Question

38.Which of the following will MOST LIKELY motivate company managers to inflate earnings?
a.The possibility of a bond covenant violation.
b.Projected earnings in excess of analysts’ forecasts.
c.Projected earnings greater than those of the previous period.

39.If the ratio of cash flow to net income has consistently ________________ for a five year period, it may be a sign the company is using aggressive accrual accounting policies to shift current expenses into later periods.
a.Increased
b.Decreased
c.Both Increased and Decreased
d.Stayed the Same

40.Projecting a company’s profits into the future based on past results would likely be MOST reliable when the company:
a.Is in the commodities business.
b.Operates in a single business segment for over ten years.
c.Is a large diversified company with a long record of operating in mature industries.

Answer 1

38.Which of the following will MOST LIKELY motivate company managers to inflate earnings?
a.The possibility of a bond covenant violation.

Option A is correct answer because if there is a chance of company violating bond covenant(Not able to meet), then the Managers will try ot inflate earnings.

39.If the ratio of cash flow to net income has consistently ________________ for a five year period, it may be a sign the company is using aggressive accrual accounting policies to shift current expenses into later periods.
b.Decreased

when the current expenses are shifted into later periods then the net income of the company will increase and the Cash flow to net income will decrease

40.Projecting a company’s profits into the future based on past results would likely be MOST reliable when the company:

c.Is a large diversified company with a long record of operating in mature industries.

Because a large diversified company will have multiple business which might offset other businesses income or losses. thus margins will be stable for this company

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