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10 Questions

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Quality of Financial Statements

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Questions and Answers

What characterizes financial reporting ranked as the best quality?

Compliant with GAAP and decision-useful; earnings are sustainable and adequate (correct)

Compliant with GAAP, but earnings quality is low and reporting choices and estimates are biased

Compliant with GAAP but the amount of earnings is actively managed

Not compliant with GAAP, but based on the company’s actual economic activities

What does aggressive accounting often result in for future periods?

Decreased future period earnings (correct)

Sustainable and adequate earnings

Increased future period earnings

Compliant reporting with GAAP

What is the purpose of employing a conservative bias during periods of higher-than-expected earnings?

To decrease the company’s reported earnings for that period (correct)

To defer the recognition of earnings to a future period

To increase the company’s reported earnings for that period

To maintain neutrality in financial reporting

In what way does conservatism in financial reporting deviate from neutral reporting or faithful representation?

It introduces higher standards of verification for revenue and profit than for expenses and accrual of liabilities Signup and view all the answers

What is one possible consequence of a more aggressive earnings choice in a future period?

Increase in reported earnings Signup and view all the answers

What does financial reporting quality primarily refer to?

The characteristics of a firm’s financial statements following GAAP Signup and view all the answers

Which of the following best describes faithful representation in financial statements?

The neutrality and completeness of the information presented Signup and view all the answers

What does high-quality reported earnings signify?

Earnings represent an adequate return on equity and are expected to recur in future periods Signup and view all the answers

What is the main consideration regarding high financial reporting quality and low earnings quality for a firm?

It may have high-quality financial reporting but low earnings quality Signup and view all the answers

Why is compliance with GAAP by itself not sufficient to produce high-quality financial reporting?

Because GAAP allows choices among methods, estimates, and specific treatments Signup and view all the answers