1. Which quality is best represented by the quality spectrum of financial reports?
A. Financial reporting.
2. Which of the following is a reason for issuing low quality reports in a period of good performance for a company with low leverage?
A. Avoiding debt covenant violation.
B. Indifferent to political attention.
C. Inadequate internal systems.
3. High quality financial reports least likely reflect:
A. Decision-useful information.
B. Earnings smoothing.
C. Accounting compliant with a standard such as GAAP or IFRS.
Quality spectrum represents both financial reporting and earnings. At the top of the spectrum is high financial reporting and high earnings quality. At the bottom, is low financial reporting and low earnings quality.
A is incorrect because the company has low leverage, so avoiding debt covenant is unimportant considering the performance is also good. B is incorrect as a company that wants to avoid unwanted political attention issues low quality reports. It is was indifferent, then the company should have issued unbiased high quality reports.
High quality financial reports have decision-useful information and are compliant with accounting standards such as GAAP or IFRS. Earnings smoothing is the result of biased accounting choices and low reporting quality.