CFA Practice Question

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CFA Practice Question

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. Y has made detailed accounting disclosures such as segment information, acquisitions, accounting policies and assumptions. X has not done so.
II. X has given excessive loans to directors and key officers, while Y has not.
III. The management of X has a bigger pressure to make revenue or earnings targets.

Which statement(s) indicate(s) that the quality of Y's financial statements is higher?
A. II and III
B. I and III
C. I, II and III
Explanation: All of these risk factors may signal lower quality of financial statements. Analyst must be careful in analyzing quantitative inputs where the quality of such figures is in doubt.

User Contributed Comments 5

User Comment
wollogo I don't really agree with 3. Pressure to make revenue targets not necesarily a negative signal, only negative if the targets are short term in nature and the they are manipulating earnings to reach these targets.
volkovv I think in III they are impliying about management's intent of using aggressive accounting techniques to achieve this tagets, the word "bigger" was a key word for me, but I agree there are cases where III may not send a negative signal.
AusPhD I don't get II. I understand that it is poor practice, but does this reflect poorly on the other numbers in the books?
Yurik74 May be II should be considered since management might hide this fact?
MonkeySee II is a sign that there isn't perhaps enough independence and objectivity by the board therefore by extension the finanical statements.
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