CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

Which statement is true regarding financial reporting quality and earnings quality?
A. A financial report is considered to be high quality if it conforms to GAAP.
B. If earnings quality is low, the financial report's quality must be low.
C. It is possible for poor reporting quality to occur with high-quality earnings.
Explanation: A is false. GAAP are the "minimum standards."
B is false. However, poor reporting quality often occurs simultaneously with poor earnings quality.
C is true. A company with high-quality earnings may produce poor quality reports.

User Contributed Comments 3

User Comment
akirchner1 According to the official CFA curriculum, I believe option 'A' to be true. It states "High-quality financial reports conform to generally accepted accounting principles (GAAP) of jurisdiction, such as IFRS, US GAAP, or other home-country GAAP."
harley The textbook is true: high quality reports conform to GAAP. However, the opposite is NOT necessarily true: Conforming to GAAP is high quality. It's what A is talking about.

Therefore A is false.
ascruggs92 akirchner1 - A is not true. As the explanation states, GAAP is the minimum standard, and just meeting the minimum doesn't imply quality reporting.

For example - a company may give their PP&E an expected useful live that is twice as long as any reasonable estimate, the intent being to reduce expenses and increase reported net income. This company would be in compliance with GAAP standards, but their financial statements would be considered low quality due to the overstatement of assets & earnings
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