FRA (3)

According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company's financial statements and footnotes except for: fair value. impairment loss. amortization rate.

A is correct. IFRS do not require fair value of intangible assets to be disclosed.

For which of the following inventory valuation methods is the gross profit margin least likely to be the same under both a perpetual inventory system and a periodic inventory system? LIFO Specific identification FIFO

A is correct. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO.

All else being equal and ignoring tax effects, compared with using the straight-line method of depreciation, the use of an accelerated method of depreciation in the early years of an asset's life would most likely result in a decrease in the firm's: asset turnover ratio. shareholders' equity. cash flow from operations.

B is correct. An accelerated method of deprecation produces greater expenses in the early years and lowers net income, which in turn lowers the retained earnings, resulting in a decrease in shareholders' equity.

Company A adheres to US GAAP and Company B adheres to IFRS. Which of the following is most likely to be disclosed on the financial statements of both companies? Any material income resulting from the liquidation of LIFO inventory The amount of inventories recognized as an expense during the period The circumstances that led to the reversal of a write down of inventories

B is correct. Both US GAAP and IFRS require disclosure of the amount of inventories recognized as an expense during the period. Only US GAAP allows the LIFO method and requires disclosure of any material amount of income resulting from the liquidation of LIFO inventory. US GAAP does not permit the reversal of prior-year inventory write downs.

Under IFRS, the costs incurred in the issuance of bonds are most likely: expensed when incurred. included in the measurement of the bond liability. deferred as an asset and amortized on a straight-line basis.

B is correct. Under IFRS, debt issuance costs are included in the measurement of the bond liability.

When the market rate of interest falls after issuance, a company selecting the fair value option for reporting a liability with a fixed coupon rate will report: no change. a gain. a loss.

C is correct. A company selecting the fair value option for a liability with a fixed coupon rate will report a loss when market interest rates decrease.

Which of the following statements most accurately describes a valuation allowance for deferred taxes? A valuation allowance is required under: both IFRS and US GAAP on deferred tax assets arising from the translation of foreign operations. IFRS on revaluation of a deferred tax asset. US GAAP if there is doubt about recovering a deferred tax asset.

C is correct. A valuation allowance is required under US GAAP if there is doubt about whether a deferred tax asset will be recovered. Under IFRS, the deferred tax asset is written down directly.

In an issuer's financial statements, reported interest expense for a bond is computed using the: bond's coupon rate. market rate of interest. effective interest rate.

C is correct. Reported interest expense for a company's bonds is computed using the effective interest rate, which is the market interest rate at issuance.

Which of the following is a required financial statement disclosure for long-lived intangible assets under US GAAP? The useful lives of assets The reversal of impairment losses Estimated amortization expense for the next five fiscal years

C is correct. Under US GAAP, companies are required to disclose the estimated amortization expense for the next five fiscal years. Under US GAAP, there is no reversal of impairment losses. Disclosure of the useful lives—finite or indefinite and additional related details—is required under IFRS.

A company whose objective is to maximize income spent $1,000,000 for a machine with two significant components, as indicated in the table. The machine is expected to have an overall useful life of 10 years, and the company uses the straight-line method of depreciation. Component Cost Useful Life A $500,000 10 years B $500,000 5 years The depreciation expense for the first year computed under International Financial Reporting Standards (IFRS) compared with US GAAP, will most likely be: $50,000 higher. $50,000 lower. the same.

A is correct. Under IFRS, the company must use the component method of depreciation expense:

A company acquires some new depreciable assets. It uses straight-line deprecation for all of its assets. Which of the following combinations of estimated residual values and useful lives is most likely to produce the highest net profit margin? Estimated residual values should be: high with long average lives. low with long average lives. high with short average lives.

A is correct. A high residual value estimate reduces the depreciable base and thus depreciation expense. Long average lives reduce the annual depreciation expense for any given depreciable base. The combination of the two would result in the lowest depreciation expense, which would lead to the highest net income and profit margins.

A company acquires a license for $6,500 with the right to use the license for four years. Management expects to derive benefits from the license for three years and uses the straight-line amortization method. Accumulated amortization at the end of Year 2 is closest to: $4,333. $3,250. $2,167

A is correct. Accumulated amortization for the intangible asset at the end of Year 2 is closest to $4,333. At the end of the second year, amortization taken = 2 years × (6,500/3) = $4,333.

Fernando's Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando's inventory balance will most likely be: higher if it complies with IFRS. higher if it complies with US GAAP. the same under US GAAP and IFRS

A is correct. IFRS require the reversal of inventory write-downs if net realizable values increase; US GAAP do not permit the reversal of write-downs.

During a period of declining prices, a company using the last-in, first-out (LIFO) inventory method instead of first-in, first-out (FIFO) method will most likely report a lower value for: cost of goods sold. gross profit. ending inventory.

A is correct. If prices are declining, using LIFO would match the lower (most recent) costs with current sales. Compared with using FIFO, costs of goods sold would be lower, and gross profit (income) would be higher when using LIFO. Lower cost of goods sold means inventory balances, consisting of older, higher-priced items, would be higher using LIFO, increasing current assets relative to FIFO.

All else equal, in the fiscal year when long-lived equipment is purchased: depreciation expense increases. cash from operations decreases. net income is reduced by the amount of the purchase.

A is correct. In the fiscal year when long-lived equipment is purchased, the assets on the balance sheet increase and depreciation expense on the income statement increases because of the new long-lived asset.

LIFO reserve is most likely to increase when inventory unit: costs are increasing. costs are decreasing. levels are decreasing.

A is correct. LIFO reserve is the FIFO inventory value less the LIFO inventory value. In periods of rising inventory unit costs, the carrying amount of inventory under FIFO will always exceed the carrying amount of inventory under LIFO. The LIFO reserve may increase over time as a result of the increasing difference between the older costs used to value inventory under LIFO and the more recent costs used to value inventory under FIFO. When inventory unit levels are decreasing, the company will experience a LIFO liquidation, reducing the LIFO reserve.

Costs incurred for intangible assets are generally expensed when they are: internally developed. individually acquired. acquired in a business combination.

A is correct. The costs to internally develop intangible assets are generally expensed when incurred.

A company purchased a €2,000 million long-term asset in 2012 when the corporate tax rate was 30%. Asset's Year-End Value for: 2013 (€ mil) 2012 (€ mil) Accounting purposes 1,800 1,900 Tax purposes 1,280 1,600 On 15 January 2013, the government lowered the corporate tax rate to 25% for 2013 and beyond. The deferred tax liability (€ millions) as of 31 December 2013, is closest to: 130. 231. 156

A is correct. The deferred tax liability equals the difference between the value for accounting purposes and the value for tax purposes times the current tax rate in effect.

The gain or loss on a sale of a long-lived asset to which the revaluation model has been applied is most likely calculated using sales proceeds less: carrying amount. carrying amount adjusted for impairment. historical cost net of accumulated depreciation.

A is correct. The gain or loss on the sale of long-lived assets is computed as the sales proceeds minus the carrying amount of the asset at the time of sale. This is true under the cost and revaluation models of reporting long-lived assets. In the absence of impairment losses, under the cost model, the carrying amount will equal historical cost net of accumulated depreciation.

If inventory unit costs are increasing from period-to-period, a LIFO liquidation is most likely to result in an increase in: gross profit. LIFO reserve. inventory carrying amounts.

A is correct. When the number of units sold exceeds the number of units purchased, a company using LIFO will experience a LIFO liquidation. If inventory unit costs have been rising from period-to-period and a LIFO liquidation occurs, it will produce an increase in gross profit as a result of the lower inventory carrying amounts of the liquidated units (lower cost per unit of the liquidated units).

Which of the following most likely indicates effective inventory management? Sales growth rate exceeds finished goods inventory growth rate Current year's days of inventory on hand exceeds the prior year's days of inventory on hand Finished goods growth rate exceeds growth rate of inventories other than finished goods

A is correct. When the sales growth rate exceeds the finished goods inventory growth rate, the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management.

All else being equal, if the purchase price of inventory is increasing, a company that accounts for its inventory under last-in, first-out (LIFO) instead of first-in, first-out (FIFO) is most likely to have a: higher debt-to-equity ratio. lower net cash flow from operating activities. lower market valuation of its common equity.

A is correct. With rising costs of inventory, a company using LIFO compared with FIFO will report a higher cost of sales and lower profits. This scenario will result in lower increments to retained earnings and a higher debt-to-equity ratio.

Cinnamon Corp. started business in 2017 and uses the weighted average cost method. During 2017, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2018, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2018 cost of sales (€ thousands) was closest to: €490. €491. €495

B is correct. Cinnamon uses the weighted average cost method, so in 2018, 5,000 units of inventory were 2017 units at €10 each and 50,000 were 2008 purchases at €11. The weighted average cost of inventory during 2008 was thus (5,000 × 10) + (50,000 × 11) = 50,000 + 550,000 = €600,000, and the weighted average cost was approximately €10.91 = €600,000/55,000. Cost of sales was €10.91 × 45,000, which is approximately €490,950.

During periods of rising inventory unit costs, a company using the FIFO method rather than the LIFO method will report a lower: current ratio. inventory turnover. gross profit margin.

B is correct. During a period of rising inventory costs, a company using the FIFO method will allocate a lower amount to cost of goods sold and a higher amount to ending inventory as compared with the LIFO method. The inventory turnover ratio is the ratio of cost of sales to ending inventory. A company using the FIFO method will produce a lower inventory turnover ratio as compared with the LIFO method. The current ratio (current assets/current liabilities) and the gross profit margin [gross profit/sales = (sales less cost of goods sold)/sales] will be higher under the FIFO method than under the LIFO method in periods of rising inventory unit costs.

Compared with a company that uses the FIFO method, during a period of rising unit inventory costs, a company using the LIFO method will most likely appear more: liquid. efficient. profitable.

B is correct. During a period of rising inventory prices, a company using the LIFO method will have higher cost of cost of goods sold and lower inventory compared with a company using the FIFO method. The inventory turnover ratio will be higher for the company using the LIFO method, thus making it appear more efficient. Current assets and gross profit margin will be lower for the company using the LIFO method, thus making it appear less liquid and less profitable.

According to IFRS, all of the following pieces of information about property, plant, and equipment must be disclosed in a company's financial statements and footnotes except for: useful lives. acquisition dates. amount of disposals.

B is correct. IFRS do not require acquisition dates to be disclosed.

In a period of declining inventory unit costs and constant or increasing inventory quantities, which inventory method is most likely to result in a higher debt-to-equity ratio? LIFO FIFO Weighted average cost

B is correct. In an environment of declining inventory unit costs and constant or increasing inventory quantities, FIFO (in comparison with weighted average cost or LIFO) will have higher cost of goods sold (and net income) and lower inventory. Because both inventory and net income are lower, total equity is lower, resulting in a higher debt-to-equity ratio.

MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for its property, plant, and equipment. One of MARU's machines was purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31 March 2010, the machine has a fair value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine? Yes. No, because this revaluation is recorded directly in equity. No, because value increases resulting from revaluation can never be recognized as a profit

B is correct. In this case, the value increase brought about by the revaluation should be recorded directly in equity. The reason is that under IFRS, an increase in value brought about by a revaluation can only be recognized as a profit to the extent that it reverses a revaluation decrease of the same asset previously recognized in the income statement.

Mustard Seed PLC adheres to IFRS. It recently purchased inventory for €100 million and spent €5 million for storage prior to selling the goods. The amount it charged to inventory expense (€ millions) was closest to: €95. €100. €105.

B is correct. Inventory expense includes costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. It does not include storage costs not required as part of production.

A regional jet manufacturer delivers 20 regional jets to an airline under long-term leases. The lease terms are for 15 years with annual payments of $5 million per plane; the first payment is due on delivery. The airline leasing the jets is responsible for all maintenance and operating costs. If the company that manufactures and leases the jets prepares its financial statements according to US GAAP the leases will most likely be classified as: operating leases. sales-type leases. direct financing leases.

B is correct. It appears the risks and benefits of ownership of the jets has been transferred to the lessee as it is responsible for all maintenance and operating costs. Therefore, under US GAAP the leases should be classified as sales-type leases.

JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs: Purchase price $12,980 Freight and insurance $1,200 Installation $700 Testing $100 Maintenance staff training costs $500 Q. The total cost of the machine to be shown on JOOVI's balance sheet is closest to: $14,180. $14,980. $15,480.

B is correct. Only costs necessary for the machine to be ready to use can be capitalized. Therefore, Total capitalized costs = 12,980 + 1,200 + 700 + 100 = $14,980.

A company that prepares its financial statements in accordance with IFRS incurred and capitalized €2 million of development costs during the year. These costs were fully deductible immediately for tax purposes, but the company is depreciating them over two years for financial reporting purposes. The company has a long history of profitability, which is expected to continue. Which is the most appropriate way for an analyst to incorporate the differential tax treatment in his analysis? He should include it in: equity when calculating the company's return-on-equity ratio. liabilities when calculating the company's debt-to-equity ratio. liabilities when calculating the company's current ratio.

B is correct. The different treatment for tax purposes and financial reporting purposes is a temporary difference and would create a deferred tax liability. Deferred tax liabilities should be classified as debt if they are expected to reverse with subsequent tax payments. The long history of profitability implies the company will likely be paying taxes in the following years, and hence an analyst could reasonably expect the temporary difference to reverse. Under IFRS, all deferred tax liabilities are non-current.

Which of the following statements best describes the usual balance sheet presentation of long-term debt? Long-term debt due after one year is presented as multiple line items. Non-current, long-term debt is presented as a single line item. All long-term debt is excluded from classification as a current liability.

B is correct. The non-current (long-term) liabilities section of the balance sheet usually includes a single line item of the total amount of a company's long-term debt due after one year.

Which of the following long-term debt information is presented both on the balance sheet and in the notes to the financial statements? Maturity dates Current maturities of long-term debt Effective interest rate

B is correct. The portion of long-term debt due in the next twelve months is shown as a current liability on the balance sheet. The amount of scheduled debt repayments for the next five years, including an adjustment for long term debt currently coming due, is also shown in the notes to the financial statements.

A company uses the straight-line method to depreciate its assets. One of its assets is accounted for under the revaluation model. At the end of Year 1, a revaluation gain is recorded for this asset in other comprehensive income. If there is no further revaluation in Year 2, what is the most appropriate depreciable base for the asset in Year 2? No depreciation expense will be recorded under the revaluation model The asset's value including the revaluation gain The asset's original cost

B is correct. The revaluation model essentially resets the asset's carrying value to fair value. Depreciation is then calculated based on the new carrying value, which would include the revaluation gain.

One of the notable differences between IFRS and US GAAP when dealing with income tax is best illustrated by the fundamental treatment of: non-deductible goodwill. the revaluation of property, plant, and equipment. temporary differences between the carrying amount and tax base of assets and liabilities.

B is correct. US GAAP prohibits the revaluation of PP&E. Therefore, this is a source of an important difference between US GAAP and IFRS with respect to reporting of income taxes.

Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the carrying amount over the asset's: fair value. recoverable amount. undiscounted expected future cash flows

B is correct. Under IFRS, an impairment loss is measured as the excess of the carrying amount over the asset's recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. Value in use is a discounted measure of expected future cash flows. Under US GAAP, assessing recoverability is separate from measuring the impairment loss. If the asset's carrying amount exceeds its undiscounted expected future cash flows, the asset's carrying amount is considered unrecoverable and the impairment loss is measured as the excess of the carrying amount over the asset's fair value.

A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) is attempting to produce lighter and longer-lasting batteries for portable electronic devices. The most appropriate accounting treatment for the related costs incurred in this project is to: capitalize costs directly related to the development. expense costs until technical feasibility has been established. expense them as incurred.

B is correct. Under IFRS, research and development costs are expensed until certain criteria, including demonstration of technical feasibility, have been met.

Eric's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at: £550,000. £1,000,000. £3,000,000.

B is correct. Under IFRS, the reversal of write-downs is required if net realisable value increases. The inventory will be reported on the balance sheet at £1,000,000. The inventory is reported at the lower of cost or net realisable value. Under US GAAP, inventory is carried at the lower of cost or market value. After a write-down, a new cost basis is determined and additional revisions may only reduce the value further. The reversal of write-downs is not permitted.

When constructing an asset for sale, directly related borrowing costs are most likely: expensed as incurred. capitalized as part of inventory. capitalized as part of property, plant, and equipment.

B is correct. When a company constructs an asset, borrowing costs incurred directly related to the construction are generally capitalized. If the asset is constructed for sale, the borrowing costs are classified as inventory.

When accounting standards require recognition of an expense that is not permitted under tax laws, the result is a: deferred tax liability. temporary difference. permanent difference.

C is correct. Accounting items that are not deductible for tax purposes will not be reversed and thus result in permanent differences.

A write down of the value of inventory to its net realizable value will have a positive effect on the: balance sheet. income statement. inventory turnover ratio.

C is correct. Activity ratios (for example, inventory turnover and total asset turnover) will be positively affected by a write down to net realizable value because the asset base (denominator) is reduced. On the balance sheet, the inventory carrying amount is written down to its net realizable value and the loss in value (expense) is generally reflected on the income statement in cost of goods sold, thus reducing gross profit, operating profit, and net income.

Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of: revaluation. impairment. amortization.

C is correct. An intangible asset with a finite useful life is amortized, whereas an intangible asset with an indefinite useful life is not.

Which of the following statements regarding inventory valuation is most accurate? IFRS defines market value as net realizable value less a normal profit margin. Both IFRS and US GAAP allow the reversal of write-downs back to the original cost. Both IFRS and US GAAP allow agricultural inventories to be valued at net realizable value.

C is correct. Both IFRS and US GAAP allow agricultural inventories to be valued at net realizable value.

In the current year, a company increased its deferred tax asset by $500,000. During the year, the company most likely: became entitled to a $500,000 tax refund. had permanent differences between accounting profit and taxable income. reported a lower accounting profit than taxable income.

C is correct. Deferred tax assets represent taxes that have been paid (because of the higher taxable income) but have not yet been recognized on the income statement (because of the lower accounting profit).

Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be relatively low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If Martinez wants to minimize tax payments in the first year of the machine's life, which of the following depreciation methods is Martinez most likely to use? Straight-line method. Units-of-production method. Double-declining balance method

C is correct. If Martinez wants to minimize tax payments in the first year of the machine's life, he should use an accelerated method, such as the double-declining balance method.

A company has announced that it is going to distribute a group of long-lived assets to its owners in a spin-off. The most appropriate way to account for the assets until the distribution occurs is to classify them as: held for sale with no depreciation taken. held for use until disposal with no deprecation taken. held for use until disposal with depreciation continuing to be taken.

C is correct. Long-lived assets that will be disposed of other than by sale, such as in a spin-off, an exchange for other assets, or abandonment, are classified as held for use until disposal and continue to be depreciated until that time.

A company purchases equipment for $200,000 with a five-year useful life and salvage value of zero. It uses the double-declining balance method of depreciation for two years, then shifts to straight-line depreciation at the beginning of Year 3. Compared with annual depreciation expense under the double-declining balance method, the resulting annual depreciation expense in Year 4 is: smaller. the same. greater.

C is correct. Shifting at the end of Year 2 from double-declining balance to straight-line depreciation methodology results in depreciation expense being the same in each of Years 3, 4, and 5. Shifting to the straight-line methodology at the beginning of Year 3 results in a greater depreciation expense in Year 4 than would have been calculated using the double-declining balance method.

When certain expenditures result in tax credits that directly reduce taxes, the company will most likely record: a deferred tax asset. a deferred tax liability. no deferred tax asset or liability.

C is correct. Tax credits that directly reduce taxes are a permanent difference, and permanent differences do not give rise to deferred tax.

Denson Corporation issued $5,000,000 of five-year bonds at a discount. After three years, the company calls the bonds at 101 when the bond's carrying value is $4,950,000. The company will realize a: loss of $50,000. gain of $50,000. loss of $100,000.

C is correct. The call price is $5,050,000 ($5,000,000 × 1.01) for the issue, and the carrying value is $4,950,000, resulting in a $100,000 loss ($4,950,000 - $5,050,000).

The impairment of intangible assets with finite lives affects: the balance sheet but not the income statement. the income statement but not the balance sheet. both the balance sheet and the income statement.

C is correct. The carrying amount of the asset on the balance sheet is reduced by the amount of the impairment loss, and the impairment loss is reported on the income statement.

Inventory cost is least likely to include: production-related storage costs. costs incurred as a result of normal waste of materials. transportation costs of shipping inventory to customers.

C is correct. Transportation costs incurred to ship inventory to customers are an expense and may not be capitalized in inventory. (Transportation costs incurred to bring inventory to the business location can be capitalized in inventory.) Storage costs required as part of production, as well as costs incurred as a result of normal waste of materials, can be capitalized in inventory. (Costs incurred as a result of abnormal waste must be expensed.)

Which of the following statements relating to the financial reporting of defined contribution pension plans is correct? The only balance sheet impact from contributions to defined-contribution plans is on an asset account. Defined-contribution plans require companies to make several assumptions in order to estimate their pension obligations. Under a defined-contribution plan, company contributions to the plan are treated as an operating cash flow.

C is correct. Under a defined-contribution plan, company contribution to the plan are treated as an operating cash flow.

Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from: contractual or legal rights. assets that can be separated from the acquired company. assets that are neither tangible nor identifiable intangible assets.

C is correct. Under both International Financial Reporting Standards (IFRS) and US GAAP, if an item is acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset, it is recognized as goodwill. Under US GAAP, assets arising from contractual or legal rights and assets that can be separated from the acquired company are recognized separately from goodwill.

Which costs incurred with the purchase of property and equipment are expensed? Delivery charges Installation and testing Training required to use the property and equipment

C is correct. When property and equipment are purchased, the assets are recorded on the balance sheet at cost. Costs for the assets include all expenditures required to prepare the assets for their intended use. Any other costs are expensed. Costs to train staff for using the machine are not required to prepare the property and equipment for their intended use, and these costs are expensed.