"Financial Report":Earnings management
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Questions 1:
Which of the following is lowest in quality on the spectrum of GAAP conforming financial reports?
A、 Aggressive accounting choices
B 、Earnings management
C 、Conservative accounting choices
Questions 2:
Which of the following techniques is most likely to provide a company with the opportunity to inflate earnings?
A、Reductions in the useful lives of fixed assets
B 、Last-in, first-out (LIFO) liquidation
C、 Increases to tax asset valuation allowances
B is correct. Earnings management represents deliberate actions to influence reported earnings and their interpretation. The distinction between earnings management and biased choices is subtle and, primarily, a matter of intent.
A is incorrect because aggressive accounting is a biased choice. Biased accounting choices are higher in quality than earnings management on the spectrum of GAAP conforming financial reports.
C is incorrect because conservative accounting is a biased choice. Biased accounting choices are higher in quality than earnings management on the spectrum of GAAP conforming financial reports.
B is correct. The LIFO liquidation of low-cost inventory layers results in the transfer of low inventory costs to the income statement as costs of goods sold. With reduced costs of goods sold, reported earnings are higher.
A is incorrect. Reducing the useful lives of fixed assets results in faster depreciation, and hence higher reported depreciation expense and lower reported earnings.
C is incorrect. Increases to tax asset valuation allowances are equivalent to asset write-downs, which reduce reported earnings.
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