FSA QBank - Part 1

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Vindaloo Company manufactures a single product. The following information was taken from the company's production and cost records last year: Units produced 5,000; Raw materials $15,000; Conversion cost for finished goods $20,000; Freight-in to plant $800; Storage cost for finished goods $500; Abnormal waste $100; Freight-out customers $1,100. Assuming no abnormal waste is included in conversion cost, calculate the capitalized cost of one unit.

$7.16 Raw materials $15,000; Conversion cost $20,000; Freight-in to plant $800; Total capitalized cost $35,800; Units produced 5,000; Capitalized cost per unit $7.16 ($35,800 / 5,000 units). The storage cost, abnormal waste, and the freight-out to customers are expensed as incurred.

At the beginning of 20X7, Big 4 Manufacturing Company had 400 units of inventory as follows: Year Purchased Number of Units Cost Per Unit Total Cost 20X4 120 $10 $1,200 20X5 140 11 1,540 20X6 140 12 1,680 400 $4,420 Big 4 reports inventory under LIFO. Due to a strike, no units were produced during 20X7. During 20X7, Big 4 sold 280 units. In the absence of the strike, Big 4 would have had a cost of $14 for each unit produced. Compute the extra profit that resulted from the inventory liquidation.

$700 Had Big 4 produced 280 units during 20X7, COGS would have been 280 × $14 = $3,920. Due to the LIFO liquidation, COGS was lower by $700 ($3,920 - $3,220); thus, pretax profit was higher by $700. The higher profit is unsustainable because Big 4 will need to produce units at the new higher cost in future periods.

Johnson Company has 10,000 shares outstanding at the beginning of the year. On April 1, Johnson issues 4,000 new shares. On July 1, Johnson distributes a 10% stock dividend. On September 1, Johnson repurchases 3,000 shares. Calculate Johnson's weighted average number of shares outstanding for the year, for its reporting of basic earnings per share.

1) Shares outstanding on January 1: 10,000 × 1.10 × 12/12 of the year = 11,000 2) Shares issued April 1: 4,000 × 1.10 × 9/12 of the year = 3,300 3) Shares repurchased September 1: -3,000 × 4/12 of the year = -1,000 4) Weighted average shares outstanding = 13,300 13,300

A company has a net profit margin of 4%, asset turnover of 2.0, and a debt-to-assets ratio of 60%. What is the ROE?

20% Debt-to-assets = 60%, which means equity to assets is 40%; this implies assets to equity (the leverage ratio) is 1 / 0.4 = 2.5 ROE = (net profit margin)(total asset turnover)(average assets / average equity) = (0.04)(2.00)(2.50) = 0.20, or 20%

Sales of inventory would be classified as: A) operating cash flow. B) investing cash flow. C) financing cash flow.

A vertical common-size income statement expresses each category of the income statement as a percentage of: A) assets. B) gross profit. C) revenue.

A company has convertible preferred stock outstanding. In the computation of diluted earnings per share, common shares issued when convertible preferred stock is converted are added to the denominator of the basic EPS equation, and the numerator is: A) adjusted by adding back convertible preferred stock dividends. B) adjusted by adding back non-convertible preferred stock dividends. C) not adjusted.

A complex capital structure, for purposes of determining disclosure of diluted earnings per share, is distinguished from a simple capital structure by the company having outstanding: A) warrants, convertible securities, or options. B) debt securities or convertible securities. C) preferred stock, warrants, or options.

A firm engages in a new type of financial transaction that has a material effect on its earnings. An analyst should most likely be suspicious of the new transaction if: A) management has not explained its business purpose. B) no accounting standard exists that applies to the transaction. C) the transaction is not governed by existing regulations.

A vertical common-size balance sheet expresses each category of the balance sheet as a percentage of: A) assets. B) equity. C) revenue.

According to the IASB conceptual framework, characteristics that enhance relevance and faithful representation include: A) timeliness, comparability, and verifiability. B) comparability, understandability, and thoroughness. C) assurance, timeliness, and understandability.

According to the IFRS framework, timeliness is a characteristic that enhances: A) both relevance and faithful representation. B) only relevance. C) only faithful representation.

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

Which of the following is least likely considered in determining the useful life an intangible asset? A) Initial cost. B) Legal, regulatory, or contractual provisions. C) Provisions for renewal or extension.

A Initial cost has nothing to do with the useful life of an intangible asset.

Bluff, Inc.'s stock transactions during the year were as follows: - January 190,000 common shares outstanding. - April 120% stock dividend is declared and issued. - October 110,000 shares are reacquired as treasury stock. What is Bluff's weighted average number of shares outstanding during the year? A) 101,000. B) 98,000. C) 105,500.

Issuing bonds would be classified as: A) investing cash flow. B) financing cash flow. C) no cash flow impact.

At the beginning of the year, Parent Company purchased all 500,000 shares of Sub Incorporated for $15 per share. Just before the acquisition date, Sub's balance sheet reported net assets of $6 million. Parent determined the fair value of Sub's property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of Sub? A) $0. B) $500,000. C) $1,500,000.

Purchase price of $7,500,000 [$15 per share × 500,000 shares] - fair value of net assets of $7,000,000 [$6,000,000 book value + $1,000,000 increase in property and equipment] = goodwill of $500,000.

The Gaffe Company had net income of $1,500,000. Gaffe paid preferred dividends of $5 on each of the 100,000 preferred shares. Each preferred share is convertible into 20 common shares. There are 1 million Gaffe common shares outstanding. In addition to the common and preferred stock, Gaffe has $25 million of 4% bonds outstanding. If Gaffe's tax rate is 40%, what is its diluted earnings per share? A) $0.33. B) $0.50. C) $1.00.

The preferred shares are convertible into 100,000 × 20 = 2 million common shares. They are dilutive since: Basic EPS = $1,000,000 / 1,000,000 = $1.00 Diluted EPS = $1,500,000 / 3,000,000 = $0.50 which is less.

Formula: Net increase in common shares from exercise of stock options or warrants (when the exercise price is less than the average market price)

[Avg market price - Exercise price / Avg market price] * # of convertible shares

Changing an accounting estimate: A) is reported prospectively. B) requires restatement of all prior-period statements presented in the current financial statements. C) is reported by adjusting the beginning balance of retained earnings for the cumulative effect of the change.

Do gains and losses, as well as expenses appear on the income statement? A) Both appear on the income statement. B) Only expenses appear on the income statement. C) Only gains and losses appear on the income statement.

Examples of potentially dilutive securities least likely include: A) premium bonds. B) convertible preferred stock. C) stock options.

For a firm with a simple capital structure, all of the following are necessary to measure basic earnings per share (EPS) EXCEPT: A) dividends paid to common shareholders. B) the timing and number of shares issued or repurchased during the year. C) dividends paid to preferred shareholders.

Securities are considered to be dilutive to earnings per share if: A) converting them to common shares would actually reduce earnings per share, compared to basic earnings per share. B) they can be converted to common shares now or at any time in the future. C) converting them to common shares would decrease earnings available to common shareholders.

Standard-setting bodies are responsible for: A) establishing financial reporting standards only. B) establishing and enforcing standards for financial reporting. C) enforcing compliance with financial reporting standards only.

The Hall Corporation had 100,000 shares of common stock outstanding at the beginning of the year. Hall issued 30,000 shares of common stock on May 1. On July 1, the company issued a 10% stock dividend. On September 1, Hall issued 1,000, 10% bonds, each convertible into 21 shares of common stock. What is the weighted average number of shares to be used in computing basic and diluted EPS, assuming the convertible bonds are dilutive? Average shares, basic Average shares, dilutive A) 132,000 139,000 B) 132,000 146,000 C) 139,000 146,000

The objective of financial reporting, according to the IASB framework, is to: A) provide information about the firm to current and potential investors. B) decide the acceptable standards for presenting financial performance. C) minimize management discretion in presenting the financial results of a firm.

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

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are: A) going concern and accrual accounting. B) historical cost and going concern. C) accrual accounting and historical cost.

When accounting for inventory, are the first-in, first-out (FIFO) and last-in, first-out (LIFO) cost flow assumptions permitted under U.S. GAAP? FIFO LIFO A) Yes Yes B) Yes No C) No Yes

When considering the impact of warrants on earnings per share, the method to calculate the number of shares added to the denominator is derived using which method? A) Treasury Stock method. B) Cost recovery method. C) Weighted average method.

Which expense recognition method is most appropriate for intangible assets with indefinite lives? A) Test for impairment but do not amortize. B) Use accelerated amortization for tax reporting and straight-line amortization for financial reporting. C) Use straight-line amortization.

Which of the following expense items is best described as being classified by function rather than classified by nature? A) Cost of goods sold. B) Depreciation. C) Wage expense.

Which of the following firms is most likely to present a liquidity-based balance sheet rather than a classified balance sheet? A) Banking institution. B) Manufacturing firm. C) Chain of retail stores.

Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No. 1? A) Disclosures of material events. B) A summary of accounting policies. C) Statement of changes in owners' equity.

Which of the following is least likely one of the general requirements for financial statements under IFRS? A) Statements should be prepared at least quarterly. B) Statements should be prepared under a going concern assumption. C) No offsetting of income against expenses unless a standard permits or requires it.

Which of the following transactions affects owners' equity but does not affect net income? A) Foreign currency translation gain. B) Repaying the face amount on a bond issued at par. C) Dividends received from available-for-sale securities.

RGB, Inc.'s receivable turnover is ten times, the inventory turnover is five times, and the payables turnover is nine times. RGB's cash conversion cycle is closest to: A) 69 days. B) 104 days. C) 150 days.

A (365 / 10 + 365 / 5 - 365 / 9) = 69 days

Which of the following is least likely a change in cash flow from operations under U.S. GAAP? A) A decrease in notes payable. B) An increase in interest expense. C) An increase in accounts payable.

A A change in notes payable is a financing cash flow

To convert an indirect statement of cash flows to a direct basis, the analyst would: A) add decreases in accounts receivables to net sales. B) subtract increases in inventory from cost of goods sold. C) add increases in accounts payable to cost of goods sold.

A A decrease in accounts receivable represents an increase in cash so this should be added to sales. Increases in accounts payable represent an increase in cash so these should be subtracted from cost of goods sold. Increases in inventory represent a use of cash so these would be added to cost of goods sold.

How will a firm's operating cash flow be affected by a decrease in accounts receivable and by an increase in accounts payable? A) Both will increase operating cash flow. B) One will increase operating cash flow and one will decrease operating cash flow. C) Both will decrease operating cash flow.

A A decrease in the accounts receivable amount on the balance sheet indicates that cash collections exceed revenues (sales). This increases operating cash flow because receivables are being collected. An increase in the accounts payable amount on the balance sheet indicates that purchases from suppliers exceed cash payments. This increases operating cash flow because the cash was not used to pay the suppliers.

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) decrease. | decrease. B) increase. | decrease. C) increase. | increase.

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

A manufacturing firm shuts down production at one of its plants and offers the facility for rent. Based on the market for similar properties, the firm determines that the fair value of the plant is €500,000 more than its carrying value. If this firm uses the cost model for plant and equipment and the fair value model for investment property, should it recognize a gain on its income statement? A) No, because the increase in value does not reverse a previously recognized loss. B) Yes, because the plant will be reclassified as investment property. C) No, because the firm must continue to use the cost model for valuation of this asset.

A According to IFRS, property held for the purpose of earning rental income is classified as investment property. However, when a property is transferred from owner-occupied to investment property, a firm using the fair value model must treat any increase in the property's value as a revaluation. That is, the firm may only recognize a gain on the income statement to the extent that it reverses a previously recognized loss.

According to U.S. GAAP, an asset is impaired when: A) the firm cannot fully recover the carrying amount of the asset through operations. B) accumulated depreciation plus salvage value exceeds acquisition cost. C) the present value of future cash flows from an asset exceeds its carrying value.

A An asset is impaired when the firm cannot recover the carrying value. Under U.S. GAAP, recoverability is tested based on undiscounted future cash flows.

An impairment write-down is least likely to decrease a company's: A) debt-to-equity ratio. B) future depreciation expense. C) assets.

A An impairment write-down reduces equity and has no effect on debt. The debt-to-equity ratio would therefore increase.

Carpenter Corporation reported the following statement of shareholders' equity as of December 31, 2006: Common stock at par $600,000 Additional paid-in-capital 900,000 Treasury stock (200,000) Retained earnings 10,500,000 Accumulated other comprehensive income 450,000 TOTAL: $12,250,000 During 2007, Carpenter: - earned net income of $1,700,000. - declared dividends of $300,000. $75,000 of the dividends remain unpaid. - purchased held-to-maturity securities for $100,000. The securities have a fair value of $110,000 at year-end. - purchased available-for-sale securities for $250,000. The securities have a fair value of $225,000 at year-end. - translated the financial statements of a foreign subsidiary and calculated a $90,000 unrealized gain. - purchased treasury stock for $75,000. The stock was valued at $60,000 when issued. Calculate Carpenter's accumulated other comprehensive income as of December 31, 2007. A) $515,000. B) $440,000. C) $65,000.

A As of December 31, 2007, Carpenter's accumulated other comprehensive income is $515,000 [$450,000 beginning balance - $25,000 unrealized loss from available for sale securities ($225,000 fair value - $250,000 cost) + $90,000 unrealized translation gain]. There is no impact on accumulated other comprehensive income from unrealized gains and losses on held-to-maturity securities since the securities are not reported at fair value on the balance sheet. The purchase of treasury stock does not affect comprehensive income because it is a transaction with shareholders.

The average age of a firm's property, plant, and equipment can be estimated by dividing: A) accumulated depreciation by depreciation expense. B) gross PP&E by depreciation expense. C) net PP&E by depreciation expense.

A Average age = accumulated depreciation / annual depreciation expense.

A key limitation of balance sheets in financial analysis is that: A) different balance sheet items may be measured differently. B) liquidity and solvency ratios require information from other financial statements. C) some items are recognized when they are unlikely to reflect a flow of economic benefits.

A Balance sheet values may use a mixture of measurement bases (historical cost, fair value, etc.). As a result, balance sheet values of assets, liabilities, and equity may not reflect their intrinsic values. Balance sheets provide the information necessary to calculate the firm's solvency and liquidity ratios. Items are recognized on the balance sheet only if a flow of future economic benefits to or from the firm is probable.

An analyst has gathered the following information about Zany Corp. - Net income of $200,000 for the year ended December 31, 2004. - During 2004, 50,000 common shares were outstanding. - Zany has 10,000 shares of 7%, $50 par convertible preferred stock outstanding, each convertible into two shares of common. - 5,000 warrants are outstanding with an exercise price of $24. Each warrant is convertible into one common share. - The average market price per common share during 2004 was $20. Calculate Zany's basic and diluted earnings per share (EPS) for 2004. Basic EPS Diluted EPS A) $3.30 $2.86 B) $3.30 $2.00 C) $4.00 $2.86

A Basic EPS = (net income − preferred dividends) / number of common shares = (200,000 − 35,000) / 50,000 = $3.30 per share The preferred shares are converted into 20,000 common shares, the firm does not pay preferred dividends. Diluted EPS = 200,000 / (50,000 + 20,000) = $2.86 per share. The warrants are out of the money at a stock price of $20.

In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under: A) both IFRS and U.S. GAAP. B) IFRS but not U.S. GAAP. C) U.S. GAAP but not IFRS.

A Both IFRS and US GAAP require disclosure of gross asset values and accumulated depreciation.

Assuming, US GAAP is applied, determine the cash flow from financing given the following data. Cash payment of dividends $30, Sale of equipment $10, Net income $25, Purchase of land $15, Increase in accounts payable $20, Sale of preferred stock $25, Increase in deferred taxes $5, Profit on sale of equipment $4. A) -$5. B) $15. C) $20.

A CFF = 25(Sale of Stock) − 30(Div Paid) = -$5

Which of the following is least likely a limitation of financial ratios? A) Data on comparable firms are difficult to acquire. B) Determining the target or comparison value for a ratio requires judgment. C) Different accounting treatments require the analyst to adjust the data before comparing ratios.

A Company and industry data are widely available from numerous private and public sources. The other statements describe limitations of financial ratios

In periods of rising prices and stable inventory quantities, which of the following best describes the effect on gross profit of using LIFO as compared to using FIFO? A) Lower. B) Higher. C) The same.

A Compared to FIFO, COGS calculated under LIFO will be higher because the most recent, higher cost units are assumed to be the first units sold. Higher COGS under LIFO will result in lower gross profit (revenue - COGS).

Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income? Inventory write-down Acquisition of treasury stock A) Yes No B) No No C) No Yes

A Comprehensive income includes all transactions that affect shareholders' equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.

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

A 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.

At the beginning of the year, Company P purchased $80,000 face value of Company S corporate bonds for $77,000. Company P intends to hold these bonds for several years but sell them before they mature. At the end of the year, the market value of the bonds was $75,000. What amount should Company P report on its balance sheet at year-end for the investment in Company S bonds? A) $75,000 B) $77,000 C) $80,000

A Debt securities acquired with the intent to sell before maturity are reported on the balance sheet at their fair values.

Which of the following statements about deferred taxes is most accurate? Deferred tax liabilities: A) arise primarily due to differences between financial and tax accounting. B) can relate to either permanent or temporary differences. C) should be treated as debt when calculating financial statement ratios.

A Deferred tax liabilities result from temporary differences between financial accounting and tax accounting that cause income tax expense for a period to be larger than taxes due. Permanent differences do not result in deferred tax items. Whether to treat deferred tax liabilities as debt or equity depends on whether they are expected to reverse in the foreseeable future.

All-Star Enterprises purchased a machine on January 1. The company uses straight-line depreciation for financial reporting and accelerated depreciation for tax purposes. Depreciation for tax purposes during the year was $36,000 greater than depreciation for financial reporting. Assuming a 30% tax rate will apply in the future, how much will be recorded as a deferred tax liability during the year? A) $10,800. B) $25,200. C) $36,000.

A Deferred tax liability = $36,000 × 30% = $10,800.

Under US GAAP, which of the following is NOT a cash flow from operation? A) dividends paid to shareholders. B) dividends received. C) interest payments.

A Dividends paid are a financing cash flow. Dividends received and interest paid are both operating cash flows.

When a U.S. company pays dividends to its stockholders, which type of cash flow does this represent? A) Financing. B) Investing. C) Operating.

A Dividends paid to stockholders are considered cash outlays from financing according to U.S. GAAP.

Under U.S. GAAP, dividends received from investments would be classified as: A) operating cash flow. B) investing cash flow. C) financing cash flow.

A Dividends received from investments would be classified as operating cash flow under U.S. GAAP.

East Company purchased a new truck at the beginning of this year for $30,000. The truck has a useful life of eight years or 150,000 miles, and an estimated salvage value of $3,000. If the truck is driven 16,500 miles this year, how much depreciation will East report under the double-declining balance (DDB) method and the units-of-production (UOP) method? DDB | UOP A) $7,500 | $2,970 B) $7,500 | $3,300 C) $6,750 | $2,970

A Double-declining balance = $30,000 book value × (2/8) = $7,500. Units-of-production = ($30,000 cost - $3,000 salvage value) / 150,000 miles = $0.18 per mile. 16,500 miles driven × $0.18 per mile = $2,970.

During the year, a firm's inventory purchases were as follows: Quarter Units Purchased Cost per Unit Total 1 400 $3.30 $1,320 2 100 3.60 360 3 200 3.90 780 4 50 4.20 210 750 $2,670 - The firm uses a periodic inventory system and calculates inventory and COGS at the end of the year. - Beginning inventory was 200 units at $3 per unit = $600. - Sales for the year were 600 units. Compute COGS for the year under FIFO and LIFO. FIFO LIFO A) $1,920 $2,175 B) $1,920 $1,850 C) $2,070 $2,175

A FIFO COGS 200 units from beginning inventory × $3.00 = $600 400 units from 1st quarter × $3.30 = 1,320 $1,920 LIFO COGS 50 units from 4th quarter × $4.20 = $210 200 units from 3rd quarter × $3.90 = 780 100 units from 2nd quarter × $3.60 = 360 250 units from 1st quarter × $3.30 = 825 $2,175 Note the shortcut. Once FIFO COGS of $1,920 is calculated, look at the LIFO column. We know that during inflation and stable or increasing inventory quantities, LIFO COGS is higher than FIFO. Only LIFO COGS of $2,175 meets this condition.

An analyst is comparing a company that uses the LIFO inventory cost method to companies that use FIFO for inventories. The analyst should adjust the LIFO firm's cost of goods sold by subtracting the: A) change in the LIFO reserve. B) LIFO reserve, net of tax. C) LIFO reserve.

A FIFO cost of goods sold equals LIFO cost of goods sold minus the change in the LIFO reserve.

A company must report separate financial information for any segment of their business which: A) accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business. B) is located in a country other than the firm's home country. C) is more than 20% of a firm's revenues.

A Financial statement items must be reported separately for any segment of a firm's business that is greater than 10% of revenue or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business. Requirements for reporting of geographic segments have the same size threshold and the segment must operate in a business environment that is different from that of the firm's other segments.

McKay Company uses a periodic inventory system and the FIFO inventory cost method. In the most recent period, McKay had beginning inventory of $4,200, purchases of $1,400, cost of sales $1,300, and ending inventory of $4,300. If McKay had used a perpetual inventory system, its ending inventory would have been: A) $4,300. B) $4,400. C) $4,200.

A For a firm that uses the FIFO inventory cost method, cost of sales and ending inventory are unaffected by the choice between periodic and perpetual inventory systems.

For purposes of financial analysis, an analyst should: A) determine the treatment of deferred tax liabilities on a case-by-case basis. B) always consider deferred tax liabilities as stockholder's equity. C) always consider deferred tax liabilities as a liability.

A For financial analysis, an analyst must decide on the appropriate treatment of deferred taxes on a case-by-case basis. These can be classified as liabilities or stockholder's equity, depending on various factors. Sometimes, deferred taxes are just ignored altogether.

The revaluation model for investment property is permitted under: A) neither IFRS nor U.S. GAAP. B) both IFRS and U.S. GAAP. C) IFRS, but not U.S. GAAP.

A For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of long-lived assets and does not identify investment property as a specific subset of long-lived assets.

The author of a new textbook received a $100,000 advance from the publisher this year. $40,000 of income taxes were paid on the advance when received. The textbook will not be finished until next year. Determine the tax base of the advance at the end of this year. A) $0. B) $40,000. C) $100,000.

A For revenue received in advance, the tax base is equal to the carrying value minus any amounts that will not be taxed in the future. Since the advance has already been taxed, $100,000 will not be taxed in the future. Thus, the textbook advance liability has a tax base of $0 ($100,000 carrying value - $100,000 revenue not taxed in the future).

Accounting standards require segment reporting for a distinguishable part of a firm that comprises at least: A) 10% of assets. B) 5% of revenues. C) 20% of earnings.

A For segment reporting, a business segment is a distinguishable portion of the overall company that produces more than 10% of its revenues, assets, or profits.

A firm recently recognized a $15,000 loss on the sale of machinery used in its manufacturing operation. The original cost of the machinery was $100,000 and the accumulated depreciation at the date of sale was $60,000. What amount did the firm receive from the sale? A) $25,000. B) $45,000. C) $85,000.

A Gain or loss is equal to the sale proceeds minus the carrying value (cost minus accumulated depreciation) at the time of sale. Given the loss of $15,000 and carrying value of $40,000 ($100,000 - $60,000), we can solve for the proceeds of $25,000 (-15,000 + 40,000).

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

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

Which of the following choices most accurately illustrates an operating liability and which most accurately illustrates a financing liability? Operating liabilities | Financing liabilities A) Accounts payable | Current portion of long-term debt B) Customer advances | Accrued liabilities C) Short-term note payable | Current portion of long-term debt

A Operating liabilities result from the operations of the firm and consist of operating and trade liabilities such as accounts payable, customer advances, and accrued liabilities. Financing liabilities are a result of prior financing inflows. Financing liabilities (current) include short-term notes payable and the current maturities of long-term debt.

A If the franchise cost had been amortized over six years beginning in 20X3, net income in 20X3 would have been $6 million instead of $1 million due to the cost of franchise expense of $6 million being eliminated and replaced by franchise amortization of $1 million. Net income in 20X4 would have been reduced by the franchise amortization to $7 million instead of $8 million. On the equity side, retained earnings at the end of 20X3 would have been $11 million ($5 million higher), and total equity for 20X3 would have been $8 + $11 = $19 million. Retained earnings for 20X4 would be the 20X3 retained earnings of $11 million increased by 20X4 net income of $7 million for a total of $18 million, and total equity for 20X4 would be $8 + $18 = $26 million. If the franchise cost were amortized, return on total equity for 20X4 would be $7 / ((19 + 26) / 2) = 31.1%.

If a company purchases an asset with future economic benefits that are highly uncertain, the company should: A) expense the purchase. B) use straight-line depreciation. C) use an accelerated depreciation method.

A If the future economic benefits of a purchase are highly uncertain, a company should expense the purchase in the period it is incurred.

If the tax base of an asset exceeds the asset's carrying value and a reversal is expected in the future: A) a deferred tax asset is created. B) a deferred tax liability is created. C) neither a deferred tax asset nor a deferred tax liability is created.

A If the tax base of an asset exceeds the carrying value, a deferred tax asset is created. Taxable income will be lower in the future when the reversal occurs.

Under normal circumstances, intangible assets with indefinite lives are: A) not amortized. B) amortized over a period specified in the accounting standards. C) amortized over a period chosen by management.

A Intangible assets with indefinite lives are not amortized, but are subject to impairment charges. An intangible asset is impaired if events and circumstances indicate that the firm may not be able to recover its carrying value through future use. Examples include significant declines in market value of the asset or significant deterioration in the asset's physical condition.

Which of the following inventory valuation methods is required by the accounting standard-setting bodies? A) Lower of cost or net realizable value. B) Weighted average cost. C) First-in, first-out.

A Inventories are required to be valued at the lower of cost or net realizable value (or "market" under U.S. GAAP). FIFO and average cost are two of the inventory cost flow assumptions among which a firm has a choice.

For which of the following balance sheet items is a change in market value most likely to affect net income? A) Equity securities purchased by the firm. B) Debt securities that the firm intends to hold until maturity. C) Debt securities issued by the firm.

A Listed equity securities are measured at fair value through profit and loss, unless the firm chooses at the time of purchase to measure them at fair value through other comprehensive income. Debt securities issued by the firm, and debt securities that the firm intends to hold until maturity, are both reported at amortized cost unless the firm chooses to report them at market value.

Moulding Company's net income was $13,820,000 with 2,600,000 shares outstanding. The average share price for the year was $58.00. Moulding had 10,000 options to purchase 10 shares each at $40 per share outstanding the entire year. Moulding Company's diluted earnings per share are closest to: A) $5.25. B) $5.32. C) $3.71.

A Moulding's basic EPS (net income / weighted average common shares outstanding) was $13,820,000 / 2,600,000 = $5.32. Using the treasury stock method to compute diluted EPS, if the options were exercised, cash inflow would be 10,000 × 10 × $40 = $4,000,000. Based on the average share price of $58.00, the number of Moulding shares that can be purchased with the cash flow is $4,000,000 / $58 = 68,966. The number of shares that would have been created is 100,000 - 68,966 = 31,034. Diluted EPS was $13,820,000 / (2,600,000 + 31,034) = $5.25.

A company acquires an intangible asset for $100,000 and expects it to have a value of $20,000 at the end of its 5-year useful life. If the company amortizes the asset using the double-declining balance method, amortization expense in year 4 of the asset's useful life is closest to: A) $1,600. B) $6,910. C) $8,640.

A Net book value at the end of year 3 is $100,000 × 3/5 × 3/5 × 3/5 = $21,600. DDB amortization in year 4 of 2/5 × $21,600 = $8,640 would amortize the asset below its salvage value, so amortization expense is the remaining $1,600 that will amortize net book value to $20,000.

Net income for Monique, Inc, for the year ended December 31, 20X7 was $78,000. Its accounts receivable balance at December 31, 20X7 was $121,000, and this balance was $69,000 at December 31, 20X6. The accounts payable balance at December 31, 20X7 was $72,000 and was $43,000 at December 31, 20X6. Depreciation for 20X7 was $12,000, and there was an unrealized gain of $15,000 included in 20X7 income from the change in value of trading securities. Which of the following amounts represents Monique's cash flow from operations for 20X7? A) $52,000. B) $67,000. C) $82,000.

A Net income $78,000 Depreciation 12,000 Unrealized gain (15,000) Increase in accounts receivable (52,000) Increase in accounts payable 29,000 Cash flow from operations $52,000

The following data pertains to the McGuire Company: - Net income equals $15,000. - 5,000 shares of common stock issued on January 1. - 10% stock dividend issued on June 1. - 1000 shares of common stock were repurchased on July 1. - 1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year. What is the company's basic earnings per share (EPS)? A) $1.00. B) $2.50. C) $1.20.

A Number of average shares: - 1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000 - 7/1 1,000 shares repurchased × 6 months = 6,000 - 66,000 − 6,000 = 60,000 - 60,000 shares / 12 months = 5,000 average shares Preferred dividends = ($10)($1,000) = $10,000 Basic EPS = [$15,000(NI) - $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share

Given the following income statement and balance sheet for a company: Balance Sheet Assets Year 2003 Year 2004 Cash 500 450 Accounts Receivable 600 660 Inventory 500 550 Total CA 1300 1660 Plant, prop. equip 1000 1250 Total Assets 2600 2910 Liabilities Accounts Payable 500 550 Long term debt 700 700 Total liabilities 1200 1652 Equity Common Stock 400 400 Retained Earnings 1260 1260 Total Liabilities & Equity 2600 2910 Income Statement Sales 3000 Cost of Goods Sold (1000) Gross Profit 2000 SG&A 500 Interest Expense 151 EBT 1349 Taxes (30%) 405 Net Income 944 What is the operating profit margin? A) 0.50. B) 0.45. C) 0.67.

A Operating profit margin = (EBIT / sales) = (1,500 / 3,000) = 0.5

A company purchased a new pizza oven for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. For this question ignore all expenses other than depreciation. What is the deferred tax liability as of the end of year one? A) $780. B) $1,129. C) $1,909.

A Pretax Income = $7,192 − $2,535 = $4,657 Taxable Income = $7,192 − $4,437 = $2,755 Deferred Tax liability = ($4,657 − $2,755)(0.41) = $780. Alternative solution: Difference in depreciation at the end of year one is $12,676 × (0.35 − 0.20) = $1,901 Deferred tax liability = difference in depreciation × tax rate = $1,901 × 0.41 = $780.

An analyst contemplates using the indirect method to create the projected statement of cash flows. She decides to research the differences between the direct and indirect methods. Which of the following is least likely a component of the statement of cash flows under the direct method? A) Net income. B) Payment of dividends. C) Investment in Property, Plant, & Equipment.

A Property, Plant, & Equipment and payment of dividends are components of the statement of cash flows under both the direct and indirect methods. Net income is the first figure under the indirect method, but it is not a part of the statement of cash flows under the direct method. The correct response is net income.

A company's quick ratio is 1.2. If inventory were purchased for cash, the: A) numerator would decrease more than the denominator, resulting in a lower quick ratio. B) denominator would decrease more than the numerator, resulting in a higher current ratio. C) numerator and denominator would decrease proportionally, leaving the current ratio unchanged.

A Quick ratio = (cash + marketable securities + AR) / current liabilities. If cash decreases, the quick ratio will also decrease. The denominator is unchanged.

A firm's financial statements reflect the following: EBIT $2,000,000 Sales $16,000,000 Interest expense $900,000 Total assets $12,300,000 Equity $7,000,000 Effective tax rate 35% Dividend payout rate 28% Based on this information, what is the firm's sustainable growth rate? A) 7.35%. B) 8.82%. C) 10.63%.

A ROE = tax burden × interest burden × EBIT margin × asset turnover × financial leverage tax burden = net income/EBT EBT = EBIT - I = 2,000,000 - 900,000 = 1,100,000 net income = (EBT)(1-t) = (1,100,000)(1 - 0.35) = 715,000 tax burden = 715,000/1,100,000 = 0.65 interest burden = EBT/EBIT = 1,100,000/2,000,000 = 0.55 EBIT margin = EBIT/revenue = 2,000,000/16,000,000 = 0.125 asset turnover = revenue/total assets = 16,000,000/12,300,000 = 1.301 financial leverage = total assets/total equity = 12,300,000/7,000,000 = 1.757 ROE = 0.65 × 0.55 × 0.125 × 1.301 × 1.757 = 0.1021 Alternatively, ROE = [(EBIT - I)(1-t)]/equity = [(2,000,000 - 900,000)(1 - 0.35)]/7,000,000 = 0.1021 Sustainable growth = ROE (1 - dividend payout rate) = 0.1021 × 0.72 = 7.35%.

A U.S. GAAP reporting firm reports an increased valuation allowance at the end of the current period. What effect will this have on the firm's income tax expense in the current period? A) Increase. B) Decrease. C) No effect.

A Recognizing a greater valuation allowance reduces the net value of a deferred tax asset, which increases income tax expense in the current period.

Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slayton's stock increases. Do Slayton's repurchased shares continue to have voting rights and to pay cash dividends? Voting rights Cash dividends paid A) No No B) No Yes C) Yes No

A Repurchased stock that is not cancelled is called treasury stock. Treasury stock does not have voting rights and does not receive cash dividends.

Assume U.S. GAAP. Net income $45 Depreciation 75 Taxes paid 25 Interest paid 5 Dividends paid 10 Cash received from sale of company building 40 Issuance of preferred stock 35 Repurchase of common stock 30 Purchase of machinery 20 Issuance of bonds 50 Debt retired through issuance of common stock 45 Paid off long-term bank borrowings 15 Profit on sale of building 20 Cash flow from financing activities is: A) $30. B) $55. C) $75.

A Sale of preferred stock + issuance of bonds - principal payments on bank borrowings - repurchase of common stock - dividends paid = 35 + 50 - 15 - 30 - 10 = $30. Note that we did not include $45 of debt retired through issuance of common stock since this was a noncash transaction. Knowing how to handle noncash transactions is important.

Which of the following items would NOT be included in cash flow from investing? A) Selling stock of the company. B) Proceeds related to acquisitions. C) Buying or selling a building.

A Selling stock of the company would be a financing cash flow.

Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of common stock issued, and 1.8 million shares of common stock outstanding. How many shares of treasury stock does Ascot own and is the treasury stock reported as an asset in Ascot's balance sheet? Treasury shares Reported as an asset A) 600,000 No B) 600,000 Yes C) 1.6 million Yes

A Shares that were issued previously but are not outstanding are treasury shares (owned by the firm). Thus, there are 600,000 treasury shares (2.4 million issued - 1.8 million outstanding). Treasury shares are reported as a reduction in shareholders' equity on the balance sheet. Treasury stock is not an asset.

In a period of rising prices, LIFO liquidation results in: A) higher earnings. B) higher inventory. C) lower earnings.

A Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

Paragon Co. has an operating profit margin (EBIT / revenue) of 11%; an asset turnover ratio of 1.2; a financial leverage multiplier of 1.5 times; an average tax rate of 35%; and an interest burden of 0.7. Paragon's return on equity is closest to: A) 9%. B) 10%. C) 11%.

A Tax burden = 1 - 0.35 = 0.65. ROE = 0.65 × 0.7 × 0.11 × 1.2 × 1.5 = 0.0901.

> A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. > The asset will generate $50,000 of cash flow for all four years. > The tax rate is 40% each year. > The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. Taxes payable in year 1 are: A) $4,000. B) $6,000. C) $8,000.

A Taxes payable is taxable income × tax rate = $10,000 × 40% = $4,000. (The $10,000 was calculated in the previous question.)

An analyst is comparing a firm to its competitors. The firm has a deferred tax liability that results from accelerated depreciation for tax purposes. The firm is expected to continue to grow in the foreseeable future. How should the liability be treated for analysis purposes? A) It should be treated as equity at its full value. B) It should be treated as a liability at its full value. C) The present value should be treated as a liability with the remainder being treated as equity.

A The DTL is not expected to reverse in the foreseeable future because a growing firm is expected to continue to increase its investment in depreciable assets, and accelerated depreciation for tax on the newly acquired assets delays the reversal of the DTL. The liability should be treated as equity at its full value.

One of a firm's assets is 270-day commercial paper that the firm intends to hold to maturity. One of its liabilities is a short position in a common stock, which the firm holds for trading purposes. How should this asset and this liability be classified on the firm's balance sheet? A) Both should be classified as current. B) Both should be classified as non-current. C) One should be classified as current and one should be classified as non-current.

A The commercial paper should be classified as current because it will be converted to cash in less than a year. A liability that is held primarily for trading purposes, such as this short position, should also be classified as current.

The cost of an intangible asset is most likely to be amortized if the asset has: A) a finite life and was purchased. B) a finite life and was created internally. C) an indefinite life and was acquired in a business combination.

A The cost of an intangible asset is amortized if the asset has a finite life and was purchased or acquired in a business combination. Development costs for internally generated intangible assets may be capitalized under IFRS, but research costs are expensed as incurred

Miller Corporation has 160,000 shares of common stock authorized. There are 92,000 shares issued and 84,000 shares outstanding. How many shares of treasury stock does Miller own? A) 8,000. B) 68,000. C) 76,000.

A The difference between the issued shares and the outstanding shares is the treasury shares.

Which of the following data are least likely to be read directly from a common-size income statement? A) Effective tax rate. B) Net profit margin. C) Ratio of SG&A expense to sales.

A The effective tax rate is income tax expense as a percentage of pretax income. Items on a common-size income statement are stated as a percentage of revenue (sales). Net profit margin is net income as a percentage of revenue.

When analyzing a company's financial leverage, deferred tax liabilities are best classified as: A) a liability or equity, depending on the company's particular situation. B) a liability. C) neither as a liability, nor as equity.

A The recommended analyst treatment of deferred tax liabilities is to treat them as liabilities if they are expected to reverse or as equity if they are not expected to reverse.

Selected information from the most recent cash flow statement of Thibault Company appears below: - Cash collections €8,900, Cash paid to suppliers (€3,700), Cash operating expenses (€1,500), Cash taxes paid (€2,400), Cash from operating activities €1,300 - Cash paid for plant and equipment (€2,600), Cash interest received €700, Cash dividends received €600, Cash from investing activities (€1,300) - Cash received from debt issuance €2,000, Cash interest paid (€400), Cash dividends paid (€600), Cash from financing activities €1,000 - Total change in cash €1,000. Thibault's reinvestment ratio for this period is closest to: A) 0.50. B) 0.75. C) 1.00.

A The reinvestment ratio is CFO divided by cash paid for long-term assets: €1,300 / €2,600 = 0.5. (Note that on this cash flow statement, CFI includes interest and dividends received and CFF includes interest paid, which is acceptable under IFRS.)

The traditional DuPont equation decomposes return on equity as: A) net income/sales × sales/assets × assets/equity. B) EBIT/sales × sales/assets × assets/equity × (1 - tax rate). C) net income/assets × sales/equity × assets/sales.

A The traditional three-part DuPont decomposition of ROE is profit margin × asset turnover × financial leverage. Although ROE can also be decomposed as net income/assets × sales/equity × assets/sales, this is not the DuPont equation.

Poulter Products reports under IFRS and wrote its inventory value down from cost of $400,000 to net realizable value of $380,000. The most likely financial statement effect of this change is: A) an increase in cost of sales. B) a decrease in depreciation charges. C) a loss reported as other comprehensive income.

A The write-down in inventory value from cost to net realizable value is reported on the income statement either as an addition to cost of sales or as a separate line item, not as other comprehensive income. Depreciation will not be affected as inventory is not depreciated

The correct set of cash flow treatments as they relate to interest paid according to U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is: U.S. GAAP | IAS GAAP A) CFO | CFO or CFF B) CFO or CFF | CFO C) CFF | CFF

A U.S. GAAP treats interest paid as CFO whereas IAS GAAP treats interest paid as either CFO or CFF.

Under which inventory cost flow assumption does inventory on the balance sheet best approximate its current cost? A) First-in, first-out. B) Weighted average cost. C) Last-in, first-out.

A Under FIFO, ending inventory is made up of the most recent purchases, thereby providing a closer approximation of current cost.

Under IFRS, deferred tax assets and deferred tax liabilities are classified on the balance sheet as: A) noncurrent items. B) current items. C) either current or noncurrent items.

A Under IFRS, deferred tax assets and liabilities are classified as noncurrent. Under U.S. GAAP, deferred tax items may be current or noncurrent, depending on how the underlying asset or liability is classified.

Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets that are valued on the balance sheet at $600 million. This includes previously recognized revaluation losses of $80 million. In the most recent accounting period, the fair value of these assets in an active market is $690 million. Which of the following entries will Davis record under the IFRS revaluation model? A) Gain on income statement and a revaluation surplus. B) Gain on income statement only. C) Revaluation surplus only.

A Under IFRS, firms may choose to report long-lived assets at fair value. Upward revaluations are permitted and will result in a gain recognized on the income statement to the extent it reverses a previously recognized loss. Any excess is reported as a revaluation surplus, a direct adjustment to equity. In this case, the carrying value of the assets is $600 million and the fair value is $690 million. Of the $90 million excess of fair value over carrying value, $80 million is recognized as a gain on the income statement to reverse the $80 million loss that was previously recognized. The remaining $10 million is recorded as revaluation surplus in shareholders' equity.

Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using the revaluation model. Edgewater needs to determine 1) what Pfaff's carrying value of property, plant and equipment would be under the historical cost model, and 2) which of Pfaff's intangible assets have finite useful lives. Will these items be disclosed in Pfaff's financial statements? A) Both of these items are required to be disclosed. B) Only one of these items is required to be disclosed. C) Neither of these items is required to be disclosed.

A Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historical cost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite.

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

A 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.

Under IFRS, interest expense would be classified as: A) either operating cash flow or financing cash flow. B) operating cash flow only. C) financing cash flow only.

A Under IFRS, interest expense can be classified as either an operating cash flow or financing cash flow.

A firm owns a warehouse that it rents out. Under IFRS, the firm may report the value of this asset on its balance sheet using: A) the cost model or the fair value model. B) the cost model or the revaluation model. C) the revaluation model or the fair value model.

A Under IFRS, the warehouse is classified as investment property because it is owned primarily for rental income. Investment property may be reported using either the cost model or the fair value model.

A company that reports under U.S. GAAP and changes its inventory cost assumption from weighted average cost to last-in first-out is required to apply this change in accounting principle: A) prospectively, and explain the reasons for the change in the financial statement disclosures. B) retrospectively, and disclose the new cost flow method being used. C) retrospectively, and explain the reasons for the change in the financial statement disclosures.

A Under U.S. GAAP, a change to LIFO from another inventory cost method is an exception to the requirement of retrospective application of changes in an accounting principle. Instead of restating prior years' data, the firm uses the carrying value of inventory at the time of the change as the first LIFO layer. U.S. GAAP requires a company that is changing its inventory cost assumption to explain, in its financial statement disclosures, why the new method is preferable to the old method.

At the beginning of this year, Fairweather Corp. incurred $200,000 of research costs and $100,000 of development costs to create a new patent. The patent is expected to have a useful life of 40 years with no salvage value. Calculate the carrying value of the patent at the end of this year, assuming Fairweather follows U.S. GAAP. A) $0. B) $97,500. C) $292,500.

A Under U.S. GAAP, research and development costs are expensed as incurred. Thus, the entire $300,000 of R&D is expensed this year. The result is a zero carrying value.

Convenience Travel Corp.'s financial information for the year ended December 31, 20X4 included the following: Property Plant & Equipment $15,000,000, Accumulated Depreciation 9,000,000. The only asset owned by Convenience Travel in 20X5 was a corporate jet airplane. The airplane was being depreciated over a 15-year period on a straight-line basis at a rate of $1,000,000 per year. On December 31, 20X5 Convenience Travel sold the airplane for $10,000,000 cash. Net income for the year ended December 31, 20X5 was $12,000,000. Based on the above information, and ignoring taxes, what is cash flow from operations (CFO) for Convenience Travel for the year ended December 31, 20X5? A) $8,000,000. B) $11,000,000. C) $13,000,000.

A Using the indirect method, CFO is net income increased by 20X5 depreciation ($1,000,000) and decreased by the gain recognized on the sale of the plane [$10,000,000 sale price − ($15,000,000 original cost − $10,000,000 accumulated depreciation including 20X5) = $5,000,000]. $12,000,000 + $1,000,000 − $5,000,000 = $8,000,000.

An analyst using vertical common-size analysis is most likely to express each item on an income statement as a percentage of: A) sales. B) operating income. C) its value in a base period.

A Vertical common-size analysis of an income statement is typically done by stating each item as a percentage of sales. Stating each item on a financial statement as a percentage of its value in a base period is referred to as horizontal common-size analysis.

Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end of its life it will have an estimated salvage value of $15,000. Using the double-declining balance (DDB) method, depreciation expense in year 2 is closest to: A) $51,020. B) $58,750. C) $71,430.

A Year | 2 / Depreciable Life × Book Value at Beginning of the Year = Depreciation 1 | 0.2857 | 250,000 | 71,429 2 | 0.2857 | 178,571 | 51,020

JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006? A) $15,000. B) $6,000. C) $12,000.

A first two years = (60,000 − 0) / 10 = 6,000 per year yr. 2006 = (60,000 − 12,000 − 3,000) / 3 = 15,000

On January 1, 2004, JME purchased a truck that cost $24,000. The truck had an estimated useful life of 5 years and $4,000 salvage value. The amount of depreciation expense recognized in 2006 assuming that JME uses the double declining balance method is: A) $3,456. B) $4,000. C) $5,760.

A yr. 2004 = 24,000 × 2/5 = 9,600 yr. 2005 = (24,000 − 9,600) × 2/5 = 5,760 yr. 2006 = (24,000 − 9,600 − 5,760) × 2/5 = 3,456

A company has the following sequence of events regarding their stock: - One million shares outstanding at the beginning of the year. - On June 30th, they declared and issued a 10% stock dividend. - On September 30th, they sold 400,000 shares of common stock at par. Basic earnings per share at year-end will be computed on how many shares? A) 1,100,000. B) 1,200,000. C) 1,000,000.

According to the IASB Conceptual Framework, the fundamental qualitative characteristics that make financial statements useful are: A) verifiability and timeliness. B) relevance and faithful representation. C) understandability and relevance.

At the beginning of the year, Triple W Corporation purchased a new piece of equipment to be used in its manufacturing operation. The cost of the equipment was $25,000. The equipment is expected to be used for 4 years and then sold for $4,000. Depreciation expense to be reported for the second year using the double-declining-balance method is closest to: A) $5,250. B) $6,250. C) $7,000.

CC Corporation reported the following inventory transactions (in chronological order) for the year: Purchase Sales 40 units at $30 13 units at $35 20 units at $40 35 units at $45 90 units at $50 60 units at $60 Assuming inventory at the beginning of the year was zero, calculate the year-end inventory using FIFO and LIFO. FIFO LIFO A) $5,220 $1,040 B) $2,100 $1,280 C) $2,100 $1,040

For a nonfinancial firm, are depreciation expense and interest expense included or excluded from operating expenses in the income statement? Depreciation expense Interest expense A) Included Included B) Included Excluded C) Excluded Included

International Accounting Standard (IAS) No. 1 least likely requires which of the following? A) Neither assets and liabilities, nor income and expenses, may be offset unless required or permitted by a financial reporting standard. B) Audited financial statements and disclosures, along with updated information about the firm and its management, must be filed at least quarterly. C) Fair presentation of financial statements means faithfully representing the firm's events and transactions according to the financial reporting standards.

Sale of land would be classified as: A) operating cash flow. B) investing cash flow. C) financing cash flow.

The first step in the revenue recognition process is to: A) determine the price. B) identify the contract. C) identify the obligations.

Two of the elements of a balance sheet are: A) income and liabilities. B) assets and equity. C) equity and cash flows.

Which of the following best describes the impact of depreciating equipment with a useful life of 6 years and no salvage value using the declining balance method as compared to the straight-line method? A) Total depreciation expense will be higher over the life of the equipment. B) Depreciation expense will be higher in the first year. C) Scrapping the equipment after five years will result in a larger loss.

Which of the following is least likely a qualitative characteristic accounting information must possess in order to provide useful information to an analyst, according to the IASB Conceptual Framework? A) Faithful representation B) Conservatism C) Relevance

Which of the following is the best description of the financial statement analysis framework? A) Gather data, analyze and interpret the data, determine the context, report the conclusions, update the analysis. B) State the objective and context, gather data, process the data, analyze and interpret the data, report the conclusions or recommendations, update the analysis. C) Gather data, analyze and interpret the data, process the conclusions, assess the context, report the recommendations, update the analysis.

Which of the following statements about a firm with convertible preferred stock outstanding is most accurate? A) If diluted and basic EPS are equal, the firm must report both basic and diluted EPS. B) Diluted EPS is calculated with net income minus preferred dividends in the numerator. C) If diluted EPS is less than basic EPS then the convertible preferred is said to be antidilutive.

Which of the following would most likely result in higher gross profit margin, assuming no fixed costs? A) A 10% increase in the number of units sold. B) A 5% decrease in production cost per unit. C) A 7% decrease in administrative expenses.

Consider the following: Statement #1: One approach to presenting a common-size cash flow statement is to express each inflow of cash as a percentage of total cash inflows and each outflow of cash as a percentage of total cash outflows. Statement #2: Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows. Which of these statements regarding a common-size cash flow statement is (are) CORRECT? A) Only statement #1 is correct. B) Both statements are correct. C) Only statement #2 is correct.

B A cash flow statement can be presented in common-size format by expressing each line item as a percentage of total revenue or by expressing each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows. Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows since revenue usually drives the forecast.

B A deferred tax liability and asset is created when an income or expense item is treated differently on financial statements than it is on the company's tax returns. A deferred tax liability is when that difference results in greater tax expense on the financial statements than taxes payable on the tax return. The deferred tax liability for firm 1 = $180,000 tax expense - $160,000 taxes payable = $20,000 A deferred tax asset is when that difference results in lower taxes payable on the financial statements than on the tax return. The deferred tax asset for firm 2 = $200,000 taxes payable - $196,000 tax expense = $4,000

Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use: A) accelerated depreciation methods for tax purposes will decrease the amount of taxes paid in early years. B) accelerated depreciation methods will have lower asset turnover ratios than if they used straight line depreciation. C) straight-line depreciation methods will have higher book values for the assets on the balance sheet than companies that use accelerated depreciation.

B Accelerated depreciation will lead to lower book values and hence a higher asset turnover ratio.

Darth Corporation's net income was $1,200 in the most recent period. Its depreciation expense was $800 and its accounts receivable increased by $1,000. Based only on this information, cash flow from operating activities reported by Darth should be: A) $2,200. B) $1,000. C) $1,200.

B Adjustments to reconcile net income to cash flow from operating activities will require that depreciation ($800) be added back, and the increase in accounts receivable ($1,000) be subtracted: $1,200 + 800 - 1,000 = $1,000.

The balance sheet is most likely to provide an analyst with information about a firm's: A) operating profitability. B) solvency. C) investing and financing activities.

B An analyst can use the balance sheet to assess a firm's solvency and liquidity. Operating profitability can be assessed by examining the income statement. Information on a firm's investing and financing activities appears in a firm's statement of cash flows.

Under U.S. GAAP, an asset is impaired when: A) accumulated depreciation plus salvage value exceeds acquisition costs. B) the firm can no longer fully recover the carrying amount of the asset. C) the present value of future cash flows exceeds the carrying amount of the asset.

B An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.

Which of the following characteristics are required for recognition of a balance sheet asset? Characteristic #1: Future economic benefits to the firm are probable. Characteristic #2: The asset is tangible and is obtained at a cost. Characteristic #1 Characteristic #2 A) No No B) Yes No C) No Yes

B An asset is recognized on the balance sheet only if it is probable that it will provide future economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired without cost, but will be reported to the extent that they will provide future economic benefit, and thus have value.

An analyst who needs to model and forecast a company's earnings for the next three years would be least likely to: A) assume that key financial ratios will remain unchanged for the forecast period. B) use common-size financial statements to estimate expenses as a percentage of net income. C) examine the variability of the predicted outcomes by performing a sensitivity or scenario analysis.

B An earnings forecast model would typically estimate expenses as a percentage of sales

A firm has deferred tax assets of $315,000 and deferred tax liabilities of $190,000. If the tax rate increases, adjusting the value of the firm's deferred tax items will: A) increase income tax expense. B) decrease income tax expense. C) have no effect on income tax expense.

B An increase in the tax rate increases the values of both DTAs and DTLs. Because the firm's DTAs are greater than its DTLs, the net effect of adjusting their values for an increase in the tax rate will be to decrease income tax expense.

> A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. > The asset will generate $50,000 of cash flow for all four years. > The tax rate is 40% each year. > The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. Taxable income in year 1 is: A) $6,000. B) $10,000. C) $20,000.

B Annual depreciation expense for tax purposes is ($120,000 cost - $0 salvage value) / 3 years = $40,000. Taxable income is $50,000 - $40,000 = $10,000.

While evaluating the financial statements of Omega, Inc., the analyst observes that the effective tax rate is 7% less than the statutory rate. The source of this difference is determined to be a tax holiday on a manufacturing plant located in South Africa. This item is most likely to be: A) continuous in nature, so the termination date is not relevant. B) sporadic in nature, and the analyst should try to identify the termination date and determine if taxes will be payable at that time. C) sporadic in nature, but the effect is typically neutralized by higher home country taxes on the repatriated profits.

B As the name suggests, a tax holiday is usually a temporary exemption from having to pay taxes in some tax jurisdiction. Because of the temporary nature, the key issue for the analyst is to determine when the holiday will terminate, and how the termination will affect taxes payable in the future.

Using the following information for Boxes, Inc.: - Net income $53,000,000 - Outstanding 7% preferred stock, par value $30,000,000 - Outstanding convertible bonds, face value of $10,000,000, Issued on January 1 at par with a coupon rate of 6% and convertible at the rate of 20 shares per 1,000 of face value - 100,000 options at 55 outstanding all year - Tax rate 30% - 3,000,000 common shares outstanding all year - Stock price 60 at year-end, average stock price over the year 50. Diluted EPS is closest to: A) $15.00. B) $16.00. C) $17.00.

B Basic EPS = 53,000,000 − (0.07 × 30,000,000) /3,000,000 = $16.97 Diluted EPS = 53,000,000 − (0.07 × 30,000,000) + [10,000,000 × 0.06 × (1 − 0.30)] / 3,000,000 + 200,000 = $16.04

In the year after an impairment charge on a finite-lived identifiable intangible asset, compared to not taking the charge, net income is most likely to be: A) lower. B) higher. C) unaffected.

B Because a finite-lived identifiable intangible asset would be amortized, amortization expense in the year after the reduction from the impairment charge would be lower (the carrying value of the asset would most likely be lower), increasing net income.

After acquiring a subsidiary, Lafleur Company adds to its balance sheet a patent that expires in five years and a trademark that can be renewed every three years. Lafleur should amortize: A) the patent over five years and the trademark over three years. B) the patent over five years, but should not amortize the trademark. C) neither the patent nor the trademark, but must test them for impairment annually.

B Because the trademark can be renewed, it should be considered to have an indefinite life and therefore should not be amortized. The patent has an expiration date and should be amortized over its remaining life.

Capitalizing interest costs related to a company's construction of assets for its own use is required by: A) IFRS only. B) both IFRS and U.S. GAAP. C) U.S. GAAP only.

B Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during the construction of capital assets for their own use.

Determine the cash flow from investing given the following data: Cash payment of dividends = $30, Sale of equipment = $25, Net income = $25, Purchase of land = $15, Increase in accounts payable = $20, Sale of preferred stock = $25, Increase in deferred taxes = $5. A) -$10. B) $10. C) -$5.

B CFI = Sale of Equipment (+25) + Purchase of Land (-15) = $10.

MJ Inc. reported cost of goods sold of $80,000 for the year under the LIFO inventory valuation method. MJ had a beginning LIFO reserve of $8,000 and an ending LIFO reserve of $11,000. Cost of goods sold under the FIFO inventory valuation method is: A) $91,000. B) $77,000. C) $83,000.

B COGS = 80,000 − (11,000 − 8,000) = 77,000.

A company that capitalizes costs instead of expensing them will have: A) higher income variability and higher cash flows from operations. B) lower cash flows from investing and lower income variability. C) lower cash flows from operations and higher profitability in early years.

B Capitalizing costs tends to smooth earnings and reduces investment cash flows. It will also increase cash flows from operations and increase profitability in the early years.

If a firm pledges inventories as collateral for a loan, the firm must: A) create a contra asset account in the amount of the pledged inventories. B) disclose the carrying value of the pledged inventories. C) offset the pledged inventories against current liabilities.

B Carrying value of inventories pledged as collateral is one of the required disclosures under both IFRS and U.S. GAAP.

Murray Company reported the following revenues and expenses for the year ended 2007: Sales revenue $200,000 Wage expense 89,000 Insurance expense 17,000 Interest expense 10,400 Depreciation expense 50,000 Following are the related balance sheet accounts: 2007 | 2006 Unearned revenue $15,600 | $13,200 Wages payable 5,400 | 6,600 Prepaid insurance 1,200 | 0 Interest payable 500 | 1,600 Accumulated depreciation 95,000 | 45,000 Calculate cash collections and cash expenses. Cash collections | Cash expenses A) $197,600 | $119,900 B) $202,400 | $119,900 C) $202,400 | $58,100

B Cash collections are $202,400 ($200,000 sales + $2,400 increase in unearned revenue). Cash expenses are $119,900 (-$89,000 wages expense - $1,200 decrease in wages payable - $17,000 insurance expense - $1,200 increase in prepaid insurance - $10,400 interest expense - $1,100 decrease in interest payable). Depreciation expense is a non-cash expense.

The cash conversion cycle is the: A) length of time it takes to sell inventory. B) sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases. C) sum of the time it takes to sell inventory and the time it takes to collect accounts receivable.

B Cash conversion cycle = (average receivables collection period) + (average inventory processing period) - (payables payment period)

Which of the following statements about indefinite-lived intangible assets is most accurate? A) They are amortized on a straight-line basis over a period not to exceed 40 years. B) They are reported on the balance sheet indefinitely. C) They never appear on the balance sheet unless they are internally developed.

B Indefinite-lived intangible assets are not amortized; rather, they are reported on the balance sheet indefinitely unless they are impaired.

A company has a receivables turnover of 10, an inventory turnover of 5, and a payables turnover of 12. The company's cash conversion cycle is closest to: A) 37 days. B) 79 days. C) 30 days.

B Cash conversion cycle = receivables days + inventory processing days - payables payment period. Receivables days = 365 / receivables turnover = 365 / 10 = 36.5 days. Inventory processing days = 365 / inventory turnover = 365 / 5 = 73.0 days. Payables payment period = 365 / payables turnover = 365 / 12 = 30.4 days. Cash collection cycle = 36.5 + 73.0 - 30.4 = 79.1 days.

An examination of the cash receipts and payments of Xavier Corporation reveals the following: Cash paid to suppliers for purchase of merchandise $5,000, Cash received from customers 14,000, Cash paid for purchase of equipment 22,000, Dividends paid 2,000, Cash received from issuance of preferred stock 10,000, Interest received on short-term investments 1,000, Wages paid 4,000, Repayment of loan to the bank 5,000, Cash from sale of land 12,000. Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be: CFF CFI A) $10,000 $12,000 B) $3,000 -$10,000 C) $3,000 $12,000

B Cash flow relating to financing activities includes dividends paid, cash received from preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000. Cash flow relating to investing activities includes cash paid for equipment and cash from sale of land. -22,000 + 12,000 = -10,000.

B Cash from sale of building - purchase of machinery = 40 - 20 = $20.

During a period of increasing prices, compared to reporting under LIFO, a firm that reports using average cost for inventory will have a: A) lower gross margin. B) higher current ratio. C) higher asset turnover.

B Compared to using LIFO, using average cost would produce lower COGS, higher gross operating income, and higher ending inventory, so current assets and the current ratio would be higher. Consequently, gross margin would be higher and asset turnover would be lower under the average cost inventory method.

Maverick Company reported the following financial information for 2007: Beginning accounts receivable $180, Ending accounts receivable 225, Sales 11,000, Beginning inventory 2,000, Ending inventory 2,300, Purchases 8,100, Beginning accounts payable 1,600, Ending accounts payable 1,200. Calculate Maverick's cost of goods sold and cash paid to suppliers for 2007. Cost of goods sold Cash paid to suppliers A) $7,800 million $7,100 million B) $7,800 million $8,500 million C) $3,800 million $8,500 million

B Cost of goods sold is equal to $7,800 million ($2,000 million beginning inventory + $8,100 million purchases - $2,300 million ending inventory). Cash paid to suppliers is equal to $8,500 million (-$7,800 COGS - $300 million increase in inventory - $400 million decrease in accounts payable). Alternate solution: Cash paid to suppliers is equal to $8,500 million (-$8,100 million purchases - $400 decrease in accounts payable).

A company's current ratio is 1.9. If some of the accounts payable are paid off from the cash account, the: A) numerator would decrease by a greater percentage than the denominator, resulting in a lower current ratio. B) denominator would decrease by a greater percentage than the numerator, resulting in a higher current ratio. C) numerator and denominator would decrease proportionally, leaving the current ratio unchanged.

B Current ratio = current assets / current liabilities. If cash (a current asset) and AP (a current liability) decrease by the same amount and the current ratio is greater than 1, then the numerator decreases less in percentage terms than the denominator, and the current ratio increases.

A health care company purchased a new MRI machine on 1/1/X3. At year-end the company recorded straight-line depreciation expense of $75,000 for book purposes and accelerated depreciation expense of $94,000 for tax purposes. Management estimates warranty expense related to corrective eye surgeries performed in 20X3 to be $250,000. Actual warranty expenses of $100,000 were incurred in 20X3 related to surgeries performed in 20X2. The company's tax rate for the current year was 35%, but a tax rate of 37% has been enacted into law and will apply in future periods. Assuming these are the only relevant entries for deferred taxes, the company's recorded changes in deferred tax assets and liabilities on 12/31/X3 are closest to: DTA | DTL A) $52,500 | $6,650 B) $55,500 | $7,030 C) $55,500 | $6,650

B DTL = (tax depreciation - financial statement depreciation) × future tax rate = ($94,000 - $75,000) × 37% = $7,030. DTA = (estimated warranty expense - actual warranty expense) × future tax rate = ($250,000 - $100,000) × 37% = $55,500.

Due to declining prices, Steffen Inc. has a LIFO reserve of -$20. Its income tax rate is 35%. If an analyst is converting Steffen's financial statements to a FIFO basis, which of the following adjustments is most appropriate? A) Increase assets by $20. B) Increase cash by $7. C) Increase shareholders' equity by $13.

B Declining prices (negative LIFO reserve) would result in FIFO inventory being less than LIFO inventory. The balance sheet adjustment would decrease assets (inventory) by the $20 LIFO reserve. In addition, the analyst would increase cash by $7 ($20 LIFO reserve × 35% tax rate). To bring the accounting equation into balance, the analyst would decrease shareholders' equity by $13 [$20 LIFO reserve × (1 − 35% tax rate)].

Deferred tax liabilities may result from: A) pretax income greater than taxable income due to permanent differences. B) pretax income greater than taxable income due to temporary differences. C) pretax income less than taxable income due to temporary differences.

B Deferred tax liabilities result from temporary differences that cause pretax income and income tax expense (on the income statement) to be greater than taxable income and taxes due (on the firm's tax form). Temporary differences that cause pretax income to be less than taxable income are recognized as deferred tax assets. Permanent differences do not result in deferred tax items; instead they cause the effective tax rate to differ from the statutory tax rate.

Intangible assets with finite useful lives are: A) amortized over their actual lives. B) amortized over their expected useful lives. C) not amortized, but are tested for impairment at least annually.

B Intangible assets with finite lives are amortized over their expected useful lives, which is an estimate. Actual lives of intangible assets are often not known in advance. Intangible assets with infinite lives are not amortized, but are tested for impairment at least annually.

Czernezyk Company buys a delivery vehicle for €60,000. Czernezyk expects to drive the vehicle 400,000 kilometers over 4 years, at the end of which the firm expects to be able to sell the vehicle for €10,000. At the end of Year 2, the vehicle has been driven 250,000 kilometers. If Czernezyk depreciates the vehicle by the units of production method, its carrying value at the end of Year 2 is: A) €15,000. B) €28,750. C) €31,250.

B Depreciation per unit of production = (€60,000 - €10,000) / 400,000 km = €0.125 per kilometer. Through year 2, depreciation expense = €0.125 × 250,000 = €31,250. Carrying value at the end of Year 2 = €60,000 - €31,250 = €28,750.

Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions): E Company G Company Sales 70 90 Cost of Goods Sold (30) (40) Gross Profit 40 50 Sales and Administration (5) (15) Depreciation (5) (10) Operating Profit 30 25 Interest Expense (20) (5) Earnings Before Taxes 10 20 Income Taxes (4) (8) Earnings after Taxes 6 12 The financial risk of E Company, as measured by the interest coverage ratio, is: A) higher than G Company's because its interest coverage ratio is less than G Company's, but at least one-third of G Company's. B) higher than G Company's because its interest coverage ratio is less than one-third of G Company's. C) lower than G Company's because its interest coverage ratio is at least three times G Company's.

B E Company's interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5. G Company's interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G Company.

Given the following inventory data about a firm: - Beginning inventory 20 units at $50/unit - Purchased 10 units at $45/unit - Purchased 35 units at $55/unit - Purchased 20 units at $65/unit - Sold 60 units at $80/unit What is the inventory value at the end of the period using LIFO? A) $3,450. B) $1,225. C) $1,575.

B Ending inventory equals 20 + 10 + 35 + 20 - 60 = 25 of the first units purchased equals: (20 units)($50/unit) + (5 units)($45/unit) = $1,000 + $225 = $1,225

What is the appropriate measurement basis for equipment used in the manufacturing process? A) Lower of cost or net realizable value. B) Historical cost. C) Fair value.

B Equipment is reported in the balance sheet at historical cost less accumulated depreciation.

The year-end financial statements for a firm using LIFO inventory accounting show an inventory level of $5,000, cost of goods sold of $16,000, and inventory purchases of $14,500. If the LIFO reserve is $4,000 at year-end and was $1,500 at the beginning of the year, what would the cost of goods sold have been using FIFO inventory accounting? A) $12,000. B) $13,500. C) $18,500.

B FIFO COGS = LIFO COGS − change in LIFO reserve = $16,000 − ($4,000 − $1,500) = $13,500.

SF Corporation has created employee goodwill by reorganizing its retirement benefit package. An independent management consultant estimated the value of the goodwill at $2 million. In addition, SF recently purchased a patent that was developed by a competitor. The patent has an estimated useful life of five years. Should SF report the goodwill and patent on its balance sheet? Goodwill Patent A) Yes No B) No Yes C) No No

B Goodwill developed internally is expensed as incurred. The purchased patent is reported on the balance sheet.

Lakeside Co. recently determined that one of its processing machines has become obsolete after 7 years of use and, unexpectedly, has no salvage value. The machine was being depreciated over a useful economic life of 10 years. Which of the following statements is most consistent with this discovery? A) Historically, economic depreciation was overstated in the financial statements. B) Historically, economic depreciation was understated in the financial statements. C) Lakeside Co. will owe back taxes.

B Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less than expected, accounting methods for depreciation have understated the economic depreciation. In addition, if there is no salvage value when positive salvage value was expected, the understatement problem is compounded.

Rossdale, Inc., buys a small manufacturing plant with an estimated useful life of 12 years. The building includes two built-in machines that are expected to be replaced after four years and six years. Under International Financial Reporting Standards, Rossdale: A) may have separate depreciation schedules for the machines and the building. B) must have separate depreciation schedules for the machines and the building. C) must have a single depreciation schedule for the plant.

B IFRS requires firms to use component depreciation. Each component of an asset is depreciated separately based on its estimated useful life. U.S. GAAP permits component depreciation but does not require firms to use it.

What is the impact on accounts receivable if sales exceed cash collections and what is the impact on accounts payable if cash paid to suppliers exceeds purchases? A) Only accounts payable will increase. B) Only accounts receivable will increase. C) Both accounts payable and accounts receivable will increase.

B If a firm sells more than it collects, accounts receivable will increase. If a firm pays suppliers more than it purchases, accounts payable will decrease.

The following data is from Delta's common size financial statement: Earnings after taxes 18% Equity 40% Current assets 60% Current liabilities 30% Sales $300 Total assets $1,400 What is Delta's total-liabilities-to-equity ratio? A) 1.0. B) 1.5. C) 2.0.

B If equity = 40% of assets, total liabilities = 60% of assets, thus 60 / 40 = 1.5.

Adams Co.'s common sized balance sheet shows that: Current Liabilities = 20% Equity = 45% Current Assets = 45% Total Assets = $2,000 What are Adams' long-term debt to equity ratio and working capital? Debt to Equity Working Capital A) 0.78 $250 B) 0.78 $500 C) 1.22 $500

B If equity equals 45% of assets, and current liabilities equals 20%, then long-term debt must be 35%. Long-Term Debt / Equity = 0.35 / 0.45 = 0.78 Working capital = CA - CL = 45% - 20% = 25% of assets WC = 2,000(0.25) = $500

An increase in the tax rate causes the balance sheet value of a deferred tax asset to: A) decrease. B) increase. C) remain unchanged.

B If tax rates increase, the balance sheet value of a deferred tax asset will also increase.

RGB, Inc.'s income statement shows sales of $1,000, cost of goods sold of $400, pre-interest operating expense of $300, and interest expense of $100. RGB's interest coverage ratio is closest to: A) 2 times. B) 3 times. C) 4 times.

B Interest coverage ratio = EBIT / I = (1,000 - 400 - 300) / 100 = 3 times

Stone Development Company owns four office buildings and a tract of raw land. Stone occupies one of the buildings, collects rental income from the other three buildings, and is holding the land for capital appreciation. Under IFRS, which of these assets should Stone classify as investment property on its balance sheet? A) All of these assets. B) The land and the buildings that generate rental income. C) Only the land held for capital appreciation.

B Investment property is defined under IFRS as property held for the purpose of earning rental income, capital appreciation, or both. Owner-occupied property is not classified as investment property.

In an environment of increasing prices, the last-in first-out (LIFO) inventory cost method results in: A) cost of sales below current cost and inventory above replacement cost. B) cost of sales near current cost and inventory below replacement cost. C) inventory near replacement cost and cost of sales below current cost.

B LIFO assumes the most recently purchased items are the first items sold. In an increasing or decreasing price environment, LIFO results in cost of sales that are nearer to current costs compared to other inventory cost methods, and inventory values based on outdated prices (below replacement cost if prices are increasing, above replacement cost if prices are decreasing).

Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm's pre-tax financial income? Lincoln Corporation | Continental Incorporated A) First-in, first-out | First-in, first-out B) Last-in, first-out | Average cost C) Last-in, first-out | Last-in, first-out

B LIFO will result in the lowest pre-tax financial income and FIFO will result in the highest pre-tax income. Average cost pre-tax financial income will fall in the middle. LIFO is allowed under U.S. GAAP but is not allowed under IFRS. Thus, Lincoln should choose LIFO and Continental should choose average cost in order to minimize pre-tax financial income.

Duster Company reported the following financial information at the end of 2007: in millions Unearned revenue $240 Common stock at par 30 Capital in excess of par 440 Accounts payable 1,150 Treasury stock 2,000 Retained earnings 5,160 Accrued expenses 830 Accumulated other comprehensive loss 210 Long-term debt 1,570 Calculate Duster's liabilities and stockholders' equity as of December 31, 2007. Liabilities Stockholders' equity A) $3,550 million $7,840 million B) $3,790 million $3,420 million C) $3,790 million $7,420 million

B Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long-term debt + $1,150 accounts payable + $830 accrued expenses). Stockholders' equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par - $2,000 treasury stock + $5,160 retained earnings - $210 accumulated other comprehensive loss).

As of December 31, 2007, Manhattan Corporation had a quick ratio of 2.0, current assets of $15 million, trade payables of $2.5 million, and receivables of $3 million, and inventory of $6 million. How much were Manhattan's current liabilities? A) $12.0 million. B) $4.5 million. C) $7.5 million.

B Manhattan's quick assets were equal to $9 million ($15 million current assets - $6 million inventory). Given a quick ratio of 2.0, quick assets were twice the current liabilities. Thus, the current liabilities must have been $4.5 million ($9 million quick assets / 2.0 quick ratio).

Kamp, Inc., sells specialized bicycle shoes. At year-end, due to a sudden increase in manufacturing costs, the replacement cost per pair of shoes is $55. The original cost is $43, and the current selling price is $50. The normal profit margin is 10% of the selling price, and the selling costs are $3 per pair. Using the lower of cost or market method under U.S. GAAP, which of the following amounts should each pair of shoes be reported on Kamp's year-end balance sheet? A) $42. B) $43. C) $47.

B Market is equal to the replacement cost as long as replacement cost is within a specific range. The upper bound is net realizable value (NRV) which is equal to the selling price ($50) less selling costs ($3) for a NRV of $47. The lower bound is NRV ($47) less normal profit margin (10% of selling price = $5) for a net amount of $42. Because replacement cost is greater than NRV ($47), market equals NRV ($47). Additionally, we have to use the lower of cost ($43) or market ($47) principle, so the shoes should be recorded at a cost of $43.

B Net income - profit on sale of building + depreciation = 45 - 20 + 75 = $100. Note that taxes and interest are already deducted in calculating net income, and that the profit on the sale of the building should be subtracted from net income.

Using the following information, what is the firm's cash flow from operations? Net income $120 Decrease in accounts receivable 20 Depreciation 25 Increase in inventory 10 Increase in accounts payable 7 Decrease in wages payable 5 Increase in deferred tax liabilities 15 Profit from the sale of land 2 A) $158. B) $170. C) $174.

B Net income - profits from sale of land + depreciation + decrease in receivables - increase in inventories + increase in accounts payable - decrease in wages payable + increase in deferred tax liabilities = 120 - 2 + 25 + 20 - 10 + 7 - 5 + 15 = $170. Note that the profit on the sale of land should be subtracted from net income because this transaction is classified as investing, not operating.

Given the following: Sales $1,500 Increase in inventory 100 Depreciation 150 Increase in accounts receivable 50 Decrease in accounts payable 70 After-tax profit margin 25% Gain on sale of machinery $30 Cash flow from operations is: A) $115. B) $275. C) $375.

B Net income = $1,500 × 0.25 = $375, and cash flow from operations = net income - gain on sale of machinery + depreciation - increase in accounts receivable - increase in inventory - decrease in accounts payable = 375 - 30 + 150 - 50 - 100 - 70 = $275.

The following data pertains to a company's common-size financial statements. Current assets 40%; Total debt 40%; Net income 16%; Total assets $2,000; Sales $1,500; Total asset turnover ratio 0.75; The firm has no preferred stock in its capital structure. The company's after-tax return on common equity is closest to: A) 15%. B) 20%. C) 25%.

B ROE = net income/equity = [0.16 (1,500)]/[(1−0.40)(2,000)] = 0.20, or 20% If the debt ratio (TD/TA) is equal to 40% and the firm has no preferred stock, the percentage of equity is 1 − 0.40, or 60%.

Paul Neimer calculates the following horizontal common-size inventory data for Redpine Manufacturing, Inc.: Year 1 | Year 2 | Year 3 | Year 4 Sales 1.00 | 1.10 | 1.18 | 1.25 Inventories: Raw materials 1.00 | 1.09 | 1.07 | 1.04 Work in process 1.00 | 1.11 | 1.15 | 1.17 Finished goods 1.00 | 1.10 | 1.21 | 1.33 Based on these data, Neimer should most likely conclude that Redpine: A) has an increasing inventory turnover ratio. B) anticipates declining demand for its products. C) might be losing sales due to inadequate inventory.

B Redpine's finished goods inventory is growing faster than sales, while work-in-process inventory is growing more slowly than sales and raw materials inventory is decreasing. These data are consistent with Redpine reducing production in response to decreasing demand. Inventory turnover ratios cannot be calculated directly from the common-size data given, but finished goods inventory increasing faster than sales suggests inventory turnover is likely decreasing.

Which of the following is best estimated by the ratio of net PP&E to annual depreciation expense? A) Average age. B) Remaining useful life. C) Total useful life.

B Remaining useful life = ending net PP&E / annual depreciation expense.

Vasco Ltd. purchased a unit of heavy equipment one year ago for £500,000 and capitalized it as a long-lived asset. Because demand for equipment of this type has grown significantly, Vasco believes the fair value of its equipment has increased to £600,000. If Vasco revalues its equipment to £600,000, what will be the most likely effect on Vasco's financial results, compared to not revaluing the equipment? A) The debt-to-equity ratio will be unaffected by the revaluation. B) Net income will be lower in the periods following the revaluation. C) Net income will be higher in the period of the revaluation.

B Revaluing the asset to £600,000 will increase future depreciation expense, and therefore reduce net income in subsequent periods. Because Vasco has not previously recognized a loss on this asset, the revaluation is not recognized as income but is recorded as an adjustment to equity. An increase in equity (with unchanged debt) will decrease the debt-to-equity ratio.

A U.S. GAAP reporting company has the following changes in its balance sheet accounts: Net Sales $500, An increase in accounts receivable 20, A decrease in accounts payable 40, An increase in inventory 30, Sale of common stock 100, Repayment of debt 10, Depreciation 2, Net Income 100, Interest expense on debt 5. The company's cash flow from financing is: A) $100. B) $90. C) -$10.

B Sale of common stock $100 Repayment of debt (10) Financing cash flows$ 90

A company's financial statement data for the most recent year include the following: Net income $100 Depreciation expense 25 Purchase of machine 50 Sale of company trucks 30 Sale of common stock 45 Decrease in accounts receivable 10 Increase in inventory 20 Issuance of bonds 25 Increase in accounts payable 15 Increase in wages payable 10 Based only on these items, cash flow from financing activities is closest to: A) $140. B) $70. C) $85.

B Sale of common stock 45 Issuance of bonds 25 Financing cash flows $70

An analyst gathered the following information about a company: - 100,000 common shares outstanding from the beginning of the year. - Earnings of $125,000. - 1,000, 7%, $1,000 par bonds convertible into 25 shares each, outstanding as of the beginning of the year. - The tax rate is 40%. The company's diluted EPS is closest to: A) $1.22. B) $1.25. C) $1.34.

B Since $1.68 is greater than the basic EPS of $1.25, the bonds are antidilutive. Thus, diluted EPS = basic EPS = $1.25.

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 $10,880. C) liability of $16,320.

B 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)]

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in Years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,384 over these five years. A change in the tax law was enacted in Year 3, reducing the tax rate from 41% to 31% for Years 4 and 5. What is the deferred tax liability as of the end of Year 3? A) $2,948. B) $3,144. C) $1,039.

B Straight-line depreciation = $25,352 / 5 = $5,070. Income (Years 1, 2, and 3) using straight-line depreciation = $14,384 − $5,070 = $9,314. Accelerated depreciation (Years 1 and 2) = 0.35($25,352) = $8,873. Income (Years 1 and 2) = $14,384 − $8,873 = $5,511. Accelerated depreciation (Year 3) = 0.3($25,352) = $7,606. Income (Year 3) = $14,384 − $7,606 = $6,778. Cumulative difference in income at end of Year 3 = 3($9.314) − [2($5,511) + $6,778] = $10,142. DTL value at new tax rate = 0.31($10,142) = $3,144.

Which of the following statements regarding differences between taxable and pretax income is most accurate? Differences between taxable and pretax income that: A) increase or decrease the effective tax rate are called temporary differences. B) result in deferred tax assets or liabilities are called temporary differences. C) are not reversed for five or more years are called permanent differences.

B Temporary differences between taxable income (for tax reporting) and pretax income (for financial statement reporting) result in deferred tax assets or liabilities. Permanent differences result in a company's effective tax rate being different from the statutory tax rate. There is no time limit on temporary differences to reverse.

Which set of accounting standards allows a firm to classify interest received as a financing cash flow and interest paid as an investing cash flow on its cash flow statement? A) The IFRS only. B) Neither the IFRS nor U.S. GAAP. C) U.S. GAAP only.

B The IFRS allows a firm to classify interest received as either operating or investing cash flow and to classify interest paid as either operating or financing cash flow. U.S. GAAP requires that interest received and paid both be classified as operating cash flows.

To study trends in a firm's cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by: A) assets. B) sales. C) net income.

B With a vertical common-size income statement, all income statement accounts are divided by sales.

A firm's purchases and sales during a period occur in the following order: Beginning inventory - 3 units @ $390 per unit Purchase - 7 units @ $385 per unit Sale - 5 units Purchase - 4 units @ $380 per unit Sale - 8 units Purchase5 units @ $370 per unit Using LIFO and a perpetual inventory system, the firm's cost of sales for the period is: A) $4,605. B) $4,995. C) $5,145.

B The cost of the first five units sold is $385 per unit. Of the next eight units sold, the cost of four of them is $380 per unit, two have a cost of $385 per unit, and two have a cost of $390 per unit. Cost of sales = 5 × $385 + 4 × $380 + 2 × $385 + 2 × $390 = $4,995.

Wells Incorporated reported the following common size data for the year ended December 31, 20X7: Income Statement % Sales 100.0 Cost of goods sold 58.2 Operating expenses 30.2 Interest expense 0.7 Income tax 5.7 Net income 5.2 Balance sheet % % Cash 4.8 Accounts payable 15.0 Accounts receivable 14.9 Accrued liabilities 13.8 Inventory 49.4 Long-term debt 23.2 Net fixed assets 30.9 Common equity 48.0 Total assets 100.00 Total liabilities & equity 100.0 For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of 20X6, Wells' total assets were $75,900,000 and common equity was $37,800,000. At the end of 20X7, total assets were $95,300,000. Calculate Wells' current ratio and return on equity ratio for 20X7. Current ratioReturn on equity A) 2.4 24.5% B) 2.4 26.8% C) 4.6 25.2%

B The current ratio is equal to 2.4 [(4.8% cash + 14.9% accounts receivable + 49.4% inventory) / (15.0% accounts payable + 13.8% accrued liabilities)]. This ratio can be calculated from the common size balance sheet because the percentages are all on the same base amount (total). Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 × 5.2%) and average equity is $41,772,000 [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200 net income / $41,772,000 average equity).

Which of the following ratios is NOT part of the original DuPont system? A) Asset turnover. B) Debt to total capital. C) Equity multiplier.

B The debt to total capital ratio is not part of the original DuPont system. The firm's leverage is accounted for through the equity multiplier.

The most likely result of increasing the estimated useful life of a depreciable asset is that: A) asset turnover will increase. B) net profit margin will increase. C) return on assets will decrease.

B The longer the estimated useful life of an asset, the lower the annual depreciation expense charged to operations. Lower depreciation expense results in higher net income, profit margins, and contributions to shareholder's equity.

Consider the following statements. Statement #1: Par value is a nominal dollar value assigned to shares of stock in a corporation's charter. Statement #2: The par value of common stock represents the amount the corporation received when the stock was issued. With respect to these statements: A) both statements are correct. B) only statement #1 is correct. C) only statement #2 is correct.

B The par value of common stock is the stated or nominal value assigned to the stock. Par value has no relationship to market value. The amount the corporation receives from the issuance of common stock is equal to the par value plus the additional paid-in-capital (proceeds in excess of par).

Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy's liabilities? Bad debt expense Warranty expense A) Increase No effect B) No effect Increase C) No effect No effect

B The recognition of bad debt expense has no effect on liabilities, current revenues are reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net income and reduces assets. The recognition of expected warranty expense decreases net income (following the matching principle), and since it is not currently paid (doesn't reduce assets) it creates or increases a liability at the time of sale.

Metallurgy, Inc., reported depreciation expense of $15 million for the most recent year. Beginning-of-year gross PP&E and accumulated depreciation were $287 million and $77 million, respectively. If end-of year gross PP&E and accumulated depreciation were $300 million and $80 million, the estimated remaining useful life of PP&E is closest to: A) 10 years. B) 15 years. C) 20 years.

B The remaining useful life can be estimated as ending net PP&E value divided by annual deprecation. (300 - 80)/15 = 14.66 years

KLH Company reported the following: > Gross DTA at the beginning of the year $10,500 > Gross DTA at the end of the year $11,250 > Valuation allowance at the beginning of the year $2,700 > Valuation allowance at the end of the year $3,900 Which of the following statements best describes the expected earnings of the firm? Earnings are expected to: A) increase. B) decrease. C) remain relatively stable.

B The valuation allowance account increased from $2,700 to $3,900. The most likely explanation is the future earnings are expected to decrease, thereby reducing the value of the DTA.

An analyst has gathered the following information about a company: - 50,000 common shares outstanding from the beginning of the year. - Warrants outstanding all year on 50,000 shares, exercisable at $20 per share. - Stock is selling at year-end for $25. - The average price of the company's stock for the year was $15. How many shares should be used in calculating the company's diluted EPS? A) 16,667. B) 50,000. C) 66,667.

B The warrants in this case are antidilutive. The average price per share of $15 is less than the exercise price of $20. The year-end price per share is not relevant. The denominator consists of only the common stock for basic EPS.

Selected data from Alpha Company's balance sheet at the end of the year follows: Investment in Beta Company, at fair value $150,000 Deferred taxes $86,000 Common stock, $1 par value $550,000 Preferred stock, $100 par value $175,000 Retained earnings $893,000 Accumulated other comprehensive income $46,000 The investment in Beta Company had an original cost of $120,000. Assuming the investment in Beta is classified as available-for-sale, Alpha's total owners' equity at year-end is closest to: A) $1,618,000. B) $1,664,000. C) $1,714,000.

B Total stockholders' equity consists of common stock of $550,000, preferred stock of $175,000, retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already included in accumulated other comprehensive income.

Earlier this year, Ponca Corporation purchased non-dividend paying equity securities which it classified as trading securities. Information related to the securities follows: Security | Cost | Fair value at year end X | $400,000 | $435,000 Y | $550,000 | $545,000 What amounts should Ponca report in its year-end income statement and balance sheet as a result of its investment in securities X and Y? Income Statement Balance Sheet A) $30,000 unrealized gain $950,000 B) $30,000 unrealized gain $980,000 C) No gain or loss $980,000

B Trading securities are reported in the balance sheet at fair value. At the end of the year, the fair value of the securities was $980,000 ($435,000 + $545,000). The unrealized gains and losses from trading securities are recognized in the income statement. Thus, Ponca would recognize an unrealized gain of $30,000 ($980,000 fair value - $950,000 cost).

Under U.S. GAAP, which of the following least likely represents a cash flow relating to operating activity? A) Cash received from customers. B) Dividends paid to stockholders. C) Interest paid to bondholders.

B U.S. GAAP requires dividends paid to stockholders to be classified as cash flow relating to financing activity, and interest paid to bondholders to be classified an operating activity.

Arlington, Inc. uses the first in, first out (FIFO) inventory cost flow assumption and a periodic inventory system. Beginning inventory and purchases of refrigerated containers for Arlington were as follows: Units | Unit Cost | Total Cost Beginning Inventory 20 | $10,000 | $200,000 Purchases, April 10 | 12,000 | 120,000 Purchases, July 10 | 12,500 | 125,000 Purchases, October 20 | 15,000 | 300,000 In November, Arlington sold 35 refrigerated containers to Johnson Company. What is the cost of goods sold assigned to the 35 sold containers? A) $485,000. B) $382,500. C) $434,583.

B Under FIFO, cost of goods sold is the value of the first units purchased. The 35 units sold consist of the 20 units in beginning inventory, the 10 units purchased in April, and 5 of the units purchased in July. COGS = $200,000 + $120,000 + (5 × $12,500) = $382,500. Using FIFO, ending inventory and COGS are not affected by the choice of a periodic or perpetual inventory system.

Victor Electronics, a manufacturer of electronic components, reports inventory using the FIFO costing method. In the prior period, Victor wrote its inventory down from cost of $2 million to its net realizable value of $1 million. During the current period, net realizable value increased to $4 million because of a shortage of computer chips. For the current period, Victor would most appropriately report an inventory value of: A) $2 million under both IFRS or U.S. GAAP. B) $2 million under IFRS and $1 million under U.S. GAAP. C) $2 million under U.S. GAAP and $4 million under IFRS.

B Under IFRS, a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a gain on the income statement. Under U.S. GAAP, reversals of inventory writedowns are not permitted.

Under IFRS, firms may report an investment in the equity securities of other companies at fair value through: A) other comprehensive income only. B) either profit and loss, or other comprehensive income. C) profit and loss only.

B Under IFRS, firms have an irrevocable choice at the time of purchase to report equity securities at fair value through other comprehensive income. If they do not make this election, equity securities are reported at fair value through profit and loss.

A firm determines that inventory of manufactured goods with a cost of €10 million has a net realizable value of €9 million and writes down its carrying value to this amount. One period later, the firm determines that the net realizable value of this inventory has increased to €11 million. Under IFRS, the carrying value of this inventory: A) may be revalued up to €11 million. B) may be revalued up to €10 million. C) must remain valued at €9 million.

B Under IFRS, inventory is measured at the lower of cost or net realizable value. Inventory that has been written down can later be revalued upward if its net realizable value recovers, but only to the extent that reverses the writedown (i.e., no higher than cost). Under U.S. GAAP, inventory that has been written down may not be revalued upward.

Under U.S. GAAP, an asset is considered impaired if its book value is: A) less than its market value. B) greater than the sum of its undiscounted expected cash flows. C) greater than the present value of its expected future cash flows.

B Under U.S. GAAP, an asset is considered impaired when its book value is greater than the sum of the estimated undiscounted future cash flows from its use and disposal.

Where are dividends paid to shareholders reported in the cash flow statement under U.S. GAAP and IFRS? U.S. GAAP IFRS A) Operating or financing activities Operating or financing activities B) Financing activities Operating or financing activities C) Operating activities Financing activities

B Under U.S. GAAP, dividends paid are reported as financing activities. Under IFRS, dividends paid can be reported as either operating or financing activities.

Under which financial reporting standards is the full amount of a deferred tax asset shown on the balance sheet, regardless of its probability of being realized fully? A) IFRS, but not U.S. GAAP. B) U.S. GAAP, but not IFRS. C) Neither IFRS nor U.S. GAAP.

B Under U.S. GAAP, the full amount of a DTA is shown on the balance sheet, with a contra account (valuation allowance) if it is likely that the full amount of the DTA will not be realized in the future. Under IFRS, the reported value of a DTA is reduced if there is a positive probability that the full amount of the DTA will not be realized in the future.

Under which financial reporting standards is the full amount of a deferred tax asset shown on the balance sheet, regardless of its probability of being realized fully? A) Neither IFRS nor U.S. GAAP. B) U.S. GAAP, but not IFRS. C) IFRS, but not U.S. GAAP.

Under the first-in-first-out (FIFO) inventory valuation method, ending inventory reflects the costs of the: A) earliest purchases. B) most recent purchases. C) specific units available for sale.

B Under the FIFO inventory valuation method, ending inventory reflects the costs of the most recently purchased items and cost of sales reflects the costs of the earliest purchases. If prices are increasing or decreasing, ending inventory is unlikely to reflect the costs of the specific units available for sale.

A firm acquires investment property for €3 million and chooses the fair value model for financial reporting. In Year 1 the market value of the investment property decreases by €150,000. In Year 2 the market value of the investment property increases by €200,000. On its financial statements for Year 2, the firm will recognize a: A) €150,000 gain on its income statement and a €50,000 revaluation surplus in shareholders' equity. B) €200,000 gain on its income statement. C) €150,000 increase in shareholders' equity.

B Under the fair value model, all gains and losses from changes in the value of investment property are recognized on the income statement. The firm will recognize a loss of €150,000 in Year 1 and a gain of €200,000 in Year 2.

Two years ago, Metcalf Corp. purchased machinery for $800,000. At the end of last year, the machinery had a fair value of $720,000. Assuming Metcalf uses the revaluation model, what amount, if any, is recognized in Metcalf's net income this year if the machinery's fair value is $810,000? A) $0. B) $80,000. C) $90,000.

B Under the revaluation method, Metcalf reports the equipment on the balance sheet at fair value. At the end of last year, an $80,000 loss was recognized (from $800,000 to $720,000) in the income statement. Any recovery is recognized in the income statement to the extent of the loss. Any remainder is recognized in shareholders' equity as revaluation surplus. Thus, at the end of this year, an $80,000 gain is recognized in the income statement, and a $10,000 revaluation surplus is recognized in shareholders' equity

Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at: A) historical cost less accumulated depreciation. B) historical cost. C) fair market value minus selling costs.

B Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S. GAAP.

At the beginning of the year, Alpha Corporation, which reports under U.S. GAAP, purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta's stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security? Available-for-sale Trading security A) $0 $20,000 B) $2,000 $22,000 C) $0 $22,000

B Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders' equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.

Which of the following statements about the role of depreciable lives and salvage values in the computation of depreciation expenses for financial reporting is most accurate? A) Companies are specifically required to disclose data about estimated salvage values in the footnotes to the financial statements. B) Depreciable lives and salvage values are chosen by management and allow for the possibility of income manipulation. C) The estimated useful life of the same depreciable asset should be the same regardless of which company owns the asset.

B Useful lives and salvage values of long-lived assets are management estimates that may vary among companies. Companies typically do not disclose data about estimated salvage values, except when estimates are changed.

Which of the following best describes valuation allowance? Valuation allowance is a reserve: A) created when deferred tax assets are greater than deferred tax liabilities. B) against deferred tax assets based on the likelihood that those assets will not be realized. C) against deferred tax liabilities based on the likelihood that those liabilities will be paid.

B Valuation allowance is a reserve against deferred tax assets based on the likelihood that those assets will not be realized. Deferred tax assets reflect the difference in tax expense and taxes payable that are expected to be recovered from future operations.

Which of the following is most likely included in a firm's ending inventory? A) Storage costs of finished goods. B) Variable production overhead. C) Selling and administrative costs.

B Variable production overhead is capitalized as a part of inventory. Storage costs not related to the production process, and selling and administrative costs are expensed as incurred.

For a firm that uses the cost basis for valuing its long-lived assets, fair value is a consideration when calculating a gain or loss on: A) abandoning an asset. B) exchanging an asset. C) selling an asset.

B When exchanging one long-lived asset for another, a gain or loss is recorded as the difference between the old asset's carrying value and its fair value (or the fair value of the asset received in exchange, if that value is more evident). When selling an asset, the gain or loss is the difference between the carrying value and the cash received. When abandoning an asset, a firm records a loss equal to the carrying value of the asset.

When calculating cash flow from operations (CFO) using the indirect method which of the following is most accurate? A) In using the indirect method, each item on the income statement is converted to its cash equivalent. B) When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. C) The indirect method requires an additional schedule to reconcile net income to cash flow.

B When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. This is because the gain would be double counted in the investing section and in net income. Therefore, the gain must be removed from net income. The direct method of cash flow calculation converts the income statement items to their cash equivalents, not the indirect method. Also, depreciation is added to net income in order to calculate CFO using the indirect method.

Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date it has accumulated depreciation of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000? A) Loss of $360,000. B) Gain of $40,000. C) Loss of $100,000.

B With a sale of an asset to a third party, the difference between the proceeds and carrying value is reported as a gain or loss on the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000). Therefore, the gain is equal to $40,000 ($400,000 proceeds less $360,000 carrying value).

In a period of falling prices, a firm reporting under LIFO, compared to reporting under FIFO, will have a higher: A) cost of sales. B) gross profit margin. C) inventory turnover ratio.

B With falling prices, LIFO COGS will include the cost of lower priced inventory and COGS will be less when compared to FIFO COGS. Because of this, the firm would report a higher gross profit margin under LIFO than under FIFO, while LIFO inventory will be higher and inventory turnover lower

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as: A) higher ROA in the current period and lower ROA in later periods. B) lower ROA in the current period and higher ROA in later periods. C) lower ROA in the current period and no effect on ROA in later periods.

B Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA.

A firm has a dividend payout ratio of 40%, a net profit margin of 10%, an asset turnover of 0.9 times, and a financial leverage multiplier of 1.2 times. The firm's sustainable growth rate is closest to: A) 4.3%. B) 6.5%. C) 8.0%.

B g = (retention rate)(ROE) ROE = net profit margin × asset turnover × equity multiplier = (0.1)(0.9)(1.2) = 0.108 g = (1 - 0.4)(0.108) = 6.5%

RGB, Inc.'s purchases during the year were $100,000. The balance sheet shows an average accounts payable balance of $12,000. RGB's payables payment period is closest to: A) 37 days. B) 44 days. C) 52 days.

B payables turnover = (purchases / avg. AP) = 100 / 12 = 8.33 payables payment period = 365 / 8.33 = 43.8 days

RGB, Inc., has a gross profit of $45,000 on sales of $150,000. The balance sheet shows average total assets of $75,000 with an average inventory balance of $15,000. RGB's total asset turnover and inventory turnover are closest to: Asset turnover Inventory turnover A) 7.00 times 2.00 times B) 2.00 times 7.00 times C) 0.50 times 0.33 times

B total asset turnover = (sales / total assets) = 150 / 75 = 2 times inventory turnover = (COGS / avg. inventory) = (150 - 45) / 15 = 7 times

Antidilutive securities should be assumed to have been converted to common shares when calculating: A) basic EPS but not diluted EPS. B) diluted EPS but not basic EPS. C) neither basic nor diluted EPS.

Given the following information, how many shares should be used in computing diluted EPS? - 300,000 shares outstanding. - 100,000 warrants exercisable at $50 per share. - Average share price is $55. - Year-end share price is $60. A) 9,091. B) 90,909. C) 309,091.

The objective of financial reporting is most accurately described as providing information about a firm that is: A) complete, neutral, and free from error. B) compliant with accepted accounting principles. C) useful to decision makers.

Which financial statement reports information about a company's financial position at a single point in time? A) Income statement B) CF statement C) Balance sheet

Which of the following is least likely considered a nonoperating transaction from the perspective of a manufacturing firm? A) Dividends received from available-for-sale securities. B) Interest expense on subordinated debentures. C) Accruing bad debt expense for goods sold on credit.

Which of the following is least likely to be included when calculating comprehensive income? A) Unrealized loss from cash flow hedging derivatives. B) Unrealized gain from available-for-sale securities. C) Dividends paid to common shareholders.

Which of the following most accurately lists a required reporting element that is used to measure a company's financial position and one that is used to measure a company's performance? Position Performance A) Assets Liabilities B) Income Expenses C) Liabilities Income

Which of the following organizations is least likely involved with enforcing compliance with financial reporting standards? A) FCA B) SEC C) IASB

Which of the following ratios are used to measure a firm's liquidity and solvency? Liquidity Solvency A) Current ratio Quick ratio B) Debt-to-equity ratio Financial leverage ratio C) Cash ratio Total debt ratio

Which of the following statements about a classified balance sheet is least likely accurate? A classified balance sheet: A) distinguishes between current and noncurrent assets. B) groups accounts by subcategories. C) presents the net equity of each asset by subtracting its related liability.

Which of the following statements about nonrecurring items is least accurate? A) Discontinued operations are reported net of taxes at the bottom of the income statement before net income. B) Unusual or infrequent items are reported before taxes above net income from continuing operations. C) A change in accounting principle is reported in the income statement net of taxes after extraordinary items and before net income.

Which of the following transactions would most likely be reported below income from continuing operations, net of tax? A) Gain or loss from the sale of equipment used in a firm's manufacturing operation. B) A change from the accelerated method of depreciation to the straight-line method. C) The operating income of a physically and operationally distinct division that is currently for sale, but not yet sold.

Which of the following equations least accurately represents return on equity? A) (net profit margin)(equity turnover). B) (net profit margin)(total asset turnover)(assets / equity). C) (ROA)(interest burden)(tax retention rate).

C (ROA)(interest burden)(tax retention rate) is not one of the DuPont models for calculating ROE.

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm's basic earnings per share (EPS) for 2004? A) $2.71. B) $2.91. C) $2.64.

C - 1/1/00 22,000 shares (adjusted for 10% stock dividend) × 12 months = 264,000 - 6/1/00 7,700 shares (adjusted for 10% stock dividend) × 7 months = 53,900 Total share month = 317,900 Average shares = 317,900 / 12 = 26,492 Basic EPS = ($150,000 − $80,000) / 26,492 = 2.64

Martin, Inc., had the following transactions during 20X7: - Purchased new fixed assets for $75,000. - Converted $70,000 worth of preferred shares to common shares. - Received cash dividends of $12,000. Paid cash dividends of $21,000. - Repaid mortgage principal of $17,000. Assuming Martin follows U.S. GAAP, which of the following amounts represents Martin's cash flows from investing and cash flows from financing in 20X7, respectively? Cash flows from investing Cash flows from financing A) ($5,000) ($21,000) B) ($75,000) ($21,000) C) ($75,000) ($38,000)

C - Purchased new fixed assets for $75,000 --> (cash outflow from investing) - Converted $70,000 of preferred shares to common shares --> (noncash transaction) - Received dividends of $12,000 --> (cash inflow from operations) - Paid dividends of $21,000 --> (cash outflow from financing) - Mortgage repayment of $17,000 --> (cash outflow from financing) CFI = -75,000 CFF = -21,000 - 17,000 = -$38,000

Lightfoot Shoe Company reported sales of $100 million for the year ended 20X7. Lightfoot expects sales to increase 10% in 20X8. Cost of goods sold is expected to remain constant at 40% of sales and Lightfoot would like to have an average of 73 days of inventory on hand in 20X8. Forecast Lightfoot's average inventory for 20X8 assuming a 365 day year. A) $22.0 million. B) $8.0 million. C) $8.8 million.

C 20X8 sales are expected to be $110 million [$100 million × 1.1] and COGS is expected to be $44 million [$110 million sales × 40%]. With 73 days of inventory on hand, average inventory is $8.8 million [($44 million COGS / 365) × 73 days].

When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following? A) A negative (positive) adjustment to net income when accounts payable increases (decreases). B) A negative adjustment to net income regardless of whether accounts payable increases or decreases. C) A positive (negative) adjustment to net income when accounts payable increases (decreases).

C A decrease in accounts payable represents an outflow. Hence, a negative adjustment will be required. Conversely, an increase represents an inflow and a positive adjustment.

Regarding the use of financial ratios in the analysis of a firm's financial statements, it is most accurate to say that: A) many financial ratios are useful in isolation. B) variations in accounting treatments have little effect on financial ratios. C) a range of target values for a ratio may be more appropriate than a single target value.

C A range of target values for a financial ratio may be more appropriate that a single numerical target. Financial ratios are not useful when viewed in isolation and are only valid when compared to historical figures or peers. Comparing ratios among firms can be complicated by variations in accounting treatments used at each firm.

This information pertains to equipment owned by Brigade Company. > Cost of equipment: $10,000. > Estimated residual value: $2,000. > Estimated useful life: 5 years. > Depreciation method: straight-line. The accumulated depreciation at the end of year 3 is: A) $5,200. B) $1,600. C) $4,800.

C Accumulated depreciation at the end of year 3 = [($10,000 − $2,000) / 5] × 3 = $4,800

Varin, Inc. purchases franchise rights with an estimated useful life of ten years and a trademark that can be renewed every five years for a nominal fee. Under IFRS, Varin will recognize amortization expense on: A) both of these assets. B) neither of these assets. C) only one of these assets.

C Acquired intangible assets with finite expected useful lives are amortized. Intangible assets with indefinite lives are not amortized but are tested at least annually for impairment. Renewal at a nominal cost means the trademark should be treated as an asset with an indefinite life.

Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be: A) a decrease in deferred tax liability and a decrease in tax expense. B) a decrease in deferred tax liability and an increase in tax expense. C) an increase in deferred tax liability and an increase in tax expense.

C An increase in tax rates will increase future deferred tax liability, and the impact of the increase in liability will be reflected in the income statement of the year in which the tax rate change is affected.

Other things equal, which of the following actions related to property, plant, and equipment will most likely decrease a firm's return on assets in future periods? A) Impairment. B) Derecognition. C) Upward revaluation.

C An upward revaluation will increase the book value of assets and increase depreciation expense in future periods (decreasing net income), both of which reduce ROA. Impairment would have the opposite effects, decreasing future depreciation and book values. Derecognizing an asset may increase, decrease, or not affect ROA in future periods.

> A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. > The asset will generate $50,000 of cash flow for all four years. > The tax rate is 40% each year. > The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. Pretax income in year 4 is: A) $6,000. B) $10,000. C) $20,000.

C Annual depreciation expense for financial purposes is ($120,000 cost - $0 salvage value) / 4 years = $30,000. Pretax income is $50,000 - $30,000 = $20,000.

Red Company immediately expenses its development costs while Black Company capitalizes its development costs. All else equal, Red Company will: A) show smoother reported earnings than Black Company. B) report higher operating cash flow than Black Company. C) report higher asset turnover than Black Company.

C As compared to a firm that capitalizes its expenditures, a firm that immediately expenses expenditures will report lower assets. Thus, asset turnover (revenue / average assets) will be higher for the expensing firm (lower denominator).

> A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. > The asset will generate $50,000 of cash flow for all four years. > The tax rate is 40% each year. > The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. At the end of year 2, the firm's balance sheet will report a deferred tax: A) asset of $4,000. B) asset of $8,000. C) liability of $8,000.

C At the end of year 2, the tax base is $40,000 ($120,000 cost - $80,000 accumulated tax depreciation) and the carrying value is $60,000 ($120,000 cost - $60,000 accumulated financial depreciation). Since the carrying value exceeds the tax base, a DTL of $8,000 [($60,000 carrying value - $40,000 tax base) × 40%] is reported.

An analyst will most likely use the average age of depreciable assets to estimate the company's: A) cash flows. B) earnings potential. C) near-term financing requirements.

C Average age of depreciable assets is useful for estimating financing required for major capital expenditures in the near term to replace depreciated assets.

The exhibit below provides relevant data and financial statement information about Acme's inventory purchases and sales of inventory for the last year. Units | Unit Price Beginning Inventory 699 | $5.00 Purchases 710 | $8.00 Sales 806 | $15.00 The cost of goods sold using the average cost method is closest to: A) $6,160. B) $4,130. C) $5,250.

C Average cost of units available for sale = (699 × $5 + 710 × $8) / (699 + 710) = $6.51 Cost of goods sold = $6.51 × 806 = $5,247

Dubois Company bought land for company use five years ago for €2 million and presents its balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million, Dubois will: A) recognize a loss of €400,000 and decrease shareholders' equity by €200,000. B) decrease shareholders' equity by €400,000 but will not recognize a loss. C) recognize a loss of €200,000 and decrease shareholders' equity by €400,000.

C Because the land is valued above its historical cost on the balance sheet, Dubois is using the revaluation model. The land's revaluation up to €2.2 million would have been reflected in shareholders' equity with a revaluation surplus of €200,000. The decrease in fair value to €1.8 million will reduce the revaluation surplus to zero, and the amount of the writedown below historical cost (€2 million - €1.8 million = €200,000) will be recognized as a loss on Dubois's income statement. This loss, combined with the removal of the revaluation surplus, will decrease shareholders' equity by €400,000. Note that the land was purchased for company use and therefore would not be classified as investment property.

Stannum Records obtains two intangible assets in a business acquisition: legal rights to reproduce songs, valued at $5 million, and a trademark valued at $1 million. The trademark expires in 10 years and can be renewed at a minimal cost. Stannum estimates a 5-year useful life for the song rights. Because much of the songs' economic value is realized in their early years, Stannum uses double-declining balance amortization. Amortization expense in the first year after the acquisition is closest to: A) $2.1 million. B) $2.2 million. C) $2.0 million.

C Because the trademark can be renewed at minimal cost, it should be treated as an intangible asset with an indefinite life: the asset is not amortized but is tested for impairment at least annually. For the song rights, DDB depreciation in the first year = 2/5 × $5 million = $2 million.

> A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. > The asset will generate $50,000 of cash flow for all four years. > The tax rate is 40% each year. > The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. Income tax expense in year 4 is: A) $4,000. B) $6,000. C) $8,000.

C Because there has been no change in the tax rate, income tax expense is pretax income × tax rate = $20,000 × 40% = $8,000. (The $20,000 was calculated in the previous question.)

An analyst has gathered the following information about a company: Cost of goods sold = 65% of sales. Inventory of $450,000. Sales of $1 million. What is the value of this firm's average inventory processing period using a 365-day year? A) 0.7 days. B) 1.4 days. C) 252.7 days.

C COGS = (0.65)($1,000,000) = $650,000 Inventory turnover = COGS / Inventory = $650,000 / $450,000 = 1.4444 Average Inventory Processing Period = 365 / 1.4444 = 252.7 days

A segment of a common-size balance sheet for Olsen Company in its most recent year shows the following data: Common stock 1% Additional paid-in capital 19% Preferred stock 15% How should an analyst most appropriately interpret these data? A) Shareholders' equity is 35% of total assets. B) Preferred stock is 15% of shareholders' equity. C) Proceeds from the issuance of common stock are 20% of total assets.

C Common-size balance sheets express each balance sheet item as a percentage of total assets. Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value). Shareholders' equity is unlikely to consist only of common and preferred stock, as it also includes components such as retained earnings and accumulated other comprehensive income.

A common-size cash flow statement is least likely to show each cash inflow as a percentage of: A) revenue. B) all cash inflows. C) total cash flows.

C Common-size cash flow statements show each cash flow item as a percentage of revenue or show each cash flow outflow as a percentage of all cash outflows and each cash inflow as a percentage of all cash inflows.

Copper, Inc., had $4 million in bonds outstanding that were convertible into common stock at a conversion rate of 100 shares per $1,000 bond. In 20X1, all of the outstanding bonds were converted into common stock. Copper's average share price for 20X1 was $15. Copper's statement of cash flows for the year ended December 31, 20X1, should most likely include: A) cash flows from financing of +$6 million from issuance of common stock and -$4 million from retirement of bonds and cash flows from investing of -$2 million for a loss on retirement of bonds. B) cash flows from financing of +$4 million from issuance of common stock and -$4 million from retirement of bonds. C) a footnote describing the conversion of the bonds into common stock.

C Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.

Torval, Inc., retires debt securities by issuing equity securities. This is considered a: A) cash flow from investing. B) cash flow from financing. C) noncash transaction.

C The exchange of debt securities for equity securities is a noncash transaction.

All other things held constant, which of the following transactions will increase a firm's current ratio if the ratio is greater than one? A) Accounts receivable are collected and the funds received are deposited in the firm's cash account. B) Fixed assets are purchased from the cash account. C) Accounts payable are paid with funds from the cash account.

C Current ratio = current assets / current liabilities. If CR is > 1, then if CA and CL both fall, the overall ratio will increase

Which of the following statements regarding deferred taxes is least accurate? A) A permanent difference is a difference between taxable income and pretax income that will not reverse. B) A deferred tax asset is created when a temporary difference results in taxable income that exceeds pretax income. C) Deferred tax assets and liabilities are not adjusted for changes in tax rates.

C Deferred tax assets and liabilities are adjusted for changes in expected tax rates under the liability method.

An analyst gathered the following information about a company: > Taxable income = $100,000. > Pretax income = $120,000. > Current tax rate = 20%. Assuming the difference between taxable income and pretax income will reverse in the future, the effect these events on the company's financial statements will be to report income tax expense of: A) $24,000 and a decrease in deferred tax assets of $4,000. B) $22,000 with no change in deferred tax items. C) $24,000 and an addition to deferred tax liabilities of $4,000.

C Deferred tax liability = (120,000 − 100,000) × 0.2 = 4,000 Tax expense = current tax rate × taxable income + change in deferred tax liability 0.2 × 100,000 + 4,000 = 24,000

Which of the following would be least likely to cause a change in investing cash flow? A) The sale of a division of the company. B) The purchase of new machinery. C) An increase in depreciation expense.

C Depreciation does not represent a cash flow. To the extent that it affects the firm's taxes, an increase in depreciation changes operating cash flows, but not investing cash flows.

Which of the following statements regarding depreciation expense in the cash flow statements is CORRECT? Depreciation is added back to net income when determining CFO using: A) either the direct or indirect methods. B) the direct method. C) the indirect method.

C Depreciation is a non-cash expense. Only in the indirect method is depreciation added back to net income when determining CFO because net income is only used in the indirect method and not the direct method. The direct method instead starts with cash sales and works down the income statement.

Which of the following would most likely result in a current liability? A) Possible warranty claims. B) Recognizing impairment of PP&E. C) Estimated income taxes for the current year.

C Estimated income taxes for the current year are likely reported as a current liability. To recognize the warranty expense, it must be probable, not just possible. Recognizing impairment of PP&E does not create a liability.

A firm that uses LIFO for inventory accounting reported COGS of $300,000 and ending inventory of $200,000 for the current period, and a LIFO reserve that decreased from $40,000 to $35,000 over the period. If the firm had reported using FIFO, its gross profit would have been: A) the same. B) $5,000 higher. C) $5,000 lower.

C FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve) Ending LIFO reserve - beginning LIFO reserve = $35,000 - $40,000 = -$5,000 With FIFO COGS $5,000 greater than LIFO COGS, gross profit under FIFO would be $5,000 lower than under LIFO.

Orchard Supply Company uses LIFO inventory valuation. Orchard had a cost of goods sold of $1 million for the most recent year. Inventory was $500,000 at the beginning of the year and $600,000 at the end of the year. Orchard Supply's LIFO reserve was $100,000 at the beginning of the year and $200,000 at the end of the year. What is Orchard Supply's cost of goods sold using FIFO inventory valuation? A) $800,000. B) $1.1 million. C) $900,000.

C FIFO COGS = LIFO COGS − change in LIFO reserve = $1 million − $100,000 = $900,000.

Bangor Company discloses that its LIFO reserve was $625,000 at the end of the previous year and $675,000 at the end of the current year. For the current year, beginning inventory was $2,350,000 and ending inventory was $2,525,000. The firm's tax rate is 30%. What would Bangor's ending inventory have been using FIFO? A) $2,575,000. B) $2,997,500. C) $3,200,000.

C FIFO inventory = LIFO inventory + LIFO reserve = $2,525,000 + $675,000 = $3,200,000.

Which balance sheet items are most likely to be linked to cash flows from financing? A) Long-lived assets. B) Current assets and liabilities. C) Long-term liabilities and equity.

C Financing cash flows are linked primarily to changes in long-term liabilities and equity. Changes in current assets and liabilities tend to be linked to operating cash flows. Changes in long-lived assets are typically linked to investing cash flows.

An analyst who is interested in a company's long-term solvency would most likely examine the: A) return on total capital. B) defensive interval ratio. C) fixed charge coverage ratio.

C Fixed charge coverage is a solvency ratio. Return on total capital is a measure of profitability and the defensive interval ratio is a liquidity measure.

Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an provision for doubtful debt equal to 10% of its credit sales outstanding. For tax purposes, the doubtful debts cannot be deducted until written off. The tax base of Alter's accounts receivable at the end of 20X8 is closest to: A) $3,500. B) $31,500. C) $35,000.

C For tax purposes, bad debt expense cannot be deducted until the receivables are deemed worthless. Therefore, the tax base is $35,000 since no bad debt expense has been deducted on the tax return. Note that the carrying value would be $31,500 since bad debt expense is reflected on the income statement.

Selected inventory information for the current year for Flemming Parts Company is as follows: Beginning inventory: Jan 1350 units @ $43; Purchases: March 20, 120 units @ $45; July 18, 150 units @ $48; October 22, 200 units @ $51; Sales: February 22, 215 units @ $85; April 15, 90 units @ $85; September 8, 120 units @ $85. If Flemming reports using LIFO and a perpetual inventory system, its cost of goods sold for the year is: A) $15,350. B) $17,075. C) $19,055.

C For the February sale, the last-in units cost $43. For the April sale, the last-in units cost $45. For the September sale, the last-in units cost $48. Cost of goods sold is 215 × $43 + 90 × $45 + 120 × $48 = $19,055.

Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory: > Depreciation: straight-line; double-declining balance (DDB) > Inventory: first in, first out (FIFO); last in, first out (LIFO) Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1? A) DDB; FIFO. B) Straight-line; FIFO. C) Straight-line; LIFO.

C For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

Which of the following is most likely for a firm with high inventory turnover and lower sales growth than the industry average? The firm: A) is managing its inventory effectively. B) may have obsolete inventory that requires a write-down. C) may be losing sales by not carrying enough inventory.

C High inventory turnover coupled with low sales growth relative to the industry may be an indication of inadequate inventory levels. In this case, the firm may be losing sales by not carrying enough inventory.

Under IFRS, a firm may report the value of property, plant, and equipment using: A) only the cost model. B) the cost model or the fair value model. C) the cost model or the revaluation model.

C IFRS permits either the cost model or the revaluation model for property, plant, and equipment.

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

C 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.

If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax: A) must be reduced by a valuation allowance. B) should be considered an asset or liability. C) should be considered an increase in equity.

C If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities. If, however, they are not expected to reverse in the future, then they should be classified as equity.

Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively: Deferred Taxes | Net Income A) No effect | Decrease B) Increase | No effect C) Increase | Decrease

C If tax rates rise then deferred tax liabilities will also rise. The increase in deferred tax liabilities will increase the current tax expense, and if expenses are increasing the net income will decrease.

Which one of the following statements is most accurate? Under the liability method of accounting for deferred taxes, a decrease in the tax rate at the beginning of the accounting period will: A) increase taxable income in the current period. B) increase a deferred tax asset. C) reduce a deferred tax liability.

C If the tax rate decreases, balance sheet DTL and DTA are both reduced. Taxable income is unaffected.

As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate? A) During the year of the write-downs, retained earnings and deferred taxes will decrease. B) The write-downs are reported as a component of income from continuing operations. C) Write-downs taken on asset values can be reversed in later years if market conditions improve.

C Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.

In an inflationary environment, a LIFO liquidation will most likely result in an increase in: A) inventory. B) accounts payable. C) operating profit margin.

C In a LIFO liquidation, older and lower costs are included in cost of sales. Thus, cost of sales per unit decreases and profit margins increase.

In the early years of an asset's life, a firm using the double-declining balance method, as compared to a firm using straight-line depreciation, will report lower: A) depreciation expense. B) operating cash flow. C) retained earnings.

C In the early years, accelerated depreciation will result in higher depreciation expense; thus, lower net income. Lower net income will result in lower retained earnings.

Which of the following statements is CORRECT? Income tax expense: A) is the amount of taxes due to the government. B) is the reported net of deferred tax assets and liabilities. C) includes taxes payable and deferred income tax expense.

C Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Taxes payable are the amount of taxes due the government.

Three years ago, Ranchero Corporation purchased equipment for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the equipment was greater than its book value. No impairment losses have been recognized on the equipment. Assuming Ranchero follows International Financial Reporting Standards, what is the impact on its total asset turnover ratio and return on equity of reporting the value of the equipment on the balance sheet at fair value? A) Only one will increase. B) Both will increase. C) Both will decrease.

C Increasing the value of the equipment on the balance sheet will increase assets and thus decrease the total asset turnover ratio (higher denominator). Increasing the value of the equipment will also increase equity, otherwise, the balance sheet equation would not balance. Increasing equity will result in lower ROE (higher denominator). The increase in the value of the equipment is not recognized in the income statement unless it is reversing a previously recognized write-down.

For a firm that uses the LIFO inventory cost method, the LIFO reserve is: A) a provision for taxes when FIFO is required for tax reporting. B) the difference between LIFO cost of sales and FIFO cost of sales. C) the difference between LIFO inventory and FIFO inventory.

C LIFO reserve is the difference between inventory under the LIFO cost method and inventory under the FIFO cost method.

Selected financial information gathered from the Matador Corporation follows: 2007 | 2006 | 2005 Average debt $792,000 | $800,000 | $820,000 Average equity $215,000 | $294,000 | $364,000 Return on assets 5.9% | 6.6% | 7.2% Quick ratio 0.3 | 0.5 | 0.6 Sales $1,650,000 | $1,452,000 | $1,304,000 Cost of goods sold $1,345,000 | $1,176,000 | $1,043,000 Using only the data presented, which of the following statements is most correct? A) Gross profit margin has improved. B) Leverage has declined. C) Return on equity has improved.

C Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007. Gross profit margin declined from 20.0% in 2005 to 18.5% in 2007. Return on equity has improved since 2005. One measure of ROE is ROA × financial leverage. Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA × (1 + 2.25 debt-to-equity)]. In 2007, ROE was 27.6% [5.9% ROA × (1 + 3.68 debt-to-equity)].

A company purchased inventory on January 1, 20X2, for $600,000. On December 31, 20X2, the inventory had a net realizable value (NRV) of $550,000 and a replacement cost of $525,000, which is also the NRV less the normal profit margin. What would be the carrying value of the inventory on the company's December 31, 20X2, balance sheet using: lower of cost or NRV?: lower of cost or market? A) $525,000; $525,000 B) $525,000; $550,000 C) $550,000; $525,000

C Lower of cost or NRV is $550,000. Using lower of cost or market, the replacement cost of $525,000 would be used because it is below NRV and equal to the NRV less the normal profit margin.

While reviewing a company, an analyst identifies a permanent difference between taxable income and pretax income. Which of the following statements most accurately identifies the appropriate financial statement adjustment? A) The amount of the tax implications of the difference should be added to the deferred tax liabilities. B) The present value of the amount of the tax implications of the difference should be added to the deferred tax liabilities. C) No financial statement adjustment is necessary.

C No analyst adjustment is needed. If a permanent difference between taxable income and pretax income is identifiable, the difference will be reflected in the firm's effective tax rate.

C Note that the asset was fully depreciated for tax purposes after year 3, so taxable income is $50,000. Taxes payable for year 4 = taxable income × tax rate = $50,000 × 40% = $20,000.

The average number of days that it takes to turn raw materials into cash proceeds is a firm's: A) inventory turnover cycle. B) receivables cycle. C) operating cycle.

C Operating cycle refers to the time it takes to turn raw materials into cash from sales.

Earnings before interest and taxes (EBIT) is also known as: A) earnings before income taxes. B) gross profit. C) operating profit.

C Operating profit = earnings before interest and taxes (EBIT) Gross profit = net sales - COGS Net income = earnings after taxes = EAT

Which of the following tax definitions is least accurate? A) Taxable income is income based on the rules of the tax authorities. B) Taxes payable are the amount due to the government. C) Pretax income is income tax expense divided by one minus the statutory tax rate.

C Pretax income and income tax expense are not always linked because of temporary and permanent differences.

Given the following data and assuming a periodic inventory system, what is the ending inventory value using the FIFO method? Purchases | Sales 50 units at $50/unit | 25 units at $55/unit 60 units at $45/unit | 30 units at $50/unit 70 units at $40/unit | 45 units at $45/unit A) $3,200. B) $3,600. C) $3,250.

C Purchased 50 + 60 + 70 = 180 units. Sold 25 + 30 + 45 = 100. Ending inventory = 180 - 100 = 80 of the last units purchased. (70 units)($40/unit) + (10 units)($45/unit) = $2,800 + $450 = $3,250. Note that FIFO inventory is not affected by the choice of a periodic or perpetual inventory system.

An analyst has gathered the following information about a company: Balance Sheet: Assets Cash 100 Accounts Receivable 750 Marketable Securities 300 Inventory 850 Property, Plant & Equip 900 Accumulated Depreciation (150) Total Assets 2750 Liabilities and Equity Accounts Payable 300 Short-Term Debt 130 Long-Term Debt 700 Common Stock 1000 Retained Earnings 620 Total Liab. and Stockholder's equity 2750 Income Statement: Sales = 1500; COGS = 1100; Gross Profit = 400; SG&A = 150; Operating Profit = 250; Interest Expense = 25; Taxes = 75; Net Income = 150. What is the receivables turnover ratio? A) 1.0. B) 0.5. C) 2.0.

C Receivables turnover = 1,500(sales) / 750(receivables) = 2.0

An analyst gathered the following information about a company: > Pretax income = $10,000. > Taxes payable = $2,500. > Deferred taxes = $500. > Tax expense = $3,000. What is the firm's reported effective tax rate? A) 25%. B) 5%. C) 30%.

C Reported effective tax rate = Income tax expense / pretax income = $3,000 / $10,000 = 30%

Income Statements for Royal, Inc. for the years ended December 31, 20X0 and December 31, 20X1 were as follows (in $ millions): 20X0 | 20X1 Sales 78 | 82 Cost of Goods Sold (47) | (48) Gross Profit 31 | 34 Sales and Administration (13) | (14) Operating Profit (EBIT) 18 | 20 Interest Expense (6) | (10) Earnings Before Taxes 12 | 10 Income Taxes (5) | (4) Earnings after Taxes 7 | 6 Analysis of these statements for trends in operating profitability reveals that, with respect to Royal's gross profit margin and net profit margin: A) both gross profit margin and net profit margin increased in 20X1. B) gross profit margin decreased but net profit margin increased in 20X1. C) gross profit margin increased in 20X1 but net profit margin decreased.

C Royal's gross profit margin (gross profit / sales) was higher in 20X1 (34 / 82 = 41.5%) than in 20X0 (31 / 78 = 39.7%), but net profit margin (earnings after taxes / sales) declined from 7 / 78 = 9.0% in 20X0 to 6 / 82 = 7.3% in 20X1.

From an analyst's perspective, an advantage of the indirect method for presenting operating cash flow is that the indirect method: A) shows operating cash received and paid. B) provides more information than the direct method. C) shows the difference between net income and operating cash flow.

C The indirect method reconciles the difference between net income and CFO. The direct method shows operating cash received and paid and, therefore, provides more information on its face than the indirect method

C 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)]

Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax: A) asset of $48,960. B) liability of $17,000. C) asset of $17,000.

C Since taxable income ($238,000) exceeds pretax income ($188,000), Kruger will have a deferred tax asset of $17,000 [($238,000 − $188,000)(0.34)].

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) decrease by $50,000. C) increase by $15,000.

C 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

Use the following information for RGB, Inc.: - EBIT / revenue = 10% - Tax retention rate = 60% - Revenue / assets = 1.8 times - Current ratio = 2 times - EBT / EBIT = 0.9 times - Assets / equity = 1.9 times RGB, Inc.'s return on equity is closest to: A) 10.5%. B) 14.0%. C) 18.5%.

C Tax burden = (1 - tax rate) = tax retention rate = 0.6. ROE = 0.6 × 0.9 × 0.1 × 1.8 × 1.9 = 0.1847 = 18.47%.

Johnson Corp. had the following financial results for the fiscal 2004 year: Current ratio 2.00; Quick ratio 1.25; Current liabilities $100,000; Inventory turnover 12; Gross profit % 25 The only current assets are cash, accounts receivable, and inventory. The balance in these accounts has remained constant throughout the year. Johnson's net sales for 2004 were: A) $300,000. B) $900,000. C) $1,200,000.

C The 25% GP indicates that the cost of goods sold is 75% of sales. The inventory is derived from the difference between current ratio and the quick ratio. The current ratio indicates that the current assets are $200,000 and the quick assets are $125,000. The difference represents the inventory of $75,000. The inventory turnover is used to obtain cost of goods sold of $900,000. The cost of goods sold is 75% of sales, indicating that sales are $1,200,000.

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A) Leverage ratio. B) Return on equity (ROE). C) Return on assets (ROA).

C The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity. Return on equity and the leverage ratio (assets/equity) would both be affected.

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A) Return on equity (ROE). B) Leverage ratio. C) Return on assets (ROA).

Which of the following disclosures would least likely be found in the financial statement footnotes of a firm? A) Accumulated depreciation. B) Carrying values by asset class. C) Average age of assets.

C The average age is not a required disclosure. However, it can be calculated given other disclosures.

An analyst determined the following information concerning Franklin, Inc.'s stamping machine: - Acquired seven years ago for $22 million - Straight line method used for depreciation - Useful life estimated to be 12 years - Salvage value originally estimated to be $4 million The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. Under U.S. GAAP, the stamping machine is: A) impaired because expected salvage value has declined. B) not impaired. C) impaired because its carrying value exceeds expected future cash flows.

C The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.

At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is: A) $13,000. B) $26,000. C) zero.

C The carrying value of the warranty liability is $26,000 (the same amount is recorded as a liability on the balance sheet and as an expense on the income statement). The tax base is equal to the carrying value less any amounts deductible in the future. Therefore, the tax base is $0 ($26,000 − $26,000) since the warranty expense will be deductible when the work is performed next year.

According to IFRS, the deferred tax consequences of revaluing held-for-use equipment upward is reported on the balance sheet: A) as an asset. B) as a liability. C) in stockholders' equity.

C The deferred tax consequences of revaluing an asset upward under IFRS are reported in stockholders' equity.

Which of the following statements is most accurate? The difference between taxes payable for the period and the tax expense recognized on the financial statements results from differences: A) in management control. B) between basic and diluted earnings. C) between financial and tax accounting.

C The difference between taxes payable for the period and the tax expense recognized on the financial statements results from differences between financial and tax accounting.

Meyer Investment Advisory and Smith Brothers Investments are operationally identical except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is likely to have: A) higher debt/equity ratio and higher debt/assets ratio. B) lower profitability (ROA and ROE) in early years and higher in later years. C) higher cash flows from operations and lower cash flow from investing.

C The net cash flow remains the same regardless of which accounting method is used. But components of cash flows change and cash flows from operations will be higher when costs are capitalized and lower when expensed. On the other hand, cash flows from investing will be lower when costs are capitalized and higher when expensed. Compared to firms expensing costs, firms that capitalize costs will have smaller debt to equity ratios and higher initial ROAs, but lower ROAs in the future.

Which of the following items is least likely considered a cash flow from financing activity under U.S. GAAP? A) Receipt of cash from the sale of bonds. B) Payment of cash for dividends. C) Payment of interest on debt.

C The payment of interest on debt is an operating cash flow under U.S. GAAP.

How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable? A) Unearned revenue is recognized to the extent that costs have been incurred. B) Revenue is recognized to the extent that costs have been incurred. C) Revenue is deferred until the sporting event is held.

C The ticket revenue should not be recognized until it is earned. Even though the tickets are nonrefundable, the seller is still obligated to hold the event.

A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company's: A) total assets on the balance sheet. B) net income/sales ratio. C) fixed asset turnover ratio.

C The use of an accelerated depreciation method will increase depreciation expenses early in the asset's life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed assets) will increase, because the book value of the fixed assets will be lower.

The exhibit below provides relevant data and financial statement information about Acme's inventory purchases and sales of inventory for the last year. Units | Unit Price Beginning Inventory 699 | $5.00 Purchases 710 | $8.00 Sales 806 | $15.00 The value of the ending inventory level in dollars using the last-in-first-out (LIFO) method is: A) $6,160. B) $4,824. C) $3,015.

C There are (699 + 710 - 806) = 603 items left in inventory. Ending inventory = 603 × $5 = $3,015.

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

C 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.

Return on equity using the traditional DuPont formula equals: A) (net profit margin) (interest component) (solvency ratio). B) (net profit margin) (total asset turnover) (tax retention rate). C) (net profit margin) (total asset turnover) (financial leverage multiplier).

C This is the correct formula for the three-ratio DuPont model for ROE

Summit Co. has provided the following information for its most recent reporting period: Beginning Figures | Ending Figures | Average Figures Sales | $ 5,000,000 | EBIT | $ 800,000 | Interest Expense | $ 160,000 | Taxes | $ 256,000 | Assets $ 3,500,000 | $ 4,000,000 | $ 3,750,000 Equity $ 1,700,000 | $ 2,000,000 | $ 1,850,000 What is Summit Co.'s total asset turnover and return on equity? Total Asset Turnover | Return on Equity A) 1.25 | 20.8% B) 1.33 | 15.8% C) 1.33 | 20.8%

C Total asset turnover = sales / average assets = 5,000,000 / 3,750,000 = 1.33 Return on equity = net income / average equity Net income = EBIT - interest - taxes = 800,000 - 160,000 - 256,000 = 384,000 ROE = 384,000 / 1,850,000 = 20.8%

Which of the following statements regarding capitalizing versus expensing costs is least accurate? A) Capitalization results in higher profitability initially. B) Cash flow from investing is higher with expensing than with capitalization. C) Total cash flow is higher with capitalization than expensing.

C Total cash flow is higher with capitalization than expensing is least accurate because total cash flow would be the same under both methods, not considering tax implications.

Which balance sheet accounts are most closely related to the operating activities on a firm's cash flow statement? A) Non-current assets. B) Equity and non-current liabilities. C) Working capital.

C Typically, operating activities on the cash flow statement are most closely related to the working capital accounts (current assets and current liabilities) on the balance sheet. Investing activities are typically related to non-current assets. Financing activities are typically related to non-current liabilities for transactions with creditors, or equity for transactions with shareholders.

During May, a firm's inventory account included the following transactions: May 1 - Inventory - 25 units @ $4.00 May 12 - Purchased - 60 units @ $4.20 May 16 - Sold - 40 units @ $6.00 May 27 - Purchased - 30 units @ $4.25 May 29 - Sold - 40 units @ $6.10 Assuming periodic FIFO inventory costing, gross profit for May was: A) $132. B) $147. C) $153.

C Under FIFO, the first units purchased are the first units sold. FIFO COGS is the same under a periodic system and a perpetual system. Revenue $484 (40 units × $6.00) + (40 units × $6.10) COGS $331 (25 units × $4.00) + (55 units × $4.20) Gross profit $153

Under IFRS, which cash flow statement classifications for dividends paid and interest received, respectively, are least likely permitted? Dividends paid Interest received A) Operating activity Investing activity B) Financing activity Operating activity C) Investing activity Financing activity

C Under IFRS, interest received may be classified as CFO or CFI, while dividends paid may be classified as CFO or CFF.

A building owned by a firm is most likely to be classified as investment property if: A) the building is a manufacturing plant or distribution center. B) the firm uses the building for its corporate headquarters. C) space in the building is rented to other firms.

C Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capital appreciation, or both.

Barber Inc., which uses LIFO inventory accounting under U.S. GAAP, sells DVD recorders. On October 14, it purchased a large number of recorders at a cost of $90 each. Due to an oversupply of recorders remaining in the marketplace due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80 and the replacement cost is $73. The normal profit margin is 5 percent of the selling price and the selling costs are $2 per recorder. What is the value of the recorders on December 31? A) $73. B) $78. C) $74.

C Under U.S. GAAP, a LIFO firm values inventory at the lower of cost or market. Market is equal to the replacement cost subject to replacement cost being within a specific range. The upper bound is net realizable value (NRV), which is equal to selling price ($80) less selling costs ($2) for an NRV of $78. The lower bound is NRV ($78) less normal profit (5% of selling price = $4) for a net amount of $74. Since replacement cost ($73) is less than NRV minus normal profit ($74), then market equals NRV minus normal profit ($74). As well, we have to use the lower of cost ($90) or market ($74) principle so the recorders should be recorded at the lower amount of $74.

Under IFRS, if a firm reports investment property using the fair value model, unrealized gains and losses on investment property are: A) disclosed in the financial statement notes. B) recognized in other comprehensive income. C) recognized on the income statement.

C Under the fair value model for investment property, unrealized gains and losses are recognized on the income statement.

For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an "indefinite reversal criterion" under: A) both IFRS and U.S. GAAP. B) IFRS, but not U.S. GAAP. C) U.S. GAAP, but not IFRS.

C Undistributed profits from a subsidiary do not require the creation of a deferred tax liability under U.S. GAAP if the subsidiary meets the indefinite reversal criterion. For IFRS, there are circumstances where a DTL is not created but the test for this treatment is not called or equivalent to the indefinite reversal criterion detailed in U.S. GAAP.

A firm purchased a piece of equipment for $6,000 with the following information provided: > Revenue will increase by $15,000 per year. > The equipment has a 3-year life expectancy and no salvage value. > The firm's tax rate is 30%. > Straight-line depreciation is used for financial reporting and double declining is used for tax purposes. What will the firm report for deferred taxes on the balance sheet for years 1 and 2? Year 1 | Year 2 A) $3,300 | $4,100 B) $3,900 | $3,900 C) $600 | $400

Determine the cash flow from operations given the following data. Cash payment of dividends = $30, Sale of equipment = $25, Net income = $25, Purchase of land = $15, Increase in accounts payable = $20, Sale of preferred stock = $25, Increase in deferred taxes = $5, Profit on sale of equipment = $15. A) $20. B) $45. C) $35.

C Using the indirect method, CFO = Net income 25 + increase in accounts payable 20 + increase in deferred taxes 5 - profit on sale of equipment 15 = $35. Increases in accounts payable and deferred taxes are sources of operating cash that are not included in net income and must be added. Profit on sale of equipment is a CFI item that must be removed from net income. No adjustment needs to be made for cash payment of dividends (CFF), sale of preferred stock (CFF), or purchase of land (CFI) because they are not included in net income. Only the profit on sale of equipment, not the full proceeds from sale, is included in net income.

Are the following statements about common-size financial statements correct or incorrect? Statement #1 - Expressing financial information in a common-size format enables the analyst to make better comparisons between two firms of similar size that operate in different industries. Statement #2 - Common-size financial statements can be used to highlight the structural changes in the firm's operating results and financial condition that have occurred over time. With respect to these statements: A) both are correct. B) both are incorrect. C) only one is correct.

C Vertical common-size statements enable the analyst to make better comparisons of two firms of different sizes that operate in the same industry. Horizontal common-size financial statements express each line as a percentage of the base year figure; thus, horizontal common-size statements can be used to identify structural changes in a firm's operating results and financial condition over time.

Compared to reporting under FIFO for both tax and financial statements, a firm that chooses to report under LIFO during a period of falling prices would be most likely to report a lower: A) inventory. B) gross profit. C) cash balance.

C When prices are falling, LIFO would result in lower COGS (higher gross profit) and higher ending inventory than FIFO. Higher gross profit with LIFO would result in higher taxes payable which would reduce cash balances (as long they pay their taxes).

Which of the following inventory disclosures would least likely be found in the footnotes of a firm following IFRS? A) The amount of loss reversals, from previously written-down inventory, recognized during the period. B) The carrying value of inventories that collateralize a short-term loan. C) The separate carrying values of raw materials, work-in-process, and finished goods computed under the LIFO cost flow method.

C While the separate carrying values of raw materials, work-in-process, and finished goods are required disclosure for some firms, LIFO is not permitted under IFRS.

The write-off of obsolete equipment would be classified as: A) operating cash flow. B) investing cash flow. C) no cash flow impact.

C Write-off of obsolete equipment has no cash flow impact.

If RGB, Inc., has annual sales of $100,000, average accounts payable of $30,000, and average accounts receivable of $25,000, RGB's receivables turnover and average collection period are closest to: Receivables turnover Average collection period A) 2.1 times 174 days B) 3.3 times 111 days C) 4.0 times 91 days

C receivables turnover = (S / avg. AR) = 100 / 25 = 4 average collection period = 365 / 4 = 91.25 days

RGB, Inc., has a net profit margin of 12%, a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. RGB's return on equity is closest to: A) 12.0%. B) 14.2%. C) 17.3%.

C return on equity = (net income/sales)(sales/assets)(assets/equity)(net income/sales)(sales/assets)(assets/equity)= (0.12)(1.2)(1.2) = 0.1728 = 17.28%

An analyst has gathered data from two companies in the same industry. Calculate the ROE for both companies and use the extended DuPont analysis to explain the critical factors that account for the differences in the two companies' ROEs. Selected Income and Balance Sheet Data Company A Company B Revenues $500 $900 EBIT 35 100 Interest expense 5 0 EBT 30 100 Taxes 10 40 Net income 20 60 Average assets 250 300 Total debt 100 50 Average equity $150 $250

Company A: ROE = 0.667 × 0.857 × 0.07 × 2.0 × 1.67 = 13.4% Company B: ROE = 0.608 × 1.0 × 0.111 × 3.0 × 1.2 = 24% EBIT margin = EBIT / revenue Company A: EBIT margin = 35 / 500 = 7.0% Company B: EBIT margin = 100 / 900 = 11.1% asset turnover = revenue / average assets Company A: asset turnover = 500 / 250 = 2.0 Company B: asset turnover = 900 / 300 = 3.0 interest burden = EBT / EBIT Company A: interest burden = 30 / 35 = 85.7% Company B: interest burden = 100 / 100 = 1 financial leverage = average assets / average equity Company A: financial leverage = 250 / 150 = 1.67 Company B: financial leverage = 300 / 250 = 1.2 tax burden = net income / EBT Company A: tax burden = 20 / 30 = 66.7% Company B: tax burden = 60 / 100 = 60.0% Company A: ROE = 0.667 × 0.857 × 0.07 × 2.0 × 1.67 = 13.4% Company B: ROE = 0.608 × 1.0 × 0.111 × 3.0 × 1.2 = 24%

Witz Company reported that at the end of last year, LIFO inventory was $14,000, cost of goods sold was $40,000, and net income was $2,400. Witz's LIFO reserve was $8,000 at the beginning of the year and $10,000 at year-end. The company's tax rate was 40%. Determine the effects on the income statement had the FIFO inventory costing method been used, including an adjustment for taxes.

Cost of goods sold under FIFO would have been lower by the change in the LIFO reserve.FIFO cost of sales = LIFO cost of sales - (ending LIFO reserve - beginning LIFO reserve)= $40,000 - ($10,000 - $8,000) = $38,000 Had COGS been $2,000 less, pretax income would have been higher by $2,000, so taxes would have been higher by $2,000 × 40% = $800. As a result, net income would have been higher by the change in the LIFO reserve net of tax.FIFO net income = LIFO net income + (1 - tax rate)(ending LIFO reserve - beginning LIFO reserve)= $2,400 + ($2,000)(1 - 0.40) = $3,600

Witz Company reported that at the end of last year, LIFO inventory was $14,000, cost of goods sold was $40,000, and net income was $2,400. Witz's LIFO reserve was $8,000 at the beginning of the year and $10,000 at year-end. The company's tax rate was 40%. Determine the effects on the balance sheet had the FIFO inventory costing method been used, including an adjustment for taxes.

Ending inventory under FIFO would be higher by the amount of the LIFO reserve.FIFO ending inventory = LIFO ending inventory + LIFO reserve= $14,000 + $10,000 = $24,000 If FIFO had been used, cash would be lower (because taxes would have been cumulatively higher) by the LIFO reserve times the tax rate, or $10,000 × 40% = $4,000. With inventories $10,000 higher and cash $4,000 lower, total assets would be $6,000 higher if FIFO had been used. This would be balanced by a $6,000 increase in shareholders' equity. This adjustment is equal to the LIFO reserve times (1 - tax rate).

During 20X6, XXX reported earnings available to common shareholders of $1,200,000 and had 500,000 shares of common stock outstanding for the entire year, for basic EPS of $2.40. XXX has 100,000 stock options (or warrants) outstanding the entire year. Each option allows its holder to purchase one share of common stock at $15 per share. The average market price of XXX's common stock during 20X6 is $20 per share. Compute diluted EPS.

diluted = $2.29 new shares = $15 * 100,000 shares = $1,500,000 / $20 avg price = 75,000 shares repurchased, 100,000 - 75,000 = 25,000 diluted EPS = 1,200,000 / (500,000 + 25,000) = $2.29

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