Question

1. A firm reports net income of $ 40 million. The firm's financial statement disclosure in management discussion and analysis reveal that $ 25 million of net income is attributable to a gain on the sale of assets. Based only on this information, for this period, the firm is best described as having high quality of:

1. Financial reporting only.
2. Both high quality earnings and financial reporting.
3. Neither high quality earnings nor financial reporting.
4. None of them.

2. Which of the following is not a potential “red flag” pointing to questionable accounting quality?

1. Unexplained transactions that boost profit.
2. Poor internal governance mechanisms.
3. Volatility in the difference between reported profits and cash-flows.
4. All of the above are potential red flags.

3. Earnings that can are less likely to repeat in the future is known as:

1. Core earnings.
2. Sustainable earnings.
3. Comprehensive earnings.
4. Transitory earnings.

4. Which of the following statement is not correct?

1. Costs of internally developing intangible assets are classified as operating cash outflows.
2. Costs of acquiring intangible assets are classified as investing cash outflows.
3. Cost of internally developing intangible assets are capitalized in the balance sheet.
4. All of the above.

5. The CFO of APEX, S.A. is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If the CFO wants to maximize tax payments in the first year of the machine’s life, which of the following depreciation methods is the CFO most likely to use?

1. Units-of-production method.
2. Straight-line method.
3. Double-declining balance method.
4. None of the above.

cash outflows. B. Costs of acquiring intangible assets are classified as investing cash outflows. C. Cost of internally developing intangible assets are capitalized in the balance sheet. D. All of the above. 10. The CFO of APEX, S.A. is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If the CFO wants to maximize tax payments in the first year of the machine’s life, which of the following depreciation methods is the CFO most likely to use? A. Units-of-production method. B. Straight-line method. C. Double-declining balance method. D. None of the above.

Answer 1

1) Answer is A. Financial reporting

The reason for choosing this option is that disclosing the income from sale of asset as it constitute a major portion of net income reveals the high quality of financial reporting as this period earning is not sustainable and earning is one time only.

2)Answer is C. Volatility in the difference between reported profits and cash-flows.

Red flag is an analysis tool to check the threat of a company and accordingly investors invest in that company. Volatility in the above statement does not reveal the potential risk of investors. Thus, it is beneficial to company only and not the investors.

3)Answer is D. Transitory earnings.

Transitory earnings are unusual earnings that are less likely to repeat in future as compared to sustainable earnings.

4)Answer is C. Cost of internally developing intangible assets are capitalized in the balance sheet.

The reason for choosing this option is that Cost of internally developed intangible asset are shown an operating cash outflow. Thus , it won't be capitalized in the balance sheet. Only the acquired asset are shown in the balance sheet.