Question

1. Which of the following statements is correct with respect to economic incentives to release financial information?

Multiple Choice

• Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.

• Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.

• Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.

• Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.

2. When reporting unusual or infrequent items in the income statement which of the following is not correct?

Multiple Choice

• The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.

• Firms that use early debt retirement will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.

• If a material event is either unusual in nature or an infrequent occurrence—such as a one-time charge resulting from a major restructuring—it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company’s last major restructuring.

• If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.

Answer 1

Ques-1

True statement

Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.

Ques 2

False statement

Firms that use early debt retirement will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.