Midterm

Question 1

2 fundamental characteristics v

Answer 1

Relevance

Representationally faithful

Question 2

Relevance

Answer 2

Predictive
Confirmatory
Materiality

Question 3

Faithful representation

Answer 3

Completeness
Neutrality
Free from material error

Question 4

Enhancing qualitative characteristics

Answer 4

Comparability
Verifiability
Timeliness
Understandability

Question 5

3 categories of foundational principles

Answer 5

Recognition/derecognition
Measurement
Presentation and full disclosure

Question 6

2 types of information asymmetry

Answer 6

Adverse selection

Moral hazard

Question 7

Adverse selection

Answer 7

Insiders know more about the firm than outsiders, insiders may want to bias info

Question 8

Moral hazard

Answer 8

Insiders know their role in fulfilment of transactions or firm objectives, while outsiders may not

Question 9

Agency conflict

Answer 9

Delegation of duties: principal delegates authority to agent, agent’s actions are unobserved by principal, agent has incentives not in line with principal

Question 10

EPS

Answer 10

Net income - preferred dividends / average shares outstanding

Question 11

Discontinued operations

Answer 11

Have separate operations and financial elements, are disposed of or held for sale

Question 12

Held for sale

Answer 12

Reasonable price
Plan to sell 
Plan will not change 
Available for immediate sale 
Will sell within a year 
Actively searching for buyer