Week 2 Q's to review

Which of the following statements best justifies analyst scrutiny of valuation allowances? A)Changes in valuation allowances can be used to manage reported net income. B)Increases in valuation allowances may be a signal that management expects earnings to improve in the future. C)If differences in taxable and pretax incomes are never expected to reverse, a company's equity may be understated.

A is correct

Which of the following statements best describes the impact of a valuation allowance on the financial statements? A valuation allowance: A)reduces reported income, reduces assets, and reduces equity. B)increases reported income, reduces assets, and reduces equity. C)reduces reported income, increases liabilities, and reduces equity.

A is correct A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. The establishment of a valuation allowance reduces reported income, offsets (reduces) assets, and reduces equity.

Julius, Inc., is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10%. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is $31.50. The after-tax costs of debt and preferred stock are closest to: -----Debt ----- Preferred stock A)---6.0% ------12.7% B)---6.0% ------ 7.6% C)---10.0% ------ 7.6%

A is correct After-tax cost of debt = 10% × (1 - 0.4) = 6%. Cost of preferred stock = $4 / $31.50 = 12.7%.

______________policy does so by mechanisms that involve spending and taxation _______________ policy uses central bank tools to modify the availability of money and credit.

Fiscal monetary

In 20X5, Carthage's merchandise imports exceeded the value of its merchandise exports. In this case, Carthage would most likely have which of the following? A)Capital account surplus. B)Current account surplus. C)Balance of trade surplus.

A is correct If a country is running a current account deficit, it must have an inflow of foreign capital, creating a surplus in the capital account.

Pfluger Company's accounts payable department receives an invoice from a vendor with terms of 2/10 net 30. If Pfluger pays the invoice on its due date, the cost of trade credit is closest to: A)43.5%. B)44.6%. C)27.9%.

B is correct "2/10 net 30" is a discount of 2% of the invoice amount for payment within 10 days, with full payment due in 30 days. Cost of trade credit on day 30 = (1+0.021−0.02)^(365(30−10)) −1=44.6%.

Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. If the tax rate decreases, the balance sheet values of these deferred tax items will: ----*Firm 1* ------- *Firm 2* A) increase -----decrease. B)decrease -----decrease. C)increase -----increase.

B is correct A decrease in the future tax rate decreases the balance sheet value of either a deferred tax liability or a deferred tax asset.

Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldberg's financial statements in the period incurred? A)Selling cost. B)Freight costs on inputs. C)Conversion cost.

.A is correct Selling costs are expensed in the period incurred since they result in no future benefit (i.e. the inventory has been sold). Conversion costs and freight costs add value in assisting in the future sale of the related inventory. Therefore, these costs are not recognized until the inventory is ultimately sold.

Which of the following is determined by the equilibrium between the demand for money and the supply of money? A)Interest rate. B)Inflation rate. C)Money supply.

A Interest rates are determined by the equilibrium between money supply and money demand.

A central bank that wants to increase short-term interest rates is most likely to: A)sell government securities. B)decrease bank reserve requirements. C)issue long-term bonds.

A is correct

In what way does a tariff differ from a quota? A tariff is: A)a tax imposed on imports, whereas a quota is a limit on the number of units of a good that can be imported. B)not significantly different from a quota; tariffs are imposed by world organizations, whereas quotas are imposed by individual countries. C)a tax imposed by a foreign government, whereas a quota is a limit on the total amount of trade allowed. Explanation The difference between a tariff and a quota is that a tariff is a tax imposed on imported goods, while a quota is an import quantity limitation. Also, a tariff will generate tax revenue, but a quota does not.

A is correct

Interest payments, either as part of a coupon payment or to creditors, are considered which type of cash flow under U.S. GAAP? A)Operating. B)Investing. C)Financing.

A is correct

Proceeds from issuing a bond are recorded on the statement of cash flows as an inflow from: A)financing (CFF). B)operations (CFO). C)investing (CFI).

A is correct

Which of the following is an independent auditor least likely to do with respect to a company's financial statements? A)Prepare and accept responsibility for them. B)Provide an opinion concerning their fairness and reliability. C)Confirm assets and liabilities contained in them.

A is correct Auditors make an independent review of financial statements, which are prepared by company management and are management's responsibility. It is the responsibility of auditors to confirm the assets, liabilities, and other items included in the statements and then issue an opinion concerning their fairness and reliability.

Jayco, Inc. sells 10,000 units at a price of $5 per unit. Jayco's fixed costs are $8,000, interest expense is $2,000, variable costs are $3 per unit, and earnings before interest and taxes (EBIT) is $12,000. What is Jayco's degree of financial leverage (DFL) and total leverage (DTL)? ----DFL -----DTL A--)1.20 -----2.00 B)--1.33 -----2.00 C)--1.33 ----- 1.75

A is correct DOL = [Q(P - V)] / [Q(P - V) - F] = [10,000(5 - 3)] / [10,000(5 - 3) - 8,000] = 1.67 DFL = EBIT / (EBIT - I) = 12,000 / (12,000 - 2,000) = 1.2 DTL = DOL × DFL = 1.67 × 1.2 = 2.0

Alton Industries will have better liquidity than its peer group of companies if its: A)receivables turnover is higher. B)quick ratio is lower. C)average trade payables are lower.

A is correct Higher receivables turnover is an indicator of better receivables liquidity since receivables are converted to cash more rapidly. A lower quick ratio is an indication of less liquidity. Lower trade payables could be related to better liquidity, but could also be consistent with very poor liquidity and a requirement from its suppliers of cash payment.

A stated interest rate of 9% compounded quarterly results in an effective annual rate closest to: A)9.3%. B)9.4%. C)9.2%.

A is correct Quarterly rate = 0.09 / 4 = 0.0225. Effective annual rate = (1 + 0.0225)^4 - 1 = 0.09308, or 9.308%.

With regard to the goal of neutrality in financial reporting, accounting standards related to research costs and litigation losses should be viewed as: A)biased toward conservative financial reporting. B)promoting neutral financial reporting. C)biased toward aggressive financial reporting.

A is correct Some accounting principles, such as IFRS and U.S. GAAP standards for expensing research costs and recognizing probable litigation losses, reflect conservatism rather than neutrality, in that they require earlier recognition of probable losses and later recognition of probable gains.

All else equal, a firm's business risk is higher when: A)fixed costs are the highest portion of its expense. B)variable costs are the highest portion of its expense. C)the firm has low operating leverage.

A is correct The higher the percentage of a firm's costs that are fixed, the higher the operating leverage, and the greater the firm's business risk and the more susceptible it is to business cycle fluctuations.

Which of the following is least likely to be disclosed in the financial statements of a bond issuer? A)The market rate of interest on the balance sheet date. B)The amount of debt that matures in each of the next five years. C)Collateral pledged as security in the event of default.

A is correct The market rate on the balance sheet date is not typically disclosed. The amount of principal scheduled to be repaid over the next five years and collateral pledged (if any) are generally included in the footnotes to the financial statements.

Thematic investing is most accurately described as: A)considering a single environmental or social factor when selecting investments. B)identifying the best companies in each sector with respect to environmental and social factors. C)excluding companies or sectors from consideration for investment based on environmental and social factors.

A is correct Thematic investing refers to selecting investments with a view to a specific environmental, social, or governance factor. Identifying the best companies in each sector with respect to environmental and social factors is referred to as best-in-class investing. Excluding companies or sectors from consideration for investment based on environmental and social factors is referred to as negative screening.

Under U.S. GAAP, a lessee must recognize a balance sheet liability for: A)both finance leases and operating leases. B)finance leases, but not operating leases. C)operating leases, but not finance leases.

A is correct U.S. GAAP requires the lessee to recognize a balance sheet liability for both finance leases and operating leases.

Axle Corporation earned £3.00 per share and paid a dividend of £2.40 on its common stock last year. Its common stock is trading at £40 per share. Axle is expected to have a return on equity of 15%, an effective tax rate of 34%, and to maintain its historic payout ratio going forward. In estimating Axle's after-tax cost of capital, an analyst's estimate of Axle's cost of common equity would be closest to: A)9.2%. B)8.8%. C)9.0%.

A is correct We can estimate the company's expected growth rate as ROE × (1 − payout ratio): g = 15% × (1 − 2.40/3.00) = 3% The expected dividend next period is then £2.40(1.03) = £2.47. Based on dividend discount model pricing, the required return on equity is 2.47 / 40 + 3% = 9.18%.

Given the following data on a firm's inventory, purchases, and sales: -----------------------# of Units ---- Price Beginning Inventory -----559----- $1.00 Purchases-----------------785 ----$5.00 Sales----------------------848-----$15.00 Cost of goods sold using the weighted average cost method is closest to: A)$2,830. B)$3,990. C)$2,000.

A is correct Weighted average cost = [559($1) + 785($5)] / (559 + 785) = $3.3363 COGS = Units sold × weighted average cost = 848 × 3.3363 = $2,829.19

Minority shareholder groups are most likely to have influence over corporate strategy when board elections: A)use cumulative voting. B)use majority voting. C)are staggered.

A is correct With cumulative voting, minority shareholders are more likely to gain seats on the board of directors and influence corporate strategy and decisions than with majority voting. Staggered board elections limit the ability of shareholders to select an entirely new board, except over a period of years.

Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote: A)a budget deficit during a recession and a budget surplus during an inflationary expansion. B)a budget surplus during a recession and a budget deficit during an inflationary expansion. C)a budget deficit during a recession but do not promote a budget surplus during an inflationary expansion.

A is correct Automatic stabilizers such as unemployment compensation, corporate profits tax, and the progressive income tax run a deficit during a business slowdown but run a surplus during an economic expansion. Therefore, they automatically implement countercyclical fiscal policy without the delays associated with policy changes that require legislative action.

Assume that Q-Tell Incorporated is in the communications industry, which has an average receivables turnover ratio of 16 times. If the Q-Tell's receivables turnover is less than that of the industry, Q-Tell's average receivables collection period is most likely: A)25 days. B)20 days. C)12 days.

A is correct Average receivables collection period = 365 / receivables turnover, which is 22.81 days for the industry (= 365 / 16). If Q-Tell's receivables turnover is less than 16, its average days collection period must be greater that 22.81 days.

Which of the following statements regarding the monetary policy transmission mechanism is most accurate? A)Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control. B)Central banks can control long-term interest rates directly because decisions by consumers and businesses are based on these rates. C)Central banks can control short-term interest rates by increasing the money supply to increase interest rates or by decreasing the money supply to decrease interest rates.

A is correct Central banks can control short-term interest rates directly. However, the decisions of consumers and businesses are based on long-term interest rates, which are beyond the control of central banks. Increasing the money supply will decrease interest rates and decreasing the money supply will increase interest rates.

Policies that can be used as tools for redistribution of wealth and income include: A)fiscal policy only. B)monetary policy only. C)both fiscal policy and monetary policy.

A is correct Fiscal policy can be used as a tool for redistribution of income and wealth, through a variety of taxation and spending policies.

Component depreciation is required under: A)IFRS, but not U.S. GAAP. B)both IFRS and U.S. GAAP. C)U.S. GAAP, but not IFRS.

A is correct IFRS requires firms to use component depreciation, which refers to depreciating the identifiable components of an asset separately. U.S. GAAP permits component depreciation but does not require it.

According to the IASB Conceptual Framework for Financial Reporting, one of the qualitative characteristics of financial statements is: A)faithful representation. B)going concern. C)timeliness.

A is correct In the IASB conceptual framework, the two qualitative characteristics of financial statements are relevance and faithful representation. Timeliness is a characteristic that enhances relevance and faithful representation. Going concern is an underlying assumption of financial statements.

Joplin Corporation reports the following in its year-end financial statements: Net income of $43.7 million. Depreciation expense of $4.2 million. Increase in accounts receivable of $1.5 million. Decrease in accounts payable of $2.3 million. Increase in capital stock of $50 million. Sold equipment with a book value of $7 million for $15 million after-tax. Purchased equipment for $35 million. ---------------------------------------------------------------------- Joplin's free cash flow to the firm (FCFF) is closest to: A)$16 million. B)$24 million. C)$66 million.

A is correct Operating cash flow is equal to $36.1 million ($43.7 million net income + $4.2 million depreciation expense − $8 million gain on sale − $1.5 million increase in receivables − $2.3 million decrease in payables). Net capital expenditures are equal to $20 million ($35 million equipment purchased − $15 million proceeds from sale). Free cash flow to the firm is equal to $16.1 million ($36.1 million operating cash flow − $20 million net capital expenditures).

Rushford Corp.'s net income is $16,500,000 with 300,000 shares outstanding. The tax rate is 40%. The average share price for the year was $372. Rushford has 50,000, 9%, $1,000 par value convertible bonds outstanding. Each bond is convertible into two shares of common stock. Rushford Corp.'s basic and diluted earnings per share (EPS) are closest to: -------> Basic EPS ------ Diluted EPS A)----> $55.00 -----$48.00 B)----> $65.63 -----$48.00 C)----> $55.00 -----$51.56

A is correct Rushford's basic EPS (net income / weighted average common shares outstanding) is $16,500,000 / 300,000 = $55.00. Diluted EPS is calculated under the assumption that the convertible bonds were converted into common stock, the bond interest net of tax is restored to net income, and the additional common shares are added to the denominator of the equation. Rushford's diluted EPS is [$16,500,000 + (50,000 × $1,000 × 0.09)(1 - .40)] / (300,000 + (50,000 × 2) = $48.00.

Which of the following policy tools is the *least likely* to be available to the U.S. Federal Reserve Board? A)Requiring the banking system to tighten or loosen its credit policies. B)Setting the discount rate at which banks can borrow from the Federal Reserve. C)Buying and selling Treasury securities in the open market.

A is correct The U.S. Federal Reserve can encourage or persuade banks as a whole to tighten or loosen their credit policies, but it cannot compel them to do so.

Sales and purchases of non-produced, non-financial assets are included in which of a country's trade accounts? A)Capital account. B)Current account. C)Financial account.

A is correct The capital account consists of sales and purchases of non-produced, non-financial assets plus capital transfers.

Compared with firms that expense costs, firms that capitalize costs can be expected to report: A)higher asset levels and higher equity levels in the early years of the asset's life. B)lower asset levels and higher equity levels in the early years of the asset's life. C)higher asset levels and lower equity levels in the early years of the asset's life.

A is correct The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset's life.

Which of the following transactions would *least likely* be reported in the cash flow statement as investing cash flows? A)Purchase of plant and equipment used in the manufacturing process with financing provided by the seller. B)Principal payments received from loans made to others. C)Sale of held-to-maturity securities for cash.

A is correct The purchase of plant and equipment with financing provided by the seller is a non-cash transaction. Non-cash transactions are disclosed separately in a note or supplementary schedule to the cash flow statement.

A company primarily engaged in the production of cement has the following characteristics: Beta = 0.8. Market value debt = $180 million. Market value equity = $540 million. Effective tax rate = 25%. Marginal tax rate = 34%. ------------------------------------------------------------------- The asset beta that should be used by a company considering entering into cement production is closest to: A)0.656. B)0.640. C)0.725.

A is correct The unlevered (asset) beta is 0.8{1 / [1 + (1 - 0.34)(180 / 540)]} = 0.656.

A common-size cash flow statement is least likely to provide payments to employees as a percentage of: A)operating cash flow for the period. B)revenues for the period. C)total cash outflows for the period.

A is correct There are two formats for a common-size cash flow statement, expressing each type of outflow as a percentage of total cash outflows or as a percentage of total revenue for the period. Operating cash flow for the period mixes inflows and outflows and is not used to calculate percentage flows for payment made.

In which of the following exchange rate regimes can a country participate without giving up its own currency? A)Target zone or conventional fixed peg. B)Crawling peg or formal dollarization. C)Monetary union or currency board.

A is correct With formal dollarization or a monetary union, a country does not have its own currency. With a currency board, conventional fixed peg, target zone, or crawling peg, a country has its own currency and manages its exchange rate with another currency or basket of currencies.

The crowding-out model implies that a: A)budget deficit will stimulate aggregate demand and trigger a multiplier effect which will lead to inflation. B)budget deficit will increase the real interest rate and thereby retard private investment. C)budget surplus will retard aggregate demand and trigger an economic downturn.

B Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates and thus lower private investment. Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand.

Both IFRS and U.S. GAAP allow deferred taxes to be: A)measured using a substantially enacted tax rate. B)presented as noncurrent on the balance sheet. C)recognized in equity after a fixed asset revaluation.

B is correct

In preparing a forecast of future financial performance, which of the following best describes sensitivity analysis and scenario analysis, respectively? ------------------------------------------------------------------------ Description #1 - A computer generated analysis based on developing probability distributions of key variables that are used to drive the potential outcomes. Description #2 - The process of analyzing the impact of future events by considering multiple key variables. Description #3 - A technique whereby key financial variables are changed one at a time and a range of possible outcomes are observed. Also known as "what-if" analysis. ------------------------------------------------------------------------- ----- *Sensitivity analysis* ------ *Scenario analysis* A) ---Description #3 -----Description #1 B)--- Description #3 -----Description #2 C)--- Description #2 -----Description #3

B is correct

Price elasticity of demand is most accurately defined as the change in: A)market price in response to a change in the quantity demanded. B)quantity demanded in response to a change in market price. C)quantity demanded in response to a change in income.

B is correct

The Fisher effect describes a nominal interest rate as the: A)expected inflation rate less the real interest rate. B)expected inflation rate plus the real interest rate. C)actual inflation rate less the real interest rate.

B is correct

Which of the following best describes a frequency distribution? A frequency distribution is a grouping of: A)data into groups, the numerical order of which does not matter B)data into non-overlapping intervals C)measures used to describe a population Explanation

B is correct

Which of the following situations will most likely require a company to record a valuation allowance on its balance sheet? A)To report depreciation, a firm uses the double-declining balance method for tax purposes and the straight-line method for financial reporting purposes. B)A firm is unlikely to have future taxable income that would enable it to take advantage of deferred tax assets. C)A firm has differences between taxable and pretax income that are never expected to reverse.

B is correct A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. If a firm is unlikely to have future taxable income, it would be unlikely to ever use its deferred tax assets, and therefore must record a valuation allowance.

Which of the following items is least likely an example of an intangible asset with an indefinite life? A)Goodwill. B)Acquired patents. C)Trademarks that can be renewed at minimal cost.

B is correct Acquired patents are most likely purchased with the intent to use over a specific period of time and therefore would be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with an indefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with infinite lives.

Aggressive accounting choices include: A)decreasing the estimated useful life of an asset. B)classifying interest paid as an investing cash flow. C)increasing the valuation allowance of a deferred tax asset.

B is correct Aggressive accounting choices are those that increase earnings, operating cash flows, or asset values in the current period. Classifying interest paid as an investing cash flow, rather than as an operating cash flow, results in higher CFO and lower CFI. The other choices are examples of conservative accounting choices because they decrease earnings in the current period.

Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is *least likely* to be recognized as an expense on Diabelli's financial statements when the inventory is sold? A)Selling cost. B)Allocation of fixed production overhead. C)Administrative overhead.

B is correct Assuming normal capacity levels, allocation of fixed production overhead is a product cost that is capitalized as part of inventory. Thus, this cost will not be recognized as an expense until the inventory is sold (it becomes part of COGS for that period). Administrative overhead and selling costs are period costs that must be expensed in the period incurred.

Capitalized interest costs are typically reported in the cash flow statement as an outflow from: A)operating. B)investing. C)financing.

B is correct Capitalized interest costs are reported as CFI on the statement of cash flows, as they are treated as part of the cost of the constructed capital asset.

The amortized cost of a trademark is *least likely* to appear on a firm's balance sheet if the trademark was: A)purchased from another firm. B)developed internally. C)obtained in the acquisition of another firm.

B is correct Costs of developing a trademark are expensed in the period incurred. The value of a trademark can appear on the balance sheet if the trademark was purchased or obtained in a business acquisition.

Which of the following would NOT be a component of cash flow from investing? A)Sale of land. B)Dividends paid. C)Purchase of equipment.

B is correct Dividends paid is not a component of cash flow from investing, it is a component of cash flow from financing. The other items are all components of cash flow from investing.

Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets? A)IFRS. B)U.S. GAAP. C)Both IFRS and U.S. GAAP.

B is correct Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.

Patch Grove Nursery uses the LIFO inventory accounting method. Maria Huff, president, wants to determine the financial statement impact of changing to the FIFO accounting method. Selected company information follows: Year-end inventory: $22,000 LIFO reserve: $4,000 Change in LIFO reserve: $1,000 LIFO cost of goods sold: $18,000 After-tax income: $2,000 Tax rate: 40% Under FIFO, the nursery's ending inventory and after-tax profit for the year would have been: -----FIFO ending inventory ------- FIFO after-tax profit A)-------------------$26,000 --------$1,400 B)-------------------$26,000 --------$2,600 C)-------------------$18,000 --------$2,600

B is correct FIFO ending inventory = LIFO ending inventory + LIFO reserve = 22,000 + 4,000 = $26,000 FIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 - t) = $2,000 + ($1,000)(1 - 0.4) = $2,000 + $600 = $2,600

Which type of unemployment describes situations where qualified workers are not immediately matched with existing job openings? A)Structural. B)Frictional. C)Cyclical.

B is correct Frictional unemployment will prevent qualified workers from being immediately matched with existing job openings. Two causes are imperfect information and the job search conducted by both employers and employees.

A high cash conversion cycle suggests that a company's investment in working capital is: A)too low. B)too high. C)appropriate.

B is correct High cash conversion cycles relative to those of comparable firms are considered undesirable. A cash conversion cycle that is too high implies that the company has excessive investment in working capital.

With a one-tier board structure: A)independent directors determine company strategy. B)both executives and non-executives can serve on the board of directors. C)senior managers determine corporate strategy.

B is correct Independent directors and senior managers both serve on a single board with a one-tier board structure and are jointly responsible for determining corporate strategy.

Aggressive accounting choices by management are most likely to: A)report sustainable earnings. B)comply with generally accepted accounting principles. C)produce decision-useful financial reporting.

B is correct Management may follow generally accepted accounting principles and still make biased (i.e., aggressive or conservative) accounting choices. Biased accounting choices diminish the decision-usefulness of financial reporting.

Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is: A)4.0 million units. B)2.5 million units. C)1.0 million units.

B is correct Operating breakeven quantity = fixed operating costs / (price - variable cost per unit) = $5 million / ($4.00 - $2.00) = 2,500,000 units.

Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran will depreciate the asset using the straight-line method over a 10-year period with no salvage value. For tax purposes the asset will be depreciated straight line for five years and Corcoran's effective tax rate is 30%. Corcoran's deferred tax liability for 2004 will: A)decrease by $15,000. B)increase by $15,000. C)decrease by $50,000.

B is correct Straight-line depreciation per financial reports = 500,000 / 10 = $50,000 Tax depreciation = 500,000 / 5 = $100,000 Temporary difference = 100,000 − 50,000 = $50,000 Deferred tax liability will increase by $50,000 × 30% = $15,000

A reconciliation of beginning and ending carrying values for each class of property, plant, and equipment is required for firms reporting under: A)U.S. GAAP. B)IFRS. C)both U.S. GAAP and IFRS.

B is correct The required disclosures for long-lived assets under IFRS are more extensive than they are under U.S. GAAP. IFRS requires a reconciliation of beginning and ending carrying values for classes of PP&E, while U.S. GAAP does not.

Two countries trade freely with each other and have agreed to specific tariffs on imports from other countries. The workers in either country may freely cross the common border to work in the other country. The two countries have agreed to common economic policies, but they use separate currencies. This type of cooperation is best described as a(n): A)customs union. B)economic union. C)monetary union.

B is correct The two countries are a part of an economic union. In an economic union, there is (1) free trade among members, (2) common restrictions (tariffs) on imports from non-members, (3) free movement of production factors (labor), and (4) common economic institutions and coordination of economic policies. While a customs union has common tariffs on imports from non-union countries and free trade, it does not allow workers to cross the borders freely and does not have common economic institutions. A monetary union requires all of the listed items and a common currency.

For impaired long-lived assets, a firm reporting under IFRS is least likely required to disclose the: A)amounts of impairment losses and reversals by asset class. B)estimated probabilities of reversing impairment losses. C)circumstances that caused the impairment losses or reversals.

B is correct Under IFRS, firms with impaired assets must disclose the amounts of impairment losses and reversals by asset class, the circumstances that caused the impairment losses or reversals, and where the losses or reversals are recognized on the income statement.

A stock increased in value last year. Which will be greater, its continuously compounded or its holding period return? A)Its continuously compounded return. B)Its holding period return. C)Neither, they will be equal.

B is correct When a stock increases in value, the holding period return is always greater than the continuously compounded return that would be required to generate that holding period return. For example, if a stock increases from $1 to $1.10 in a year, the holding period return is 10%. The continuously compounded rate needed to increase a stock's value by 10% is Ln(1.10) = 9.53%.

At the date of issuance the market interest rate was above the coupon rate. Bonds of this nature would sell for: A)par. B)discount. C)premium.

B is correct When the contract rate on a bond is lower than the market rate, a bond will sell for a discount.

Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is: A)increase the federal funds target rate. B)reduce government expenditures on major government construction projects. C)reduce the money supply.

B is correct Discretionary fiscal policy refers to the federal government's decisions regarding government spending and taxing. A reduction in government spending on major government construction projects is likely to lead to a reduction in aggregate demand and less pressure on prices, reducing inflation.

Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A)Domestic currency appreciates. B)Exports increase. C)Interest rates increase.

B is correct Expansionary monetary policy decreases interest rates. This should cause the domestic currency to depreciate, which should increase foreign demand for the country's exports.

Fiscal policy includes a government's: A)tax policies only. B)spending and tax policies only. C)spending, tax, and monetary policies.

B is correct Fiscal policy refers to a government's use of spending and taxation to meet macroeconomic goals. Monetary policy refers to central bank actions and is not considered part of fiscal policy.

If a monetary policy is focused on combating inflation, which open market actions by the Federal Reserve will most effectively accomplish this? A)Purchase Treasury securities, causing aggregate demand to decrease. B)Sell Treasury securities, causing aggregate demand to decrease. C)Sell Treasury securities, causing aggregate demand to increase.

B is correct If the Federal Reserve wants to slow inflation, it needs to decrease aggregate demand (i.e., business investment, consumer purchases of durable goods, and exports). To accomplish this, the Federal Reserve could engage in open market sales of Treasury securities.

During 2007, Topeka Corporation entered into the following transactions: ----> Transaction #1 - Interest on a certificate of deposit owned by Topeka was credited to Topeka's investment account. -----> Transaction #2 - Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20. ------------------------------------------------------------------------ Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007? A)Neither should be recognized. B)Only one should be recognized. C)Both should be recognized.

B is correct Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is reflected on the statement of changes in stockholders' equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.

The following information applies to World Turn Company: 10% rate of interest on newly issued bonds. 7% growth rate in earnings and dividends. The last dividend paid was $0.93. Shares sell for $16. Stock's beta is 1.5. Market risk premium is 6%. Risk-free rate of interest is 5%. The firm is in a 40% marginal tax bracket. If the appropriate risk premium relative to the bond yield is 4%, World Turn's equity cost of capital using the dividend discount model is closest to: A)14.0%. B)13.2%. C)12.8%.

B is correct Ke = { .93 x (1.07)/ 16 } + .07 = 13.2

Arguments against being concerned about the size of a fiscal deficit include: A)the crowding-out effect. B)Ricardian equivalence. C)higher future taxes.

B is correct Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase because the effect on the total level of demand in the economy is the same.

A local high school basketball team had 18 home games this season and averaged 58 points per game. If we assume that the number of points made in home games is normally distributed, which of the following is most likely the range of points for a confidence interval of 90%? A)26 to 80. B)34 to 82. C)24 to 78.

B is correct This question has a bit of a trick. To answer this question, remember that the mean is at the midpoint of the confidence interval. The correct confidence interval will have a midpoint of 58. (34 + 82) / 2 = 58.

Unemployment compensation is an example of: A)a discretionary fiscal policy stabilizer. B)an automatic fiscal policy stabilizer. C)an automatic monetary policy stabilizer.

B is correct Unemployment compensation automatically rises and falls with the business cycle, therefore it is an example of an automatic fiscal policy stabilizer.

Central banks that are able to define how inflation is computed and determine its desired level are best described as having: A)operational independence. B)transparency. C)target independence.

C

For analytical purposes, if a deferred tax liability is *expected to not be reversed*, it should be treated as a(n): A)liability. B)immaterial amount and ignored. C)an addition to equity. D.)an subtraction to equity

C is correct If deferred tax liabilities are expected to never reverse, they should be treated as equity for analytical purposes.

Assume the Federal Reserve purchases $1 billion of securities in the open market. What is the maximum increase in the money supply (MONEY MULTIPLIER) that can result from this action, if the required reserve ratio is 15%? A)$850 million. B)$1.00 billion. C)$6.67 billion.

C The money multiplier is 1 / 0.15 = 6.67, so the open market purchase can increase the money supply by a maximum of $6.67 billion.

Other things equal, compared to using the first-in-first-out (FIFO) inventory cost method, using the last-in-first-out (LIFO) method in a rising price environment will result in a higher: A)quick ratio. B)gross profit margin. C)inventory turnover ratio.

C is correct

The interests of community groups affected by a company's operations are most likely to be considered in corporate governance under: A)shareholder theory. B)special interest theory. C)stakeholder theory.

C is correct

The main difference between the current ratio and the quick ratio is that the quick ratio excludes: A)assets. B)cost of goods sold. C)inventory.

C is correct

The quick ratio is considered a more conservative measure of liquidity than the current ratio because the quick ratio excludes: A)accounts receivable, which may not be collectible in the short term. B)short-term marketable securities, which may need to be sold at a significant loss. C)inventories, which are not necessarily liquid.

C is correct

The step in the financial statement analysis framework that includes making any appropriate adjustments to the financial statements and calculating ratios is best described as: A)analyzing and interpreting the data. B)gathering the data. C)processing the data.

C is correct

The term "automatic stabilizers" refers to: A)changes in taxes and expenditure programs legislators automatically enact in response to changes the level of economic activity in order to smooth economic cycles. B)government expenditures and tax receipts that are required to balance over the course of the business cycle, although they may be out of balance in any single year. C)increases in transfer payments and decreases in tax revenues that result from an economic contraction without new legislation.

C is correct

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #3 - Each line item is expressed as a percentage of the prior year's amount. -------*Vertical analysis*----*Horizontal analysis* A) -----> Statement #2 ----Statement #3 B)-----> Statement #1 ---- Statement #2 C)-----> Statement #2 ---- Statement #1

C is correct

The difference between the fair value of a defined benefit pension plan's assets and its estimated benefit obligation is recognized: A)as an actuarial adjustment in other comprehensive income. B)on the income statement as pension expense. C)on the balance sheet as a net pension asset or liability.

C is correct A net pension asset or net pension liability defined benefit plan is the difference between the fair value of the plan's assets and the estimated benefit obligation. A plan with a net pension asset is said to be overfunded, and a plan with a net pension liability is said to be underfunded.

If a firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting, which of the following results is least likely? A)A temporary difference will result between tax and financial reporting. B)Income tax expense will be greater than taxes payable. C)A permanent difference will result between tax and financial reporting.

C is correct A permanent difference between tax and financial reporting is a difference that is expected to not reverse itself. Under normal circumstances, the effects of the different depreciation methods will reverse.

Which of the following forms of short-term financing is typically used to facilitate international trade? A)Commercial paper. B)Overdraft line of credit. C)Banker's acceptances.

C is correct Banker's acceptances are used by firms that export goods. A banker's acceptance is a guarantee from the bank of the firm that has ordered the goods stating that a payment will be made upon receipt of the goods. The exporting company can then sell this acceptance at a discount in order to generate immediate funds.

One of the primary limitations of using beta in calculating the cost of equity in a developing country is: A)the market portfolio in developing countries is often not well diversified. B)beta does not capture inflation risk. C)beta does not capture country risk.

C is correct Because beta does not capture country risk, we add a country risk premium to the market risk premium when calculating expected returns using the CAPM.

To adjust for operating leases before calculating financial statement ratios, what value should an analyst add to a firm's liabilities? A)Sum of future operating lease obligations. B)Difference between present values of lease payments and the asset's future earnings. C)Present value of future operating lease payments.

C is correct Before calculating ratios involving liabilities, an analyst should estimate the present value of operating lease obligations and add this value to the firm's liabilities.

A spectrum for assessing financial reporting quality should consider: A)quality of financial reports only. B)quality of earnings only. C)both quality of financial reports and quality of earnings.

C is correct Both quality of financial reports and quality of reported earnings are elements that should be considered in a spectrum for assessing financial reporting quality.

Variability in a firm's operating income is most closely related to its: A)internal risk. B)financial risk. C)business risk.

C is correct Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change: A)retrospectively, because it is a change in accounting principle. B)prospectively, with LIFO layers calculated from past purchases and sales. C)prospectively, with the carrying value as the first LIFO layer.

C is correct Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.

Which of the following statements regarding the disclosure of deferred taxes in a company's balance sheet is most accurate? A)There should be a combined disclosure of all deferred tax assets and liablities that are likely to reverse in the current period. B)Current deferred tax liability and noncurrent deferred tax asset are netted, resulting in the disclosure of a net noncurrent deferred tax liability or asset. C)Deferred tax assets and liabilities are classified as noncurrent.

C is correct Deferred tax items are classified as noncurrent.

For publicly traded firms in the United States, the Management Discussion and Analysis (MD&A) portion of the financial disclosure is least likely required to discuss: A)results of operations. B)capital resources and liquidity. C)unusual or infrequent items.

C is correct For publicly traded U.S. firms, the MD&A portion of the financial disclosure is required to discuss results of operations, capital resources and liquidity and a general business overview based on known trends. A discussion of unusual or infrequent items **may be included in the MD&A, but is not required**.

A firm records the following cash flows on the same day: $250 million from debt proceeds; $100 million funds transferred to a subsidiary; $125 million in interest payments; and $30 million in tax payments. The net daily cash position: A)remained the same. B)improved. C)worsened.

C is correct Improving a firm's net daily requires more inflows than outflows. Debt proceeds are cash inflows while funds transferred to a subsidiary, interest and dividend payments, and tax payments are outflows. The net cash change for the day is $250 - $100 - $125 - $30 = -$5 million.

In an inflationary environment, a company's: A)net income will be larger if it uses LIFO than if it uses FIFO. B)Cost of goods sold will be lower if it uses LIFO than if it uses FIFO. C)assets will be lower if it uses LIFO than if it uses FIFO.

C is correct In an inflationary period, assets will be lower under LIFO since the last, higher priced items are charged to the income statement.

With respect to utility theory, the substitution effect for a decrease in the price of a good: A)may increase or decrease consumption of the good. B)will decrease consumption of the good. C)will increase consumption of the good.

C is correct In utility theory, if the price of one good decreases, the substitution effect causes consumption of that good to increase.

The price to tangible book value ratio subtracts what components from equity? A)Goodwill and property, plant and equipment. B)Intangible assets and property, plant and equipment. C)Goodwill and intangible assets.

C is correct Price to tangible book value is calculated by removing goodwill and intangible assets from equity. This adjustment reduces assets and equity and produces a ratio that is not affected by differences in intangible asset values that may result from how the assets were acquired.

Which of the following statements regarding zero-coupon bonds is most accurate? A)The interest expense in each period is found by applying the discount rate to the book value of debt at the end of the period. B)Interest expense is a combination of operating and financing cash flows. C)A company should initially record zero-coupon bonds at their discounted present value.

C is correct The liability initially recorded for a zero-coupon bond is equal to the proceeds received, which is the present value of the principal repayment discounted at the company's normal borrowing rate. Interest expense is found by applying the discount rate to the book value of debt at the beginning of the period, and there is no cash outflow from operations for a zero coupon bond.

Enamel Manufacturing (EM) is considering investing in a new vehicle. EM finances new projects using retained earnings and bank loans. This new vehicle is expected to have the same level of risk as the typical investment made by EM. Which one of the following should the firm use in making its decision? A)After-tax cost of debt. B)Cost of retained earnings. C)Marginal cost of capital.

C is correct The marginal cost of capital represents the cost of raising an additional dollar of capital. The cost of retained earnings would only be appropriate if the company avoided creditor-supplied financing or the issuance of new common or preferred stock (and preferred stock financing). The after-tax cost of debt is never sufficient, because a business, regardless of their size, always has a residual owner, and hence a cost of equity.

Steven's Bakery produces snack cakes and bread. Listed below are the operating costs for the snack cakes division and the bread division. ---------------------------Snack cakes ----Bread Price per package----------$2.00 ----- $2.50 Variable cost per package $1.00 -----=$1.30 Fixed operating costs-----$25,000 ---$30,000 Fixed financing costs -----$10,000 ----$10,000 Compared to the snack cakes division, the operating breakeven quantity for the bread division is: A)less. B)greater. C)the same.

C is correct The operating breakeven quantity for the snack cakes division is $25,000/($2.00 - $1.00) = 25,000. The operating breakeven quantity for the bread division is $30,000/($2.50 - $1.30) = 25,000

Should a company accept a project that has an IRR of 14% and an NPV of $2.8 million if the cost of capital is 12%? A)Yes, based only on the NPV. B)No, based on the NPV and the IRR. C)Yes, based on the NPV and the IRR.

C is correct The project should be accepted on the basis of its positive NPV and its IRR, which exceeds the cost of capital.

The relationship between a company's shareholders and its senior managers is best described as a(n): A)principal relationship. B)working partnership. C)agency relationship.

C is correct This is an example of an agency relationship, which is also known as a principal-agent relationship. A company's senior managers are acting as agents, hired to act in the interest of shareholders who are the principal in the relationship.

A firm is going to create three teams of four from twelve employees. How many ways can the twelve employees be selected for the three teams? A)1,320. B)495. C)34,650.

C is correct This problem is a labeling problem where the 12 employees will be assigned one of three labels. It requires the labeling formula. There are [(12!) / (4! × 4! × 4!)] = 34,650 ways to group the employees

In estimating pro forma cash flows for a company, analysts typically hold which of the following factors constant? A)Sales. B)Repayments of debt. C)Noncash working capital as a percentage of sales.

C is correct To estimate pro forma cash flows, the analyst must make assumptions about future sources and uses of cash. The most important of these will be increases in working capital, capital expenditures on new fixed assets, issuance or repayments of debt, and issuance or repurchase of stock. A typical assumption is that noncash working capital will remain constant as a percentage of sales.

The most likely effect of a write-down of inventory to net realizable on a firm's total asset turnover is: A)no change. B)a decrease. C)an increase.

C is correct Total asset turnover is revenue divided by total assets. Writing down inventory to NRV decreases total assets and has no effect on revenue. As a result, total asset turnover increases.

Which of the following statements about corporate governance is most accurate? Corporate governance: A)is defined in the same way in most countries. B)best practices are essentially the same in developed economies. C)may be focused only on shareholder interests.

C is correct Under the shareholder theory of corporate governance, practices are primarily those that support shareholder interests, while under the stakeholder theory of corporate governance, the interests of various affected groups are considered and balanced. Corporate governance practices and definitions vary across countries.

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the: A)net realizable value. B)net realizable value minus selling costs. C)market price minus selling costs minus normal profit margin.

C is correct When inventory is written down to market, the replacement cost of the inventory is its market value, but the "market value" must fall between net realizable value (NRV) and NRV less normal profit margin. NRV is the market price of the inventory less selling costs. Therefore the minimum value is the market price minus selling costs minus normal profit margin.

The quality of a company's reported earnings is low when they: A)do not conform to GAAP. B)are lower than for the prior-year period. C)are not sustainable.

C is correct The quality of a firm's earnings is considered to be low if they are not sustainable or if they are not of a sufficient level to provide an adequate return to investors.

A central bank has operational independence if it can independently determine: A)the horizon over which to achieve its inflation target. B)how inflation is calculated. C)the policy rate.

C is correct A central bank is said to have operational independence if it has the authority to determine the policy rate independently. Determining how inflation is calculated and the time horizon for achieving its target rate of inflation refer to a central bank that has target independence.

Changes in asset lives and salvage values are changes in accounting: A)estimates and are applied retrospectively. B)principle and are applied retrospectively. C)estimates and are applied prospectively.

C is correct Changes in asset lives and salvage value are changes in accounting estimates and are not considered changes in accounting principle. Changes in accounting estimates are applied prospectively.

The role of financial statement analysis is most accurately described as: A)the reports and presentations a company uses to show its financial performance to investors, creditors, and other interested parties. B)a common requirement for companies that are listed on public exchanges. C)the use of information from a company's financial statements along with other information to make economic decisions regarding that company.

C is correct Financial statement analysis refers to the use of information from a company's financial statements along with other information to make economic decisions regarding that company. Financial reporting refers to the reports and presentations that a company uses to show its financial performance to investors, creditors, and other interested parties. Financial reporting is a requirement for companies that are listed on public exchanges.

Which of the following statements regarding U.S. Federal Reserve open market operations is least accurate? A)When the Fed sells Treasury securities, excess reserves decrease. B)When the Fed buys Treasury securities, short-term interest rates will generally decrease. C)If the Fed wants to stimulate the economy, it will sell Treasury securities to banks.

C is correct If the Fed intends to stimulate the economy, they will buy, not sell, Treasury securities. Buying Treasury securities injects reserves into the banking system.

Noncurrent assets on the balance sheet are most closely linked to which part of the cash flow statement? A)Financing cash flows. B)Operating cash flows. C)Investing cash flows.

C is correct Investing cash flows are most closely linked with a firm's noncurrent assets. For example, purchases and sales of property, plant, and equipment are classified as investing cash flows.

Which of the following statements about the role of the marginal cost of capital in determining the net present value of a project is most accurate? The marginal cost of capital should be used to discount the cash flows: A)of all projects the firm is considering. B)if the firm's capital structure is expected to change during the project's life. C)for potential projects that have a level of risk near that of the firm's average project.

C is correct Net present values of projects with the average risk for the firm should be determined using the firm's marginal cost of capital. The discount rate should be adjusted for projects with above-average or below-average risk. Using the marginal cost of capital assumes the firm's capital structure does not change over the life of the project.

In the context of stakeholder management, organizational infrastructure is most accurately described as: A)contractual arrangements a company enters into with its stakeholders. B)a framework for defining the rights and responsibilities of stakeholders. C)a company's internal procedures for addressing stakeholder relationships.

C is correct Organizational infrastructure refers to the practices and governance procedures that a company adopts to manage its stakeholder relationships.

Which of the following is least likely to be available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval System)? A)SEC filings. B)Form 10Q. C)Corporate press releases.

C is correct Securities and Exchange Commission (SEC) filings are available from EDGAR (Electronic Data Gathering, Analysis, and Retrieval System, www.sec.gov). Companies' annual and quarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q, respectively).

Unit Technologies uses accrual basis for financial reporting purposes and cash accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: A)asset of $10,880. B)liability of $16,320. C)liability of $10,880.

C is correct Since pretax income ($97,500) exceeds the taxable income ($65,500), United Technologies will have a deferred tax liability of $10,880 = [( $97,500 − $65,500)(0.34)]

The tendency for currency depreciation to increase a country's trade deficit in the short run is known as the: A)absorption effect. B) Marshall-Lerner effect. C) J-curve effect.

C is correct The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

The approach to revenue recognition in the converged accounting standards that were issued in May 2014 is best described as: A)rules-based. B)objectives-based. C)principles-based.

C is correct The converged accounting standards concerning revenue recognition, issued in May 2014 by the IASB and FASB, are principles-based.

The primary goals of the International Monetary Fund (IMF) include: A)resolving trade-related disputes among nations. B)reducing global poverty. C)promoting exchange rate stability.

C is correct The primary goals of the IMF are to promote international monetary cooperation, facilitate growth of international trade, promote exchange rate stability, assist in establishing a multilateral payment system, and provide resources to members with balance of payments difficulties. Reducing global poverty is a role of the World Bank. Resolving trade disputes is a role of the World Trade Organization.

A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is: A)$5 million. B)zero. C)$3 million.

C is correct Under IFRS, research costs must be expensed but development costs, under certain circumstances, may be capitalized.

With respect to exchange rate regimes, crawling bands are most likely used in a transition toward: A)a fixed peg arrangement. B)a monetary union. C)floating exchange rates.

C is correct When exchange rates are managed within crawling bands, the margin around a target exchange rate increases over time. This technique is sometimes used in a transition from fixed exchange rates to freely floating exchange rates.

If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst's point of view are provided by: A)LIFO inventory and FIFO cost of goods sold. B)FIFO inventory and FIFO cost of goods sold. C)FIFO inventory and LIFO cost of goods sold.

C is correct Whether prices are increasing or decreasing, LIFO cost of goods sold and FIFO inventory are preferred because they are the closest estimates of current costs.

The open market sale of Treasury securities by the Federal Reserve is least likely to result in: A)a decreased rate of inflation. B)increased longer-term interest rates. C)increased exports of U.S. goods.

C is corrrect When the Fed sells Treasuries, it causes both short- and long-term interest rates to increase. This rate increase causes the dollar to appreciate, which reduces foreign demand for domestic goods, causing exports to decline. The interest rate increase also puts downward pressure on price levels, which causes inflation to slow.

Discretionary fiscal policy refers to: A)increasing aggregate demand through lower interest rates. B)built-in devices that counteract the business cycle phase. C)active decisions regarding spending and taxing to affect economic growth.

c is correct Discretionary fiscal policy, in contrast to automatic stabilizers, refers to active decisions by the government to affect economic growth through changes in government spending and taxation. Increasing aggregate demand through lower interest rates describes expansionary monetary policy.