Financial reporting quality

Which is more likely to be an aggressive accounting choice?

• Extending the estimate of an asset's useful life

• Accelerated depreciation

• Higher provision for doubtful accounts

Answer explanation

Longer useful lives result in lower depreciation expense and therefore higher net profit.

Which is more likely to be a conservative accounting choice?

• Higher residual value for long-lived assets

• Expensing costs that may be capitalised

• Delaying impairment recognition

Answer explanation

Not capitalising such costs results in full initial recognition of these expenses and therefore lower profits in the current period

Which is least likely to be an incentive to manipulate earnings?

• Beating EPS guidance

• Avoiding the violation of a debt covenant

• Preventing a hostile takeover

Which of the following is more likely to be a potential earnings quality problem?

• Operating margins have been relatively constant

• The growth rate in revenue has exceeded the growth rate in receivables

• CFO cannot cover capital expenditures, dividends, and debt repayments

Which of the following may result in higher CFO?

• Accelerating payments to suppliers

• Accelerating payments from customers

• Extending long-lived assets' useful lives

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