10 Important Accounting Questions Answered

Importance of the Ball and Brown 1968 study for the accounting profession

1. Explain the importance of the Ball and Brown 1968 study for the accounting profession. Include in your answer a description of post earnings announcement drift and what this implies about accounting.   This article was covered in the book

2.Explain what is meant by the semi-strong efficient market, vs. weak and strong form market efficiency.  Give an example of semi-strong market efficiency.   This topic was discussed in the book and class.  Although you can google a definition of these, for a better grade on the exam, in your example, tie the example to accounting. 

3.Related to question 2, explain what semi-strong market efficiency means to a regulator like the FASB when determining what disclosures to require.  This question requires you to apply the concept.  In a strong form, we would not need any kind of financial statements.  So, think about that as you approach this answer. 

4.Explain what the earnings response coefficient is and discuss how this can assist researchers in evaluating the quality of earnings. 

5.What is meant by the term earnings persistence as it related to earnings quality?  This is a pretty important question and drives even how the income statement is structured (operating vs. nonoperating, discontinued operations).  The book talks about this extensively. 

6.For years, finance and accounting professionals subscribed to the Economic concept of rational investors.  How did the work of Kahneman and Tversky inform the way most people think about investor behavior? K&T won a Nobel prize for their work and often those prizes are given for people who really change the paradigm in the way we think about the world. 

7.Early in the book, we were introduced to valuation models that relied on the balance sheet.  Explain the contribution and the importance of the Ohlson’s clean surplus theory. What I am referring to the in the book is the material from chapter two that showed that we only need a balance sheet under ideal conditions.  The Ohlson model has made people think about the relative importance of the balance sheet vs. income statement AND it also factors in earnings persistence. 

8.Discuss the demand in the market for conservative accounting principles. Give two examples of conservatism in asset valuation.   Your book mentions this, and I am asking that you recall examples of this either given in the book or your own knowledge of GAAP.  If you give an international example, please document that.   Conservatism basically boils down to asymmetric recognition of gains and losses or assets vs. liabilities.  So in your examples think about where losses are treated different from gains.  There are numerous situations of this and you can think about non-monetary exchanges, contingencies, impairment, in house R&D, sale leaseback transactions and lower of cost or market.  Now that I have given you some hints, make sure you explain when you give an example why these are examples of conservatism.  Please be clear in your explanation for full points.

9.In your own words, explain and give an example of each of the following:(1) derecognition and (2) off balance sheet financing.   These were discussed in the book

10.Based on what we have learned in the class, explain why the FASB classify investments into levels 1, 2, and 3 for purposes of financial reporting.   So your answer for this ties to the concept, in part to reliability.   You should also think about how the classification may affect how a financial statement use may view and use the information.  I don’t expect you to go into this much depth, but the classification would tie into Bayes Theorem and revision of probabilities, etc. etc. You may need to look up the accounting treatment for these although this was discussed in the book.  Look at the FASB standards if you want to look these up.  It’s important to know clearly how the three differ to answers this question.