Accounting 4356 Practice Test 3

Stansfield Inc., presents it financial statements in accordance with U.S. GAAP. In 2017, Stansfield discloses a valuation allowance of $1,100 against total deferred tax assets of $20,000. In 2016, Stansfield disclosed a valuation allowance of $1,400 against total deferred tax assets of $18,000. The change in the valuation allowance most likely indicates that Stansfield's:

Expectations of future earning power have increased.

The Tax Reform of 2017 allows U.S. firms to expense capital assets acquired in 2017 (as well as going forward) instead of depreciating them. As a result, in 2018 and later years:

Firms electing to expense capital assets will show lower operating cash flow and higher net income.

On April 1, 2018 a firm bought a $25,000 asset with an expected life of 5 years. The asset was placed into service on July 1st . 2018. The estimated salvage value used was $5,000. The firm uses straight-line depreciation for reporting and the Sum-of-Years-Digits for tax. The fiscal year is the same as the calendar year. The firm sold the asset in the spring of 2020 for $15,000. Their tax rate is 21% As a result of the sale, they will:

Report a loss of $666.67

Which of the following most likely describe a situation that would motivate a manager to issue low-quality financial reports?

The manager's compensation is tied to stock price performance.

Your firm estimated warrantee expense of ten percent of sales when preparing financial reports as per GAAP. That same year, actual warrantee expense was closer to eight percent of sales. As a result, other things being equal:

Your firm will have an increase in deferred tax assets.

Your firm estimated warrantee expense of ten percent of sales when preparing financial reporting per GAAP. That same year, actual warrantee expense was closer to 12 percent of sales. As a result, other things being equal Your firm will have a decrease in deferred tax assets. Your firm will have an increase in deferred tax assets. Your firm will have an increase in deferred tax liabilities.

Your firm will have an increase in deferred tax liabilities.

A company incurs a capital expenditure that may be depreciated over five years for accounting purposes, but with immediate expensing for tax purposes. The company will most likely record:

a deferred tax liability

Suppose that your firm's tax rate falls due to changes in the tax code. One likely result is

a new valuation allowance on deferred tax assets

Which of the following is an indication that a company may be recognizing revenue prematurely? Relative to its competitors, the company's

days sales outstanding is increasing.

Which of the following is an indication that a company may be recognizing revenue prematurely? Relative to its competitors, the company's:

days sales outstanding is increasing.

Which of the following would most likely signal that a company may be using aggressive accrual accounting policies to shift current expenses to later periods? Over the last five- year period, the ratio of cash flow to net income has

decreased each year.

If a particular accounting choice is considered aggressive in nature, then the financial performance for the current period would most likely:

exhibit an upward bias.

A company which uses straight-line depreciation for reporting and accelerated depreciation for tax would have deferred tax liabilities that grow in early years and grow in later years

grow, reverse

To properly assess a company's past performance, an analyst requires

high financial reporting quality.

Projecting profit margins into the future on the basis of past results would be most reliable when the company:

is a large, diversified company operating in mature industries

Projecting profit margins into the future on the basis of past results would be most reliable when the company

is a large, diversified company operating in mature industries.

A company wishing to increase earnings in the current period may choose to:

lower estimates of uncollectable accounts receivabl

When screening for potential equity investments based on return on equity, to control risk, an analyst would be most likely to include a criterion that requires

positive net income

On April 1, 2018 a firm bought a $25,000 asset with an expected life of 5 years. The asset was placed into service on July 1st . 2018. The estimated salvage value used was $5,000. The firm uses straight-line depreciation for reporting and for tax. The fiscal year is the same as the calendar year. The firm sold the asset in the spring of 2020 for $8,000. As a result of the sale, they will:

report a loss of $11,000

Income tax expense reported on a company's income statement equals taxes payable plus the net increase in deferred tax liabilities, less the net increase in deferred tax assets

taxes payable plus the net increase in deferred tax liabilities, less the net increase in deferred tax assets

When comparing a U.S. company that uses the last in, first out (LIFO) method of inventory with companies that prepare their financial statements under international financial reporting standards (IFRS), analysts should be aware that according to IFRS,

the LIFO method of inventory is not permitted under IFRS.

An analyst is evaluating the balance sheet of a U.S. company that uses last in, first out (LIFO) accounting for inventory. The analyst collects the following data:

$670,000

Galambos Corporation had an average receivables collection period of 19 days in 2019. Galambos has stated that it wants to decrease its collection period in 2020 to match the industry average of 15 days. Credit sales in 2019 were $300 million, and analysts expect credit sales to increase to $400 million in 2020. To achieve the company's goal of decreasing the collection period, the change in the average accounts receivable balance from 2019 to 2020 that must occur is closest to:

$836,000

Your firm purchased an asset 3 years ago at the start of the fiscal year. The cost was $100,000, the expected salvage value was $5,000 and the expected life was 20 years. You have used the straight-line depreciation method. You sell the asset for $85,000 at the end of the third year. If you are in the 20% tax bracket your after-tax cash inflow will be closest to

$85,150

Which of the following would result in the creation of a Deferred Tax Liability? You Answered

A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes.

The Tax Cuts and Jobs Act of December 22, 2017 allows 100% expensing for certain business property acquired and placed in service after September 27, 2017, and before January 1, 2023. This legislation also reduced the corporate tax rate from a maximum of 35% under the then-existing graduated rate structure to a flat 21% rate for tax years beginning 2018. Other things equal, taken together, the rate reductions and expensing allowance changes in the tax code will most likely have the combined effect of

A decrease in deferred tax liabilities for U.S. corporations.

The average age of a company's asset base can be estimated as the

Accumulated depreciation divided by the depreciation expense

Under the tax reform passed in 2017 by the U.S. congress and signed into law by president Trump, corporate tax rates were slashed from 35% to 21%. As enacted into law, the result has been: A 15 percent reduction in taxes paid by U.S. corporations (using static scoring, that is assuming no changes in corporate behavior as a result of tax rate changes). A nearly 43 percent reduction in taxes paid by U.S. corporations (using static scoring, that is assuming no changes in corporate behavior as a result of tax rate changes). A roughly 57 percent reduction in taxes paid by U.S. corporations (using static scoring, that is assuming no changes in corporate behavior as a result of tax rate changes). Correct answer b): Under the old rules, for every $1,000 of income corporations pay $350. Under the new rules it would be $200. We can easily solve for the percentage reduction to go from $350 to $200

An even 40.0 percent reduction in taxes paid by U.S. corporations (using static scoring, that is assuming no changes in corporate behavior as a result of tax rate changes).

The Tax Cuts and Jobs Act of December 22, 2017 reduced the corporate tax rate from a maximum of 35% under the existing graduated rate structure to a flat 21% rate for tax years beginning 2018. Other things equal, this change in the tax code, considered in isolation, will most likely have the effect of

An increase in deferred tax asset valuation allowances for U.S. corporations starting in 2018.

The Tax Cuts and Jobs Act of December 22, 2017 allows 100% expensing for certain business property acquired and placed in service after September 27, 2017, and before January 1, 2023. It is an empirical fact that 95% of U.S. firms use straight line depreciation for financial reporting purposes. Other things equal, this change in the tax code, considered in isolation, will most likely have the effect of:

An increase in deferred tax liabilities for U.S. corporations.

Credit analysts are likely to consider which of the following in making a rating recommendation?

Both business risk and financial risk.