Question

When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions:
A. can arise as management may deliberately manipulate financial statements.
B. arise often through application of (correct) accounting principles.
C. can affect the quality of earnings.
D. arise if the stock market is not efficient.

Answer 1

Answer:

The correct answer is B. arise often through application of (correct) accounting principles .

Explanation:

Accounting analysis is an important precondition for an effective financial analysis. This is because the quality of the financial analysis, and the inferences made, depends on the quality of the implicit accounting information, the raw material for the analysis. Even though the accounting according to the accumulation principle allows to perceive the financial performance and condition of a company, which is not possible in the case of cash-based accounting, the imperfections of the company can distort the economic content of the financial reports.