Question 1: For this year, JJ company has 20,000 net earnings on income statement and 7,000 net cash inflow from operating activities, 15,000 net cash outflow from investing activities, and 20,000 cash inflow from financing activities on the statement of cash flows. What is the accruals total reported for this period?

0

5000

7000

13000

Question 2: Which is the measurement basis for Marketable securities in B/S?

Current or past value

Fair value or amortized cost

Past value adjusted for depreciation

Expected future value

Question 3: A company changed its method of inventory pricing from last-in, first-out to first-in, first-out during the current year. Generally accepting accounting principles require that this change in accounting method be reported by:

Accounting for the effects of the change in the current and future periods.

Showing the cumulative effect of the change in the current year's financial statements and pro forma effects on prior year's financial statements in an appropriate footnote

Disclosing the reason for the change in the "significant accounting policies" footnote for the current year but not restating prior year financial statements

Applying retroactively the new method in restatements of prior years in the current 10-k or 10-Q and appropriate footnote disclosures

Question 4: Which of the following statements is not true?

The comprehensive income should be reported only on income statement below the net income figure.

The comprehensive income is defined as a "change in equity (net assets) of a business for a period.

Under US GAAP, the comprehensive income is required to be reported because I/S cannot catch all wealth changes for the year.

Comprehensive income is a concept based on capital maintenance concept.

Question 5: The basic purpose of financial reporting is to:

Directly measure the value of a firm using historical costs of resources

Provide information for firm value, past performance, and risk factors

Show a firm's future stock price

Provide information about a firm's resources in terms of market value

Question 6: In the Apple Tree article, we discussed for a couple of ways to value business: earnings capitalization vs. discounted cash flows. Which one correctly shows the sequence of earnings capitalization process?

forecast of I/S -> forecast of annual earnings for business life --> determination of the cost of equity ---> Calculation of present value of future earnings.

determination of cost of equity -> forecast of annual earnings for business life --> forecast of I/S  ---> Calculation of present value of future earnings.

Calculation of present value of future earnings-->  determination of cost of equity -> forecast of annual earnings for business life --> forecast of I/S

determination of cost of equity -> forecast of annual earnings for business life  -->Calculation of present value of future earnings --> forecast of I/S.

Question 7: Which of the following contributes to high quality earnings?

Gains or losses resulting from debt retirement.

Frequent changes in accounting principles.

Write-off of assets from corporate restructuring.

Cash sales generated from repeat customers

Question 8: The definition of fair value in SFAS No 157(FASB ASC 820) is based on:

Replacement cost

Historical cost

Entry price

Exit price

Question 9: In stock markets. investors and financial analysts prefer to use pro forma earnings. There are several reasons that they are using this figure instead of GAAP earnings. Please discuss the following questions:

What is pro forma earnings? Is there any policies regulated by the SEC for pro forma earnings? (2 points) What are the advantages and disadvantages of pro forma earnings compared with GAAP earnings in valuing firms in the markets?

Question 10: Which of the following statements is not true?

If managers cannot meet a forecasted EPS in the market, they are willing to change firm's operation to meet or beat it.

EPS is one of the most popular performance measures that are used in the market because it cannot be manipulated by managers.

Sometimes managers release a forecast of EPS and it may cause managerial short-termism.

Every company listed on the US stock markets should report the basic and diluted EPS

Question 11: There are several ways to manage earnings (earnings management) which may reduce earnings quality. The one-time overstatement of restructuring charges to reduce assets, which reduces future expenses, is the definition of which of the following earnings management techniques?

Abusing the materiality concept

Creasing " cookie jar" reserves

Taking a bath

Creative acquisition accounting

Question 12: Which of the following statements is not true in measuring earnings?

Capital maintenance approach is more related to measurement problem, while transaction approach is more related to revenue recognition issues.

the transaction approach is more focused on the accounts on balance sheet.

The current GAAP is more based on the transaction approach.

For the income measurement, there are two approaches such as transaction and capital maintenance

Question 13: Some users in the markets prefer to use free cash flows as a performance measure instead of earnings. For this year, JJ company has 10,000 net earnings on income statement and 7,000 net cash inflow from operating activities, 5,000 net cash outflow from investing activities, and 2,000 cash outflow from financing activities on the statement of cash flows. What is the best estimate of free cash flows for this year based on the information above?

15000

3000

5000

2000

Question 14: Which one is not a main question when you evaluate earnings' quality?

Debt to equity ratio and total amounts of liabilities.

Gross profit ratio

Source of revenue and persistent of revenues

Relationship between earnings and the market price of the common stock

Question 15: The article of "Luca Pacioli" discusses the origins of accounting system. Measuring firm's performance has always been an important task for several reasons. The article introduced a couple of interesting relations.

One of that is the relationship between "reasonable profit" and business goal". We may conjecture the meaning of "reasonable profit" although the article did not clearly define it. Please discuss how "reasonable profit" can be defined. Also discuss how it is related to earnings quality we discussed in class.