chapter 5
Oracle Corporation reported the following earnings per share information in its 2013 annual report. The company has only one class of stock outstanding. ($ in millions) Net income $10,925 Dividends to common shareholders $1,433 Weighted average common shares outstanding 4,769 Weighted average dilutive shares from employee stock plans 75 Basic and diluted earnings per share were, respectively:
Basic EPS = $10,925 / 4,769 = $2.2908367 = $2.29 Diluted EPS = $10,925 / 4,844 = $2.2553675= $2.26 The correct answer is: $2.29 and $2.26
The 2013 annual report of Dow Chemical disclosed the following: Deferred tax assets decreased by $1,503 million and deferred tax liabilities increased by $38 million. How do these balance-sheet changes affect tax expense on the income statement for the year?
Changes in the deferred tax asset account inversely affects tax expense. Changes in the deferred tax liability account directly affect tax expense. Therefore Dow's decrease in deferred tax assets increases tax expense by $1,503 million and Dow's increase in deferred tax liabilities increases income tax expense by $38, for a net increase in income tax expense of $1,541 million. The correct answer is: Increase tax expense by $1,541 million
Revenue from a foreign subsidiary will be smaller in U.S. dollars when the dollar strengthens relative to the foreign currency. Select one: True Correct False
Foreign currency is weaker when the dollar strengthens. Thus, revenue in the foreign currency is worth fewer U.S. dollars. The correct answer is 'True'.
Income tax expense is not recorded at the amount owing to the tax authorities even if this is the most objectively measured amount.
Income tax expense is based on GAAP numbers. The amount paid is based on tax rules. The difference between the two is recorded as deferred tax expense (benefit). The correct answer is 'True'.
Companies that engage in long-term sales contracts such as construction projects often use the percentage of completion method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.
Percentage of completion method recognizes revenue by determining the costs incurred under the contract relative to its total expected costs and not evenly over time. The correct answer is 'True'.
Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be:
Project-directed or highly-specific research buildings and equipment with no alternate uses must be expensed as incurred. The correct answer is: Expensed in the current year.
Next year, Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.
R&D costs must be expensed under GAAP unless they have alternative future uses. If these assets do, indeed, have alternative future uses, they will be capitalized and depreciated. The correct answer is 'True'.
Life Technologies Corporation reported research and development expense of $341,892 thousand on its 2012 income statement. This expense included many types of costs. Which of the following types of costs would not be included in the $341,892 thousand?
R&D expenses exclude any costs related to sales. The correct answer is: Supplies and inventory related to R&D activities and new-product sales
Life Technologies Corporation and Affymetrix Inc. are competitors in the life sciences and clinical healthcare industry. Following is a table of Total revenue and R&D expenses for both companies. Life Technologies Corporation Affymetrix Inc 2012 2011 2010 2012 2011 2010 Total revenue $3,798,510 $3,775,672 $3,588,094 $295,623 $267,474 $310,746 R&D expenses $341,892 $377,924 $375,465 $57,881 $63,591 $67,934 Which of the following is true?
Rationale: To make comparisons, we need to common size the R&D expenditures of both firms by scaling by total revenues. Life Technologies Corporation Affymetrix Inc 2012 2011 2010 2012 2011 2010 Common sized R&D 9.0% 10.0% 10.5% 19.6% 23.8% 21.9% Affymetrix spends proportionately more on R&D than Life Technologies. Affymetrix is more R&D intensive, thus A is not true. Life Technologies has spent less on R&D in 2012 than in 2011 and 2010, thus B is not true. Affymetrix decreased R&D from 23.8% in 2011 to 19.6% in 2012, thus C is not true, but D is true. The correct answer is: Affymetrix is less R&D intensive in 2012 than in 2011.
The income tax footnote to the financial statements of Life Technologies Company for the year ended December 31, 2012, includes the following information (in thousands). How much of the income tax expense is payable in 2012? Current tax provision Federal $237,481 State 13,156 Foreign 50,548 301,185 Deferred tax provision Federal (174,953 ) State (9,925 ) Foreign (1,182 ) (186,060 ) Changes in tax rate (13,662 ) Changes in valuation allowance (87 ) Provision for income taxes $101,376
The current tax provision of $301,185 is payable in 2012. The correct answer is: $301,185 thousand
Boston Consulting Group (BCG) is a management consulting, technology services and outsourcing organization. Which of the following actions should managers take when there is evidence that a fixed-rate contract is over budget and will generate a loss for the firm?
When contracts are over-budget, managers should estimate the new, revised, total engagement cost. If this results in a loss on the engagement, that loss should be recognized immediately rather than over the remaining term of the engagement. The correct answer is: Recognize the loss in the current period rather than over the remaining term of the engagement.
Revenue from a consignment sale is recognized when the item is placed on consignment with the middleman, if sales are probable, based on past experience. Select one: True False Correct
When the item is delivered to the middleman (the consignee) no title has passed therefore no revenue has been earned. Revenue is only earned when the third party buys the item. The correct answer is 'False'.
According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, it must be earned and realized (realizable). Select one: True Correct False
According to GAAP revenue recognition criteria, revenue must be both realized (realizable) and earned, to be recognized on the income statement. The issue of when the revenue is earned is subject to professional judgment. The correct answer is 'True'.
All of the following are potentially dilutive in computing diluted EPS except:
All of the above are dilutive securities
All of the following ways can diminish accounting quality, except:
All of the choices can diminish accounting quality except for Reliable numbers that are predictive. Reliable numbers that are NOT predictive which can diminish accounting quality. The correct answer is: Reliable numbers that are predictive
R&D expense is treated as an operating expense, not a capital expenditure, unless the R&D assets acquired have an alternative future use.
Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed unless the R&D assets have alternative future uses. The correct answer is 'True'.
The 2013 annual report of Computer Corporation included the following disclosure: During fiscal 2013, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Japanese Yen. What effect did these currency fluctuations have on Computer Corporation's 2013 consolidated income statement?
Because the US dollar weakened during the year, each Yen will translate to more dollars. Thus, revenues, expenses, and net profit of the Japanese subsidiary will be higher than they would have been absent the foreign currency fluctuations. With respect to the other principal currencies, given that the US dollar strengthened during the year, the profits in these countries will translate to fewer dollars. Thus, revenues, expenses, and net profits of these subsidiaries will be lower than they would have been absent the foreign currency fluctuations. However, D is not a correct answer because the question asked about the income statement, not the balance sheet. This renders answer E incorrect too. The correct answer is: Net profit of the Japanese subsidiary will be higher
Because diluted EPS include dilutive securities such as convertible securities and employee stock options, it must always be less than or equal to basic EPS.
Diluted EPS includes dilutive securities in the denominator of the ratio. Therefore the diluted EPS ratio must always be less than or equal to basic EPS. The correct answer is 'True'.
A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.
Diluted EPS will only be lower than basic EPS if the outstanding employee stock options are dilutive, which means the stock options are at or in the money. The correct answer is 'True'.
Revenues from discontinued operations of a company are reported separately from revenues from continuing operations in the income statement.
Discontinued operations refer to any identifiable business unit that the company intends to sell. The income (loss) of the discounted operation (net of tax), and the after-tax gain (loss) on sale of the unit, are reported in a separate section of the income statement below income from continuing operations. The correct answer is 'True'.
Employee severance costs, as part of board-approved restructuring plans, are reported in the income statement even if the actual payment for these costs occurs in subsequent periods.
Employee severance costs are reported in the income statement as accrued costs. Total estimated costs of terminating or relocating a targeted employee group are recorded as an expense in the period in which these costs are estimated. The correct answer is 'True'.
Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold. Select one: True False Correct
Revenue will be recognized as soon as the merchandise is sold but only for the portion that the company estimates will not be returned. The estimated returns are netted against sales and set up as a liability (reserve). The correct answer is 'False'.
Sam's Club (part of the WalMart consolidated operations) collects annual non-refundable membership fees from customers. When should Sam's Club recognize revenue for these membership fees?
Sam's should record membership fees evenly over the year even if the fee is nonrefundable because Sam's has an obligation to stay open for business for a year to honor the customer's membership. The correct answer is: Evenly over the membership year
Nickolas Imports recorded a restructuring charge of $21.6 million during fiscal 2014 related entirely to the closing of its California based operations in San Diego and in Tijuana, Mexico. The company's financial statement footnotes indicated that expected employee separation payments amounted to $16.8 million and that fixed asset write-downs accounted for the remainder. Nickolas had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $3,600,000. What is the cash flow effect of Nickolas 's restructuring during fiscal 2014?
The total restructuring charge accrued was $16.8 million because asset write-downs are not accrued. That is there is no credit to a liability account for write-downs, the assets are credited (reduced). Thus, the company must have paid $16,800,000 - $3,600,000 = $13,200,000 in cash during fiscal 2014. The correct answer is: $13,200,000
Tickets Today contracts with the producer of Riverdance to sell tickets online. Tickets Today charges each customer a fee of $6 per ticket and receives $15 per ticket from the producer. Tickets Today does not take control of the ticket inventory. Average ticket price for the event is $150. How much revenue should Tickets Today recognize for each Riverdance ticket sold?
Tickets Toay should record $21 revenue each time it sells a ticket. Of that, $6 will be received in cash and $15 will be recorded as receivable from the Riverdance producers. The correct answer is: $21 because both the fee from the customer and the producer are earned
The two factors that enhance the quality of accounting information are reliability and relevance.
Two main uses of financial reports are evaluation and valuation of a company and its performance. As a result, high-quality accounting information that is reliable and relevant is required. The correct answer is 'True'.
Which of the following items create risk related to revenue recognition?
each of these types of revenue or business conditions creates risk associated with revenue recognition. Each requires good internal controls to prevent and detect inappropriate revenue recognition, as well as extra management vigilance and auditor care. The correct answer is: All of the above