Homework 3 - Solutions

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ACCT 30100 – Corporate Financial Reporting Homework 3 Solutions 20 points Multiple Choice (8 questions, 1 point each) Please note that Canvas will shuffle multiple choice answers. Please check answers against the text of the answer as opposed to the letter displayed below. 1. Which of the following would not represent an incentive to manage earnings upwards? A) Earnings prior to earnings management are $3.00 per share and analysts’ expectations are $3.10 per share. B) The fixed-charge ratio prior to earnings management is 1.2 and the company has an affirmative covenant in a loan agreement to maintain a fixed-charge ratio greater than 1. C) Earnings prior to earnings management are $3.00 per share and the minimum threshold for managers’ annual bonus requires earnings per share of $3.05. D) The capital adequacy ratio prior to earnings management is 6% of gross assets and the minimum capital adequacy ratio required by regulators is 8%. 2. Which of the following is the most true? A) The use of compensation committees always eliminate all conflict of interest in having executives set their own bonus targets. B) The use of stock options has grown since the FASB mandated the expensing of stock option costs in 2005. C) The use of base salary has declined over-time while the use of long-term incentives has increased. D) Stock options, restricted stock, and annual performance-based bonus awards are all good examples of long-term incentives. 3. Which of the following is not true? A) Banks, insurance companies, and public utilities must provide financial statements to the government agencies that regulate them. B) Any financial statement prepared for a government agency in the United States is prepared under GAAP. C) Avoidance of regulatory compliance costs can create incentives to manage earnings. D) Capital adequacy requirements for banks is an example of financial information being used for regulatory objectives.

4. Jeff Inc. uses the percentage of gross accounts receivable method for estimating bad debt expense. During 2023, one of Jeff’s customers (Turner Co.) goes bankrupt and it is determined that their receivable of $1,200 is uncollectible. Which of the following is most true? A) The write off of Turner’s uncollectible account has no net effect on assets. B) Jeff cannot book the write off of Turner’s uncollectible account until the end of the reporting period. C) The write off of Turner’s uncollectible account will result in the recognition of an expense in 2023. D) Jeff always knew Turner would not pay him, that is why he uses the percentage of gross accounts receivable method for estimating bad debt expense. 5. An accountant at Irish Inc. is trying to account for a receivable where it is not obvious whether the receivable was sold or is instead being used as collateral for a loan. Which (according to the FASB) would clearly demonstrate that the receivable has been sold by Irish Inc.? A) The transferee has a right to pledge or exchange the assets. B) When the accountant asked, the transferee was pretty sure that Irish Inc. (the transferor) sold them the receivable. C) Irish Inc. (the transferor) has no obligation to repurchase or redeem the transferred assets in the future. D) None of the options alone is enough to clearly demonstrate that the receivable has been sold. 6. Which of the following is not true? A) If the cost of inventory never changes, LIFO and FIFO costing methods would yield the same financial statement result. B) A company can use LIFO for tax purposes, but FIFO for financial reporting purposes. C) A company can use LIFO for financial reporting purposes even if the actual physical flow of inventory is more similar to FIFO. D) A company can use LIFO for financial reporting of one type of inventory and use FIFO for the financial reporting of another type of inventory.

7. Given a history of consistently increasing prices, which statement is true? A) LIFO method reports higher COGS compared to the FIFO method as long as inventory levels are increasing. B) FIFO method reports lower ending inventory compared to the LIFO method as long as inventory levels are increasing. C) LIFO provides the most useful measure of ending inventory compared to other cost flow assumptions. D) FIFO provides the most useful measure of COGS compared to other cost flow assumptions. 8. This question is actually just a free point because it’s midterms and you all seem stressed.

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