Posted: April 10th, 2016

which of the following statements is less likely to affect earnings quality?

1. if the market is efficient, which of the following items is always equal to the fair value
a. historical cost
b. book value
c. market valu
d. carrying value

2.if investors are truly interested in knowing a company’s future cash flows, why would they care about current earnings?
a. net income provides an estimate of sustainable “annualized” future stock
b. accruals and deferrals imitate the “lumpiness” inherent in year-to-year cash flows
c. Investors are better able to predict a company’s future free cash flows using accrual earnings.
d. Current earnings show a best estimate of cash balance that firm holds at the end of year.

3.Which of the following statements is NOT TRUE?
a. EPS is a key performance measure for investors
b. the company should report the three different EPS figures under current GAAP when it has any hybrid securities
c. every company listed on the US stock markets should report EPS
d. to calculate EPS, the numerator is net earnings reported on income statement minus preferred dividend

4. if you are applying the CAPM model to value a firm, which factor would you consider in your valuation process?
a. unsystematic risk
b. under pricing in the market
c. firm-specific risk
d. market wide risk

5. Which of the following situations best characterizes the agency costs associated with diverse ownership?
a. managers have incentives to substitute low risk projects for high risk projects
b. managers have incentives to reduce the dividend payout ratio in order to accelerate debt repayment
c. Managers that own shares of the firm they manage have incentives to consume perquisites
d. all of the above
e. none of the above

6. which of the following statements is false?
Answer a. Income statement is useless because balance sheet indirectly provides net earnings.
b. The certainty means that everyone knows everything including future cash flows
c.Under the certainty condition, all asset values on balance sheet are economic values.
d.Capital maintenance concept cannot be applied under the certainty condition

7. which one shows the agency cost based on agency theory?
a. lower earnings figure from current period
b. manager’s avoidance to invest on R&D
c. decrease in stock price at the end of year
d.audit failure by external auditors

8. which of the following statements is less likely to affect earnings quality?
a.accounting policy choice
b. conservative accounting
c. creditor’s decision model
d. earnings management

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