FINANCE
09 Financial Reporting and An...nancial Statement Analysi.pdf

09 Financial Reporting and An...nancial Statement Analysi.pdf

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Financial Reporting and Analysis: Financial Reporting Quality and Financial Statement Analysis Test ID: 7694279 Question #1 of 38 Question ID: 456304 A) B) C) Question #2 of 38 Question ID: 460648 A) B) C) Question #3 of 38 Question ID: 460651 A) B) C) Question #4 of 38 Question ID: 414694 A significant increase in days payables above historical levels is most likely associated with: low quality of the cash flow statement. an increase in net working capital. an unsustainable increase in reported earnings. Explanation A significant increase in days payables may indicate that payables have been "stretched" (not paid or paid more slowly), which increases operating cash flow in an unsustainable manner and calls the quality of the reported cash flow values into question. Stretching payables does not affect earnings because the related expenses were recognized in the period incurred. An increase in days payables will decrease net working capital, other things equal. If a firm's financial reports are of low quality, can users of the reports assess the quality of the firm's earnings? Yes, because if financial reports are of low quality, earnings are also of low quality. No, because low-quality financial reports are not useful for assessing the quality of earnings. Yes, because users can assess earnings quality independently of financial reporting quality. Explanation Financial reports that are of low quality make it difficult or impossible for users of the statements to assess the quality of the firm's earnings, cash flows, and balance sheet values. Aggressive accounting choices include: decreasing the estimated useful life of an asset. classifying interest paid as an investing cash flow. increasing the valuation allowance of a deferred tax asset. Explanation Aggressive accounting choices are those that increase earnings, operating cash flows, or asset values in the current period. Classifying interest paid as an investing cash flow, rather than as an operating cash flow, results in higher CFO and lower CFI. The other choices are examples of conservative accounting choices because they decrease earnings in the current period. 1 of 15
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A) B) C) Question #5 of 38 Question ID: 434322 A) B) C) Question #6 of 38 Question ID: 414684 A) B) C) Question #7 of 38 Question ID: 414692 A firm recognizes a goodwill impairment in its most recent financial statement, reducing goodwill from $50 million to $40 million. How should an analyst most appropriately adjust this financial statement for goodwill when calculating financial ratios? Make no adjustments to assets or earnings because both reflect the impairment. Decrease earnings but make no adjustment to assets. Decrease assets and increase earnings. Explanation The recommended adjustment for goodwill before calculating financial ratios is to remove goodwill from the balance sheet (decreasing assets) and reverse any losses recognized due to goodwill impairment (increasing earnings).
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