LOS c: List and explain the opportunities and motivations for management to intervene in the external financial reporting process, and the mechanisms that discipline such intervention.
Q1. Which of the follow characteristics is the least compelling evidence that a company has a conservative financial-reporting
strategy?
A) Fixed assets are carried at book value.
B) The LIFO method is used.
C) Earnings growth has been steady and dependable over the last few years.
Q2. Joan Zeller, CFA, suspects Cornwall Carpets is overstating its profits. Which of the following is least likely to motivate Cornwall
to overreport?
A) Cornwall depends heavily on stock options to compensate its employees.
B) Cornwall’s debt covenants are strict.
C) Cornwall is attempting to get lawmakers to institute a tariff.
Q3. Stinson Motors is attempting to make itself look more profitable. To accomplish this, the company is most likely to:
A) understate assets.
B) overstate equity.
C) overstate sales.
Q4. When a firm’s earnings are finally announced, a negative earnings surprise will most likely occur under which of the following
situations?
A) Earlier in the fiscal year, analyst forecasts tend to be more pessimistic than what the firm ends up reporting. Later in the year, analyst forecasts tend to be more optimistic than what the firm ends up reporting.
B) Earlier in the fiscal year, analyst forecasts tend to be more optimistic than what the firm ends up reporting. Later in the year, analyst forecasts tend to be more pessimistic than what the firm ends up reporting.
C) Regardless of the timing, analyst forecasts are more pessimistic than what the firm ends up reporting.
Q5. In the U.S., which of the following mechanisms is least likely to reduce management’s opportunities to intervene in a firm’s
external financial reporting process?
A) Threat of class action litigation.
B) Risk of bankruptcy.
C) Certification by senior management.
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