CFA Level I · CFA Level I Exam · Financial Reporting Quality
Analyst: Company X lengthened the useful life of its equipment, reducing depreciation, and the change is within IFRS but not supported by actual asset usage. The change is most likely an example of reporting that is:
The change is compliant but biased. Useful life estimates are permitted within a reasonable range, so no rule is broken, but extending lives without support from actual usage flatters earnings. Such aggressive, biased choices reduce financial reporting quality even though they comply with IFRS.
- Acompliant and biased, which lowers reporting qualityCorrect
- Bnon-compliant and unbiased, which is fraud
- Ccompliant and unbiased, which is high quality
Explanation
The estimate falls within the range the standards permit, so it is compliant. It is unsupported by usage and inflates earnings, which makes it biased (aggressive), lowering reporting quality even though it is permitted.
Did you get it right without looking?
One question tells you little. A timed set on Financial Reporting Quality shows your real accuracy, how long you take and where you lose marks.
More Financial Reporting Quality questions
- A company extends the estimated useful life of its equipment from 8 years to 12 years, with no change in actual asset usage. Relative to the…
- An analyst reviewing a manufacturer's annual report notices that the company's press release highlights an "adjusted operating profit" that …
- Which of the following is the most likely warning sign of low-quality financial reporting related to a company's use of non-IFRS measures?
- Which of the following conditions is most likely to motivate managers to issue low-quality financial reports?
- An analyst finds that a company's cash flow from operations has fallen steadily while net income has risen, and accounts receivable have gro…
- Which description of earnings that are of high quality is most accurate?