1. All of the following are true regarding a high quality balance sheet except:
   a.
   It should portray the economic resources that can be reasonably expected to generate future economic benefits.
   b.
   It should provide a complete and fair portrayal of all of the firm's obligations at a point in time, including the present value of long-term liabilities for future payments.
   c.
   It should minimize measurement error and bias.
   d.
   It should be optimistic in terms of accounting numbers.

d.
It should be optimistic in terms of accounting numbers.

2. The best measure of a firm's sustainable income is:
   a.
   net income.
   b.
   income from continuing operations.
   c.
   income before extraordinary items.
   d.
   income before extraordinary item and change in accounting principle.

b.
income from continuing operations.

3. Users of financial statements should consider which of the following when evaluating the quality of accounting information?
   a.
   Economic faithfulness of accounting measurements and classifications.
   b.
   Reliability of the measurements.
   c.
   Reasonableness of the estimates made in applying GAAP or IFRS.
   d.
   All of these should be considered.

d.
All of these should be considered.

4. The assessment of earnings quality is best accomplished through the use of which one of the following?
   a.
   Balance sheet and cash flow statement.
   b.
   Single-step financial statements.
   c.
   Single-step income statement, balance sheet, and cash flow statement.
   d.
   Multi-step income statement, balance sheet, and cash flow statement.

d.
Multi-step income statement, balance sheet, and cash flow statement.

5. Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?
   a.
   The firm recognizes an unexpected gain
   b.
   The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
   c.
   The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
   d.
   The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

c.
The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.

6. Which of the following items is consistent with earnings being informative about current performance and informing the analyst that level of current earnings is sustainable?
   a.
   The firm recognizes an unexpected gain
   b.
   The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
   c.
   The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
   d.
   The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

d.
The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.

7. When a company makes a change in an estimate that it has used in its financial statements, it should account for the change by:
   a.
   retroactively restating all prior financial statements
   b.
   treat the change as a cumulative effect change in accounting estimate
   c.
   spread the effect of the change over the current and future periods
   d.
   companies are not allowed to make changes to estimates

c.
spread the effect of the change over the current and future periods

8. Many times a financial analyst may decide to make adjustments to the financial statements in order to make the statements more useful. Which of the following would not require an adjustment to the financial statement?
   a.
   A company signs a new contract with a customer.
   b.
   A delivery company incurs a loss from disposition of used delivery trucks.
   c.
   A company changes the useful life of its equipment from 5 years to 8 years.
   d.
   A company incurs a charge related restructuring its operations.

a.
A company signs a new contract with a customer.

9. One definition of earnings management is that it occurs when managers use:
   a.
   judgment in financial reporting to alter financial reports to mislead stakeholder.
   b.
   an accounting method that is inconsistent with other industry members.
   c.
   more conservative accounting estimates than other companies.
   d.
   pro forma accounting results as opposed to GAAP results.

a.
judgment in financial reporting to alter financial reports to mislead stakeholder.

10. Firm's choices and estimates within U.S. GAAP should be determined by:
    a.
    how the industry operates.
    b.
    the firm's underlying economic circumstances.
    c.
    SEC interpretations regarding specific choices.
    d.
    the firm's auditor.

b.
the firm's underlying economic circumstances.