Question #11
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 9
Status: Incorrect
Correct Answer: A
Your Answer: A
Question
Brent Jones, CFA is analyzing the financial statements of Imperial Resorts Inc. Jones wants to use the Beneish model to evaluate the probability of earnings manipulation. Jones makes the following statements: 1. Depreciation index of less than 1 would indicate that the company is depreciating assets at a higher rate than its peers. 2. Increases in Asset quality index indicate that the revenue recognition policies are conservative. Regarding the statements by Jones:
Answer Choices:
A. Only statement 1 is correct
B. Only statement 2 is correct
C. None of the statements is correct
Explanation
Statement 1 is incorrect. Depreciation index less than 1 indicates that the company is
depreciating assets at a higher rate than in prior years (and not relative to its peers).
Statement 2 is incorrect. Asset quality index is used as an indicator of excessive
capitalization of expenses.