FRA- Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities

A company that prepares its financial statements using IFRS wrote down its inventory value by €20,000 at the end of year 1. In year 2, prices increased and the same inventory at the end of the year was worth €30,000 more than its value at the end of the prior year. Which of the following statements is most accurate? In year 2, the company's cost of sales: decreased by €20,000.

. Under IFRS, the recovery of a previous write-down is limited to the amount of the original write-down (€20,000) and is reported as a decrease in the cost of sales.

When the market rate of interest falls after issuance, a company selecting the fair value option for reporting a liability with a fixed coupon rate will report: a loss.

A company selecting the fair value option for a liability with a fixed coupon rate will report a loss when market interest rates decrease.

If a company has a deferred tax asset reported on its statement of financial position and the tax authorities reduce the tax rate, which of the following statements is most accurate concerning the effect of the change? The existing deferred tax asset will:decrease in value.

A decrease in the tax rate will result in a decrease in the previously reported amounts of deferred tax assets. That is, the value of the future tax assets, based on the new lower rate, is reduced for offsetting future tax payments.

Which of the following statements most accurately describes a valuation allowance for deferred taxes? A valuation allowance is required under: US GAAP if there is doubt about recovering a deferred tax asset.

A valuation allowance is required under US GAAP if there is doubt about whether a deferred tax asset will be recovered. Under IFRS, the deferred tax asset is written down directly.

Upon violation of a covenant, which action most likely requires the approval of the owners of some minimum percentage of the principal amount of the bond issue? Calling for immediate repayment of the debt

Bond contracts typically require that the decision to call for immediate repayment be made, on behalf of all the bondholders, by holders of some minimum percentage of the principal amount of the bond issue.

an affirmative covenant? --Prohibiting financial ratios from falling below specified levels

Common covenants include specifying minimum acceptable levels of financial ratios. Affirmative covenants restrict the borrower's activities by requiring certain actions, like maintaining certain ratios.

An analyst is making the necessary adjustments to convert operating leases to capital leases for comparison with other companies. The most likely effect of the adjustments will be that the: debt-to-capital ratio will increase.

Converting an operating lease to a capital lease will increase the total debt by the present value of the lease payments. This change will increase both debt and the total capital, but because the debt/total capital must be less than 1, equal additions to the numerator and denominator increase the ratio. the interest coverage ratio will change, but the effect will depend on the reversal of the lease expense and the inclusion of the depreciation expense, so the impact is not conclusive. there is no effect on current assets, but the current liabilities will increase by a portion of the lease payments, so the current ratio will decrease.

Holding all else constant, a company that develops intangible assets internally rather than purchasing them is most likely to report: lower amounts of assets.

Costs associated with internally developing intangible assets are usually expensed; thus, a company that has internally developed intangible assets through expenditures on R&D will recognize a lower amount of assets than a company that has obtained intangible assets through external purchase.

Unused tax losses and credits that a company expects to use in future periods will most likely give rise to: deferred tax assets.

Deferred tax assets arise from carrying forward unused tax losses and credits but are only recognized if there is an expectation that the company will be able to use them in the future.

. From a lessee's perspective, relative to operating leases, finance leases result in: higher total expenses in the early years of the lease.

Expenses are generally higher in the early years for a finance lease in comparison to those of an operating lease.

Under IFRS, reversals of impairments of long-lived assets are allowed: for impairment losses only.

IFRS permit the reversal of impairment losses only and does not permit the revaluation to the recoverable amount if the recoverable amount exceeds the previous carrying amount. IFRS allows for reversal of impairment losses regardless of whether the assets is classified as held for use or held for sale.

the extinguishment of debt: Net income is adjusted to remove any gain or loss on the extinguishment of debt from operating cash flows.

In a statement of cash flows prepared using the indirect method, net income is adjusted to remove any gain or loss on the extinguishment of debt from operating cash flows.

Where might an analyst look for details covering the full extent of a company's capital resources? Management discussion and analysis (MD&A)

In addition to the disclosures in the notes to the financial statements, the management discussion and analysis (MD&A) section commonly provides other information about a company's capital resources, including debt financing and off-balance-sheet financing and schedules summarizing a company's contractual obligations and other commitments in total and over the next five years.

In a period of rising prices, when compared with a company that uses weighted average cost for inventory, a company using FIFO will most likely report higher values for its: return on sales.

In periods of rising prices, FIFO results in a higher inventory value and a lower cost of goods sold and thus a higher net income. The higher net income increases return on sales. The higher reported net income also increases retained earnings and thus results in a lower debt-to-equity ratio, not a higher one. The combination of higher inventory and lower cost of goods sold (CGS) decreases inventory turnover (CGS/Inventory). the combination of higher inventory and lower cost of goods sold decreases inventory turnover (CGS/Inventory). the higher reported net income increases retained earnings and therefore results in a lower debt-to-equity ratio, not a higher one.

One reason that the last-in, first-out (LIFO) inventory valuation method is widely used in the United States is most likely that it: results in higher operating cash flows.

LIFO is widely used in the United States because it results in a higher cost of goods sold, and thus lower taxable profits, under the assumption of historically rising prices. Income taxes are correspondingly lower, and thus operating cash flows are higher.

Relative to purchasing an asset, leases generally: provide less costly financing in the form of lower fixed interest rates.

Leases can provide less costly financing and are often offered at lower fixed interest rates than those offered for asset purchases. the financial advantages of leases usually lead to lessors having several advantages over other lenders. Consequently, lessors are usually able to offer more attractive lease terms to lessees, such as less-restrictive provisions, than other forms of borrowing.

An advantage to the lessee in a leasing agreement is most likely: lower financing costs than purchasing the asset.

Leases can provide less costly financing for the lessee because they usually require little, if any, down payment and often are at lower fixed interest rates than those incurred if the assets were purchased.

At the time of issue, for a corporate bond that sells at par, the liability on the issuer's balance sheet would be: equal to face value.

On the issuer's balance sheet at the time of issue, bonds payable normally are measured and reported at the sale proceeds, which is the face value of the bonds minus any discount, or plus any premium. When a bond is issued at its face value, there is no discount or premium, so the liability would be equal to face value.

In an issuer's financial statements, reported interest expense for a bond is computed using the: effective interest rate.

Reported interest expense for a company's bonds is computed using the effective interest rate, which is the market interest rate at issuance.

Which of the following techniques is most likely to provide a company with the opportunity to inflate earnings? Last-in, first-out (LIFO) liquidation

The LIFO liquidation of low-cost inventory layers results in the transfer of low inventory costs to the income statement as costs of goods sold. With reduced costs of goods sold, reported earnings are higher.

Greene Corporation uses the last-in, first-out (LIFO) inventory method, but most of the other companies in Greene's industry use first-in, first-out (FIFO). To best compare Greene's financial statements with its competitors', an analyst would make which of the following adjustments to Greene's ending inventory? It should be: increased by the LIFO reserve

The analyst should add the ending balance in the LIFO reserve to the LIFO inventory to equal the ending balance for inventory on a FIFO basis: LIFO reserve = Inventory (FIFO) − Inventory (LIFO).

If an analyst is concerned about the liquidity of a company's inventory, he would most likely look in the notes to the financial statements to determine the: breakdown of inventory between work in progress and finished goods.

The breakdown between work in progress and finished goods provides liquidity information because finished goods are ready to ship and thus more liquid than work in progress.

Holding all else constant, a company that acquires a patent through external purchase rather than developing it internally is most likely to report: higher investing cash outflows.

The cost of acquiring intangible assets (including patents) is classified as investing cash outflows, whereas the costs of developing them internally is classified as operating cash outflows. If a company obtains intangibles through external purchase, it will report higher investing cash outflows than a company that develops intangible assets internally.

A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) uses the revaluation model to value land. At the end of the current year, the value of land, newly acquired this year, has increased and will be adjusted on the balance sheet. This land is the only asset in its asset class for revaluation purposes. Which of the following statements is most accurate? In the current period, the revaluation of the land will: decrease the debt-to-equity ratio.

The increase in the value of the land bypasses the income statement and goes directly to a revaluation surplus account in equity, assuming no previous decreases in value in the asset class for revaluation purposes. Equity increases, thereby decreasing the debt-to-equity ratio.

Which of the following is most likely a reason that a lessor can offer attractive lease terms and lower cost financing to a lessee? The lessor retains the tax benefits of ownership.

The lessor often retains the tax benefits of ownership of the leased asset, which allows the lessor to pass those savings along to the lessee in the form of lower financing costs or other attractive terms.

After issuance, the rate demanded by the purchaser of a bond is best described as the: market rate of interest.

The market rate of interest is the rate demanded by the bond purchaser given the risks associated with future cash payment obligations of the particular bond issue.

Non-current, long-term debt is presented as a single line item.

The non-current (long-term) liabilities section of the balance sheet usually includes a single line item of the total amount of a company's long-term debt due after one year.

At the end of the year, a company revalued its manufacturing facilities, increasing their carrying amount by 12%. There had been no prior downward revaluation of these facilities. The revaluation will most likely cause the company's: return on equity to decline.

The upward revaluation increases the carrying amount of the assets but bypasses net income. The revaluation is reported as other comprehensive income and will be accumulated in equity under the heading of revaluation surplus, increasing equity. This increase will cause the return on equity to decline.

One of the notable differences between IFRS and US GAAP when dealing with income tax is best illustrated by the fundamental treatment of:the revaluation of property, plant, and equipment.

US GAAP prohibits the revaluation of PP&E. Therefore, this is a source of an important difference between US GAAP and IFRS with respect to reporting of income taxes.

For a company that prepares its financial statements under IFRS, for which of the following assets is it most likely that it could report using the fair value model? A building owned by the company and leased out to tenants

Under IFRS a building owned for the purpose of earning rentals or capital appreciation—in this case the one owned by the company and leased out to tenants—is an investment property and can be reported under either the cost model or fair value model.

Under IFRS, when a lease is classified as an operating lease, the lessee:reports lease expense.

Under IFRS, a lease reported as an operating lease has a lessee reporting only the lease expense.

Under IFRS, in accounting for an operating lease, the leased item: does not appear on the balance sheet.

Under IFRS, leased items under an operating lease do not appear on the balance sheet as an asset or liability. The lessee reports on the income statement only the related lease expenses. The lessor would be in the position to take advantage of the tax benefits of ownership of the leased asset, such as taxes and depreciation, and could offer attractive lease terms to the lessee to reduce the cost of leasing versus buying.

A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) is attempting to produce lighter and longer-lasting batteries for portable electronic devices. The most appropriate accounting treatment for the related costs incurred in this project is to: expense costs until technical feasibility has been established.

Under IFRS, research and development costs are expensed until certain criteria, including demonstration of technical feasibility, have been met.

Under US GAAP, a lease would be capitalized if the: present value of the lease payments is 90% or more of the fair value of the leased asset.

Under US GAAP, a lease would be capitalized if at least one of the four following criteria is valid: 1) the lease term is at least 75% or more of the useful life of the asset, 2) the lease contains an option for the lessee to purchase the leased asset cheaply (bargain purchase option), 3) the present value of the lease payments is 90% or more of the fair value of the leased asset, or 4) ownership of the leased asset transfers to the lessee at the end of the lease.

A company is selling a long-lived asset with a carrying amount of $70,000 for $80,000. The original cost of this asset was $120,000. In the year of sale, this event is most likely to be reported on the income statement as: a gain of $10,000.

When a long-lived asset is sold, only the net gain or loss is reported on the income statement. The gain or loss on a sale = Sales proceeds − Carrying amount = $80,000 − $70,000 = $10,000 gain.

Which of the following most likely indicates effective inventory management? Sales growth rate exceeds finished goods inventory growth rate

When the sales growth rate exceeds the finished goods inventory growth rate, the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management.

Under US GAAP, a lessor classifies a lease as an operating lease if the revenue recognition requirement has been met and the lease:

payments have a present value of 75 percent of the fair value of the leased asset.