Chapter 3 Flashcards
Consider the following statement: “International Financial Reporting Standards (IFRS) are typically considered to be more principles-based than US Generally Accepted Accounting Principles (US GAAP).” This statement is (T/F)
TRUE
The objective of accounting analysis is typically not to
A. Identify areas in the financial statements that are most strongly affected by management’s discretionary accounting choices.
B. Identify accounting choices that are most critical to a firm’s accounting performance.
C. Assess whether the financial statements fully comply with accounting conventions and regulations.
D. Understand management’s reporting incentives and strategy.
E. Undo the financial statements from distortions.
c
Consider the following statement: “The use of rules-based standards rather than principles-based standards decreases the verifiability of financial statements but increases the extent to which financial statements reflect the economic substance of a firm’s transaction.” This statement is (T/F)
FALSE
Which of the following statements is true?
A. Managers of firms that are close to violating accounting-based debt covenants have an incentive to manage earnings and working capital ratios downwards.
B. In share-for-share mergers managers of the acquiring firm have an incentive to understate their firm’s accounting performance.
C. Both statements are true.
D. None of the above statements is true.
D
Which of the following statements is true?
A. Managers have an incentive to understate accounting performance shortly before a large option award is granted to them.
B. Managers who aggressively manage their firm’s taxes have an incentive to consistently overstate their firm’s accounting performance.
C. Both statements are true.
D. None of the above statements is true.
A
Which of the following is not a potential “red flag” pointing to questionable accounting quality?
A. Unexplained transactions that boost profit
B. Unexpected large asset write-offs
C. Volatility in the difference between reported profits and cash flows
D. Poor internal governance mechanisms
E. All of the above are potential red flags
C
Which of the following is not a potential “red flag” pointing to questionable accounting quality?
A. An increasing gap between a firm’s reported profit and its tax profit
B. An increasing gap between a firm’s reported profit and its cash flow from operating activities
C. Unusual increases in inventories in relation to sales increases
D. The use of accelerated depreciation methods
E. All of the above are potential red flags
D
Under IFRS firms can classify their operating expenses in the income statement either by function or by nature. Which of the following two statements about operating expense classification is true?
Statement I: Under the classification by nature firms distinguish “cost of sales” from “selling, general and administrative (SG&A) expenses”.
Statement II: The International Financial Reporting Standards require that firms classifying their operating expenses by nature in the income statement disclose their operating expenses by function in the notes to the financial statements.
A. Statement I is true; statement II is not true.
B. Statement I is not true; statement II is true.
C. Both statements are true.
D. Both statements are not true.
D
Which of the following accounting policies is most likely to be a key accounting policy of Carrefour, one of the world’s largest retailers?
A. Accounting for payables
B. Accounting for legal claims
C. Accounting for revenues
D. Accounting for property
D
Which of the following factors is not relevant in evaluating a firm’s accounting strategy?
A. Management’s incentives to manage earnings
B. The presence of mandatory changes in accounting policies
C. Average accounting choices in the industry
D. Accuracy of past accounting estimates
E. The presence of voluntary changes in accounting policies
B
Consider the following statements about standardization of financial statements.
Statement I: The income statement items “Result from associate companies” or “Equity income from associates” must be classified as “Profit or loss to non-controlling interest”.
Statement II: The balance sheet item “Provision for post-employment benefits” must be classified as “Non-current debt”.
A. Statement I is true; statement II is not true.
B. Statement I is not true; statement II is true.
C. Both statements are true.
D. Both statements are not true.
B
Which of the following statements is correct?
A. “General and Administrative Expense” is an income statement line item that firms use under a classification of operating expenses by function.
B. “Raw Materials” is an income statement line item that firms use under a classification of operating expenses by function.
C. “Marketing and Selling Expense” is an income statement line item that firms use under a classification of operating expenses by nature.
D. “Cost of Services” is an income statement line item that firms use under a classification of operating expenses by nature.
A
Which of the following relationships between income statement line item and standard income statement account is correct?
A. Servicing and maintenance -> SG&A (by function)
B. Dividend income -> Interest income
C. Asset impairments -> Cost of sales (by function)
D. Share-based payments -> Investment income
A
Which of the following relationships between balance sheet line item and standard balance sheet account is correct?
A. Amounts due from affiliates -> Trade receivables
B. Goodwill -> Non-current tangible assets
C. Work-in-progress -> Inventories
D. Provision for post-employment benefits -> Other current liabilities
C
Which of the following relationships between cash flow statement line item and standard cash flow statement account is correct?
A. Depreciation and amortization ->Non-operating losses (gains)
B. Deferred tax expense -> Non-current operating accruals
C. Stock bonus awards -> Net investments in operating working capital
D. Capital expenditures -> Net investments in operating working capital
B
