Decision-useful financial reporting must possess which two fundamental characteristics?
Explanation
Relevance refers to information useful for decision making (materiality), and faithful representation encompasses completeness, neutrality, and absence of errors.
Other questions
Which of the following best describes the primary criterion for judging financial reporting quality?
A firm follows GAAP strictly but presents earnings that are essentially unsustainable due to large one-time gains. How would this firm be classified on the quality spectrum?
Which of the following actions is best described as aggressive accounting?
During a period of higher-than-expected earnings, management increases the reserve for bad debts. This practice is best described as:
Which of the following is considered a motivation for management to issue low-quality financial reports?
The three factors of the 'fraud triangle' that are conducive to low-quality financial reporting are:
Which of the following conditions most likely provides an opportunity for low-quality financial reporting?
Regarding the discipline of financial reporting quality, an unqualified audit opinion indicates that:
In the United States, companies reporting non-GAAP financial measures are required to:
A firm changes its shipping terms from FOB destination to FOB shipping point. This change is most likely to:
Channel stuffing is a practice best described as:
A company uses 'bill-and-hold' transactions. This practice allows the company to:
If management determines that the probability of uncollectible accounts is lower than the current estimate, a decrease in the reserve for uncollectible accounts will:
A firm has a deferred tax asset. Management increases the valuation allowance against this asset. What is the impact on the current period's net income?
Comparing straight-line depreciation to accelerated depreciation in the early years of an asset's life, straight-line depreciation results in:
Management extends the estimated useful life of its depreciable assets. This change will likely:
During a period of rising prices, which inventory cost flow method results in higher reported net income?
If a firm capitalizes a marketing expense rather than expensing it immediately, what is the effect on cash flow classification?
Under IFRS, which of the following classifications of interest paid provides management with an opportunity to manage reported operating cash flow?
Stretching payables refers to the practice of:
Which of the following is a potential warning sign of revenue manipulation?
An analyst observes that a firm's inventory turnover ratio is declining. This could indicate:
LIFO liquidation allows a firm to increase current period earnings by:
A ratio of operating cash flow to net income consistently less than one is a warning sign of:
Which of the following regarding 'fourth-quarter earnings' is a warning sign?
Why might significant related-party transactions be a warning sign?
When large restructuring or impairment charges are recognized, analysts should:
One potential benefit of conservative accounting bias is:
Which of the following is NOT typically a requirement for securities regulations?
Management emphasizes a non-GAAP earnings measure that excludes 'one-time' costs. An analyst notices these costs appear every year. This suggests:
Which depreciation choice is considered conservative?
A company capitalizes interest costs associated with the construction of an asset. Compared to expensing the interest, this policy:
A firm reports high revenue growth while its peers report flat revenue. This is a warning sign that requires:
Regarding the 'opportunity' for fraudulent reporting, which factor is most relevant?
Using the 'cookie jar' technique involves:
Under U.S. GAAP, write-downs of inventory are:
Which of the following creates a higher quality balance sheet in terms of relevance during inflationary periods?
If a firm uses a lower estimate of warranty expense as a percentage of sales than its history suggests, it is:
A firm that grows primarily by purchasing other businesses may be using acquisitions to:
In the spectrum of quality, which level follows 'GAAP-compliant and decision-useful, but earnings are not sustainable'?
A company reduces its allowance for doubtful accounts from 5% of receivables to 3%, despite worsening economic conditions. This is an example of:
Why is the cash flow statement often used to check the quality of earnings?
Regarding rationalization in the fraud triangle, which statement is an example?
Which of the following is a role of the International Organization of Securities Commissions (IOSCO)?
When analyzing a firm's deferred tax assets, a decreasing valuation allowance in a period of poor performance should be viewed as:
Gross margins that are noticeably higher than peer companies are:
An analyst adjusts a firm's financial statements by capitalizing operating leases. This adjustment is intended to:
One dollar of high-quality earnings is expected to add more value to a company than one dollar of low-quality earnings because:
Which of the following describes a 'barter transaction' warning sign?