chap2.2

GAAP stands for General American Accounting Principles, and must be adhered to by publicly traded companies when preparing their financial statements.

• True

• False

FASB stands for Financial Accounting Service Bureau, and is a sub-division of the Securities and Exchange Commission (SEC).

• True

• False

Under GAAP accounting, a company has the choice of using cash or accrual accounting in preparing its financial statements.

• True

• False

Under cash accounting, a company must recognize revenues in financial statements when the revenues are earned or realized.

• True

• False

Under accrual accounting, a company will recognize expenses as they are paid.

• True

• False

Accrual income is a better predictor of future cash flows than current cash flows.

• True

• False

The auditor provides "reasonable", as opposed to "absolute" assurance that the financial statements provide no material misstatement.

• True

• False

Net income is usually higher than free cash flows.

• True

• False

By using earnings management, managers always try to increase income.

• True

• False

Income smoothing is a form of earnings management.

• True

• False