101 Concepts for the Level I Exam

Essential Concept 32: Potential Problems that Affect the Quality of Financial Reports

Income statement: Overstatement or non-sustainability of operating income and/or net income.

  • Overstated or accelerated revenue recognition
  • Understated expenses
  • Misclassification of revenue, gains, expenses, or losses

Balance sheet: Misstatement of balance sheet items

  • Over- or understatement of assets
  • Over- or understatement of liabilities
  • Misclassification of assets and/or liabilities

Cash flow statement: Overstatement of cash flow from operations.

Mergers and acquisitions provide opportunities and motivations to manage financial results. For example, companies with declining cash flow from operations (CFO) may acquire companies to increase CFO as the acquisition may appear in CFI if paid with cash or not appear at all if paid for with equity.