1) Covenants restricting the use of funds for dividend payments, share repurchases,
capital expenditures, and other business purposes are included so the creditor has
greater assurance that cash will be available to make principal and interest payments
when due.
2) Various trends and relationships that can be gleaned from a company’s financial
statements provide insights into a company’s economic opportunities and risks.
3) When the income tax rate changes, the full change in the amount of future liability
for income taxes is recognized as a change to income tax expense in the year that the
change is effective.
4) A cash collection from a customer pertaining to a sale from the prior year will result
in cash flow being reported in this year’s statement of cash flows.
5) Commercial paper consists of short-term notes sold directly to investors by large and
financially sound companies.
6) Although many firms use the LIFO cost flow assumption, no examples exist in which
the real physical flow of units sold is also last-in, first-out.
7) IFRS allows two different models for accounting for long-lived tangible assets: the
cost method and appraisal method.
8) Management has a responsibility to ensure that the company’s financial information
is properly classified, characterized, and presented clearly and concisely in order to
make it understandable.
9) Analysts need to understand what accounting data do and do not reveal about a
company’s economic activities and condition.
10) The two most significant explanations for variations in the earnings multiple are
risk differences and maturity of the firm.
11) One popular approach used to estimate a firm’s equity cost of capital is the capital
asset pricing model, which expresses the equity cost of capital as the sum of the return
on a riskless asset plus an equity risk premium multiplied by the company’s systematic
risk.
12) The cohesiveness principle means that information should be presented in financial
statements in a manner that portrays a cohesive financial picture of an entity’s activities.
13) Existing U.S. GAAP make it difficult for financial statement users to compare
operating income with operating cash flows.
14) A lessee will record a leased asset at the lower of the present value of the minimum
lease payments or the leased asset’s fair value when the lease is a capital lease.
15) Executive compensation contracts seldom contain annual bonus and longer term
pay components tied to financial statement results, but instead usually rely on stock
options as a means to reward managers in a manner that is less subject to manipulation
by management.
16) Extraordinary gains and losses are regarded as value-irrelevant earnings.
17) An essential feature of the modern corporation and most business relationships is
the delegation of financial reporting responsibility.
18) For each transaction, the dollar total of the debits must equal the dollar total of the
credits.
19) When a company accepts credit cards (e.g., VISA or MasterCard) it engages in a
form of factoring.