Chapter 9 - Operating Activities

U.S. GAAP requires firms to report the assets and liabilities of defined benefit plans ________________________________________________

in the notes to the financial statements

_____________________________ differences result from including revenues and expenses in income before taxes in a different period than those items affect taxable income

temporary

The statement of cash flows allows the accountant to agree the net cash provided to the ________________________________ general ledger

Cash account

A company that uses LIFO will experience a(n) _________________________ during a period it sells more units than it purchases

LIFO liquidation

_____________________ is primarily a question of timing

Revenue recognition

All of the following examples represent complex revenue generation models EXCEPTS: a. Pont-of-sale transactions b. Uncertain revenue timing c. Bundled service deliverables d. Bundle deliverables in leases

a

An inventory pricing procedure in which the current costs have a direct impact on the inventory is: a. FIFO b. LIFO c. Base Stock d. Weighted-average

a

Please refer to the study guide for questions regarding FALCON NETWORKS. Based on the information provided by Falcon Networks how much cash did income taxes use during 2012 a. $154.29 million b. $54.17 million c. $208.36 million d. 284.84 million

a

Please refer to the study guide for questions regarding FALCON NETWORKS. Using the information provided by Falcon Networks, determine the federal effective tax rate for 2012. a. 33.52% b. 35.00% c. 42.25% d. 45.49%

a

The accumulated benefit obligation measures: a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. b. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. c. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. d. the shortest possible period for funding to maximize the tax deduction.

a

A typical defined benefit pension plan formula includes all of the following except: a. the number of years of employee service b. the fair market value of pension plan assets c. a credit for each year of annual service d. the final salary at retirement date

b

The major difference between accounting for pensions and the accounting for other postretirement benefits is that firms: a. do not need to report an excess of the accumulated benefits obligations over assets in a postretirement benefits fund as a liability on the balance sheet. b. do not need to disclose any estimates used in calculating projected benefits c. postretirement benefits are normally NOT material for most companies and do not need to be disclosed. d. do not need to set aside funds for future postretirement benefits as they do for pension benefits

a

Upton Company has consistently used the percentage-of-completion method for recognizing income. In 2010, Upton started on an $18,000,000 construction contract that was completed in 2012. The following information was taken from Upton's 2010 accounting records: Progress billing: $6,600,000 Costs incurred $5,400,000 Collections $4,200,000 Estimated costs to complete $10,800,000 What amount of revenue should Upton recognize on the contract in 2010? a. $6,000,000 b. $5,400,000 c. $9,000,000 d. $0

a $5,400,000 / (5,400,000 +10,800,000) = 33.3% 33.3% x 18,000,000 = 6,000,000

Presented below is pension information related to Roberts Corp. for the year 2012: Service Cost 36,000 Interest on projected benefit obligation 12,000 Amortization of prior service cost due to increase in benefits 6,000 Expected return on plan assets 8,000 The amount of pension expense to be reported for 2012 is: a. $46,000 b. $48,000 c. $54,000 d. $40,000

a 36,000 + 12,000 + 6,000 + 8,000 = 46,000

Dividing a company's income tax expense by its book income before income taxes provides the company's ____________________________

average tax rate

A LIFO liquidation during periods when prices are increasing results in a company: a. recording a large inventory write down b. recording higher earnings than it would have if it had used FIFO. c. recording lower earnings than it would have if it had used FIFO d. having operational problems, but no financial statement effects

b

Deferred tax liabilities result in future tax __________________ when temporary differences reverse.

payments

All of the following are considered by analysts when assessing the quality of accounting EXCEPT: a. Price variation and the speed at which inventory turns over b. Any liquidation of FIFO inventory layers c. Any physical deterioration or obsolescence of inventory d. The inventory cost-flow assumption chosen by management

b

All of the following are most likely to change the FMV of pension plan assets during a given period EXCEPT: a. Employer cash payments are made to the plan trustee. b. Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions. c. Actual returns on invested plan assets. d. Retirement benefits paid

b

All of the following conditions signal that revenue recognition may have been recorded too early EXCEPT: a. large and volatile amounts of uncollectible accounts receivable b. a decrease in the number of days accounts receivable are outstanding. c. unusually large amounts of returned goods. d. excessive warranty expenditures

b

To calculate a company's average tax rate an analyst would a. Divide income tax payable by income before taxes b. Divide income tax expense by income before taxes c. Multiply the statutory income tax rate by income before tax d. Average a firm's Federal, State, Local, and Foreign tax rates

b

Which of the following will most likely help identify an increasing proportion of uncollectible sales? a. accounts receivable turnover b. the ratio of bad debt expense to sales c. the ratio of sales returns to sales d. the ratio of cost of sales to sales

b

Playtime Corporation Assume the Playtime Corp. has agreed to construct a new playground for Surrey County for $2,450,000. Construction of the new playground will begin on March 17, 2012 and is expected to be completed in August 2013. At the signing of the contract Playtime Corp. estimates that it will cost $1,750,000 to build the playground. At the end of 2012 Playtime provided the following information about the project: Year Cost Incurred Estimated Costs 2012 $1,200,000 $600,00 What percentage is the playground complete? a. 62.5% b. 66.7% c. 55.6% d. 50.0%

b 1,200,000/1,800,000 = 66.7%

Gorilla, Corp. implemented a defined-benefit pension plan for its employees on January 2, 2012. The following data are provided for year 2012, as of December 31: Accumulated benefit obligation $103,000 Plan assets at fair value 78,000 Net period pension expense 90,000 Employer's contribution 70,000 What amount should Gorilla record as additional minimum pension liability at December 31, 2012? a. $0 b. $5,000 c. $20,000 d. $45,000

b Current pension liability is $90,000 - $70,000 = $20,000 Need an additional $5,000

A minimum liability for pension expense is reported when: a. the projected benefit obligation exceeds the fair value of pension plan assets. b. the pension expense reported for the period is greater than the funding amount for the same period. c. the accumulated benefit obligation exceeds the fair value of pension plan assets d. vested benefits exceed the fair value of pension plan assets

c

All of the following are conditions for revenue recognition outlined by SAB 104 EXCEPT: a. There is pervasive evidence that an arrangement exists. b. Delivery has occurred or services have been performed c. The seller's price to the buyer can be variable. d. Collectability is reasonably assured.

c

Analysts concerns with postretirement benefits include all of the following EXCEPT: a. Should the underfunded postretirement benefit obligation be added to liabilities in assessing risk? b. How reasonable are the firms' assumptions regarding health care cost increases? c. Is the postretirement benefit fund adequately paying benefits? d. Is the postretirement benefit fund generating returns consistent with the expected rate of return?

c

If the portions of the firm's foreign operations in higher-tax-rate countries grew more rapidly than foreign operations in lower-tax-rate countries, the company may seek out more tax effective ways of operating abroad through all of the following means except: A.) Assess whether transfer prices or cost allocations can be adjusted to shift income from high-tax-rate to low-tax-rate jurisdictions. B.) Shift from domestic to foreign borrowing to increase deductions for interest against foreign-source income. C.) Shift from debt to equity financing of foreign operations to increase interest deductions against foreign-source income. D.) Shift some operations, like marketing, to the United States where the average tax rate is lower.

c

Regarding actuarial assumptions, firms must disclose in notes to the financial statements all of the following EXCEPT: a. the discount rate used to compute the pension benefit obligation b. the expected rate of return on pension investments. c. estimates of the number retirees over the future 10 years. d. the rate of compensation increase

c

The projected benefit obligation measures: a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. b. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. c. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. d. the shortest possible period for funding to maximize the tax deduction.

c

Under the completed contract method: a. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. b. revenue, cost, and gross profit are recognized during the production cycle. c. revenue, cost, and gross profit are recognized at the time the contract is completed. d. None of these are correct

c

Which of the following accounts would NOT be considered a reserve account? a. Allowance for Doubtful Accounts b. Estimated Warranty Liability c. Prepaid Expense d. Accumulated Depreciation

c

Which of the following is NOT part of the balance sheet approach when computing income tax expense? a. Identifying at each balance sheet date all differences between the book basis of assets, liabilities, and tax loss carryforwards b. Eliminating permanent differences between book and tax basis c. Eliminating deferred tax assets d. Assessing the likelihood that the firm will realize the benefits of deferred tax assets in the future.

c

Which of the following statements best describes the difference between U.S. GAAP and IFRS with respect to revenue recognition? a. IFRS has a substantial amount of industry specific guidance for revenue recognition b. IFRS revenue recognition is not consistent with U.S. GAAP in principle c. There are subtle differences in the wording of U.S. GAAP as compared with IFRS d. IFRS has four criteria and U.S. GAAP has five conditions for revenue recognition

c

Which of the following would NOT be suggestive of a company recognizing sales too early? a. large and volatile amounts of uncollectible accounts receivable b. excessive warranty expenditures c. large growth in accounts receivable d. unusually large amount of returned goods

c

Please refer to the study guide for questions regarding FALCON NETWORKS. Using the information provided by Falcon Networks determine the combined effective tax rate for 2012. a. 33.52% b. 35.00% c. 42.25% d. 45.49%

c Income tax expense / income before tax

A company that uses FIFO will find that its ________________________ account tends to be somewhat out of date.

cost of goods sold

Income tax expense consists of two components, the _____________________ portion and the ___________________________ portion

current, deferred

All of the following are events that can change the projected benefit obligation (PBO) during a period EXCEPT: a. The payment of retirement benefits b. Amendments to the pension plan agreement c. The interest accumulated on the liability. d. All of these can change the PBO

d

All of the following are true regarding accrual accounting EXCEPT: a. Accrual basis measures operating success by the extent to which accomplishments exceed efforts. b. Accrual basis measures operating success by the extent to which revenues exceed expenses. c. Accrual basis reports operating activities in terms of their success in generating value d. Accrual basis for the recognition of expenses is not required under IFRS.

d

Please refer to the study guide for questions regarding FALCON NETWORKS. Using the information provided by Falcon Networks, determine the foreign effective tax rate for 2012. a. 33.52% b. 35.00% c. 42.25% d. 45.49%

d

Typical U.S. GAAP disclosures for deferred income taxes include all of the following except: a. Components of income tax expense b. Components of income before taxes c. Reconciliation of income taxes at statutory rate with income tax expense d. Components of permanent tax differences

d

When input prices are increasing, companies that use the LIFO method of accounting for inventory will report a. Lower of cost of goods sold amounts in comparison to the FIFO method b. Higher sales amounts in comparison to the FIFO method c. Higher ending inventory amounts in comparison to the FIFO method. d. Lower gross profit margins in comparison to the FIFO method

d

Which of the following calculations is used to determine the amount of the liability reported on the balance sheet for underfunding? a. Plan assets less projected benefit obligation b. Projected benefit obligation less plan assets. c. Plan assets less accumulated benefit obligation d. Accumulated benefit obligation less plan assets

d

Which of the following is not a disclosure for derivatives required under SFAS No. 133? a. Firms must describe their risk management strategy and how particular derivatives help accomplish their hedging objectives b. For fair value and cash flow hedges, firms must disclose the net gain or loss recognized in earnings resulting from the hedges' ineffectiveness and the line item on the income statement that included this net gain or loss. c. For cash flow hedges, firms must describe the transactions or events that will result in reclassifying gains and losses from other comprehensive income to net income and the estimated amount of such reclassifications during the next 12 months. d. The specifics of a model that simulates with a 95 percent or other confidence level the minimum, maximum, or average amount of loss that a firm would incur.

d

Playtime Corporation Assume the Playtime Corp. has agreed to construct a new playground for Surrey County for $2,450,000. Construction of the new playground will begin on March 17, 2012 and is expected to be completed in August 2013. At the signing of the contract Playtime Corp. estimates that it will cost $1,750,000 to build the playground. At the end of 2012 Playtime provided the following information about the project: Year Cost Incurred Estimated Costs 2012 $1,200,000 $600,00 If Playtime uses the percentage of completion to recognize revenue on the long-term contract, how much gross margin should Playtime recognize in 2012? a. $389,200 b. $278,000 c. $556,000 d. $433,550

d 1,200,000/1,800,00 = 66.7% * (2,450,000-1,800,000) = 433,550

The process of allocating the historical cost of certain assets to the periods of their use in a reasonably systematic manner is referred to as ____________________________-

depreciation

The difference between the economic resources received from customers and the economic resources paid to suppliers, employees and other providers of goods and services is called _________________________

earnings

A company that uses LIFO will find that its ________________________ account will be somewhat out of date

ending inventory

A contractor would NOT use __________________________________ method of income recognition when there is a substantial uncertainty regarding the total costs it will incur in completing the project.

percentage-of-completion

Companies that engage in long-term contracts can recognize income using either the ___________________________________- method or the ___________________________________________ method

percentage-of-completion, completed contract

Recording municipal bond interest received in the general ledger will generate a(n) _________________________ difference

permanent

Differences between income before taxes and taxable income are either ___________________________ or _________________________.

permanent, temporary

The __________________________ is equal to the actuarial present value of amounts that the employer expects to pay to retired employees, based on the employees' service to date and using expected future salary amounts.

projected benefit obligation

Although LIFO generally provides higher quality earnings measures, FIFO generally provides higher _______________________________________________ measures

quality financial position

One sign that a company may be recognizing sales too early is that it has unusually large amounts of ______________________________________

returned goods

Under the accrual method of accounting, when a firm has substantially completed its value-adding activities it should recognize ______________________________

revenue

Deferred tax assets result in future tax ______________________ when temporary differences reverse

savings