Question 1

Accounting standards are set by the American Institute of Certified Public Accountants (AICPA).

Accepted Answer

Accounting standards in the United States are set by the Financial Accounting Standards Board (FASB), not the AICPA. However, the AICPA does provide guidance and support to its members in applying these standards.

Question 2

Discretionary expenditures are outlays that management can vary across periods to conserve resources and/or manage earnings. Give three examples and explain their potential impact on earnings quality when analyzing a company.

Accepted Answer

The answer of Discretionary expenditures are outlays that management can...

Question 3

The relevance of reported asset values is linked (with few exceptions like cash, held-to-maturity investments, and land) with their ultimate recognition as reported expenses. Provisions and liability values on the balance sheet may also affect earnings quality. For each of the following give an example and explain its impact upon cumulative earnings.a. An overstated asset
b. An understated asset
c. An overstated liability or provision
d. An understated liability or provision

Accepted Answer

The answer of The relevance of reported asset values is...

Question 4

There are many ways in which the management of a company can manage the reported earnings. Give three reasons why management may want to manage earnings being sure to explain your answer in full.

Accepted Answer

The answer of There are many ways in which the...

Question 5

FASB has recognized the conceptual superiority of the historical value concept and has, in principle, decided to eventually move to a model where all asset and liability values are recorded at fair value.

Accepted Answer

FASB recognizes both historical cost and fair value as relevant measurement bases depending on the context, and has not decided to move entirely to a fair value model for all assets and liabilities.

Question 6

Under the fair value model, income is determined by matching costs to recognized revenues, which have to be realized and earned.

Accepted Answer

Under the fair value model, income is determined by changes in fair values of assets or liabilities over time, not by matching costs to recognized revenues.

Question 7

ABC Co. starts its business raising $110,000 in cash; $60,000 from issuing equity and $50,000 from issuing 6% bonds at par. ABC used the whole amount of cash to buy a building, which it rents out for $10,000 per year. Given below is the opening balance sheet of ABC Co. for the first year of operations.$\begin{array}{ll}&\text { Year } 1\
\underline{\text { Assets }}&\
\text { Cash } & \$\quad0 \
\text { Building } & 110,000\
&110,000\
\underline{\text { Liabilities and Shareholder's equity }}\
\text { Long-term debt } & 50,000 \
\text { Shareholders' equity } & 60,000\
&110,000
\end{array}$
At the end of Year 1, the building is valued at $150,000. Also, the market value of bonds has fallen to $49,000. Assume the useful life of the building is 30 years, and its salvage value is $50,000 at the end of that period. The rental income is received on the last day of the year. Interest on bonds is also paid on this day.
Prepare the year-end balance sheet and income statement of ABC Co. based on Fair value. Compare the historical and fair values at year-end.

Accepted Answer

The answer of ABC Co. starts its business raising $110,000...

Question 8

Accounting standards issued by the SEC are applicable to all US companies being audited.

Accepted Answer

Accounting standards issued by the SEC are only applicable to companies that are publicly traded in the US. Private companies are not required to follow SEC accounting standards, although they may choose to do so voluntarily.

Question 9

Accrual accounting overcomes both the timing and the matching problems that are inherent in cash accounting.

Accepted Answer

Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. This eliminates the timing problem of cash accounting. Additionally, accrual accounting matches revenues with the expenses incurred to produce them, which eliminates the matching problem of cash accounting.

Question 10

Operating income is often referred to as net operating profit before tax.

Accepted Answer

The answer of Operating income is often referred to as...

Question 11

Accounting or reported income is same as economic income.

Accepted Answer

Accounting or reported income may not reflect the true economic income as it is subject to accounting principles and conventions, whereas economic income considers all relevant economic factors and cash flows.

Question 12

Operating earnings includes all revenue and expense components that pertain to the company's operating business, regardless of whether they are recurring or nonrecurring.

Accepted Answer

Operating earnings refers to the income generated by a company's core business operations, and includes all revenue and expenses related to those operations, both recurring and nonrecurring. This excludes any income or expenses related to investments or financing activities.

Quiz 2: Financial Reporting and Analysis