UNT FINA 4300 Exam 2 11,12,13

What is the quality of earnings in such cases?

Low.

What is conservative accounting?

An approach that emphasizes caution and undervalues reported performance and financial position.

What is the definition of conservative accounting?

An approach that emphasizes caution and undervalues reported performance and financial position.

What is channel stuffing?

Artificially inflating sales by shipping excess inventory.

What does 'Within GAAP, but biased choices' refer to?

Biased choices resulting in financial reports that do not faithfully represent the economic substance.

How do companies sometimes use accounting provisions to manipulate future performance?

By estimating 'big' losses in the current period.

How can non-recurring transactions be used to increase profit?

By including them in the profit calculation.

What is the relationship between financial reporting quality and assessment of earnings quality?

High financial reporting quality enables assessment, while low financial reporting quality impedes assessment.

What is the relationship between financial reporting quality and company value?

High financial reporting quality increases company value, while low financial reporting quality decreases company value.

What does 'GAAP, decision-useful, but sustainable?' refer to?

High-quality reporting that provides useful information, but reflects unsustainable results or earnings.

What is the discipline for poor financial reporting?

A system to prevent misleading financial statements.

What are examples of external conditions that create opportunities for biased accounting?

Accounting standards that allow divergent choices or minimal consequences.

What do US GAAP and IFRS provide for in terms of restructuring charges?

Accrual of future costs associated with restructurings.

What do US GAAP and IFRS require in terms of non-payments of loans?

Accruals of estimates of future non-payments of loans.

What do high-quality earnings indicate?

Adequate return on investment and sustainability.

What are aggressive accounting choices?

Choices that decrease reported performance and financial position.

What are conservative accounting choices?

Choices that decrease reported performance and financial position.

What are conservative choices in financial reporting?

Choices that decrease reported performance and financial position.

What are aggressive choices in financial reporting?

Choices that increase reported performance and financial position.

Why may earnings not be sustainable?

Company cannot expect same level of return on investment in the future or earnings will not generate sufficient return on investment.

What are the enhancing characteristics of useful information?

Comparability, verifiability, timeliness, and understandability.

What is earnings smoothing?

Conservative choices to understate earnings in periods of good performance.

What is the problem with bias in financial reporting?

Impedes investor's ability to assess performance and value company.

What is the definition of 'earnings management'?

Intentional choices that create biased financial reports.

What is IOSCO?

International Organization of Securities Commissions, global standard setter.

What is the impact of conservative accounting on performance?

It creates a positive surprise and may increase performance in later periods.

How does low earnings quality affect company value?

It decreases company value.

How does high financial reporting quality affect assessment of earnings quality?

It enables assessment of earnings quality.

How does low financial reporting quality affect assessment of earnings quality?

It impedes assessment of earnings quality and valuation.

How does high earnings quality affect company value?

It increases company value.

What does it mean for financial reporting to depart from GAAP?

It is considered low quality.

What is the impact of financial reporting departing from GAAP?

It is generally considered low quality.

What is rationalization?

Justifying a choice to oneself.

What is off-balance sheet financing?

Keeping debt off the company's balance sheet.

What is earnings management?

Manipulating financial results to meet desired targets.

Who are the stakeholders in financial reporting?

Market regulatory authorities, auditors, and private contracts.

What are aggressive accounting motivations?

Motivations to manipulate financial statements.

Does conservative accounting create a sustainability issue?

No, it decreases reported performance and financial position.

What is 'cookie jar reserve accounting'?

Overstating loans and loss allowances to smooth income over time.

What are examples of internal conditions that create opportunities for biased accounting?

Poor internal controls or an ineffective board of directors.

What is the motivation behind biased accounting choices?

Pressure to meet personal or corporate criteria.

What is the distinction between earnings management and biased choices?

Primarily a matter of intent.

What type of information is found in the lowest-quality financial reports?

Pure fabrication.

What is earnings quality?

Quality of earnings, cash flow, and/or balance sheet items.

What does it mean to recognize revenue prematurely?

Recognizing revenue before it is actually earned.

What is income smoothing?

Reducing fluctuations in reported earnings.

What can aggressive choices lead to in later periods?

Reduction in reported performance and financial position.

What are the typical features of a regulatory regime?

Registration, disclosure, auditing requirements, management commentaries, responsibility statements, regulatory review, enforcement mechanisms.

What are the fundamental characteristics of useful information?

Relevance and faithful representation.

What type of financial reporting is most useful for establishing expectations for the future?

Relevant and faithfully representative financial reporting.

What are the characteristics of high-quality financial reports?

Relevant, complete, neutral, and free from error.

What is high-quality financial reporting?

Reports based on sound financial reporting standards, free from manipulation.

What is low-quality financial reporting?

Reports containing inaccurate, misleading, or incomplete information.

What are high-quality financial reports?

Reports that conform to GAAP and provide useful information about high-quality earnings.

What is the definition of fabricated reports?

Reports that portray fictitious events.

What is the definition of adequate returns?

Returns that are sufficient to compensate investors for the risk they have taken.

What can aggressive choices increase in financial reporting?

Revenues, earnings, operating cash flow, or decrease expenses and debt.

What can conservative choices decrease in financial reporting?

Revenues, earnings, operating cash flow, or increase expenses and debt.

What can conservative choices lead to in later periods?

Rise in reported performance and financial position.

What is the risk of poor financial reporting?

Skewing investors' expectations.

What are the standards for high-quality financial reporting?

Standards set by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

What is an example of biased accounting in the guise of conservatism?

The 'big bath' restructuring charges.

Who pays the audit fees?

The company being audited.

What is the expectations gap in auditing?

The difference between public expectations and auditors' responsibilities.

Why do aggressive accounting choices create a sustainability issue?

They may decrease performance and financial position in later periods.

Why do conservative accounting choices not typically create a sustainability issue?

They may increase performance and financial position in later periods.

What is the preference of providers of resources regarding earnings quality?

They prefer high and sustainable earnings.

What is the purpose of deferring R&D expenses?

To increase earnings in the next reporting period.

Why might management make aggressive accounting choices?

To increase reported performance and financial position.

What is the role of auditing?

To provide assurance that financial information complies with accounting standards.

What is the purpose of GAAP?

To provide decision-useful financial information.

What is the purpose of high-quality financial reporting?

To provide information that is useful to analysts in assessing a company's performance and prospects.

What is another type of bias in financial reporting?

Understatement of earnings volatility or earnings smoothing.

What is sampling in auditing?

Using a portion of financial data to examine for misstatements.

Can reporting be high quality even if the economic reality is not?

Yes.

What is the concern expressed by SEC chair Arthur Levitt in his 1998 speech?

Corporations overstating loans and loss allowances to smooth income over time.

What is round-tripping?

Creating false transactions to boost revenue.

What is cookie jar accounting?

Creating reserves to manipulate future earnings.

What are the limitations of auditing?

Deception by the company, sampling, expectations gap, audit fees paid by the company.

What is the result of aggressive accounting choices?

Decreased reported performance and financial position.

What is the result of conservative accounting choices?

Decreased reported performance and financial position.

What are some actions that can be taken to increase earnings?

Deferring R&D expenses into the next reporting period.

What does it mean to defer expenses to later periods?

Delaying the recognition of expenses to future accounting periods.

What does earnings management represent?

Deliberate actions to influence reported earnings and interpretation.

What is Section 4 about?

Detection of financial reporting quality issues.

What is the definition of earnings quality?

Earnings and cash generated by a company's actual economic activities and resulting financial condition.

What are high-quality earnings?

Earnings resulting from sustainable activities that provide a sufficient return on investment.

What is the definition of sustainable earnings?

Earnings that can be maintained over the long term.

What is the bottom level of the quality spectrum in financial reporting?

Fabricated reports that portray fictitious events.

What is non-compliant accounting?

Financial reporting that cannot be compared with earlier periods or other entities.

What is the definition of non-compliant accounting?

Financial reporting that cannot be compared with earlier periods or other entities.

What is aggressive accounting?

When a company tries to make its financial situation look better by being overly optimistic about profits and assets.

What is the definition of aggressive accounting?

When a company tries to make its financial situation look better by being overly optimistic about profits and assets.

What is deception by the company?

When the audited company intentionally tries to mislead the auditor.