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21 b is correct if a company uses a non gaap

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21B is correct. If a company uses a non-GAAP financial measure in an SEC filing,it is required to provide the most directly comparable GAAP measure withequivalent prominence in the filing. In addition, the company is required toprovide a reconciliation between the non-GAAP measure and the equivalentGAAP measure. Similarly, IFRS require that any non-IFRS measures includedin financial reports must be defined and their potential relevance explained. Thenon-IFRS measures must be reconciled with IFRS measures.22B is correct. If a company wants to increase reported earnings, the company’smanagers may reduce the allowance for uncollected accounts and the relatedexpense reported for the period. Decreasing the useful life of depreciable assetswould increase depreciation expense and decrease earnings in the reportingperiod. Classifying a purchase as an expense, rather than capital expenditure,would decrease earnings in the reporting period. The use of accrual accountingmay result in estimates in financial reports, because all facts associated withevents may not be known at the time of recognition. These estimates can begrounded in reality or managed by the company to present a desired financialpicture.23B is correct. Bias in revenue recognition can lead to manipulation of informa-tion presented in financial reports. Addressing the question as to whether rev-enue is higher or lower than the previous period is not sufficient to determineif there is bias in revenue recognition. Additional analytical procedures mustbe performed to identify warning signals of accounting malfeasance. Bartertransactions are difficult to value properly and may result in bias in revenuerecognition. Policies that make it easier to prematurely recognize revenue, suchas before goods are shipped to customers, may be a warning sign of accountingmalfeasance.24A is correct. Managers can temporarily show a higher cash flow from oper-ations by stretching the accounts payable credit period. In other words, themanagers delay payments until the next accounting period. Applying all non-cash discount amortization against interest capitalized causes reported interestexpenses and operating cash outflow to be higher, resulting in a lower cash flowprovided by operations. Shifting the classification of interest paid from financ-ing to operating cash flows lowers the cash flow provided by operations.25C is correct. If a company’s days sales outstanding (DSO) is increasing relativeto competitors, this may be a signal that revenues are being recorded prema-turely or are even fictitious. There are numerous analytical procedures that canbe performed to provide evidence of manipulation of information in financialreporting. These warning signs are often linked to bias associated with revenuerecognition and expense recognition policies.

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Term
Fall
Professor
STAFF
Tags
Balance Sheet, Generally Accepted Accounting Principles, CFA Institute

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