11. Which of the following is most likely to be classified as an unusual item?
A. An expropriation of land by the local government.
B. A discontinued operation
C. A gain on the sale of capital assets.
D. Investment income
12. Which of the following statements regarding high quality earnings is true?
A. High quality earnings are strongly correlated to past earnings.
B. High quality earnings contain a lot of transitory items.
C. High quality earnings are primarily composed of permanent items.
D. High quality earnings are those that increase over the prior period.
13. Which of the following will have an impact on a company's quality of earnings?
A. The delay of payments to suppliers.
B. The use of monthly statements to encourage payment of receivables.
C. The deferral of expenditures for research and development.
D. The decision to delay the purchase of inventory until after year-end.
14. All of the following are items that management could use to manage earnings except:
A. bad debt expense.
B. warranty expense.
C. asset write-downs.
D. sales expense.
15. All of the following are items that management could use to manage earnings except:
A. unearned revenue.
B. inventory purchases.
C. obsolete inventory.
D. useful life of assets.
16. Which of the following would increase current income but decrease future income?
A. The deferral of maintenance costs.
B. The purchase of capital assets.
C. An increase in the allowance for doubtful accounts.
D. The reduction in the estimated useful lives of assets.
17. An analyst has calculated the ratio of research and development expenses to sales for a company he is following and noticed that it is significantly lower this year than in the previous years. What might this be an indication of?
A. That management might be attempting to increase current earnings.
B. That management might be attempting to increase future earnings.
C. That the earnings quality is higher than it was before.
D. That the profitability of the company is higher than it was before.
18. Which of the following mechanisms is least likely to discourage management bias in the presentation of financial information?
A. Debt covenants
B. Securities regulators
C. Class action lawsuits
D. External Auditors
19. High earnings quality is most likely to:
A. result in steady earnings growth.
B. improve the ability to predict future earnings.
C. be based on conservative accounting choices.
D. result in fewer bad debts.
20. Ratio analysis and analytical tools are grouped into themes. All of the following are analytical themes except:
A. liquidity.
B. management stewardship.
C. evaluating performance.
D. solvency and leverage.