LOS d: Discuss the importance of the interpretation of footnotes to accounting statements and other disclosures.

Q1. Notes to financial statements contain:

A)   little useful information for the analyst relative to the actual financial statements.

B)   important information about the firm's accounting practices and basis of presentation.

C)   statements by auditors.

Q2. Disclosures of accounting practices and basis are often made in what part of a firm’s financial reports?

A)   Cash flow statement.

B)   Income statement.

C)   Footnotes to the financial statements.

Q3. What are three factors that would make a firm's accounting earnings less of a gauge of future economic performance? Late filings, unusually:

A)   low amounts of loans to company insiders, and short tenure of senior management.

B)   high amounts of loans to company insiders, and long tenure of senior management.

C)   high amounts of loans to company insiders, and short tenure of senior management.

Q4. An analyst should carefully review the footnotes to a firm’s financial statements to determine the:

A)   future growth rate of the firm.

B)   accounting practices and basis utilized by the firm.

C)   salaries of top executives.

LOS d: Discuss the importance of the interpretation of footnotes to accounting statements and other disclosures. fficeffice" />

Q1. Notes to financial statements contain:

A)   little useful information for the analyst relative to the actual financial statements.

B)   important information about the firm's accounting practices and basis of presentation.

C)   statements by auditors.

Correct answer is B)

A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements.

Q2. Disclosures of accounting practices and basis are often made in what part of a firm’s financial reports?

A)   Cash flow statement.

B)   Income statement.

C)   Footnotes to the financial statements.

Correct answer is C)

A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements.

Q3. What are three factors that would make a firm's accounting earnings less of a gauge of future economic performance? Late filings, unusually:

A)   low amounts of loans to company insiders, and short tenure of senior management.

B)   high amounts of loans to company insiders, and long tenure of senior management.

C)   high amounts of loans to company insiders, and short tenure of senior management.

Correct answer is C)

Quality of earnings looks at the relationship between accounting earnings and economic profit potential of the firm. An analyst is concerned about anything that would render accounting earnings less useful as a gauge of the firm’s future expected economic earnings. Warning signals include late filings, unusually high amounts of loans to company insiders, and short tenure of senior management.

Q4. An analyst should carefully review the footnotes to a firm’s financial statements to determine the:

A)   future growth rate of the firm.

B)   accounting practices and basis utilized by the firm.

C)   salaries of top executives.

Correct answer is B)         

A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements.