"Financial Report"：financial reporting quality
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Questions 1:
If a company that leases assets for its own use classifies its leases as finance leases instead of as operating leases, its financial statements in the first year would most likely report:
A lower cash from operations.
B higher debt.
C higher equity.
Questions 2:
Which of the following companies would most likely be considered to have the lowest financial reporting quality, other things equal? :
A A company that provides high quality, decision- useful information under GAAP but delays its reports.
B A company that reports significant profits due to a favorable exchange rate movement.
C A company that reports the results from two different segments as a combined entity.
【Answer to question 1】（B）
B is correct. Classifying leases as finance leases rather than operating leases for a lessee would increase the amount of total debt reported because the present value of the total lease payments is recognized as a liability.
A is incorrect. CFO is higher because the lease payment is not deducted from NI, just the portion that is interest expense (unless interest expense is classified as a financing activity...
C is incorrect. The net income is normally lower under a finance lease, so equity would also be lower (retained earnings).
【Answer to question 2】（c）
C is correct. Combining the results from two segments is an example of biased reporting, which falls in the middle of the quality spectrum. It is difficult to interpret the profitability of each segment when their results are combined.
A is incorrect. The company’s reports are high quality, but the delay in reporting impairs their usefulness somewhat. The reporting is still better than biased reporting.
B is incorrect. This is an example of decision- useful information about a result that may not be sustainable. Reporting is not of the highest quality, but is better than biased reporting.
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