FR&A – Flashcards
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Expenses on the income statement may be grouped by: nature, but not by function. function, but not by nature. either function or nature.
answer
C is correct. IAS No. 1 states that expenses may be categorized by either nature or function.
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Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Revenue $1,000,000 Returns of goods sold $100,000 Cash collected $800,000 Cost of goods sold $700,000 Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? $200,000. $900,000. $1,000,000.
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B is correct. Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000.
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At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract: Total revenue according to contract $10,000,000 Total expected cost $8,000,000 Cost incurred during 2009 $1,200,000 Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009? None. $300,000. $1,500,000.
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A is correct. Under the completed contract method, no revenue would be reported until the project is completed.
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During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009? $600,000. $1,000,000. $3,000,000.
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A is correct. The installment method apportions the cash receipt between cost recovered and profit using the ratio of profit to sales value (i.e., $3,000,000 ÷ $5,000,000 = 60 percent). Argo will, therefore, recognize $600,000 in profit for 2009 ($1,000,000 cash received × 60 percent).
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Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: similar barter transactions with unrelated parties. similar non-barter transactions with related parties. similar non-barter transactions with unrelated parties.
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C is correct. Revenue for barter transactions should be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties.
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At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000.how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? $60,000. $110,000. $120,000.
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C is correct. Double-declining balance depreciation would be $600,000 × 20 percent (twice the straight-line rate). The residual value is not subtracted from the initial book value to calculate depreciation. However, the book value (carrying amount) of the asset will not be reduced below the estimated residual value.
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Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? Straight-line depreciation with a short useful life. Declining balance depreciation with a long useful life. Declining balance depreciation with a short useful life.
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C is correct. This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.
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Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: an extraordinary item. continuing operations. discontinued operations.
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B is correct. A fire may be infrequent, but it would still be part of continuing operations. IFRS do not permit classification of an item as extraordinary. Discontinued operations relate to a decision to dispose of an operating division.
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Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? 1,003,333. 1,006,667. 1,010,000.
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A is correct. With stock options, the treasury stock method must be used. Under that method, the company would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares ($100,000/$15). The shares for the denominator would be: Shares outstanding 1,000,000 Options exercises 10,000 Treasury shares purchased (6,667) Denominator 1,003,333
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Which of the following is not a constraint on the financial statements according to the Conceptual Framework (2010)? Understandability. Benefit versus cost. Balancing of qualitative characteristics.
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A is correct. Understandability is an enhancing qualitative characteristic of financial information—not a constraint.
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Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements? Current cost. Historical cost. Realizable value.
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B is correct. Historical cost is the consideration paid to acquire an asset.
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The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is: current cost. present value. realizable value.
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C is correct. The amount that would be received in an orderly disposal is realizable value.
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Which of the following is not a characteristic of a coherent financial reporting framework? Timeliness. Consistency. Transparency.
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A is correct. Timeliness is not a characteristic of a coherent financial reporting framework. Consistency, transparency, and comprehensiveness are characteristics of a coherent financial reporting framework.
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Which of the following is not a recognized approach to standard-setting? A rules-based approach. An asset/liability approach. A principles-based approach.
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B is correct. Rules-based, principles-based, and objectives-oriented approaches are recognized approaches to standard-setting.
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Which of the following statements about cash received prior to the recognition of revenue in the financial statements is most accurate? The cash is recorded as: deferred revenue, an asset. accrued revenue, a liability. deferred revenue, a liability.
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C is correct. Cash received prior to revenue recognition increases cash and deferred or unearned revenue. This is a liability until the company provides the promised goods or services.
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When, at the end of an accounting period, cash has been paid with respect to an expense, the business should then record: an accrued expense, an asset. a prepaid expense, an asset. an accrued expense, a liability.
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B is correct. Payment of expenses in advance is called a prepaid expense which is classified as an asset.
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The collection of all business transactions sorted by account in an accounting system is referred to as: a trial balance. a general ledger. a general journal.
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B is correct. The general ledger is the collection of all business transactions sorted by account in an accounting system. The general journal is the collection of all business activities sorted by date.
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What type of audit opinion is preferred when analyzing financial statements? Qualified. Adverse. Unqualified.
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C is correct. An unqualified opinion is a "clean" opinion and indicates that the financial statements present the company's performance and financial position fairly in accordance with a specified set of accounting standards.
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Ratios are an input into which step in the financial statement analysis framework? Process data. Collect input data. Analyze/interpret the processed data.
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C is correct. Ratios are an output of the process data step but are an input into the analyze/interpret data step.
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For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through income into retained earnings. They are a component of accumulated other comprehensive income.
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B is correct. For financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders' equity as part of retained earnings.
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For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through retained earnings. They are a component of accumulated other comprehensive income.
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C is correct. For financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of Shareholders' equity
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When a company buys shares of its own stock to be held in treasury, it records a reduction in: both assets and liabilities. both assets and shareholders' equity. assets and an increase in shareholders' equity.
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B is correct. Share repurchases reduce the company's cash (an asset). Shareholders' equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners' equity.
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The sale of a building for cash would be classified as what type of activity on the cash flow statement? Operating. Investing. Financing.
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B is correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of another company, or a long-term note receivable), it would have been considered a significant non-cash activity.
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Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: $73 million. $77 million. $83 million.
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C is correct. Cost of goods sold of $80 million plus the increase in inventory of $5 million equals purchases from suppliers of $85 million. The increase in accounts payable of $2 million means that the company paid $83 million in cash ($85 million minus $2 million) to its suppliers.
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Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: $67 million. $79 million. $83 million.
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A is correct. Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).
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Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? $22 million for interest and $10 million for taxes. $16 million for interest and $2 million for taxes. $16 million for interest and $10 million for taxes.
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C is correct. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.
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Which of the following is an appropriate method of computing free cash flow to the firm? Add operating cash flows to capital expenditures and deduct after-tax interest payments. Add operating cash flows to after-tax interest payments and deduct capital expenditures. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
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B is correct. Free cash flow to the firm can be computed as operating cash flows plus after-tax interest expense less capital expenditures.
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An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.
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A is correct. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This coverage ratio is based on cash flow information; another common coverage ratio uses a measure based on the income statement (earnings before interest, taxes, depreciation, and amortisation).
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Inventory turnover
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=Cost of goods sold / Average inventory. This ratio is used to evaluate the effectiveness of a company's inventory management. Generally, this ratio is benchmarked against the industry average.
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Receivables turnover
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=Revenue / Average rec
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Payables turnover
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=Purchases / Average trade payables. Payables turnover measures how many times a year the company theoretically pays off all its creditors.
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Working capital turnover
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=Revenue / Average working capital. Working capital turnover indicates how efficiently the company generates revenue from its working capital. Working capital equals current assets minus current liabilities.
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Fixed asset turnover
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=Revenue / Average fixed assets. This ratio measures how efficiently a company generates revenues from its investments in long-lived assets.
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Total asset turnover
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=Revenue / Average total assets. Total asset turnover measures the company's overall ability to generate revenues with a given level of assets.
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Debt-to-assets ratio
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=Total debt / Total assets. A higher D/A ratio is undesirable because it implies higher financial risk and a weaker solvency position.
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Debt-to-capital ratio
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=Total debt / Total debt+Shareholders' equity
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Debt-to-equity ratio
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=Total debt / Shareholders' equity
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Financial leverage ratio
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=Average total assets / Average total equity. This ratio measures the amount of total assets supported by each money unit of equity. For example, a leverage ratio of 2 means that each dollar of equity supports $2 worth of assets.
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Carrying inventory at a value above its historical cost would most likely be permitted if: the inventory was held by a producer of agricultural products. financial statements were prepared using US GAAP. the change resulted from a reversal of a previous write-down.
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A is correct. IFRS allow the inventories of producers and dealers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to be carried at net realisable value even if above historical cost. (US GAAP treatment is similar.)
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Eric's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at: £550,000. £1,000,000. £3,000,000.
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B is correct. Under IFRS, the reversal of write-downs is required if net realisable value increases. The inventory will be reported on the balance sheet at £1,000,000. The inventory is reported at the lower of cost or net realisable value. Under US GAAP, inventory is carried at the lower of cost or market value. After a write-down, a new cost basis is determined and additional revisions may only reduce the value further. The reversal of write-downs is not permitted.
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Fernando's Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando's inventory balance will most likely be: higher if it complies with IFRS. higher if it complies with US GAAP. the same under US GAAP and IFRS.
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A is correct. IFRS require the reversal of inventory write-downs if net realisable values increase; US GAAP do not permit the reversal of write-downs.
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Cinnamon Corp. started business in 2007 and uses the weighted average cost method. During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2008 cost of sales (€ thousands) was closest to: €490. €491. €495.
answer
B is correct. Cinnamon uses the weighted average cost method, so in 2008, 5,000 units of inventory were 2007 units at €10 each and 50,000 were 2008 purchases at €11. The weighted average cost of inventory during 2008 was thus (5,000 × 10) + (50,000 × 11) = 50,000 + 550,000 = €600,000, and the weighted average cost was approximately €10.91 = €600,000/55,000. Cost of sales was €10.91 × 45,000, which is approximately €490,950.
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Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by: Zimt is too low. Nutmeg is too low. Nutmeg is too high.
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A is correct. Zimt uses the FIFO method, so its cost of sales represents units purchased at a (no longer available) lower price. Nutmeg uses the LIFO method, so its cost of sales is approximately equal to the current replacement cost of inventory.
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Carey Company adheres to US GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that: Carey has reversed an inventory write-down. Jonathan has reversed an inventory write-down. Jonathan and Carey both use the FIFO inventory accounting method.
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A is correct. US GAAP do not permit inventory write-downs to be reversed.
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Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of: revaluation. impairment. amortization.
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C is correct. An intangible asset with a finite useful life is amortized, whereas an intangible asset with an indefinite useful life is not.
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According to IFRS, all of the following pieces of information about property, plant, and equipment must be disclosed in a company's financial statements and footnotes except for: useful lives. acquisition dates. amount of disposals.
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B is correct. IFRS do not require acquisition dates to be disclosed.
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If a company uses the fair value model to value investment property, changes in the fair value of the asset are least likely to affect: net income. net operating income. other comprehensive income.
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C is correct. When a company uses the fair value model to value investment property, changes in the fair value of the property are reported in the income statement—not in other comprehensive income.
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A company is most likely to: use a fair value model for some investment property and a cost model for other investment property. change from the fair value model when transactions on comparable properties become less frequent. change from the fair value model when the company transfers investment property to property, plant, and equipment.
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C is correct. A company will change from the fair value model to either the cost model or revaluation model when the company transfers investment property to property, plant, and equipment.
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deferred tax liability usually arises when:
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-Higher expenses are charged on the tax return compared to the financial statements. -Taxable income is lower than pretax or accounting profit. -Taxes payable are lower than income tax expense. -An asset's tax base is lower than its carrying value.
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deferred tax asset arises when:
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-Higher expenses are charged on the financial statements than on the tax return. -Taxable income is higher than pretax or accounting profit. -Taxes payable are greater than income tax expense. -A liability's tax base is lower than its carrying value.
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Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a: valuation allowance. deferred tax asset. temporary difference.
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C is correct. Because the differences between tax and financial accounting will correct over time, the resulting deferred tax liability, for which the expense was charged to the income statement but the tax authority has not yet been paid, will be a temporary difference. A valuation allowance would only arise if there was doubt over the company's ability to earn sufficient income in the future to require paying the tax.
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Analysts should treat deferred tax liabilities that are expected to reverse as: equity. liabilities. neither liabilities nor equity.
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B is correct. If the liability is expected to reverse (and thus require a cash tax payment) the deferred tax represents a future liability.
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Deferred tax liabilities should be treated as equity when: they are not expected to reverse. the timing of tax payments is uncertain. the amount of tax payments is uncertain.
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A is correct. If the liability will not reverse, there will be no required tax payment in the future and the "liability" should be treated as equity.
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When both the timing and amount of tax payments are uncertain, analysts should treat deferred tax liabilities as: equity. liabilities. neither liabilities nor equity.
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C is correct. The deferred tax liability should be excluded from both debt and equity when both the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain.
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When certain expenditures result in tax credits that directly reduce taxes, the company will most likely record: a deferred tax asset. a deferred tax liability. no deferred tax asset or liability.
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C is correct. Tax credits that directly reduce taxes are a permanent difference, and permanent differences do not give rise to deferred tax.
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Under IFRS, dividends received are least likely classified as which type of cash flow on the cash flow statement? Financing Operating Investing
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A Dividends received can be classified as either an operating or investing activity under IFRS but not as financing.
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Under the International Accounting Standards Board's (IASB's) Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as: verifiability. understandability. comparability.
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A Under the IASB's Conceptual Framework, verifiability means that different knowledgeable and independent users would agree that the information presented faithfully represents the economic events that it is intended to represent.
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A company issued bonds in 2012 that mature in 2022. The measurement basis that will most likely be used on the 2012 balance sheet for the bonds is: amortized cost. historical cost. market value.
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A Bonds payable issued by a company are financial liabilities that are usually measured at amortized cost.
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Which of the following statements about cash flow ratios is most valid? Reinvestment ratio measures a firm's ability to acquire assets with investing cash flows. Interest coverage ratio is calculated as operating cash flow divided by interest payments. Debt payment ratio measures a firm's ability to pay debts with operating cash flows.
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C Debt payment ratio (Cash flow from operations/Cash paid for long-term debt repayment) shows the firm's ability to pay debts with operating cash flows.
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Private contracts, such as bank loan agreements, are most likely to provide an effective disciplinary mechanism to insure high financial reporting quality because: loan covenants may allow the lender to recover all or part of their investment if certain financial conditions are triggered. lenders monitor managers and pay close attention to the firm's financial reports. loan covenants require the firm to meet specific financial ratios in order to renew the loan.
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B The monitoring role of lenders is most likely to insure high-quality financial reports because the lenders inspect financial reports carefully to be sure they are not manipulated.
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Under the IFRS Framework for the Preparation and Presentation of Financial Statements, it is most appropriate to recognize a financial statement element in the financial statements if it: has a cost or value that can be measured with reliability. provides certainty that any future economic benefit associated with the item will flow to or from the enterprise. is normally carried at historical cost, current cost, or fair market value.
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A For recognition in the financial statements, an element must have a cost or value that can be measured with reliability. Certainty is not a requirement for economic benefits associated with an item to flow to or from the enterprise; all that is required is the probability that they will.
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Under US GAAP, interest paid is most likely included in which of the following cash flow activities? Financing only Either operating or financing Operating only
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C Interest paid must be categorized as an operating cash flow activity under US GAAP, although it can be categorized as either an operating or financing cash flow activity under IFRS.
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An entry made to record an accrual, such as bad debt expense, that is not yet reflected in the accounting system is best described as a(n): adjusting entry. trial balance entry. ledger entry.
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A Adjusting entries are a type of journal entries typically made at the end of the accounting period to record such items as accruals that are not yet reflected in the accounting system.
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Which of the following is most likely a benefit of debt covenants for the borrower? Restrictions on how the borrowed money may be invested Reduction in the cost of borrowing Limitations on the company's ability to pay dividends
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B The reduction in the cost of borrowing is a benefit of covenants to the borrower.
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An analyst has observed that the profit margins of a company have not increased or decreased significantly in the last few years .Which of the following is the most appropriate inference that can be made as to how this observation affects the company's credit risk? The company's credit risk is: higher than otherwise. lower than otherwise. unaffected
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B With no significant increases or decreases in margins in the last few years, the company has had stable margins. Stable margins are associated with lower credit risk.
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Under International Financial Reporting Standards (IFRS), the statement of comprehensive income should most appropriately begin with: the ending total comprehensive income from the prior year. the profit or loss from the income statement. gross revenue.
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B Under IFRS, the statement of comprehensive income begins with the profit or loss from the income statement.
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When a company issues common stock as part of the conversion of a convertible bond, the cash flow statement will most likely: include the transaction because it materially affects the company's financial position. omit the transaction but disclose it in a separate note or supplementary statement. omit the transaction without disclosure.
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B Significant non-cash transactions, such as the exchange of non-monetary assets or issuance of stock as part of a stock dividend or conversion are not incorporated in the cash flow statement. They are required to be disclosed, however, in either a separate note or a supplementary schedule to the cash flow statement.
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Which of the following ratios will most likely result in an increase in a company's sustainable growth rate? Higher dividend payout Lower interest burden Higher tax burden
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C Sustainable growth rate = Retention ratio × ROE. -The higher a company's return on equity (ROE) and its ability to finance itself from internally generated funds (a higher retention ratio), the greater its sustainable growth rate. -In the five-factor ROE, any factor that increases ROE will increase sustainable growth: -ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Asset turnover × Leverage. -A higher tax burden ratio (Net income/Earnings before tax) implies that the company can keep a higher percentage of pretax profits; this result implies a lower tax rate and a higher ROE.
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Which of the following conditions would most likely create opportunities for a company to issue low-quality financial reports? A company with an audit committee comprised only of independent board members Accounting standards that provide few choices Government cutbacks in the enforcement branch of the financial regulator
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C Which of the following conditions would most likely create opportunities for a company to issue low-quality financial reports? A company with an audit committee comprised only of independent board members Accounting standards that provide few choices Government cutbacks in the enforcement branch of the financial regulator
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An analyst would most likely conduct additional analysis when faced with which of the following financial presentations? Reporting a non-GAAP financial measure in an SEC filing A change from LIFO inventory accounting to FIFO A non-GAAP financial measure that excludes an expense that is likely to recur
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C The exclusion of recurring items from non-GAAP financial measures is strictly prohibited by the SEC and should raise concerns that additional analysis is needed.
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The management of Bank EZ repurchases its own bonds in the open market. They pay €6.5 million for bonds with a face value of €10.0 million and a carrying value of €9.8 million. The bank will most likely report: other comprehensive income of €3.3 million. other comprehensive income of €3.5 million. a gain of €3.3 million on the income statement.
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C is correct. A gain of €3.3 million (carrying amount less amount paid) will be reported on the income statement.
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Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely: rise as the maturity date approaches. decline as the maturity date approaches. remain constant throughout the life of the bond.
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A is correct. The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases. Higher relative debt and lower relative equity (through retained earnings) will cause the debt-to-equity ratio to increase as the zero-coupon bonds approach maturity.
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Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have since risen to 7 percent. Using only the carrying amount (based on historical cost) reported on the balance sheet to analyze the company's financial position would most likely cause an analyst to: overestimate Fairmont's economic liabilities. underestimate Fairmont's economic liabilities. underestimate Fairmont's interest coverage ratio.
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A is correct. When interest rates rise, bonds decline in value. Thus, the carrying amount of the bonds being carried on the balance sheet is higher than the market value. The company could repurchase the bonds for less than the carrying amount, so the economic liabilities are overestimated. Because the bonds are issued at a fixed rate, there is no effect on interest coverage.
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Which of the following is most likely a lessee's disclosure about operating leases? Lease liabilities. Future obligations by maturity. Net carrying amounts of leased assets.
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B is correct. The lessee will disclose the future obligation by maturity of its operating leases. The future obligations by maturity, leased assets, and lease liabilities will all be shown for finance leases.
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Under US GAAP, a lessor's reported revenues at lease inception will be highest if the lease is classified as: a sales-type lease. an operating lease. a direct financing lease.
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A is correct. A sales-type lease treats the lease as a sale of the asset, and revenue is recorded at the time of sale equal to the present value of future lease payments. Under a direct financing lease, only interest income is reported as earned. Under an operating lease, revenue from rent is reported when collected.
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A lessor will record interest income if a lease is classified as: a capital lease. an operating lease. either a capital or an operating lease.
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A is correct. A portion of the payments for capital leases, either direct financing or sales-type, is reported as interest income. With an operating lease, all revenue is recorded as rental revenue.
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Which of the following is most likely to reflect conservative accounting choices? Decreased reported earnings in later periods Increased reported earnings in the current period Increased debt reported on the balance sheet at the end of the current period
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C is correct. Accounting choices are considered conservative if they decrease the company's reported performance and financial position in the current period. Conservative choices may increase the amount of debt reported on the balance sheet. Conservative accounting choices may decrease the amount of revenues, earnings, and/or operating cash flow reported in the current period and increase those amounts in later periods.
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If a company uses a non-GAAP financial measure in an SEC filing, then the company must: give more prominence to the non-GAAP measure if it is used in earnings releases. provide a reconciliation of the non-GAAP measure and equivalent GAAP measure. exclude charges requiring cash settlement from any non-GAAP liquidity measures.
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B is correct. If a company uses a non-GAAP financial measure in an SEC filing, it is required to provide the most directly comparable GAAP measure with equivalent prominence in the filing. In addition, the company is required to provide a reconciliation between the non-GAAP measure and the equivalent GAAP measure. Similarly, IFRS require that any non-IFRS measures included in financial reports must be defined and their potential relevance explained. The non-IFRS measures must be reconciled with IFRS measures.
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A company wishing to increase earnings in the current period may choose to: decrease the useful life of depreciable assets. lower estimates of uncollectible accounts receivables. classify a purchase as an expense rather than a capital expenditure.
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B is correct. If a company wants to increase reported earnings, the company's managers may reduce the allowance for uncollected accounts and uncollected accounts expense reported in the period. Decreasing the useful life of depreciable assets would increase depreciation expense and decrease earnings in the current period. Classifying a purchase as an expense rather than a capital expenditure would decrease earnings in the current period. The use of accrual accounting may result in estimates included in financial reports, because all facts associated with events may not be known at the time of recognition. These estimates can be grounded in reality or can be managed by the company to present a desired financial picture.
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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: increased each year. decreased each year. fluctuated from year to year.
answer
B is correct. If the ratio of cash flow to net income for a company is consistently below 1 or has declined repeatedly over time, this may be a signal of manipulation of information in financial reports through aggressive accrual accounting policies. When net income is consistently higher than cash provided by operations, one possible explanation is that the company may be using aggressive accrual accounting policies to shift current expenses to later periods.
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All else being equal and ignoring tax effects, compared with using the straight-line method of depreciation, the use of an accelerated method of depreciation in the early years of an asset's life would most likely result in a decrease in the firm's: asset turnover ratio. cash flow from operations. shareholders' equity.
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C An accelerated method of deprecation produces greater expenses in the early years and lowers net income, which in turn lowers the retained earnings resulting in a decrease in shareholders' equity.
question
According to U.S. GAAP, the payment of cash dividends during the year will most likely affect the cash flow from which type of activity? Operating Financing Investing
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B For a company that prepares its financial statements under U.S. GAAP, cash dividends paid are reported as a cash outflow in the cash flow from financing activities section on the statement of cash flows.
question
The following information applies to one of a company's investments currently classified as held to maturity: Prior Year End Current Year End Market value $17,000 $16,000 Amortized cost $22,000 $20,000 The company reports its earnings using US GAAP. If the investment is reclassified as available for sale as of the end of the current year, the balance sheet carrying value of the company's investment portfolio would most likely: decrease by $4,000. decrease by $6,000. remain the same.
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A Available-for-sale securities are carried at market value, whereas held-to-maturity securities are carried at amortized cost. If the investment is reclassified as available for sale at the end of the current year, the carrying amount should be adjusted to its market value, which is $16,000. Compared with the amortized cost of $20,000, this is a decrease of $4,000.
question
The analytical tool that would be most appropriate for an analyst to use to identify the percentage of a company's assets that are liquid is the: common-size balance sheet. current ratio. cash ratio.
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A A common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and would provide insight into what portion of a company's assets is liquid. On the other hand, cash and current ratios measure liquidity relative to current liabilities, not relative to total assets.
question
Company A owns 60% of Company B. Company A's consolidated income statement most likely includes 100% of Company A's revenues and expenses and what portion of Company B's? 100% 60% 0%
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A Because Company A owns more than 50% of the shares in Company B it must present consolidated financial statements, which will include 100% of Company B's revenues and expenses.
question
Which of the following statements about balance sheets is most accurate? For balance sheets prepared under: US GAAP, intangibles must be valued at historical cost. IFRS, a classified balance sheet must present current assets before non-current assets. IFRS, a commercial real estate company should use a liquidity based presentation.
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A Under US GAAP, intangibles must be valued at historical cost, whereas under IFRS they can be valued at cost or revaluation.
question
During the process data phase of financial statement analysis, an analyst will most likely develop a: statement of cash flows. statement of purpose. common-size balance sheet.
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C During the process data phase, an analyst will produce a variety of reports and documents based on the information collected. These may include common-size statements, ratios and graphs, forecasts, adjusted statements, and analytical results.
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Which of the following statements about the direct method for presenting cash from operating activities is most appropriate? The direct method: provides information on the specific sources of operating cash receipts and payments. shows the impact of accruals. shows the reasons for differences between net income and operating cash flows.
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A The direct method provides information on the specific sources of operating cash receipts and payments. This approach is in contrast to the indirect method, which reconciles net income to cash flow and shows only the net result of these receipts and payments.
question
All else being equal, a decrease in which of the following financial metrics would most likely result in a lower return on equity (ROE)? The tax rate Leverage Days of sales outstanding
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B Leverage is a component of the return on equity equation under the DuPont Analysis. If leverage decreases, so will return on equity. ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Total asset turnover × Leverage
question
During a period of rising inventory costs, a company decides to change its inventory method from FIFO (first in, first out) to the weighted average cost method. Under the weighted average cost method, which of the following financial ratios will most likely be higher than under FIFO? Number of days in inventory Debt-to-equity ratio Current ratio
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B If all else is held constant, in a period of rising costs the ending inventory will be lower under the weighted average cost method and the cost of goods sold will be higher (compared to FIFO), resulting in lower net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore, the debt-to-equity ratio (Total debt/Total shareholder's equity) will increase because of the decrease in retained earnings (and lower shareholders' equity).
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Under International Financial Reporting Standards (IFRS), the statement of comprehensive income should most appropriately begin with: the ending total comprehensive income from the prior year. gross revenue. the profit or loss from the income statement.
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C Under IFRS, the statement of comprehensive income begins with the profit or loss from the income statement.
question
A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty? Deferring all of the revenue and recognizing it over the life of the warranty period. Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty. Fully recognizing the revenue at the time of the sale but waiting until the actual warranty costs are incurred to recognize the expense.
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B Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties, and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue.
question
Changing the estimates of the salvage value of capital assets is the least effective way to manage earnings during the life of an asset for companies whose method of depreciation is: units-of-production. straight-line. double-declining balance.
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C The double-declining balance depreciation method applies the rate to the gross cost of the equipment, so a change in the salvage assumption will have no effect on earnings until the net book value reaches the estimated salvage value, at which point the company ceases to take depreciation on the asset.
question
The most appropriate statement about financial ratio analysis is that it has limited use as an analytical tool for: comparing companies that use different accounting methods. providing insights into microeconomic relationships within a company that help analysts project earnings. evaluating management.
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A Financial ratio analysis is limited by the use of alternative accounting methods. Accounting methods play an important role in the interpretation of financial ratios. The lack of consistency across companies makes comparability difficult to analyze and limits the usefulness of ratio analysis.
question
A company has announced that it is going to distribute a group of long-lived assets to its owners in a spin-off. The most appropriate way to account for the assets until the distribution occurs is to classify them as: held for sale with no depreciation taken. held for use until disposal with depreciation continuing to be taken. held for use until disposal with no deprecation taken.
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B Long-lived assets that will be disposed of other than by sale, such as in a spin-off, an exchange for other assets, or abandonment, are classified as held for use until disposal and continue to be depreciated until that time.
question
Under IFRS, for a firm that sponsors a defined benefit pension plan, pension expense is best described as consisting of: A) the employer's contribution to the plan during the year. B) additional benefits earned by employees during the year. C) service cost, past service costs, and interest income or expense.
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C Under IFRS, the components of the change in net pension asset or liability that are recognized as pension expense include service cost, past service costs, and interest expense or income on the beginning value of the net pension liability or asset.
question
Carolina Company has employee stock options outstanding for 100,000 shares that will be exercisable by the option holders in two years. The exercise price is $40 per share. The market price of Carolina shares was $42 on December 31 and averaged $38 during the year. When calculating its diluted earnings per share, Carolina should most likely: A) not include the options because they are antidilutive. B) not include the options because they cannot be exercised yet. C) include the options because they are potentially dilutive securities.
answer
A Potentially dilutive securities are included in the diluted earnings per share (EPS) calculation only if their exercise would dilute (reduce earnings per share to less than) basic EPS. Because these options may only be exercised at $40 per share, and the average market price for the year is $38, the options are antidilutive and the diluted EPS calculation should not include them. Dilutive securities that are not immediately exercisable are included in the calculation of diluted EPS.
question
This year, Eberman, Inc. recorded $42,000 in net income, declared $50,000 in dividends, and issued $7,000 of new shares. What is the combined effect of these events on end-of-period assets and owners' equity? Assets Owners' equity A) Increase Decrease B) Decrease Increase C) Decrease Decrease
answer
A Net income and issuing new shares will increase assets and equity. Declaring a dividend will increase liabilities and decrease equity. Change in assets = $42,000 + $7,000 = $49,000. Change in equity = $42,000 + $7,000 - $50,000 = -$1,000.
question
In 20X6, an IFRS reporting company writes down inventory to its net realizable value, which is 4.5 million less than its carrying value, and reports this loss in its income statement. At year-end 20X7, the company determines that the inventory's net realizable value exceeds its carrying value by 3.0 million. The company's year-end 20X7 financial statements will most likely reflect: A) no adjustment to inventory's carrying value because inventory is measured at the lower of cost or market. B) 3.0 million lower cost of sales than the company would have reported if the inventory's net realizable value had not increased above its carrying value. C) a 1.5 million net loss in the 20X7 income statement because the inventory's net realizable value is still less than its original cost by this amount.
answer
B Under IFRS, a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a reduction in the cost of sales reported for the period when the reversal occurs. Hence, the company will increase the recorded value of its inventory by 3.0 million and decrease 20X7 cost of sales by the same amount.
question
Under IFRS, which cash flow statement classifications for dividends paid and interest received, respectively, are least likely permitted? Dividends paid Interest received A) Operating activity Investing activity B) Financing activity Operating activity C) Investing activity Financing activity
answer
C Under IFRS, interest received may be classified as CFO or CFI, while dividends paid may be classified as CFO or CFF.
question
Ralph, Inc. invested in two bonds, Bond X and Bond Y. Ralph bought Bond X with the intent to profit in the near term but intends to hold Bond Y for several years before selling it. Both bonds have decreased in value since Ralph purchased them. For the current reporting period, Ralph, Inc. should report: A) Bond X at fair value and Bond Y at amortized cost on the balance sheet. B) the unrealized loss on Bond X on the income statement and report Bond Y at fair value on the balance sheet. C) the unrealized loss on Bond X as other comprehensive income and disclose the unrealized loss on Bond Y in the financial statement notes.
answer
B Bond X is a trading security. It should be reported at fair value on the balance sheet, and the unrealized loss should be reported on the income statement. Bond Y is an available-for-sale security because Ralph, Inc. does not intend to hold it to maturity. It should also be reported at fair value on the balance sheet, but the unrealized loss should be reported in other comprehensive income.
question
Xingia Inc. earns profits of $2,500,000 for the year ended December 31, 2008. Xingia has 1,000,000 shares outstanding during the year and pays taxes at the rate of 40%. Xingia paid preference dividends amounting to $50,000 in 2008. The average market price of Xingia's stock over the year was $50. Xingia has 10,000 stock options outstanding, which have an exercise price of $30. Calculate Xingia's diluted EPS for 2008.
answer
Since the average market price exceeds the exercise price of the options, they should be assumed to have been exercised. Number of common shares issued to option holders = 10,000 Cash proceeds from exercise of options = $300,000 (10,000 shares × $30) Number of shares that can be purchased at average market price with these funds = $300,000/$50 = 6,000 Net increase in common shares outstanding from the exercise of options = 10,000 ? 6,000 = 4,000 Diluted EPS = $2,500,000 ? $50,000 / (1,000,000 + 10,000 ? 6,000) = $ 2.44 Diluted EPS ($2.44) is lower than basic EPS ($2.45). Therefore, the options are dilutive and should be considered in the calculation of diluted EPS.
question
An analyst has the following information regarding XYZ Company: (Amounts in millions) Net income $225 Beginning retained earnings $1,250 Dividends declared $75 Calculate ending retained earnings for 2008.
answer
Ending retained earnings = Beginning retained earnings + Net income ? Dividends declared Ending retained earnings = $1,250 + $225 ? $75 = $1,400 million
question
An analyst has the following information regarding ROB Company: (Amounts in million) Revenue earned during the year $350 Beginning retained earnings $90 Expenses incurred during the year $280 Dividends declared for the year $25 Liabilities $120 Contributed capital $75 Calculate ROB's total assets at the end of 2008.
answer
Step 1: Ending retained earnings = Beginning retained earnings + Revenues - Expenses ? Dividends declared Ending retained earnings = $90 + $350 ? $280 ? $25 = $135 million Step 2: Assets = Liabilities + Contributed capital + Ending retained earnings Assets = $120 + $75 + $135 = $330 million
question
IFRS inventory is stated as
answer
Lower of cost or NRV(net realizable value, = selling price-selling cost). A subsequent reversal of NRV can lead to an increase in value, limied to the amount of the previous write down.
question
Robbins, Inc., reports under IFRS and uses the effective interest rate method for valuing its bond liabilities. Robbins sells a 10-year, $100 million, 5% annual coupon bond issue for $98 million and paid $500,000 in issuance costs. Two years later, the bond liability Robbins will report on its balance sheet for this debt is closest to: A) $97.9 million. B) $98.0 million. C) $98.1 million.
answer
A Under IFRS, bond liabilities are reported under the effective interest method and issuance costs are deducted from the proceeds to determine the initial liability. The yield at issuance is: PV = 97.5 million; FV = ?100 million; PMT = ?5 million; N = 10; CPT I/Y = 5.33. Change N to 8 and CPT PV after two years as 97.9 million.
question
A manager of a firm operating in an inflationary environment determines that the cost of goods will be different if the firm reports using FIFO, using LIFO with a perpetual inventory accounting system, or using LIFO with a periodic inventory system. Net income is most likely to be lowest if the firm reports using: A) LIFO and a perpetual inventory system. B) LIFO and a periodic inventory system. C) FIFO and a periodic inventory system.
answer
B With increasing prices, COGS is higher using LIFO compared to FIFO. With LIFO, using a periodic inventory system can result in higher COGS compared to a perpetual inventory system. The method with the highest COGS will result in the lowest gross and net profit.
question
Given constant or increasing inventory levels, if prices are rising over a given period.....
answer
COGS LIFO > COGS AVCO > COGS FIFO EI FIFO > EI AVCO > EI LIFO
question
Given constant or increasing inventory levels, if prices are falling over a given period:
answer
COGS FIFO > COGS AVCO > COGS LIFO EI LIFO > EI AVCO > EI FIFO
question
Periodic and Perpetual Inventory Systems
answer
Under the LIFO cost flow assumption, in a period of rising prices, use of the periodic system for inventory results in a: Lower ($60 versus $84) value of ending inventory. Higher ($588 versus $564) value for COGS. Therefore, gross profit would be lower under the periodic system.
question
A firm that reports under IFRS has begun providing a product under a long-term contract for which it cannot reliably estimate the outcome. In the first year of this contract, compared to reporting under U.S. GAAP, reporting under IFRS will cause the firm's operating profit margin to be: A) lower. B) higher. C) the same.
answer
A If a firm cannot reliably estimate the outcome of a long-term contract, under IFRS its costs are expensed when incurred, revenues are recognized to the extent of costs, and profit is recognized only when the contract has been completed. Under the U.S. GAAP completed-contract method, expenses, revenues, and profit are all recognized upon completion. Thus, in the years before completion, the treatment under IFRS results in higher revenues but the same operating profit as the treatment under U.S. GAAP. Therefore, operating profit margin (operating profit / revenue) is lower if the contract is accounted for under IFRS.
question
Master Machines bought a customer list from a competitor leaving the market. The list has an estimated economic life of five years and no residual value, and it is recorded as an intangible asset. A year later, industry changes lead Master to reduce the list's remaining useful life to two years. This change in the useful life will most likely result in: A) a decrease in net income in the next year and restatement of historical financial statements. B) higher amortization expense in the next year but no restatement of historical financial statements. C) a restatement of historical financial statements to reflect the change but no change in net income for the next year.
answer
B The customer list is a finite lived intangible asset, and the firm will amortize it each year. The change in the amortization period is a change in estimate, which is accounted for prospectively. Thus, the remaining (unamortized) intangible asset balance will be amortized over a 2-year period. If the useful life had not been changed, the remaining amortization period would have been four years, and the company would have had lower amortization expense. Thus, the change in estimated life increases the amortization expense. Restatement of past financial statements is not required for a change in accounting estimate.
question
Which of the following statements is most accurate regarding the capitalization of interest for a constructed asset (that will take several years to complete) and the treatment of discontinued operations, respectively, under U.S. GAAP? Construction interest - Discontinued operations A) Optional to capitalize - Different treatment than under IFRS B) Required to capitalize - Different treatment than under IFRS C) Required to capitalize - Same treatment as under IFRS
answer
C Both IFRS and U.S. GAAP require firms to capitalize construction interest. U.S. GAAP and IFRS have also converged in their requirements for reporting discontinued operations.
question
Compared to using the FIFO method to account for inventory during a period of rising prices, using the weighted average method will most likely cause a company's days of inventory to be: A) lower. B) higher. C) the same.
answer
A Compared to FIFO, in a rising price environment, the weighted average method results in higher COGS and lower inventories. This causes inventory turnover to be higher and days of inventory to be lower.
question
For a U.S. GAAP reporting firm, an analyst should add interest expense net of tax to cash flow from operations when calculating free cash flow: A) to equity and free cash flow to the firm. B) to equity, but not free cash flow to the firm. C) to the firm, but not free cash flow to equity.
answer
C Free cash flow to the firm = net income + noncash charges + interest expense net of tax - fixed capital investment - working capital investment; or, cash flow from operations + interest expense net of tax - fixed capital investment. Free cash flow to equity = cash flow from operations - fixed capital investment + net borrowing.
question
Which of the following pairs of accounting methods for revenue recognition should be considered the most conservative? A) Net reporting and completed contract. B) Gross reporting and completed contract. C) Gross reporting and percentage of completion.
answer
A Accounting methods that report revenue later or reduce the amount of reported revenue are considered more conservative. Net reporting reduces the amount of revenue reported to the difference between sales proceeds and a firm's cost (typically what is paid to a supplier to fulfill the order). The completed contract method requires that no revenue is recorded until the contract work is completed, whereas under the percentage of completion method, revenue is recognized over the period of the contract.
question
A user of financial statements should most appropriately interpret an auditor's disclaimer of opinion to mean the auditor: A) believes the financial statements are not presented fairly. B) is unable to express an opinion about the financial statements. C) has noted exceptions to accounting principles in the financial statements.
answer
B An auditor's disclaimer of opinion means the auditor is unable to express an opinion about whether the financial statements are presented fairly. An adverse opinion means the auditor believes that the financial statements are not presented fairly. A qualified opinion means the auditor believes the financial statements are presented fairly but make exceptions to the applicable accounting principles that the auditor will describe in its report.
question
An increase in which of the following accounts will increase shareholders' equity? A) Treasury stock. B) Revaluation surplus. C) Valuation allowance.
answer
B Revaluation surplus is an account in shareholders' equity that reflects cumulative increases in the fair value of long-lived assets above their historical cost, when a firm uses the revaluation model under IFRS. Treasury stock is a contra account in shareholders' equity that increases when a firm repurchases its own shares. Under U.S. GAAP, a valuation allowance is a contra account in assets that reflects a decrease in the realizable value of a deferred tax asset. An increase in a valuation allowance increases income tax expense and decreases shareholders' equity.
question
Joe Lau, CFA, is calculating solvency ratios for a firm that has significant operating lease obligations. Lau should most appropriately adjust the firm's financial statements by adding: A) total future operating lease payments to both liabilities and equity. B) the present value of future operating lease payments to both assets and liabilities. C) the present value of future operating lease payments to both assets and equity.
answer
B An analyst should adjust for operating lease obligations by estimating the present value of the obligations and adding it to the firm's liabilities and long-lived assets.
question
During a fiscal year a company had the following selected financial items(in millions): Interest expense 5.0 Debt issued 10.0 Debt repaid 7.0 Common stock issued 4.0 Tax rate 40.0% Based on the items given, the company's free cash flow to the firm (FCFF) is: A) equal to free cash flow to equity (FCFE). B) less than free cash flow to equity (FCFE). C) greater than free cash flow to equity (FCFE).
answer
A Because net borrowing is equal to after-tax interest expense, FCFF = FCFE: FCFF = CFO + Int(1 - tax rate) - FC Inv Int(1 - tax rate) = 5.0 million × (1 - 0.40) = 3.0 million FCFF = CFO + 3.0 million - FC Inv FCFE = CFO - FC Inv + net borrowing net borrowing = debt issued - debt repaid = 10.0 million - 7.0 million = 3.0 million FCFE = CFO - FC Inv + 3.0 million
question
An analyst is evaluating a firm that repurchases shares to offset dilution resulting from the exercise of incentive stock options. The most appropriate adjustment the analyst should make for these share repurchases is to decrease: A) net income. B) financing cash flow. C) operating cash flow.
answer
C The cash outlay to repurchase the stock is classified as a financing outflow under reporting standards, but is properly viewed as a compensation expense, which the analyst should treat as an operating cash outflow.
question
The most likely problem with using financial statement ratios to screen for stocks to include in a portfolio is that: A) specific industries are often over-represented. B) firms with undesirable characteristics will be included. C) firm characteristics are not identified well by financial statement measures.
answer
A It is often the case a screening metric, such as low P/E, high dividend yield, or high ROE, will identify many stocks in the same industry. Undesirable characteristics can be avoided by including additional screening metrics. Financial statement measures provide a great amount of information about a firm's characteristics.
question
Dividends received from available-for-sale securities $150 Unrealized gain from available-for-sale securities 70 Unrealized loss from trading securities 40 Issuance of new common stock 200 Net income 725 Based on the information above, comprehensive income for the year is: A) $795. B) $905. C) $1,105.
answer
A Net income $725 Unrealized gain from available-for-sale securities 70 Comprehensive income $795 The dividends received from the available-for-sale securities and the unrealized loss from trading securities are already included in net income. Issuance of new common stock is a transaction with shareholders, so it is not included in comprehensive income.
question
By entering a finance lease rather than an operating lease, in the early years of the lease a lessee will report a higher: A) quick ratio. B) return on assets. C) debt-to-equity ratio.
answer
C The lessee using a finance lease versus operating lease will report a: Higher debt-to-equity ratio because it reports higher debt and lower equity (less profits in early years going into retained earnings). Lower quick ratio because current assets are not affected but current liabilities are higher due to the current portion of the lease liability. Lower return on assets (net income divided by average total assets) because the firm has lower net income in the early years and higher assets throughout the lease term.
question
Compared to using the LIFO method, during periods of rising prices, a company that uses the FIFO method will most likely have a higher: A) inventory turnover ratio. B) total asset turnover ratio. C) interest coverage ratio.
answer
C The interest coverage ratio will be higher under FIFO because cost of goods sold is lower, resulting in higher earnings before interest and taxes. Inventory turnover will be lower because a company using FIFO will have lower cost of goods sold and higher inventory compared to the LIFO method. Total asset turnover will be lower using FIFO because higher inventory will result in higher total assets.
question
A firm that reports a non-GAAP accounting measure must provide a reconciliation of its value with the most comparable GAAP measure under: A) IFRS only. B) U.S. GAAP only. C) both IFRS and U.S. GAAP
answer
C This is a requirement under both U.S. GAAP and IFRS
question
Aries Industries has purchased a warehouse that it uses as rental property for income. Aries uses the fair value model to account for the value of the warehouse on its balance sheet. With regard to the treatment of this asset on Aries's financial statements: A) the warehouse may not be revalued to an amount above original cost. B) any revaluation above original cost will increase revaluation surplus. C) any revaluation above original cost will increase reported income and equity.
answer
C Under IFRS, a warehouse owned primarily to earn rental income is classified as investment property. If a firm uses the fair value model for investment property, increases in value above original cost are reported on the income statement as gains.
question
When comparing the financial statement effects of expensing versus capitalizing an expenditure, capitalizing will most likely result in which of the following effects in the years after the expenditure is incurred? A) Lower net income and higher return on assets. B) Higher net income and lower return on assets. C) Lower net income and lower return on assets.
answer
C In the years following the expenditures, capitalizing will result in depreciation being deducted against net income, thereby resulting in a lower net income than expensing. Furthermore, capitalizing will increase total assets and cause ROA (net income / assets) to be lower.
