1) When a company restates its financial statements due to some accounting
irregularity, shareholder lawsuits are often filed against the company and its
management.
2) If a lessee mistakenly treats a capital lease as an operating lease, both assets and
liabilities would be understated at the inception of the lease.
3) “Cookie jar reserves” refers to the practice of overreserving estimated obligations
during good times and underestimating, or reversing previous charges, in bad times.
4) In countries where capital is typically provided by a broad base of external investors,
financial reporting practices tend to be different from those found in countries where
capital is primarily provided by banks or the government.
5) The size of the divergence between FIFO cost of goods sold and replacement cost of
goods sold depends on the severity of input cost changes and the rapidity of physical
inventory turnover.
6) Diluted earnings per share reflects the EPS that would result if all potentially dilutive
securities were converted into shares of common stock.
7) The two conditions for revenue recognition are occasionally satisfied even before a
sale of product occurs.
8) The value of a futures contract entered into to hedge inventory being held for sale
increases as the selling price of the inventory increases.
9) The realized gain on an investment classified as trading securities is calculated by
comparing the selling price to the original cost.
10) For information to be relevant it must possess either predictive value or
confirmatory value.
11) If a deferred tax asset may not be fully realized in future periods, a valuation
allowance is required to reduce the deferred tax asset to the amount that is more likely
than not to be realized.
12) Because the supply of financial information is guided by the costs of producing and
disseminating it and the benefits it will provide to the company, regulatory groups have
little influence over the amount and type of financial information that companies
disclose.
13) The matching principle requires that expenses incurred in generating revenue are
recognized in the same period the related revenue is recognized.
14) Recognized prior service cost amortization causes reported pension expense to
increase for defined benefit plans.
15) Product costs, i.e. raw material, labor, and certain overhead items, are assigned to
inventory and treated as assets until the inventory is sold.
16) Regulators of industries granted monopoly privileges use financial statement data in
setting allowable charges for the services these industries provide.