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Exam 9: Accounting Quality

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Question 31

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The _________________________ is the date of closing the sale, if the firm intends to sell the segment, or the date operations cease, if the firm intends to abandon the segment.

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Question 32

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Many users of financial statements believe that the quality of accounting information for intangible assets is low because firms seldom report intangible asset resources on the balance sheet. However, from the perspective of accounting quality what are arguments in favor of expensing most intangibles and not recording them on the balance sheet?

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Question 33

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Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings are not sustainable?

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?

In a restructuring it is possible that managers may use the opportunity to write down assets that do not even relate directly to the restructuring action. Why might a manager decide to write down an asset that is not included in the restructuring action?

Some firms attempt to maximize the amount of restructuring charge in a particular year, analysts refer to this as the _________________________ approach.

Earnings that are high quality would

Creighton Corp., a textile manufacturer, reported net income of $258,000 in 2012. During 2012 Creighton reported a gain of $29,800 from the sale of three used delivery trucks. The gain was included as part of income from continuing operations. Assuming that the gain is a one-time event and that Creighton has an effective tax rate of 35% calculate Creighton's adjusted net income. Show all of your calculations for credit.

Many times a financial analyst may decide to make adjustments to the financial statements in order to make the statements more useful. Which of the following would not require an adjustment to the financial statement?

When evaluating the quality of accounting information, an analyst should consider all of the following except:

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

Accounting information should be a fair and complete representation of the firm's economic ____________________, ____________________, and ____________________.

Earnings are informative if they signal the portion of current period's due to a new product and the additional earnings in the future as a result of the ____________________ of this new earnings stream.

An extraordinary gain or loss is unusual in nature, _____________________________________________, and material in amount.

Income or loss from discontinued operations would best be regarded by an analyst as:

When evaluating the quality of accounting information the user should consider the reasonableness of the ____________________ made in applying GAAP.

On September 1, 2012, Ramos Inc. approved a plan to dispose of a segment of its business. Ramos expected that the sale would occur on March 31, 2013, at an estimated gain of $350,000. The segment had actual and estimated operating profits (losses as follows): $\begin{array}{|l|l|}\hline\text { Realized lossfrom } 1 / 1 / 12 \text { to } 8 / 31 / 12 & \$(300,000) \\\hline \text { Realized lossfrom } 9 / 1 / 12 \text { to } 12 / 31 / 12 & 200,000) \\\hline \text { Expected profit from } 1 / 1 / 13 \text { to } 3 / 31 / 13 & 400,000\\\hline\end{array}$ Assume a marginal tax rate of 30%. Required: In its 2012 income statement, what should Ramos report as profit or loss from discontinued operations (net of tax effects)?

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

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

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.