Question 13 pts
(TCO C) Financial accounting data has some inherent limitations. Which of the following are limitations?
I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.
Group of answer choices
I, II, and III
I, III, and IV
II, III, and IV
I, II, III, and IV
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Question 23 pts
(TCO C) Accounting Standards are best described as:
Group of answer choices
the result of a political process among groups with diverse interests.
presentation standards mandated by the Securities and Exchange Commission.
the state of the art presentation of the science of accounting.
measuring the quality of safeguarding assets.
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Question 33 pts
(TCO C) When you record revenues early it:
Group of answer choices
inflates short run sales and earnings.
deflates short run sales and earnings.
has not effect on earnings.
inflates earnings and deflates short run sales.
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Question 43 pts
(TCO C) Which of the following is not a source of industry information?
Group of answer choices
SEC manuals
Standard and Poor's
Trade journals
Robert Morris Associates
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Question 53 pts
(TCO C) Some key SEC filings are:
Group of answer choices
10-K.
10-Q.
20-F.
All of the above
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Question 63 pts
(TCO E) Deferral of unrealized gains or losses may generate major difference between the economic
pension cost and the:
Group of answer choices
reported pension.
company pension.
past pension.
post retirement pension.
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Question 73 pts
(TCO E) One way for a company to increase its book value per share is to:
Group of answer choices
issue long term debt.
retire long term debt.
increase dividend payout ratio.
buy back shares at market prices below their book value.
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Question 83 pts
(TCO E) Which of the following is an example of off-balance sheet financing?
Group of answer choices
Operating leases
Capital leases
Issuance of convertible bonds
Issuance of common stock
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Question 93 pts
(TCO E) Which of the following statements concerning contingencies is correct?
Group of answer choices
Gain contingencies are recorded if they are probable and reasonably estimable.
Unredeemed frequent flier mileage is an example of a loss contingency.
A loss contingency is a form of off balance sheet financing.
Loss contingencies are not recognized unless there is a greater than 95% chance they will be realized.
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Question 103 pts
(TCO E) Treasury stock is:
Group of answer choices
investments in government securities.
retained earnings that have been appropriated to make equity investments.
a company's own stock that it has repurchased.
assets held for safekeeping in company's vaults.
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Question 113 pts
(TCO F) Which of the following is not considered an intangible asset?
Group of answer choices
Goodwill
Customer lists
Prepaid advertising expenses
Memberships
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Question 123 pts
(TCO F) The LIFO Conformity rule states that if a company uses LIFO for tax purposes, it must also use
it for:
Group of answer choices
balance sheet reporting.
cash reporting.
financial reporting.
liability reporting.
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Question 133 pts
(TCO F) LIFO provides a better match of _________ on the income statement.
Group of answer choices
revenues
liabilities
assets
none of the above
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Question 143 pts
(TCO F) Which of the following would rarely be classified as a current asset?
Group of answer choices
Prepaid insurance
Goodwill
Marketable securities
Work in progress
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Question 153 pts
(TCO F) FIFO provides a better ending inventory figure more closely reflecting:
Group of answer choices
current assets.
current costs.
current liabilities.
current inventory.
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Question 163 pts
(TCO G) Some items appear on a company's income statement but never appear on its _________.
Group of answer choices
financial statement
tax return
balance sheet
cash flow statement
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Question 173 pts
(TCO G) Which of the following statements is correct?
Group of answer choices
Tax loss carrybacks result in deferred tax assets.
Tax loss carryforwards result in deferred tax assets.
The tax valuation account is used to adjust deferred tax liabilities.
All of the above
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Question 183 pts
(TCO G) Which of the following measures of accounting income is typically reported in an income
statement?
Group of answer choices
Net income
Comprehensive income
Continuing income
All of the above
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Question 193 pts
(TCO G) Which of the following would be considered an extraordinary item?
Group of answer choices
Write down of receivables
Gains on disposal of a business segment
Loss of inventory resulting from a fire
Loss resulting from a strike
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Question 203 pts
(TCO G) Compared with companies that expense costs, firms that capitalize costs can be expected to
report:
Group of answer choices
higher asset levels and lower equity levels.
higher asset levels and higher equity levels.
lower asset levels and higher equity levels.
lower asset levels and lower equity levels.
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Question 2125 pts
(TCO F) Analysts maintain that two of the most important ratios are inventory turnover and
accounts receivable turnover.
1. You are analyzing XYZ Company, a tractor manufacturer. You notice that inventory turnover
this year is significantly lower than prior years. Provide two explanations that would be consistent
with this observation. Explain whether these would be a good sign or if these would be a concern
to you and what the effect might be on next period's financial results.
Inventory turnover relates to how long a company holds a product in the warehouse before it is sold to
the consumer. It directly shows how the company sells a product and is very important from an
investor’s point of view. Low inventory turnovers generally mean a company is holding too much
inventory compared to its sales. Decreasing inventory turnover often means sales are decreasing below
expected levels and that an average inventory is being held for a longer period of time before it is sold.
There may be several reasons for the inventory being held longer than necessary. Some of them are:
Less demand: The demand for XYZ Company’s products may have decreased owing to a number
of socio-economic reasons, owing to less demand than expected in prior period. A decrease in
demand would be a matter of concern.
Inaccurate sales forecast: XYZ Company may have planned and produced a certain level of
inventory based on sales forecasts that didn't materialize. An inaccurate sales forecast would
also be a matter of concern.
Obsolete Inventory: XYZ Company’s inventory could possibly have been at the end of its product
life cycle. This type of inventory has to be written down and can cause large losses for the
company. This would also be matter of concern.
Future potential sales increases: XYZ Company may have forecasted a larger number of
potential sales based on their historic data. Therefore, the extra inventory may be a result of
future potential sales increases or fulfillment of a contractual stocking agreement with a
customer. This would be a good sign.
2. You are analyzing XYZ Company, a tractor manufacturer. You notice that accounts receivable
turnover this year is significantly lower than prior years. Provide two explanations that would be
consistent with this observation. Explain whether these would be a good sign of if these would be
of concern to you and what the effect might be on next period's financial results.
The accounts receivable turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a
company uses and manages the credit it extends to customers and how quickly that short-term debt is
collected or is paid. An increase in accounts receivable relative to sales can be due to the following
reasons:
Company's credit policy: XYZ Company may have made more sales on credit or may have
recently made changes in their credit policy. If the credit policy has changed to allow customers
more time to pay, this can have a significant drag on a company's resources, because it is money
that is not coming in as quickly. Another possible reason could have failure by their employees
to follow credit policy. This would be a matter of concern.
Problems with collecting receivables on time: Another reason might be that the customers are
not paying on time. If the problem is that customers are simply not paying on time,
management needs to review collection policies to correct the problem quickly. Allowing
customers to drag out payments can lead to write-offs. There may be several reasons for this
including but not limited to possible recession, lack of collection effort from XYZ Company’s
credit department or inferior quality merchandise being produced by the company. This would
also be a matter of concern.
Unrequited changes: XYZ Company could have possibly made changes in allowance for
uncollected accounts receivable or allowance for returns. They could have possibly changed to a
more belligerent revenue recognition procedure causing the accounts receivable turnover ratio
to suffer. This may also be a matter of concern.
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Question 2225 pts
(TCO E) Compare the effects of operating leases as compared to capitalized leases in the first year of a
lease on the following items listed. Explain your answer.
1. Earnings Before Interest and Taxes (EBIT)
2. Return on Assets
3. Cash flow from Operations
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Question 2325 pts
(TCO C) One step in assessing the quality of earnings is to look for red flags. An example of a red flag is
a change in auditors. A parting of the ways with auditors may be because of disagreements over
accounting matters. This will be filed in an 8-K report. List five other red flags the astute analyst might
look for, describe why it is a red flag, and identify where the analyst might find this information.
5. Reported net income is consistently higher than operating cash flow. Unless the company is
growing fast for long periods this may indicate inflated earnings.
7. Poor financial performance. Desperate companies are prone to desperate means and their
managements are subject to temptation.
8. Frequent one-time charges and big baths. These may indicate significant underlying problems.
11. Related party transactions and relationships. Unusual transactions (if disclosed) between
management and the company (such as Adelphia Communications' guarantee of loans to the
controlling Rigas family and Worldcom's extension of loans to its CEO Bernie Ebbers) indicate
conflicts of interest, potential for abuses and self dealing, often prefacing financial difficulties for
the company. Similarly, a board of directors with few independent directors is less likely to
protect the interests of outside shareholders. The proxy statement is a particularly good place to
catch these disclosures.
Incomprehensible disclosures. Some disclosures are so convoluted that it is just impossible to
make heads or tails out of them. Looking back, with the benefit of hindsight, Enron's SPE
disclosures contained interesting clues and warning signs. Increasingly, companies take pains to
clearly explain complex situations so that the reader may take some comfort.
13. Last minute transactions. Transactions that take place at the end of the reporting period may
be used to make up for the poor results that would otherwise have been achieved.
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Question 2425 pts
(TCO G) For each of these nonrecurring items, give an example and indicate (match with) the
appropriate accounting treatment.
1. Change in accounting estimate
2. Change in accounting principle
3. Discontinued operation
4. Special items
5. Comprehensive income items
6. Change in reporting entity
7. SEC Enforcement Releases
A. Shown net as a separate line item between net income and comprehensive income, no
restatement.
B. Income statement line items adjusted as appropriate, gross or net, prior years restated.
C. Gross amount is part of its regular income or expense line item in income from continuing
operations, prior years restated.
D. Gross amount is part of its regular income or expense line item in income from continuing
operations, no restatement.
E. Shown gross as a separate line item in income from continuing operations, no restatement.
F. Shown net as a separate line item between income from continuing operations and net income,
prior years restated.
G. Shown cumulative net as a separate line item between income from continuing operations and
net income, no restatement.
1. D – Change in depreciable lives
2. G – Change in depreciation method
3. F – Operating income/loss from discontinued operations
4. E – Restructuring charges
5. A – Foreign currency translation adjustment
6. C – Consolidation of subsidiary
7. B – aggressive accounting practices.
