Which of the following might indicate that a company uses aggressive accounting choices to increase its reported performance and financial position in the current period?
A. Increasing the estimated salvage values of PP&E
B. Changing the depreciation method from straight-line to double-declining balance
C. Changing from weighted average to FIFO inventory valuation method in a period of declining inventory prices and constant inventory quantities
Tiene sentido que sea la A. infla los earnings de este año, y lo posterior que se joda, lo pensé mal o apenas lo pensé JODER
Which of the following is not classified as a liability or equity on the balance sheet?
A. Deferred revenue
B. Noncontrolling interest
C. Allowance for doubtful accounts
Correct answer: C
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Correct because the allowance for doubtful accounts is called a contra account because it is netted against (i.e., reduces) the balance of accounts receivable, which is an asset account. The allowance for doubtful accounts reflects the company’s estimate of the amount of receivables that will ultimately be uncollectible.
To properly assess a company’s past performance, an analyst requires:
A. high earnings quality.
B. high financial reporting quality.
C. both high earnings quality and high financial reporting quality.
Había pensado que cuanto mejor mejor, pero parece que no, son independientes, y no importa tanto para tu analizarlo bien los earnings
Correct Answer:
B. high financial reporting quality.
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B is correct. Financial reporting quality pertains to the quality of the information contained in financial reports. If financial reporting quality is low, the information provided is of little use in assessing the company’s performance. Financial reporting quality is distinguishable from earnings quality, which pertains to the earnings and cash generated by the company’s actual economic activities and the resulting financial condition.
When earnings are increased by deferring research and development (R&D) investments until the next reporting period, this choice is considered:
A. non-compliant accounting.
B. earnings management as a result of a real action.
C. earnings management as a result of an accounting choice.
Correct Answer:
B. earnings management as a result of a real action.
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Solution:
B is correct. Deferring R&D investments into the next reporting period is an example of earnings management by taking a real action.
Why deferring R&D = “real action”
You’re not changing how you account for R&D — you’re changing when you perform the actual spending.
It’s a real business decision that affects operations and cash flows, not just accounting records.
The firm is managing activities, not changing accounting policies.
So:
✅ B. Earnings management as a result of a real action
❌ Not C, because accounting methods/estimates stay the same.
A high-quality financial report may reflect:
A. earnings smoothing.
B. low earnings quality.
C. understatement of asset impairment.
es la B
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B is correct. High-quality financial reports offer useful information, meaning information that is relevant and faithfully represents actual performance. Although low earnings quality may not be desirable, if the reported earnings are representative of actual performance, they are consistent with high-quality financial reporting. Highest-quality financial reports reflect both high financial reporting quality and high earnings quality.
Which of the following conditions best explains why a company’s manager would obtain legal, accounting, and board level approval prior to issuing low-quality financial reports?
A. Motivation
B. Opportunity
C. Rationalization
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C is correct. Typically, conditions of opportunity, motivation, and rationalization exist when individuals issue low-quality financial reports. Rationalization occurs when an individual is concerned about a choice and needs to be able to justify it to herself or himself. If the manager is concerned about a choice in a financial report, the manager may ask for other opinions to convince herself or himself that it is okay.
Changing the estimates of the salvage value of capital assets is the least effective way to manage earnings during the life of an asset for companies whose method of depreciation is:
A. straight-line.
B. units-of-production.
C. double-declining balance.
Correct Answer:
C. double-declining balance.
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Incorrect. The units-of-production method calculates depreciation rate based on the net cost of the assets. Changing the salvage value will change the depreciation rate and thereby affect earnings.
Which of the following items is a non-GAAP financial measure?
A. Net income after taxes
B. Income from operations
C. EBITDA
,Correct Answer:
C. EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is not defined under GAAP or IFRS — companies calculate it using their own adjustments.
→ Therefore, it’s a non-GAAP measure (also called a non-IFRS measure).
Not Selected
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Incorrect because income from operations is a GAAP-compliant financial measure that should be defined, calculated, and presented consistently with the same measure on income statements of other US-based publicly traded companies.
Which of the following approaches will most likely reveal manipulation of financial reporting?
A. Using EBITDA to adjust for non-recurring items
B. Evaluating potential warning signals in isolation
C. Comparing a company’s methods and policies to those of its peers
Correct Answer:
C. Comparing a company’s methods and policies to those of its peers
no leí, soy tonto
Which of the following conditions is most likely associated with decreased earnings quality? Compared with the prior year, the reporting entity’s earnings:
A. decreased slightly in response to the introduction of conservative accounting policies.
, Not Selected
B. were similar in magnitude but included a large gain on the sale of a manufacturing plant.
, Not Selected
Incorrect answer:
C. increased slightly because of a reduction in bad debt expense based on more-current experiences.
Lo sopesé la verdad, puse la c, pero obvio la b
Correct Answer:
B. were similar in magnitude but included a large gain on the sale of a manufacturing plant.
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Based on your answer
Incorrect. If the estimates are based on more recent experiences, it does not imply the intent to manipulate earnings and will provide a more faithful representation of the company’s performance.
An analyst would most likely conduct additional analysis when faced with which of the following financial presentations?
A. A non-GAAP financial measure that excludes an expense that is likely to recur
B. Reporting a non-GAAP financial measure in an SEC filing
C. A change from LIFO inventory accounting to FIFO
Correct Answer:
A. A non-GAAP financial measure that excludes an expense that is likely to recur
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Based on your answer
Incorrect. LIFO reporting provides sufficient information in the Notes to convert from LIFO to FIFO so a formal change should not alter an analyst’s opinion about the company.
Which of the following is lowest in quality on the spectrum of GAAP conforming financial reports?
A. Aggressive accounting choices
B. Earnings management
C. Conservative accounting choices
Correct Answer:
B. Earnings management
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Based on your answer
Incorrect because aggressive accounting is a biased choice. Biased accounting choices are higher in quality than earnings management on the spectrum of GAAP conforming financial reports.
