Question

Question 2

Reported expenses are most likely to have been understated with management’s discretionary ________

A. increase in doubtful accounts  

B. decrease in warranty provisions  

C. increase in the interest earned on credit sales

D. acceleration in revenue recognition.

Question 3

An analyst is comparing two pharmaceutical companies, Abraham Inc. and Branson Corporation. Both companies follow the US GAAP with a fiscal year ending on 31 December. They released their first new drugs around the same time early this year. Branson developed its drug internally, whereas Abraham acquired the research and development for its drug from another company. All else equal, Branson compared to Abraham would most likely report in the current year

A. similar net cash from investing activities.

B. lower net cash from investing activities.

C. higher total assets.

D. none of the above

Question 4

An analyst observed a decrease in a company’s days in sales outstanding (DSO). Which of the following could explain this trend?

A. The company agreed on more lenient credit terms with its suppliers.

B. Due to a general economic downturn, customers needed to delay payments to the company

C. The company increased the allowance for doubtful accounts this year.

D. The company adopted more lenient credit terms for its customers

Question 5

Which of the following comparisons is most useful to indicate a change in profitability?

A. Net income growth vs. Revenue growth.

B. Operating cash flow growth vs. Net income growth.

C. Revenue growth vs. Asset growth.

D. None of the above

Question 6

In order to identify possible understatement of expenses with regard to non-current assets, an analyst would most likely be cautious and alert to management's discretion to:

A. accelerate depreciation.

B. over-estimate the residual value.

C. under-estimate the expected useful life

D. all of the above

Question 7

Analysts sometimes restate accounting items on a financial statement as a percentage of total assets. This helps to factor out differences in the scale of operations among different firms. Which of the following statement formats uses this analysis technique?

A. Common-size balance sheet.

B. Common-size statement of equity

C. Common-size income statement

D. All of the above

Question 8

When comparing a company following IFRS to another following US GAAP, it is important to remember that under IFRS

A. Research-phase R&D expenditures may be capitalised.

B. Development-phased R&D expenditures may be capitalised

C. Research-phase R&D expenditures must be capitalised.

D. None of the above

Question 9

In conducting the financial statement analysis of a company, which of the following is an information source from outside the company that may be used to obtain relevant data?

(i) press releases
(ii) industry reports
(iii) economic statistics

A. Only (i) and (ii)
B. Only (ii) and (iii)
C. Only (i) and (iii)
D. All of (i), (ii), and (iii)

Answer 1

Ans 2. Reported expenses are most likely to have been understated with management's discretionary when there is decrease in warranty provisions.

Reason : Warranty provisions are estimates based on management's discretion. They are estimated on some reasonable basis but ultimately management has discretion over warranty expenses. So, if there is decrease in warranty provision, then reported expenses will also decrease.

Option B is correct ( decrease in warranty provisions ).

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