Chapter 3 – Overview of Accounting Analysis
Q3.1. The objective of accounting analysis is typically not to
A. Identify areas in the financial statements that are most strongly affected by management’s
discretionary accounting choices.
B. Identify accounting choices that are most critical to a firm’s accounting performance.
C. Asses whether the financial statements fully comply with accounting conventions and
regulations.
D. Understand management’s reporting incentives and strategy.
E. Undo the financial statements from distortions.
Q3.2. Consider the following statement: “International Financial Reporting Standards (IFRS) are typically
considered to be more principles-based than US Generally Accepted Accounting Principles (US GAAP).”
This statement is
A. True
B. False
Q3.3. Consider the following statement: “The use of rules-based standards rather than principles-based
standards decreases the verifiability of financial statements but increases the extent to which financial
statements reflect the economic substance of a firm’s transaction.” This statement is
A. True
B. False
Q3.4. Which of the following statements is true?
A. Managers of firms that are close to violating accounting-based debt covenants have an incentive
to manage earnings and working capital ratios downwards.
B. In share-for-share mergers managers of the acquiring firm have an incentive to understate their
firm’s accounting performance.
C. Both statements are true.
D. None of the above statements is true.
Q3.5. Which of the following statements is true?
A. Managers have an incentive to understate accounting performance shortly before a large option
award is granted to them.
B. Managers who aggressively manage their firm’s taxes have an incentive to consistently
overstate their firm’s accounting performance.
C. Both statements are true.
D. None of the above statements is true.
Q3.6. Which of the following is not a potential “red flag” pointing to questionable accounting quality?
A. Unexplained transactions that boost profit
B. Unexpected large asset write-offs
C. Volatility in the difference between reported profits and cash flows
D. Poor internal governance mechanisms
E. All of the above are potential red flags
Q3.7. Which of the following is not a potential “red flag” pointing to questionable accounting quality?
A. An increasing gap between a firm’s reported profit and its tax profit
B. An increasing gap between a firm’s reported profit and its cash flow from operating activities
C. Unusual increases in inventories in relation to sales increases
D. The use of accelerated depreciation methods
E. All of the above are potential red flags
Q3.8. Under IFRS firms can classify their operating expenses in the income statement either by function
or by nature. Which of the following two statements about operating expense classification is true?
Statement I: Under the classification by nature firms distinguish “cost of sales” from “selling,
general and administrative (SG&A) expenses”.
Statement II: The International Financial Reporting Standards require that firms classifying their
operating expenses by nature in the income statement disclose their operating expenses by
function in the notes to the financial statements.
A. Statement I is true; statement II is not true.
B. Statement I is not true; statement II is true.
C. Both statements are true.
D. Both statements are not true.
Q3.9. Which of the following accounting policies is most likely to be a key accounting policy of Carrefour,
one of the world’s largest retailers?
A. Accounting for payables
B. Accounting for legal claims
C. Accounting for revenues
D. Accounting for property
Q3.10. Which of the following factors is not relevant in evaluating a firm’s accounting strategy?
A. Management’s incentives to manage earnings
B. The presence of mandatory changes in accounting policies
C. Average accounting choices in the industry
D. Accuracy of past accounting estimates
E. The presence of voluntary changes in accounting policies
Q3.11. Consider the following statements about standardization of financial statements.
Statement I: The income statement items “Result from associate companies” or “Equity income
from associates” must be classified as “Profit or loss to non-controlling interest”.
Statement II: The balance sheet item “Provision for post-employment benefits” must be
classified as “Non-current debt”.
A. Statement I is true; statement II is not true.
B. Statement I is not true; statement II is true.
C. Both statements are true.
D. Both statements are not true.
