Chapter 2 Self Test (Answers are below)
1. Which of the following statements about accruals and cash flows is false? A. Company value can be determined by using accrual accounting numbers. B. Accrual accounting numbers are subject to accounting distortions. C. Cash flows are more reliable than accruals.
D. Cash flows cannot be manipulated.
2. Financial accounting data has some inherent limitations. Which of the following are limitations? I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.
A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II, III and IV
3. Which of the following are examples of judgments made in the accounting reporting process? I. Useful life of machinery
II. Allowance for doubtful accounts
III. Obsolescence of assets
IV. Interest payment on bonds
A. I, II, III and IV
B. I, II and III
C. II and III
D. I and III
4. Under the fair value model, income is determined by matching costs to recognized revenues, which have to be realized and earned.
5. The fair value of an asset is the hypothetical price at which a business can sell the asset (exit price).
6. To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as: A. core earnings.
B. permanent earnings.
C. basic earnings.
D. operating earnings.
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