Chapter 3 – Overview of Accounting Analysis

The objective of accounting analysis is typically not to
1. Identify areas in the financial statements that are most strongly affected by management’s discretionary accounting choices.
2. Identify accounting choices that are most critical to a firm’s accounting performance.
3. Asses whether the financial statements fully comply with accounting conventions and regulations.
4. Understand management’s reporting incentives and strategy.
5. Undo the financial statements from distortions.
Which of the following items is not a required component of European public firms’ financial statements?
1. A comprehensive income statement (or statement of total recognized income and expense)
2. An income statement
3. A cash flow statement (or statement of cash flows)
4. A balance sheet (or statement of financial position)
5. All of the above items are required components
Consider the following statement: “An economic resource whose future benefits cannot be measured with a reasonable degree of certainty is not considered to be an asset for accounting purposes.” This statement is
1. True
2. False
Which of the following statements is correct?
1. Revenues cannot be recognized before cash is collected.
2. Expenses cannot be recognized before the cash outflow has occurred.
3. Revenues cannot be recognized if cash collection is uncertain.
4. Expenses will always be recognized before or when the cash outflow occurs.
5. None of the above.
Consider the following statement: “International Financial Reporting Standards (IFRS) are typically considered to be more principles-based than US Generally Accepted Accounting Principles (US GAAP).” This statement is
1. True
2. False
Consider the following statement: “The use of rules-based standards rather than principles-based standards decreases the verifiability of financial statements but increases the extent to which financial statements reflect the economic substance of a firm’s transaction.” This statement is
1. True
2. False
Which of the following statements is true?
1. The implementation of the Eight Company Law Directive in the European Union has removed all systematic differences in the effectiveness of external auditing across countries.
2. One of the objectives of the Eight Company Law Directive in the European Union is to set minimum standards for public audits that improve auditor independence.
3. All audits of public firms within the European Union must be carried out in accordance with the set of Generally Accepted Auditing Standards, as promulgated by the Public Company Accounting Oversight Board.
4. None of the above
Which of the following statements is true?
1. Managerial legal liability regimes are equally strict across the member states of the European Union.
2. Under a strict legal liability regime, managers tend to provide more forward-looking disclosures than under a loose regime.
3. Managerial legal liability regimes are less strict in Germany and the UK than in the US.
4. None of the above
One of the primary tasks of the Committee of European Securities Regulators is to
1. Improve the consistency of public enforcement activities across European countries.
2. Publicly disclose all European public enforcement decisions.
3. Develop a set of International Public Enforcement Standards.
4. Discipline European public companies for violations of International Financial Reporting Standards.
Which of the following statements is true?
1. Managers of firms that are close to violating accounting-based debt covenants have an incentive to manage earnings and working capital ratios downwards.
2. In share-for-share mergers managers of the acquiring firm have an incentive to understate their firm’s accounting performance.
3. Managers have an incentive to understate accounting performance shortly before a large option award is granted to them.
4. Managers who aggressively manage their firm’s taxes have an incentive to consistently overstate their firm’s accounting performance.
Which of the following accounting policies is most likely to be a key accounting policy of Carrefour, one of the world’s largest retailers?
1. Accounting for payables
2. Accounting for legal claims
3. Accounting for revenues
4. Accounting for property
Which of the following factors is not relevant in evaluating a firm’s accounting strategy?
1. Management’s incentives to manage earnings
2. The presence of mandatory changes in accounting policies
3. Average accounting choices in the industry
4. Accuracy of past accounting estimates
5. The presence of voluntary changes in accounting policies

Chapter 3 – Overview of Accounting Analysis

Quiz