of the following are typical sources of risk disclosures required in Item 1A in U.S. filings with the SEC? a. Firm-specific risks b. Industry risks c. Domestic risks d. All of the answer choices are correct - CORRECT ANSWER d. All of the answer choices are correct" "The following are Item 1A risk disclosures by Tesla, Inc., a manufacturer of electric vehicles. Which of the following would be an example of a risk disclosure that might be applicable to any company? a. We may fail to meet our publicly announced guidance or other expectations about our business, which would cause our stock price to decline. b. If our vehicles or vehicles that contain our powertrains fail to perform as expected, or if we suffer product recalls, our ability to develop, market, and sell our electric vehicles could be harmed. c. Our future growth is dependent upon consumers' willingness to adopt electric vehicles. d. Our vehicles make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame, and such events have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications. - CORRECT ANSWER a. We may fail to meet our publicly announced guidance or other expectations about our business, which would cause our stock price to decline." "As defined in the chapter, financial flexibility a. is the ability to pay for goods and services through barter transactions. b. is the ability to refinance debt with common or preferred equity. c. is the ability to delay payments to suppliers or accelerate collections from customers. d. is the ability of a firm to strategically use debt financing to increase returns to common shareholders on their investment in a firm. - CORRECT ANSWER d. is the ability of a firm to strategically use debt financing to increase returns to common shareholders on their investment in a firm." "In reformatting balance sheets into operating, financing, and equity components, which of the following would be considered a financial asset? a. Inventory b. Prepaid assets c. Excess cash d. Accounts Receivable - CORRECT ANSWER c. Excess cash" "A firm would likely have low financial flexibility if a. cash and cash equivalents are low. b. leverage is high. c. operating ROA is above 10%. d. operating ROA is close to the net borrowing rate. - CORRECT ANSWER d. operating ROA is close to the net borrowing rate." "Which of the industries would you expect to have the longest cash-to-cash cycle? a. Shipbuilding b. Restaurant c. Electric power distribution d. Retail grocer - CORRECT ANSWER a. Shipbuilding" "Which of the following is not an important factor in assessing a firm's credit risk? a. Cash flows b. Current debt levels c. Contingent claims d. All the answer choices are important. - CORRECT ANSWER d. All the answer choices are important." "Credit risk analysis relies primarily on quantitative inputs from the financial statements, as opposed to qualitative assessments. a. True b. False - CORRECT ANSWER b. False" "Bankruptcy prediction a. is a combination of financial statement analysis and statistical modeling. b. is not relevant for firms reporting losses because such firms are already performing poorly. c. is used by creditors to minimize losses from loans, but it is not useful to equity investors. d. is not relevant for firms reporting profits because there is no risk of bankruptcy. - CORRECT ANSWER a. is a combination of financial statement analysis and statistical modeling." "The beta coefficient measuring systematic risk indicates the covariability of a firm's common stock return and a. bottom-line accounting earnings. b. long-term debt to total capital ratios. c. cash flows from operations. d. the market portfolio in excess of the risk-free rate. - CORRECT ANSWER d. the market portfolio in excess of the risk-free rate." "Which of the following statements about accounting quality is false? a. Accounting information should be conservative. b. Accounting information should be a fair and complete representation of the firms' financial position and risk. c. Accounting information should be a fair and complete representation of the firms' financial performance. d. Accounting information should provide relevant information to forecast payoffs such as earnings, cash flows, and dividends. - CORRECT ANSWER a. Accounting information should be conservative." "Which of the following elements of accounting information reflects the highest accounting quality? a. Measurement error b. Favoring certain political or economic parties c. Bias d. Economics - CORRECT ANSWER d. Economics" "Which of the following best describes the concept of noise in accounting information? a. Noise represents the tendency for an accounting number to systematically fall below the true number as indicated by economic reality. b. Noise represents the tendency for an accounting number to systematically fall above or below the true number as indicated by economic reality. c. Noise represents the tendency for an accounting number to deviate from the true number as indicated by economic reality. d. Noise represents the tendency for an accounting number to systematically fall above the true number as indicated by economic reality. - CORRECT ANSWER c. Noise represents the tendency for an accounting number to deviate from the true number as indicated by economic reality." "Which of the following best describes the concept of bias in accounting information? a. Bias represents the tendency for an accounting number to systematically fall above or systematically fall below the true number as indicated by economic reality. b. Bias represents the tendency for an accounting number to systematically fall below the true number as indicated by economic reality. c. Bias represents the tendency for an accounting number to systematically fall above the true number as indicated by economic reality. d. Bias represents the tendency for an accounting number to deviate from the true number as indicated by economic reality. - CORRECT ANSWER a. Bias represents the tendency for an accounting number to systematically fall above or systematically fall below the true number as indicated by economic reality." "Which statement best describes the relation between bias and conservatism? a. All biased accounting is conservative accounting. b. All conservative accounting is biased accounting. c. Neither statement best describes the relation between bias and conservatism. d. Both statements best describe the relation between bias and conservatism. - CORRECT ANSWER b. All conservative accounting is biased accounting." "Which of the following is an example of when earnings are informative about neither current performance nor future performance? a. Increase in cost of sales from raw materials price increases due to a weather-related event b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Fraudulent one-time omission of depreciation expense d. Increase in sales revenue from introduction of a new product - CORRECT ANSWER c. Fraudulent one-time omission of depreciation expense" "Which of the following is not a benefit of the statement of cash flows? a. It is logically organized into three intuitive sections: operating, investing and financing. b. It reconciles the change in cash from the balance sheet. c. It highlights accruals as the difference between net income and operating cash flows. d. It focuses on cash flows, which are difficult for managers to manipulate - CORRECT ANSWER d. It focuses on cash flows, which are difficult for managers to manipulate" "An indirect statement of cash flows a. is more common than a direct method statement of cash flows. b. reports cash inflows and outflows within three different sections. c. can be useful in identifying significant estimates and choices made by managers under accrual accounting. d. All of these answer choices are correct. - CORRECT ANSWER d. All of these answer choices are correct." "On the statement of cash flows, operating activities a. are the primary source of cash flows for early-stage enterprises. b. involve cash outflows for investments in long-lived assets. c. include noncash transactions such as the purchase of inventory with common stock. d. include activities related to the production and delivery of goods or services. - CORRECT ANSWER d. include activities related to the production and delivery of goods or services." "On the statement of cash flows, investing activities a. would not include acquisitions or divestitures of businesses or business units. b. summarize cash outflows for the acquisition of long-lived assets, as well as cash inflows from the disposal of long-lived assets. c. include activities related to the production and delivery of goods or services. d. include bank borrowings only if those borrowings are collateralized by long-lived assets. - CORRECT ANSWER b. summarize cash outflows for the acquisition of long-lived assets, as well as cash inflows from the disposal of long-lived assets" "A company reports a net loss of $773 million, cash flows from operating activities of $(124) million, cash flows from investing activities of $(1,416) million, and cash flows from financing activities of $3,744 million. What is the change in cash on the balance sheet during the year? a. $(897) million b. $1,431 million c. $2,204 million d. $(773) million - CORRECT ANSWER c. $2,204 million" "On the statement of cash flows, financing activities a. include cash flows generated from the investment of debt or equity capital in productive assets. b. are the primary source of cash flows for mature businesses. c. summarize cash received or paid back to banks and shareholders. d. capture cash inflows from the unplanned sale or liquidation of investments of idle cash. - CORRECT ANSWER c. summarize cash received or paid back to banks and shareholders." "For early-stage businesses, a. cash flows from financing activities tend to be close to zero. b. cash flows from financing activities depend on whether capital comes from banks versus equity investors. c. cash flows from financing activities tend to be positive. d. cash flows from financing activities tend to be negative. - CORRECT ANSWER c. cash flows from financing activities tend to be positive." "For very mature businesses, a. cash flows from operating and financing activities tend to be negative. b. cash flows from operating and financing activities tend to be positive. c. cash flows from operating activities tend to be negative, and cash flows from financing activities tend to be positive. d. cash flows from operating activities tend to be positive, and cash flows from financing activities tend to be negative. - CORRECT ANSWER d. cash flows from operating activities tend to be positive, and cash flows from financing activities tend to be negative." "Which of the following is an example of when earnings are informative about current performance but not informative about future performance? a. Increase in sales revenue from introduction of a new product b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Increase in cost of sales from raw materials price increases due to a weather-related event d. Fraudulent one-time omission of depreciation expense - CORRECT ANSWER c. Increase in cost of sales from raw materials price increases due to a weather-related event" "Which of the following is an example of when earnings are very informative about current performance and tell you that current performance will persist? a. Increase in sales revenue from introduction of a new product b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Fraudulent one-time omission of depreciation expense d. Increase in cost of sales from raw materials price increases due to a weather-related event - CORRECT ANSWER a. Increase in sales revenue from introduction of a new product" "A firm's EPS last year was $1, and it issues an earnings release conveying a current year's EPS of $5. Which of the following do you expect will result in the highest positive price change for the firm's common stock? a. Expected EPS was $4, and the current year EPS is expected to persist. b. Expected EPS was $5, and the current year EPS is not expected to persist. c. Expected EPS was $4, and the current year EPS is not expected to persist. d. Expected EPS was $5, and the current year EPS is expected to persist. - CORRECT ANSWER a. Expected EPS was $4, and the current year EPS is expected to persist." "A firm's EPS last year was $5, and it issues an earnings release conveying a current year's EPS of $4. Which of the following do you expect will result in the least negative price change for the firm's common stock (choose from among the set of answers that would result in a price decline)? a. Expected EPS was $5, and the current year EPS is expected to persist. b. Expected EPS was $4, and the current year EPS is not expected to persist. c. Expected EPS was $4, and the current year EPS is expected to persist. d. Expected EPS was $5, and the current year EPS is not expected to persist. - CORRECT ANSWER d. Expected EPS was $5, and the current year EPS is not expected to persist." "Healy and Wahlen (1999) state that "earnings management occurs when managers use judgment in financial reporting and structuring transactions to alter financial reports" for the purpose of misleading stakeholders. Which of the following is not an example of earnings management? a. Underreporting of a bad debt provision to increase a manager's bonus b. Delay of required maintenance to increase reported income c. Taking accelerated depreciation on property, plant, and equipment to obtain favorable terms in a labor negotiation when straight-line is more appropriate d. Misclassification of a current liability as long term to increase the current ratio - CORRECT ANSWER d. Misclassification of a current liability as long term to increase the current ratio" "Which of the following is an example of real earnings management? a. Overstating interest expense b. Prepaying for an insurance policy c. Accelerating a purchase of land to the current period d. Using heavy discounts to generate sales to meet a quarterly sales goal - CORRECT ANSWER d. Using heavy discounts to generate sales to meet a quarterly sales goal" "Which of the following is a disincentive to engage in earnings management? a. Trading on public exchanges and being subject to SEC scrutiny b. Having a compensation contract based on earnings c. Engaging in insider trading d. Becoming a target in a takeover attempt - CORRECT ANSWER a. Trading on public exchanges and being subject to SEC scrutiny" "Which of the following is an incentive to engage in earnings management? a. Being a bank subject to capital requirements b. Desiring a reputation for being honest and trustworthy c. Having informed, outside members of the board of directors d. Legal rights of shareholders to sue - CORRECT ANSWER a. Being a bank subject to capital requirements" "Financial reporting rules require liabilities to be reported if they involve "probable future sacrifices of economic benefits," the firm has an unavoidable "present obligation," and the "transaction or event that gave rise to the obligation has already occurred." Considering the different kinds of uncertainty that may exist, what would be the rank order on uncertainty (most uncertain first) of the following: 1. Obligations for which the firm must estimate both timing and amount of payment 2. Contingent obligations 3. Obligations arising from mutually unexecuted contracts 4. Obligations with fixed payment dates and amounts 5. Obligations arising from advances from customers on unexecuted contracts and agreements 6. Obligations with fixed payment amounts but estimated payment dates a. 1, 6, 5, 3, 2, 4 b. 3, 5, 6, 1, 2, 4 c. 3, 6, 5, 1, 4, 2 d. 2, 3, 6, 5, 4, 2 - CORRECT ANSWER c. 3, 6, 5, 1, 4, 2" "Under certain circumstances, contingencies are recognized in the body of the financial statements. Which of the following contingency is recognized? a. A probable gain from an expected victory in a lawsuit b. A probable loss from a lawsuit c. A reasonably possible loss from a lawsuit d. A remotely possible gain from a lawsuit - CORRECT ANSWER b. A probable loss from a lawsuit" "Guarantees also may trigger financial statement recognition of a liability. Which of the following guarantees would not require financial statement recognition on the books of the guarantor? a. Guarantee to repay the debt of another firm that is solvent and profitable (the interest rate of the debt was not reduced due to the guarantee) b. Guarantee to repurchase accounts receivable sold in a prior transaction if the receivables become uncollectible c. Guarantee to repay the debt of another firm that is insolvent d. Guarantee to repay the debt of another firm that is currently solvent but has no history of profitability (the interest rate of the debt was reduced due to the guarantee) e. All of the above will result in financial statement recognition of a liability on the books of the guarantor. - CORRECT ANSWER a. Guarantee to repay the debt of another firm that is solvent and profitable (the interest rate of the debt was not reduced due to the guarantee)" "