Question 1

Fundamental investors buy undervalued stocks and avoid buying overvalued stocks.

Accepted Answer

This is the basic principle of fundamental investing. Fundamental investors analyze the financial health and future growth potential of a company to determine its intrinsic value, and only invest in stocks that are trading below their intrinsic value. They avoid stocks that appear to be overvalued based on their analysis.

Question 2

Financial reports provide information that can reduce investors' uncertainty about the company's opportunities and risks,thereby raising the company's cost of capital.

Accepted Answer

Financial reports reduce investors' uncertainty by providing transparent information about a company's performance, which can lower the company's cost of capital by increasing investor confidence.

Question 3

Financial information capable of making a difference in a decision is relevant.

Accepted Answer

Financial information that has the potential to influence the outcome of a decision is considered relevant. It must be accurate, timely, and trustworthy so that it can be used to make informed decisions. Non-relevant financial information, on the other hand, may be interesting but is not likely to impact the decision-making process.

Question 4

Suppliers monitor the financial statements of their customers to protect collection of their accounts receivable.

Accepted Answer

Suppliers often monitor the financial statements of their customers to keep an eye on their creditworthiness and financial stability. This helps them assess any potential risks and take preventative measures to protect their accounts receivable and ensure timely collections.

Question 5

All of the information needed by professional analysts to give a complete picture of a company is found in the published financial statements.

Accepted Answer

While the published financial statements provide a lot of information about a company's financial performance, professional analysts also need other information such as management's discussion and analysis, footnotes, and other disclosures to give a complete picture of the company. Additionally, analysts may also gather information from external sources such as industry reports and news articles.

Question 6

Timeliness is a qualitative characteristic of accounting information that indicates that information should be provided to users before statutory deadlines.

Accepted Answer

Timeliness in accounting means providing information to users in time to make informed decisions, not necessarily before statutory deadlines.

Question 7

Management has a responsibility to ensure that the company's financial information is properly classified,characterized,and presented clearly and concisely in order to make it understandable.

Accepted Answer

Management is responsible for ensuring that the company's financial information is properly classified, characterized, and presented clearly and concisely in order to make it understandable to external users such as investors, lenders, and analysts. This ensures that the financial information is reliable, relevant, and timely, which is essential for making informed business decisions. Failure to do so can result in serious consequences such as financial loss, legal liabilities, and damage to the company's reputation. Therefore, it is important for management to take this responsibility seriously and implement effective financial reporting and disclosure practices.

Question 8

Accounting improprieties are sometimes designed to meet the expectations and financial targets of Wall Street analysts.

Accepted Answer

Accounting improprieties may be committed to manipulate financial statements and meet Wall Street analysts' expectations and financial targets. This can lead to inflated stock prices and bonuses for executives.

Question 9

Besides assessing the general reasonableness of reported numbers in relation to the company's activities,industry conditions,and business climate,when designing audit procedures the company's auditor must also assess fraud risk factors that may be present.

Accepted Answer

Auditors are required to assess fraud risk factors in order to design appropriate audit procedures to detect or prevent potential fraud.

Question 10

The "quality of information" as applied to financial reporting refers to the degree to which financial statements are grounded in facts and sound judgments and thus are free from distortion.

Accepted Answer

The statement accurately defines the concept of "quality of information" in financial reporting.

Question 11

For information to be relevant it must possess either predictive value or confirmatory value.

Accepted Answer

This is true. Predictive value means the information helps predict future events, while confirmatory value means the information confirms or supports a previously held belief or hypothesis.

Question 12

A mispriced security is a stock or bond that is selling for substantially more-or less-than it seems to be worth.

Accepted Answer

A mispriced security is one that is trading at a price that is not in line with its true value, either overvalued or undervalued.

Question 13

Using the same accounting methods for a company to record and report similar events from period to period demonstrates faithful representation.

Accepted Answer

Using the same accounting methods for a company to record and report similar events from period to period demonstrates consistency, not faithful representation. Faithful representation refers to information that is complete, neutral, and free from error.

Question 14

Comparability across companies allows analysts to identify real economic similarities in and differences between underlying economic events because those similarities or differences are not obscured by accounting methods or disclosure practices.

Accepted Answer

Comparability enables analysts to make meaningful comparisons across different companies' financial statements by removing the impact of accounting methods or disclosure practices. This allows analysts to identify real economic similarities and differences between companies and make informed decisions.

Question 15

Financial statements are crucial in investment decisions that use fundamental analysis to identify mispriced securities (i.e.,securities selling for more or less than they seem to be worth).

Accepted Answer

Financial statements provide important information about a company's financial performance and health, which is used in fundamental analysis to determine the true value of a security. Mispriced securities can be identified by comparing the market price with the value derived from fundamental analysis using financial statements. Therefore, financial statements are crucial in investment decisions that use fundamental analysis.

Question 16

Managers are the stewards of the company's resources and thus responsible for their efficient use and for protecting them from adversity.

Accepted Answer

This is a commonly accepted principle of management that managers are expected to use the company's resources efficiently and wisely while safeguarding them from any potential risks or losses.

Question 17

An understanding of management's reporting incentives is sufficient to enable auditors to recognize vulnerable areas where financial reporting abuses are likely to occur.

Accepted Answer

While understanding management's reporting incentives is important, auditors also need to consider other factors such as the company's internal control environment, the nature of its business and industry, and the complexity of its transactions to effectively recognize areas vulnerable to financial reporting abuses.

Question 18

Owners and managers have an economic incentive to supply the amount and type of financial information that will enable the company to raise capital at the lowest cost.

Accepted Answer

Owners and managers want to minimize the cost of capital and provide investors with sufficient financial information to evaluate the company's value and make informed investment decisions. By providing the right amount and type of financial information, they can increase investor confidence and reduce their cost of capital.

Question 19

The role of financial accounting information is to facilitate economic transactions and to foster efficient allocation of resources among businesses and individuals.

Accepted Answer

Financial accounting information provides important data and insights that can help businesses make informed decisions about investing, lending, and borrowing money. By providing accurate and up-to-date financial statements and reports, financial accounting helps businesses and individuals assess their financial health and identify areas where they may need to make changes or adjustments. This information can also be used by investors, creditors, and other stakeholders to evaluate a company's performance and potential for future growth. Ultimately, by providing reliable financial information, financial accounting helps promote transparency and accountability in the business world, which can lead to more efficient use of resources and greater overall economic prosperity.

Question 20

Highly profitable but politically vulnerable firms have an incentive to make themselves appear less profitable than they really are.

Accepted Answer

Highly profitable but politically vulnerable firms may face pressure from regulators, the public or the media to justify their profits or to otherwise address concerns about their activities. One way they may do this is by understating their profits or by engaging in practices that reduce their apparent profitability. This can serve to shield them from criticism and regulatory intervention, and may help to maintain their social legitimacy.

Quiz 1: The Economic and Institutional Setting for Financial Reporting