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Exam 6: Accounting Quality

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Question 31

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Warranties payable and Notes payable are considered which of the following?

A) Accounting Liabilities
B) Assets
C) Stockholders' Equity
D) Other Financial Assets

E) A) and B)
F) None of the above

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Question 32

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Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?

A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

E) All of the above
F) C) and D)

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Question 33

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Accounting information should provide relevant information to forecast the firm's expected future earnings and _________________________.

Firms' choices and estimates within U.S.GAAP or IFRS should be determined by all of the following except:

Which one of the following is an example of sustainable earnings? 

Accounting information should provide a fair and complete representation about a number of a firm's characteristics.Which of the following is not one of those characteristics?

First Bank recognized an extraordinary loss from the settlement of a lawsuit with Fifth Street Bank that it had impeded on a processing patent.The extraordinary loss was in the amount of $4,250,000 and First Bank Corporation has an effective tax rate of 35%.First Bank paid the settlement immediately and recognized the tax benefit as a receivable to offset the current period's taxes. Instructions: a.Prepare the extraordinary item portion of First Bank Corporation's financial statement. b.Using the analytical framework discussed in the text and reprinted below show the effect of following event on First Bank Corporation's financial statements. Analytical Framework:

Under new accounting standards passed in 2006 firms must report changes in accounting principle in the current and prior years as if the new accounting principle had been applied all along.The rationale for this change was:

Users of financial statements should consider which of the following when evaluating the quality of accounting information?

Motor Corporation's income statements for the years ended December 31,2012 and 2011 included the following information before adjustments: $\begin{array}{|l|r|r}\hline & 2012 & 2011 \\\hline \text { Operating income } & \$ 900,000 & \$ 600,000 \\\hline \text { Gain on sale of division } & \underline{450,000 }&\underline{ \ldots 0\cdots} \\\hline & \$ 1,350,000 & \$ 600,000 \\\hline \text { Provision for income taxes } & \underline{(405,000)} &\underline{ (180,000)} \\\hline \text { Net income } &\underline{ \$ 945,000} &\underline{ \$ 420,000} \\\hline & & \\\hline\end{array}$ On January 1,2012,Motor Corporation agreed to sell the assets and product line of one of its operating divisions for $1,600,000.The sale was consummated on December 31,2012,and it resulted in a gain on disposition of $450,000.This division's pre-tax net losses were $320,000 in 2012 and $250,000 in 2011.The income tax rate for both years was 30%. Required: Starting with operating income (before tax),prepare revised comparative income statements for 2012 and 2011 showing appropriate details for gain (loss)from discontinued operations.

A change in the useful life of an asset is treated as a(n)_____________

Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings is sustainable?

When a company makes a change in an estimate that it has used in its financial statements,it should account for the change by:

As transitory components become a more important part of a firm's reported earnings,the reported earnings: 

In the empirical research on earnings manipulation discussed in the chapter,a number of firm characteristics are found to be associated with the likelihood of engaging in earnings manipulation.For each of the characteristics listed below,discuss the rationale for their inclusion in the model: a.Gross Margin Index b.Asset Quality Index c.Sales Growth Index d.Depreciation Index e.Leverage Index

Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company.Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss four reasons that discourage managers from practicing earnings management.

Under current GAAP unrealized gains and losses from four balance sheet items are reported in ___________________________________________________________________________.

On November 15,2012,Jacobs Co.sold a segment of its business for $2,750,000.The net book value of the segment at the time of its disposal was $3,000,000.Jacobs had pretax operating income of $1,750,000 for 2012 which included $380,000 earned by the discontinued segment prior to its disposal.Assume Jacobs' tax rate is 30%. Required: Prepare a partial income statement for Jacobs Co.beginning with pretax income from continuing operations. 

A(n)____________________ of operations differs from a discontinuation of operations because the firm continues to operate in the business segment.

During July 2012,Ralston Company decides to dispose of one of its subsidiaries,which qualifies for accounting as a discontinued operation.At the July 2012 measurement date,Ralston Company estimates that it will report net losses of $1,500,000 dollars from the measurement date until the disposal date,which is expected to be in April 2013.In addition,Ralston estimates that it will lose $300,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes) ?