Module 25

Question 1

High-quality financial reporting is:

Answer 1

decision useful: relevant, faithful representation
unbiased

Question 2

quality of reported results are:

Answer 2

sustainable over time
adequate returns

Question 3

Pertains to the quality of information in the financial reports

Answer 3

quality financial reporting

Question 4

Low-quality earnings are likely not _____ over time

Answer 4

sustainable
because the company does not expect to generate the same level of earnings in the future or because earnings will not generate sufficient return on investment to sustain the company

Question 5

Combining the results from two segments is an example of :

Answer 5

biased reporting

Question 6

Earnings that result from non-recurring activities are _____, which are an example of :

Answer 6

unsustainable
lower-quality earnings

Question 7

Depreciating equipment over the shortest estimated period of its useful life is a ______ accounting choice.

Answer 7

conservative
that reduces earnings in the early years and increases them in the future, creating a positive trajectory

Question 8

Deferring research and development (R&D) investments into the next reporting period is an example of _________ by taking a _____ action

Answer 8

earnings management
real

Question 9

Choices tend to decrease the company’s reported earnings and financial position for the current period

Answer 9

Conservative bias

Question 10

choices tend to increase reported earnings or improve the financial position for the current period

Answer 10

Aggressive

Question 11

Earnings smoothing is the understatement of earnings _____

Answer 11

volatility

Question 12

Earnings smoothing: using _____ bias when company is doing well, and using _____ bias when company is not

Answer 12

conservative
aggressive

Question 13

making intentional choices or deliberate actions to influence reported earnings and their interpretation

Answer 13

earnings management

Question 14

The possibility of bond covenant violations may provide __________ to inflate earnings in the reporting period

Answer 14

motivation to managers

Question 15

An audit is intended to provide assurance that the company’s financial reports are presented _______.

Answer 15

fairly, thus providing discipline regarding financial reporting quality.

Question 16

To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding ______.

Answer 16

asset impairment; charges either for long-lived assets, goodwill, or other intangible assets

Question 17

The SEC prohibits the exclusion of charges or liabilities requiring cash settlement from any non-GAAP liquidity measures other than _______

Answer 17

EBIT and EBITDA

Question 18

EBITDA is a _____ financial measure

Answer 18

non-GAAP

Question 19

The __________ of payments is an example of how choices affect both the balance sheet and income statement.

Answer 19

capitalization
Capitalizing a payment changes the benefit from only the current period—making it an expense—to a benefit in future periods as an asset. The creation of an asset results in a comparable increase in stockholder’s equity

Question 20

Bias choices must occur _____

Answer 20

in the current period in review

Question 21

______ accounting, typically avoids a sustainability issue.

Answer 21

Conservative

Question 22

Meeting or exceeding its own earnings guidance is a possible:

Answer 22

Motivation; for managers to issue low-quality financial reports