ACC 4356 Exam 2
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
Discounted present value
Which of the following is not a difference between U.S. GAAP and IFRS treatment of impaired assets?
Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS
In comparing firms in the same industry, which of the following does not present a challenge for analysts?
Each of these answer choices presents a challenge for analysts
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
FIFO inventory = LIFO inventory + LIFO reserve
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
Gross depreciable property, plant, and equipment/straight-line depreciation expense
Which of the following statements with respect to floating-rate debt is incorrect?
If the market rate of interest decreases, both the issuing company and the investors benefit
Which of the following statements is true regarding sales returns and allowances?
Ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year
Which of the following statements is true regarding a troubled debt restructuring?
In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender
Using the effective interest method, amortization of a discount or premium behave in this manner over the life of the outstanding bonds.
Increase for premium bond, increase for discounted bond.
A lessor mistakenly treated a sales-type lease without manufacturing profit as an operating lease (the lessor uses straight-line depreciation). How does this mistake impact the following at the end of the first year of the lease term?
Net Income=Understated, Interest Revenue=Understated
In assessing whether an exchange transaction has commercial substance, the firm's future cash flows are expected to change significantly as a result of the exchange. Which item below does not describe whether a significant change in cash flow is expected?
Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional
Which of of the following statements does not correctly describe required income tax disclosures in the notes to the financial statements?
The effective tax rate applicable to firms in the same industry is a required disclosure
Which of the following statements regarding inventory accounting is true?
The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices)
Which of the following statements regarding inventory accounting is false?
U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve
Which of the following statements regarding inventory accounting is false?
Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure.
Consistent with ASC topic 326, expected credit losses are recognized as
a separately reported loss
When a bond is sold at a discount the effective interest rate is:
above the stated rate
If a lease contains a residual value guarantee, the lessee must:
add the present value of the guaranteed amount to the present value of the minimum lease payments
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs
The major issue in inventory accounting is
choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
research evidence suggests that
companies reduce their allowance for credit losses when earnings are otherwise low and then increase the provision when earnings are high
The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes employs the accounting principle of:
conservatism
Research findings almost uniformly indicate that existing U.S. GAP for both R&D and software development is:
conservative
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:
deferred tax liabilities
Increases in deferred tax liability balances represent a potential:
deterioration of earnings quality
net realizable value of receivables is gross receivables minus
estimated provision for credit losses and estimated returns and allowances
When firms dispose of a long-lived asset by selling it before the end of its useful life, the difference between the net book value of the asset and the disposition proceeds is a/an:
gain or loss from continuing operations
The carrying cost of inventory should include all of the following costs except:
general administrative costs associated with the purchase of inventory
when a specific account receivable is written off, the entry
has no effect on net income
The dominant method under GAAP for measuring long-lived assets is the:
historical cost approach
The mechanics of absorption costing can lead to year-to-year income changes:
if production and sales levels are not the same
When the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may:
impede profit and loss comparisons
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:
increase
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of:
increases in the market interest rate
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
inflated
The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called:
interperiod tax allocation
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price:
is higher than the carrying value of the mortgages on the bank's books
The LIFO reserve disclosure is required because LIFO inventory costs are:
lower than FIFO inventory costs
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to
match current costs with current revenues
According to U.S. GAAP, technological feasibility is established when an entity has completed all of the following activities necessary to establish that a product can be produced, except:
measuring
To preclude firms from generating artificial gains on exchange transactions being recorded at fair value, U.S. GAAP requires that the transaction:
must possess commercial substance
GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee
must treat the lease as a finance lease
When a lessee has a finance lease under ASC 842, the amount shown for the asset and the amount shown for the related liability are equal
only at the lease inception
Consistent with ASC Topic 842, the amortization of the right-to-use asset fluctuates for a(n)
operating lease
An impairment loss is reported on the income statements as:
part of income from continuing operations
Noncurrent monetary liabilities are initially recorded at their:
present value when incurred
A seller/lessee who enters into a sale and leaseback agreement that meets revenue recognition criteria under ASC Topic 606
recognizes the profit margin on the sold/leased asset immediately
Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%. The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a:
reduction of the bond premium
To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts relied on
required note disclosures
Evaluation and testing for impairment assessments of indefinite-lived intangible assets:
requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10 year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ray's books, this lease is treated as a(n):
sales-type capital lease
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
severity of input cost change
Blume Corporation leases equipment for a ten-month period. The entire related lease payment is due at the end of the ten-month period. The journal entry to recognize the monthly accrual related to the lease will include a debit to:
short-term lease expense
The Fair value adjustment-accounts receivable account is an asset valuation account
that would be adjusted upward or downward as fair values change and as the receivables are collected
Under IFRS, when an asset is revalued upward, subsequent depreciation is based on:
the asset's revaluation net book value which is the fair value at the time of revaluation
Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case:
the assets acquired are recorded at the book value of the assets relinquished
Goods held on consignment are included in the inventory valuation of:
the consignor
Which of the following can't be assessed by analyzing a company's deferred tax note to the financial statements?
the impact of economic changes on deferred taxes
Consistent with ASC Topic 842, operating lease expense is equal to:
the lease expense that would have been recognized if classified as a short-term lease
Over the lease term, the total income derived from a lease is _____ if the lease is classified as a sales-type lease instead of an operating lease.
the same
Under ASC 842, over the life of a lease, the amount charged to expense is:
the same for a finance or operating lease
The determining factor for accounting treatment of a troubled debt restructuring when there is a continuation with modification of terms is whether:
the undiscounted sum of the future cash flows under the restructured note is above or below the note's carrying value (including accrued interest) at the restructuring date
When a financial analyst adjusts a company's reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that:
the useful lives differences are "real"
Which of the following does not represent guidance for assets held for sale?
they are reported at the lower of book value or fair value
When an asset's fair value has increased and a firm elects the revaluation method,
under IFRS, the accumulated depreciation account is removed and the revalued amount becomes the new book value.
Which of the following is not part of the IFRS revaluation rules for tangible long-lived assets?
A company can elect to revalue individual assets
Which of the following statements is not correct?
A permanent difference results when a revenue enters into the determination of book income in one period but affects taxable income in a different period.
When two companies exchange products to facilitate sales to customers and the exchange also includes a cash payment, which of the following is the proper treatment of the transaction by the recipient of the cash?
A portion of any gain is recorded
Which of the following would not create a temporary difference?
A revenue included in the determination of book income this year but never included in taxable income.
Which of the following does not describe a difference between ASC 842 and IFRS16?
ASC 842 limits the recognized gain to that of the residual interest retained by the buyer-lessor
Which of the following is not an accurate description of the controversies surrounding the fair value accounting option?
Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress
Which of the following statements regarding inventory accounting is false?
Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, first-out.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life
Which of the following results in an increase in income tax expense for a particular time period?
An increase in the income tax rate for future years that was enacted during the time period for a company reporting a deferred tax liability at the end of the period.
Which one of the following items would be charged to the cost of a building rather than the cost of land?
Architectural fees
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets?
Assets may be tested as a group if they are used in combination with other assets in the group
Which of the following statements regarding inventory accounting is false?
Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory
Which of the following statements regarding inventory accounting is false?
By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold
Similarities between U.S. GAAP and IFRS include which of the following?
The definition of inventory is similar in both U.S. GAAP and IFRS
When interest rates have increased and bonds are retired before maturity, market value is:
below book value generating an accounting gain
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on:
both the severity of input cost changes and the rapidity of physical inventory turnover
When troubled debt is restructured via continuation with modification of debt terms, the original loan is:
cancelled and a new loan agreement is signed
A corporation that incurs a pre-tax operating loss must:
carryforward the loss for tax purposes
Which of the statements is not true when applying both IFRS and U.S. GAAP accounting for long-term debt?
Periodic interest expense is computed using the contractural interest rate.
Everwood Co. had net income of $1,000,000 for the year ending December 31, 20X1, its first year of operations. During this time period, Everwood also had a permanent tax difference of $120,000 and its adjusted pre-tax book income is $1,220,000. Analysts have approximated Everwood's taxable income at $735,000 for the year ending December 31, 20X1. Which of the following most likely caused the difference between Everwood's book and tax income?
Purchases of long-lived capital assets
TAD, Inc. uses the LIFO-lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true?
Replacement cost is greater than net realizable value less a normal profit margin
Which of the following is not a valid statement regarding floating-rate debt?
The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt
Which of the following statements regarding inventory accounting is true?
When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase.
which one of the following is an example of an aggressive revenue recognition policy?
a firm with a liberal sales return policy recognizes revenue at shipment
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life,
a liability simultaneously arises for those future expenditures
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
a premium
When the market rate of interest is below the stated rate of interest, a bond sells at:
a premium
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show:
a reduction in the percentage of the allowance for credit losses to receivables
Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for
all receivables reported at amortized cost
Unequal lease payments relating to an operating lease should be
allocated equally to expense over the lease term
Accounts receivables initially are recognized at
amortized cost
Amortization of discount on bonds payable (bond discount) results in which of the following?
an increase in the carrying value of the bond
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs:
and the denominator consists of old LIFO costs
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms:
apply the same depreciation methods and the same useful lives among similar groups of assets
