1) Reported accrual accounting income for a period always provides an accurate picture
of underlying economic performance.
2) Companies judged to be high credit risks may be subject to loan covenants.
3) For accounting purposes, “fair value” is an entry price, not an exit price.
4) It is not unusual for a start-up company to experience total negative cash flows.
5) When firms dispose of a long-lived asset before the end of its useful life, the
difference between the net book value of the asset and the sale proceeds is a gain or loss
from a discontinued item.
6) The SEC rule (Regulation S-X) requires firms to disclose “the excess of replacement
cost or current cost over stated LIFO value . . .” rather than the difference between
inventory book value at LIFO and inventory book value at FIFO.
7) Companies are not required to disclose business transactions that involve potential
conflicts of interest if the transactions are with affiliated companies.
8) A more streamlined approach to credit analysis than costly scrutiny of financial
statement details, ratios, etc. is to rely on credit reports issued by third-parties.
9) The cash flow statement explains why a firm’s cash position has changed between
successive balance sheet dates while simultaneously explaining the changes that have
taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over
the same period.
10) Firms using the indirect method must also provide a reconciliation between accrual
earnings and cash flows from operating activities.
11) In order to recognize revenue, it must be possible to measure the amount of revenue
that has been earned with a reasonable degree of assurance.
12) The FASB and the IASB are working on a joint project which will ultimately result
in all leases being treated as capital leases.
13) Currently, publicly traded companies located in the European Union may adopt
IFRS for financial reporting in consolidated statements.
14) When a company sells its accounts receivable to a factor with recourse, it usually
maintains an allowance for uncollectible accounts.
15) Lenders typically petition to have a borrower judged insolvent by a court when the
borrower is in default.
16) Depreciation is the apportionment of the cost of a long-lived tangible asset to the
future periods in which it provides benefits.
17) Research findings almost uniformly indicate that existing GAAP for both R&D and
software development is conservative.