Because Managers Can Exercise Professional Judgment When Preparing the Financial

question 8

Multiple Choice

Because managers can exercise professional judgment when preparing the financial statements for their company, the stakeholder should:

• A)read the report of the external auditor.
• B)place complete confidence in the financial data.
• C)understand that management can be motivated to act in its own self-interests.
• D)place no confidence in the financial data.

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Definitions:

Dividends

Profit payouts by a corporation to its shareholders, usually as a method of distributing earnings.

Initial Value Method

An accounting approach for investments where the investment is recorded at its original cost without subsequent adjustments for changes in market value.

Equity Method

A method of accounting for investments where the investor's share of the investee's profits or losses is recognized in the investor's income statement.

Investment in Pitts Co.

The allocation of resources, typically financial, into Pitts Company with the expectation of generating a future financial return.