Prior to the Introduction of Impairment Testing Companies Had Attempted

question 28

Multiple Choice

Prior to the introduction of impairment testing companies had attempted to manipulate their accounts through amortisation:

• A) because where managers were rewarded based on profits attained it was in their best interests to reduce expenses while they held that position.
• B) because contractual arrangements such as debt covenants often required asset values to be maximised.
• C) because recording higher amortisation expenses allowed profits to be reduced, thus allowing tax payments to be minimised without any cash outflows.
• D) because where managers were rewarded based on profits attained it was in their best interests to reduce expenses while they held that position and because contractual arrangements such as debt covenants often required asset values to be maximised.

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Definitions:

Incurred Expense

An expense that a company has recognized on its books, representing a cost that has been encountered in the operation of the business.

Wages Paid

This refers to the total amount of remuneration paid by an employer to an employee, including salaries, commissions, and bonuses, for work performed during a specific period.

Unearned Revenue

Income received by a business for goods or services yet to be provided; considered a liability until the service or product is delivered.

Recognizes Revenue

The process of recording revenue in the financial statements when it is earned and realizable, following the accrual accounting principle.