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Basic Question 1 of 4

Company X and Y are both in the automotive industry. They've both reported equal operating earnings. An equity analyst has identified the following after carefully examining their financial statements:

I. X has reported disputes with and/or changes in auditors, while Y has not.
II. X has engaged in lots of related party transactions, while Y has not.
III. X has a higher management turnover than Y.
IV. The management of X has a bigger pressure on profitability.

Which statement(s) indicate(s) that the quality of Y's financial statements may be higher?

User Contributed Comments 5

User Comment
silvershine How do u measure management turnover? Is it even in financial statement?
Nightsurfer Look at the section on executive management. New faces mean turnover.
vi2009 management turnover .. because they do not subscribe to the way the financial statement is being reported ...
avnik I. statement looked to me like X has reported disputes, and Y has not even tough there WERE disputes to report
jejemike All four options are absolutely correct because they reduce the financials of the firms .
Option 1 suggests that firm X would have reported higher profits resulting in disputes with auditors as opposed to their actual performance
Option 2 suggests that firm X could have under-reported or omit transactions since related party transactions are usually below fair value
Option 3 suggests that frequent changes in management is due to poor management practices resulting in low quality financial reporting
Option 4 suggests that the books of firm X could have been window dressed in a bid to meet up the pressures of high profit targets
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Martin Rockenfeldt

Martin Rockenfeldt

Learning Outcome Statements

describe questions that should be addressed in conducting an industry and competitive analysis;

CFA® 2024 Level II Curriculum, Volume 3, Module 22.