Practice Midterm Quiz 9a

Question 1

1. What is the significance of a company’s meeting or beating analysts’ earnings forecasts for many quarters in a row?

a. This is evidence that stock prices in the United States have, on average, increased by about 10% per year over the past 80 years.
b. This is evidence that companies manage both their own reported earnings as well as managing the forecasts by providing guidance to analysts.
c. This is evidence that the cost of capital is less than the cost of forecasting.
d. This is evidence that the probability of an earnings management meltdown is greater than 50%.
e. This is evidence that companies are using analysts’ earnings forecasts to avoid paying corporate income taxes.

Answer 1

1. Solution = B. See the Packet pre-reading for Quiz 9a.

Question 2

2. In what sense is financial reporting part of a company’s general public relations effort?

a. The financial statements are one of the methods used by the shareholders of a company to communicate information to the Board of Directors.
b. The financial statements are one of the methods used by the banks that have loaned money to the company to communicate information to the shareholders of the company.
c. The financial statements are one of the methods used by the employees of a company to communicate information to the Board of Directors.
d. The financial statements are one of the methods used by the managers of a company to communicate information about the company to the public.

Answer 2

2. Solution = D. See the Packet pre-reading for Quiz 9a.

Question 3

3. What is one way of distinguishing between earnings management that is ethically right and earnings management that is ethically wrong?

a. Income tax consequences
b. Cost of forecasting
c. Management intent
d. Short-term impact on stock price
e. Absence of SEC enforcement action

Answer 3

3. Solution = C. See the Packet pre-reading for Quiz 9a.

Question 4

4. How do accounting standards impact the cost of capital?

a. Reduce information risk
b. Reduce income taxes
c. Reduce stock price per share
d. Reduce working capital efficiency
e. Reduce return on sales

Answer 4

4. Solution = A. See the Packet pre-reading for Quiz 9a.