Chapter 9—Operating Activities
What are the four disclosures required by U.S. GAAP relating to income taxes?
1) Components of the provision for income taxes. 2) Reconciliation of income taxes at the statutory rate with the provision for income taxes. 3) Components of deferred tax assets and liabilities. 4) Information regarding uncertain tax positions and related reserves.
What are the five steps to apply the core principles of revenue recognition?
1) Identify the contract with a customer. 2) Identify the separate performance obligations in the contract. 3) Determine the transaction price. 4) Allocate the transaction price to the separate performance obligations in the contract. 5) Recognize revenue when (or as) the entity satisfies a performance obligation.
A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively. In these cases the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable. List four conditions that might suggest that a company is recognizing revenues too early?
1. Large and volatile amounts of uncollectible accounts receivable. 2. Unusually large amounts of returned goods. 3. Excessive warranty expenditures. 4. A significant increase in days accounts receivable are outstanding.
Accountants use reserve accounts for various reasons, for each of the scenarios below describe a specific account example that matches the scenario. 1. The use of a reserve account in order to match expense with revenues. 2. The use of a reserve account in order to keep expense out of the income statement. 3. The use of a reserve account in order to revalue an asset, but delay the income recognition effect.
1. The reserve account might appear on the balance sheet as a reduction in an asset. Firms provide for bad debt expense and increase the account, Reserve for Bad Debts. This reserve account appears as a subtraction from Accounts Receivable on the balance sheet. Likewise, firms recognize depreciation expense and increase the account, Reserve for Depreciation (U.S. firms use the account, Accumulated Depreciation). The reserve account appears as a reduction from fixed assets on the balance sheet. Alternatively, the reserve account might appear as a liability on the balance sheet. For example, a firm might provide for warranty expense or pension expense and increase the accounts, Reserve for Warranties (Estimated Warranty Liability in the United States) or Reserve for Retirement Benefits (Accrued Retirement Liability in the United States). 2. A practice in some countries is to create a reserve account by reducing the Retained Earnings account. For example, a firm might decrease Retained Earnings and increase Reserve for Price Increases or Reserve for Contingencies. These accounts appear among the shareholders' equity accounts and may carry a title such as Retained Earnings Appropriated for Price Increases or Retained Earnings Appropriated for Contingencies. When firms later experience the price increase or contingency, they charge the cost against the reserve account rather than include it in expenses. These costs therefore bypass the income statement and usually result in an overstatement of earnings. Note that this use of reserves does not misstate total shareholders' equity because all of the affected accounts (Retained Earnings, reserve accounts, expense accounts) are components of shareholders' equity. Thus, the analyst's primary concern with these reserves is assessing whether the reported net income that excludes these items is an appropriate base for estimating future earnings. The analyst can study the shareholders' equity portion of the balance sheet to ascertain whether firms have used reserve accounts to avoid sending legitimate expenses through the income statement. Reserves of this type have been particularly common in the German reporting system. 3. Firms might use reserves in situations where they revalue assets but do not desire the income effect of the revaluation to affect income of the current period. The next chapter points out that firms in the United States account for investments in marketable equity securities using the market value method. When market value differs from acquisition costs, U.S. firms write up or write down the investment account. Financial reporting in the United States does not generally permit the immediate recognition of this increase or decrease in market value in measuring income (except for securities held for "trading" purposes, as defined in the next chapter). Instead, these firms increase or decrease Accumulated Other Comprehensive Income, a shareholders' equity account. When the firm sells the securities, it eliminates the unrealized gain or loss account and recognizes a realized gain or loss in measuring net income. Another example of this use of the reserve account relates to foreign currency translation (also discussed in the next chapter). U.S. firms with foreign operations usually translate the financial statements of their foreign entities into U.S. dollars each period using the exchange rate at the end of the period. Changes in the exchange rate cause an unrealized foreign currency gain or loss. Firms do not recognize this gain or loss in measuring income each period but instead increase or decrease Accumulated Other Comprehensive Income. When the firm disposes of the foreign unit, it eliminates the unrealized foreign currency adjustment from Accumulated Other Comprehensive Income and recognizes a gain or loss on disposal.
Pronto, Inc. is a major producer of printing equipment. Pronto uses a LIFO cost-flow assumption for inventories. The company's tax rate is 35%. Below is selected financial data for the company. Pronto, Inc. Selected Financial Data December 31, 2013 2012 2011 Inventories (LIFO) 48,454 42,369 45,388 Total Assets 395,685 384,545 378,122 Common Shareholders' Equity 102,754 98,564 89,455 Sales 546,258 488,965 Cost of Goods Sold 393,857 348,920 Interest Expense 14,253 15,689 Net Income 24,581 21,025 Required: a. The excess of FIFO over LIFO inventories was $25 million on December 31, 2013, $28.5 million on December 31, 2012 and $22 million on December 31, 2011. Compute the cost of goods sold for Pronto, Inc. for years 2013 and 2012 assuming that it had used a FIFO assumption. b. Compute the inventory turnover ratio for Pronto, Inc. for years 2013 and 2012 using a LIFO cost-flow assumption. c. Compute the inventory turnover ratio for Pronto, Inc. for years 2013 and 2012 using a FIFO cost-flow assumption. d. Compute the rate of return on assets for years 2013 and 2012 based on the reported amounts. Disaggregate ROA into profit margin and asset turnover components. e. Compute the rate of return on assets for years 2013 and 2012 assuming that Pronto, Inc. had used the FIFO method of accounting for inventories. Disaggregate ROA into profit margin and asset turnover components.
: Required: a. The excess of FIFO over LIFO inventories was $25 million on December 31, 2013, $28.5 million on December 31, 2012 and $22 million on December 31, 2011. Compute the cost of goods sold for Pronto, Inc. for years 2013 and 2012 assuming that it had used a FIFO assumption. 2013 2012 COGS (LIFO) $393,857 $348,920 Excess of FIFO over LIFO Beginning of year 28,500 22,000 end of year (25,000) (28,500) COGS (FIFO) $397,357 $342,420 b. Compute the inventory turnover ratio for Pronto, Inc. for years 2013 and 2012 using a LIFO cost-flow assumption. 2013 2012 COGS (LIFO) $393,857 $348,920 Average inventory 45,412 43,879 Inventory turnover 8.67 7.95 c. Compute the inventory turnover ratio for Pronto, Inc. for years 2013 and 2012 using a FIFO cost-flow assumption. 2013 2012 COGS (FIFO) $397,357 $342,420 Average inventory(FIFO) 72,161 69,128 Inventory turnover 5.51 4.95 d. Compute the rate of return on assets for years 2013 and 2012 based on the reported amounts. Disaggregate ROA into profit margin and asset turnover components. 2013 2012 Net Income + Int. Exp (1 - .35) $ 33,845 $ 31,223 Average Total Assets (LIFO) 390,115 381,334 ROA 8.7% 8.2% Sales $546,258 $488,965 Profit margin -ROA 6.2% 6.4% Asset Turnover 1.40 1.28 e. Compute the rate of return on assets for years 2013 and 2012 assuming that Pronto, Inc. had used the FIFO method of accounting for inventories. Disaggregate ROA into profit margin and asset turnover components. 2013 2012 Net Income + Int. Exp(1 - .35) $33,845 $31,223 FIFO adjustment Change (1 - .35) (2,275) 4,225 Net income (FIFO) 31,570 35,448 Average Total Assets (FIFO) 416,865 406,584 ROA 7.6% 8.7% Sales $546,258 $488,965 Profit margin - ROA 5.8% 7.3% Asset Turnover 1.31 1.20
Upton Company has consistently used the percentage-of-completion method of 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
What determines whether a pension plan is underfunded or overfunded?
A pension plan is underfunded when the fair value of Plan Assets are less than the ABO.
Explain the difference between a temporary and a permanent timing difference for income tax purposes"
A permanent difference arises when, for example, a company is paid interest on municipal obligations. The IRS Code specifically states that municipal interest is not taxable so therefore it is never entered into the tax computation. Temporary differences arise when taxes are paid in different accounting periods. Straight line depreciation versus accelerated depreciation methods will overall incur the same tax liability at the end but the components will be recognized in different accounting periods.
The statement of cash flows allows the accountant to agree the net cash provided to the _________________________ general ledger
Cash account
Assume that Madison Corp. has agreed to construct a new basketball arena for Gator Town for $70 million dollars. Construction of the new arena begins in July, 2012 and is expected to be completed in March 2009. At the signing of the contract Madison Corp. estimates that the new arena will cost $60 million dollars to build. Given the following cost and building schedule determine the cumulative degree of completion and how much revenue and gross margin Madison Corp. should recognize in years 2012, 2013 and 2014. Year Costs incurred to date Estimated costs remaining 2012 $18,000,000 $42,000,000 2013 $48,000,000 $12,000,000 2014 $60,000,000 $0
Costs incurred Percentage Gross Year to date Complete Revenue Margin 2012 $18,000,000 30% $21 M $3 M 2013 $48,000,000 80% $35 M $5 M 2014 $60,000,000 100% $14 M $2 M
Under U.S. GAAP, application of the LIFO and FIFO inventory methods result in differences in the balance sheet, income statement and cash flow statement. Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.
Financial Statement LIFO FIFO Balance Sheet Disadvantage-Balance sheet inventory amount not reflective of current replacement cost Advantage - Balance sheet inventory amount is more reflective of current replacement cost Income Statement Advantage - Income statement more closely matches current cost income when prices are rising. Advantage - LIFO results in lower pre-tax earnings, which leads to lower tax payments. Disadvantage -LIFO leads to lower reported net income for external financial reports. Disadvantage - Income statement tends to overstate earnings in comparison to current cost income when prices are rising. Disadvantage - results in higher pre-tax earnings, which leads to higher tax payments. Advantage - FIFO leads to higher reported net income for external financial reports. Cash Flow Statement Advantage- Provides more cash from operations Other Considerations Disadvantage - Requires more record keeping. Disadvantage - If early LIFO inventory is liquidated then tax advantages of LIFO are lost and a larger than normal tax payment is required. Advantage - Record keeping is easier. Advantage - There is no danger of LIFO liquidation.
How does each component of pension expense effect pension expense during the period (increase, decrease, or uncertain)?
How each effects pension expense: a. Service Cost - increase b. Interest Cost - increase c. Expected Return on Plan Assets - decrease d. Amortization of net pension asset/liability - increase or decrease e. Amortization of Prior Service Cost - increase f. Amortization of Gains/Losses - could be an increase or decrease
A company that uses LIFO will experience a(n) ______________________________ during a period it sells more units than it purchases.
LIFO liquidation
Recording municipal bond interest received in the general ledger will generate a(n) _________________ difference
Permanent
___________________________________ is primarily a question of timing.
Revenue recognition
____________________ differences result from including revenues and expenses in income before taxes in a different period than those items affect taxable income.
Temporary
What is the difference between the accumulated pension obligation and the projected pension obligation?
The ABO is the present value of expected employees' benefits based on service to date using current salary amounts. The PBO is the present value of employees' benefits based on service to date, but using expected future salary amounts.
Companies with defined benefit pension plans must recognize pension expense each period. What are the five components of pension expense? Briefly describe each component.
The components of pension expense are: a. Service Cost - the increase in the PBO due to employees working an additional year. b. Interest Cost - the increase in the PBO due to the passage of time. c. Expected Return on Pension Investments - the expected change in the market value of plan assets due to interest, dividends and changes in market value. d. Amortization of Prior Service Cost - the amortization of any plan changes that increase future benefits. e. Amortization of Gains/Losses - the amortization of the actuarial gains and losses when actual returns differ from expectations and when the actuarial assumptions underlying the pension plan change.
Global, Inc. provides consulting services throughout the world. The company pays taxes to the nation where revenues are earned. Information about the company's taxes is presented below: Global, Inc. Components of Income Tax Expense (in millions) 2012 2011 Current - Federal $ 35.60 $ 29.80 - Foreign 53.86 65.85 - State and Local 17.15 15.28 Total Current $106.61 $110.93 Deferred - Federal $ 10.56 $ 8.54 - Foreign 3.28 6.57 Total Deferred $ 13.84 $ 15.11 Total Income Tax Expense $120.45 $126.04 Components of Income before Taxes 2012 2011 United States $155.45 $150.29 Foreign 142.85 134.50 Total $298.30 $284.79 Required: a. Using the information provided for Global, prepare the company's journal entry to record income taxes for 2012 and 2011. b. Using the information provided for Global, determine the company's effective tax rate for 2012 and 2011.
a. ___________2012 __________2011 Income Tax Expense 120.45 126.04 Income Tax Payable 106.61 110.93 Deferred Tax Asset/Liab. 13.84 15.11 b. The company's effective tax rate is calculated by dividing income tax expense by income before tax. 2012 2011 Income Tax Expense $120.45 $126.04 Income before Tax 298.30 284.79 Effective tax rate 40.38% 44.26%
Falcon Networks Falcon Networks is a leading semiconductor company with operations in 17 different countries. Information about the company's taxes appears below: Falcon Networks Components of Income Tax Expense (in millions) 2012 2011 Current - Federal $ 55.65 $ 47.52 - Foreign 83.85 78.95 - State and Local 14.69 12.5 Total Current $154.19 $138.97 Deferred - Federal $ 30.28 $ 42.90 - Foreign 23.89 14.58 Total Deferred $ 54.17 57.48 Total Income Tax Expense $208.36 $196.45 Note: Falcon Networks has no current liability at year-end with respect to total current taxes. Components of Income before Taxes 2012 2011 United States $256.35 $253.68 Foreign 236.85 198.85 Total $493.20 $452.53 Based on the information provided by Falcon Networks how much cash did income taxes use during 2012? a. $154.19 million b. $54.17 million c. $208.36 million d. $284.84 million
a. $154.19 million
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 8000 The amount of pension expense to be reported for 2012 is: a. $46,000 b. $48,000 c. $54,000 d. $40,000
a. $46,000 $36,000+ 12,000 + 6,000 - 8,000 = $46,000
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. 33.52% Income tax expense / income before tax
All of the following examples represent complex revenue generation models except: a. Point-of-sale transactions b. Uncertain revenue timing c. Bundled service deliverables d. Bundled deliverables in leases
a. Point-of-sale transactions
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. 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.
Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.
average tax rate
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. $5,000 Current pension liability is $90,000 - $70,000 = $20,000 Need an additional $5,000
At the end of 2012 Playtime provided the following information about the project: Year : 2012 Cost incurred to date: $1,200,000 Estimated costs remaining: $600,000 What percentage is the playground complete? a. 62.5% b. 66.7% c. 55.6% d. 50.0%
b. 66.7% 1,200,000/1,800,000=66.7%
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. Any liquidation of FIFO inventory layers
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. Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions.
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. Divide income tax expense by income before taxes
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
b. LIFO
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. a decrease in the number of days accounts receivable are outstanding.
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. recording higher earnings than it would have if it had used FIFO.
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 fair market value of pension plan assets
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. the ratio of bad debt expense to sales
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. 42.25% Income tax expense / income before tax
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. Eliminating deferred tax assets.
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. Is the postretirement benefit fund adequately paying benefits?
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. Prepaid Expense
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. Shift from debt to equity financing of foreign operations to increase interest deductions
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. The seller's price to the buyer can be variable.
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. There are subtle differences in the wording of U.S. GAAP as compared with IFRS.
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 of retirees over the future 10 years. d. the rate of compensation increase.
c. estimates of the number of retirees over the future 10 years.
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. large growth in accounts receivable
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. revenue, cost, and gross profit are recognized at the time the contract is completed.
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. the accumulated benefit obligation exceeds the fair value of pension plan assets.
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. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
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
Playtime Corporation Assume that 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 : 2012 Cost incurred to date: $1,200,000 Estimated costs remaining: $600,000 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. $433,550 1,200,000/1,800,000 = 66.7%*($2,450,000-$1,800,000) = $433,550
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. 45.49% Income tax expense / income before tax
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. Accrual basis for the recognition of expenses is not required under IFRS.
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. Accumulated benefit obligation less plan assets.
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 these can change the PBO.
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. Components of permanent tax differences
When input prices are increasing, companies that use the LIFO method of accounting for inventory will report: a. Lower 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. Lower gross profit margins in comparison to the FIFO method
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 includes 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. 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.
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
U.S. GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.
in the notes to the financial statements
Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.
payments
A contractor would not use ________________________________________ method of income recognition when there is 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
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
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.
the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
