Question

-Which of the following is true when using the earnings record to appraise a stock for investment?

	1) Multiples used in valuation should relate to average earnings.
	2) Be justified by indications available about the future.
	3) Cover at least five years and preferably 7-10 years (Professor L says 10+).
	4) All of the above.

-Which of a company's three main financial statements is easiest to manipulate?

	1) Income statement
	2) Balance sheet
	3) Cash flow statement
	4) Management letter

-List three ways to manipulate the income statement (income accounts) of a company?

Answer 1

Which of the following is true when using the earnings record to appraise a stock for investment?

Answer: 2 Be justified by indications available about the future.

• As the future event has good impact on stock price, like company is going to get big amount order and that will increase the revenue in next year and resulting increase in stock price.

Which of a company's three main financial statements is easiest to manipulate?

Below three main financial statements is easiest to manipulate:

1. Income Statement
2. Balance Sheet
3. Cash flow Statement

List three ways to manipulate the income statement (income accounts) of a company?

Below are the three ways to manipulate the income statement:

1. Deflate current period earning on income statement by inflating current period expenses or deflating current period revenue. When company is going to make loss anyway sometimes company decides to write off losses that were kept off books from the previous quarters, so company's current period make big loss but future period's performance will improve.
2. Inflate current period of earning by recording revenue prior to completing all services.
3. Company can manipulate income by switching accounting standard.