CFA Practice Question

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CFA Practice Question

Which of the following groups of financial statement users is likely to use accounting information as a decision-making tool to evaluate the performance of senior management?

A. Lenders and other creditors
B. Existing shareholders
C. Suppliers
Correct Answer: B

Management is accountable to the shareholders of the corporation. The shareholders elect the board of directors, who provide direct monitoring of senior management and evaluate performance.

User Contributed Comments 10

User Comment
examinee Why not A?
Done The reason why not A is because lenders and creditors don't care about management. They care about their own utility, their ability to get their money back with interest which is affected by the health, not management, of the company.
sarath Only shareholders are more interested in the management of the company...
Farina Sarath is true, to a certain extent, depending on the tenor of the credit being offered by the lenders.

If you're buying a 30y bond from company X, current management aren't likely to be around for the majority of the term. Similarly, with short-term / commercial paper creditors, who are principly concerned with internal liquidity.

However, buyers of medium term debt (e.g., 1y-5y bonds) will likely by very interested in current management as their decisions can bring company X closer to violating the covenants of the bonds.

This is why so many med. + long-term bonds have final, or voting rights on issues such as, company X buying/selling assets, selling new debt, purchasing leases or issuing stock etc. All things that can have a significant impact on cashflows.
childpsych1 Shareholders elect the board of directors at the annual general meeting AGM and therefore they are responsible for the checking the performance of senior management
BunnyBaby You're over thinking the question.
cfairs I think "Evaluate" is the key term here.
It refers to evaluation in performance evaluation..

Lenders, Creditors, and Suppliers will be interested in the performance of the management but they are not responsible for evaluating the management performance
MRSLETS A is not correct bcoz lenders are interested in the firms solvency and liquidity not performance of management.
kahh If i were to lend a firm my money, i would be very interested in evaluating the credibility of the management to deliver the firm's goal which is directly related to their solvency and liquidity. If management did mess up then the firm may have to file for bankruptcy which would then jeopardize my lending business with them.
vatsal92 Cfairs has a very valid point.
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