Financial Accounting

Question 1

Which of the following best describes financial reporting and financial statement analysis?

A) Financial reporting refers to how companies show their financial performance and financial analysis refers to using the information to make economic decisions.
B) Financial reports assess a company’s past performance in order to draw conclusions about the company’s ability to generate cash and profits in the future.
C) The objective of financial analysis is to provide information about the financial position of an entity that is useful to a wide range of users.

Answer 1

Financial reporting refers to how companies show their financial performance and financial analysis refers to using the information to make economic decisions.

Question 2

A company’s operating revenues for a reporting period are most likely to be shown on its:

A) cash flow statement.
B) balance sheet.
C) income statement.

Answer 2

C) income statement.
Revenues for a reporting period are presented on a company’s income statement. They can be, but are not required to be, classified as operating and nonoperating revenues. Cash from operating activities is presented on the company’s statement of cash flows, but this is not necessarily equal to operating revenues because revenue might be recognized in a different period than cash is collected. The balance sheet displays a company’s financial position at a fixed point in time.

Question 3

Which of the following statements regarding footnotes to the financial statements is least accurate?

A) Some supplementary schedules are audited whereas footnotes are not audited.
B) Footnotes may contain information regarding contingent losses.
C) Footnotes provide information about assumptions and estimates used by management.

Answer 3

A) Some supplementary schedules are audited whereas footnotes are not audited.

Some supplementary schedules are not audited whereas footnotes are audited. The financial statements and footnotes in the annual report and the SEC 10-k filings are all audited.

Question 4

Which of the following would NOT require an explanatory paragraph added to the auditors’ report?

A) Statements that the financial information was prepared according to GAAP.
B) Doubt regarding the “going concern” assumption.
C) Uncertainty due to litigation.

Answer 4

A) Statements that the financial information was prepared according to GAAP.

The statements that the financial information was prepared according to GAAP should be included in the regular part of the auditors’ report and not as an explanatory paragraph. The other information would be contained in explanatory paragraphs added to the auditors’ report.
This question tested from Session 7, Reading 29, LOS d.

Question 5

Which of the following is least likely to be available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval System)?

A) SEC filings.
B) Form 10Q.
C) Corporate press releases.

Answer 5

C) Corporate press releases.

Securities and Exchange Commission (SEC) filings are available from EDGAR (Electronic Data Gathering, Analysis, and Retrieval System, www.sec.gov). Companies’ annual and quarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q, respectively).

Question 6

A company that uses the LIFO inventory cost method records the following purchases and sales for an accounting period:

Beginning inventory, July 1: $5,000, 10 unitsJuly 8: Purchase of $2,600 (5 units)July 12: Sale of $2,200 (4 units)July 15: Purchase of $2,800 (5 units)July 21: Sale of $1,680 (3 units)

The company’s cost of goods sold using a perpetual inventory system is:
A) $3,760. B)$3,780. C) $3,500.

Answer 6

A) $3,760.

With a perpetual inventory system, units purchased and sold are recorded in inventory in the order that the purchases and sales occur. Cost of goods sold for the July 12 sale uses 4 of the units purchased on July 8: 4 × ($2,600 / 5) = $2,080. Cost of goods sold for the July 21 sale uses 3 of the units purchased on July 15: 3 × ($2,800 / 5) = $1,680. COGS = $2,080 + $1,680 = $3,760.

Question 7

During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:

A) weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.
B) FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.
C) LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

Answer 7

C) LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

LIFO is the most informative inventory accounting method for income statement purposes in periods of rising prices and stable or growing inventories. It allocates the most recent purchase prices to COGS, and thus provides a better measure of current income and future profitability.

Question 8

The step in the financial statement analysis framework of “processing the data” is least likely to include which activity?

A) Making appropriate adjustments to the financial statements.
B) Acquiring the company’s financial statements.
C) Preparing exhibits such as graphs.

Answer 8

B) Acquiring the company’s financial statements.

The financial statement analysis framework consists of six steps. Step 2: “Gather data” includes acquiring the company’s financial statements and other relevant data on its industry and the economy. Step 3. “Process the data” includes activities such as making any appropriate adjustments to the financial statements and preparing exhibits such as graphs and common-size balance sheets.

Question 9

A company’s chart of accounts is:

A) a detailed list of the accounts that make up the five financial statement elements.
B) used for entries that offset other accounts.
C) the set of journal entries that makes up the components of owners’ equity.

Answer 9

A) a detailed list of the accounts that make up the five financial statement elements.

A company’s chart of accounts is a detailed list of the accounts that make up the five financial statement elements and the line items presented in the financial statements. Contra accounts are used for entries that offset other accounts. The categories that make up owners’ equity are capital, additional paid-in capital, retained earnings and other comprehensive income.

Question 10

What is the fundamental balance sheet equation?

A) Assets = Stockholders’ Equity - Liabilities (A = E - L).
B) Assets = Liabilities + Stockholders’ Equity (A = L + E).
C) Liabilities = Assets + Stockholders’ Equity (L = A + E).

Answer 10

B) Assets = Liabilities + Stockholders’ Equity (A = L + E).

The fundamental balance sheet equation is Assets = Liabilities + Stockholders’ Equity (A = L + E). This is the fundamental accounting relationship that sets the basis for recording all financial transactions.

Question 11

Which of the following is the least likely to be considered an accrual for accounting purposes?

A) Wages payable.
B) Accumulated depreciation.
C) Unearned revenue.

Answer 11

B) Accumulated depreciation.

Accruals fall into four categories:1. Unearned revenue.2. Accrued revenue.3. Prepaid expenses. 4. Accrued expenses. Wages payable are a common example of an accrued expense.

Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.

Question 12

The best description of the general ledger is that it:

A) sorts the entries in the general journal by account.
B) groups accounts into the categories that are presented in the financial statements.
C) is where journal entries are first recorded.

Answer 12

A) sorts the entries in the general journal by account.

Question 13

Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to his new assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes to a firm’s financial statement and the Management Discussion and Analysis (MD&A) before making an investment decision. Which rationale is Martinenko least likely to provide to Stevenson regarding the importance of analyzing the footnotes and MD&A?

A) Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.
B) Evaluating the footnotes helps the analyst assess whether management is manipulating earnings.
C) The footnotes disclose whether or not the company is adhering to GAAP.

Answer 13

C) The footnotes disclose whether or not the company is adhering to GAAP.
Various accruals, adjustments, and management assumptions that went into the financial statements are often explained in the footnotes to the statements and in Management’s Discussion and Analysis. Because adjustments and assumptions within the financial statements are to some extent at the discretion of management, the possibility exists that management can try to manipulate or misrepresent the company’s financial performance. With this information, the analyst can better judge how well the financial statements reflect the company’s true performance, and in what ways he needs to adjust the data for his own analysis. Whether or not the company is adhering to GAAP is addressed in the auditor’s opinion, not the footnotes.

Question 14

Which of the following statements about financial statements and reporting standards is least accurate?

A) Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions.
B) Financial statements could potentially take any form if reporting standards didn’t exist.
C) The objective of financial statements is to provide economic decision makers with useful information.

Answer 14

A) Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions.

Question 15

Professional organizations of accountants and auditors that establish financial reporting standards are called:

A) Standard setting bodies.
B) Regulatory authorities.
C) International organizations of securities commissions.

Answer 15

A) Standard setting bodies.

Standard-setting bodies are professional organizations of accountants and auditors that establish financial reporting standards. Regulatory authorities are government agencies that have the legal authority to enforce compliance with financial reporting standards. Regulatory authorities, such as the Securities and Exchange Commission (SEC) in the U.S. and the Financial Services Authority (FSA) in the United Kingdom, are established by national governments. Most national authorities belong to the International Organization of Securities Commissions (IOSCO).

Question 16

Which of the following is most likely to be considered a barrier to developing one universally recognized set of reporting standards?

A) Reluctance of firms to adhere to a single set of reporting standards.
B) Different standard-setting bodies of different countries disagree on the best treatment of a particular issue.
C) GATT already requires sufficient agreement.

Answer 16

B) Different standard-setting bodies of different countries disagree on the best treatment of a particular issue.

Question 17

Which of the following is NOT a qualitative characteristic accounting information must possess in order to provide useful information to an analyst?

A) Believability.
B) Comparability.
C) Relevance.

Answer 17

A) Believability.

Qualitative characteristics that accounting information must possess under Statement of Financial Accounting Concepts (SFAC) 2 include relevance, reliability, timeliness, consistency, materiality, and comparability. Believability is not one of the factors.

Question 18

Required financial statements, according to International Accounting Standard (IAS) No. 1, include a(n):

A) income statement and working capital summary.
B) balance sheet and explanatory notes.
C) cash flow statement and auditor’s report.

Answer 18

B) balance sheet and explanatory notes.

Question 19

Which of the following statements about the differences between the IASB framework and the FASB framework for preparing financial statements is least accurate?

A) The FASB framework states different objectives for business and non-business financial statement reporting, while the IASB framework has one objective for both.
B) The FASB requires that management consider the framework if no explicit standard exists on an issue, but the IASB does not.
C) In the FASB framework, relevance and reliability are the two primary characteristics, while the IASB framework also lists comparability and understandability as primary characteristics.

Answer 19

B) The FASB requires that management consider the framework if no explicit standard exists on an issue, but the IASB does not.

The IASB requires management to consider the framework if no explicit standard exists on an issue, but FASB does not require this. The FASB framework states different objectives for business and non-business financial statement reporting; the IASB framework has one objective for both. In the FASB framework, relevance and reliability are the two primary characteristics, while the IASB framework also lists comparability and understandability as primary characteristics.

Question 20

Disagreements that inhibit development of a coherent financial reporting framework are least likely to involve which of the following?

A) Valuation.
B) Transparency.
C) Standard setting.

Answer 20

B) Transparency.

There is widespread agreement that transparency is desirable in financial reporting. Disagreements that inhibit development of a single framework often arise around issues of measurement, valuation, and standard setting.

Question 21

Which of the following is an analyst least likely to rely on as objective information to include in a company analysis?

A) Proxy statements.
B) Government agency statistical data on the economy and the company’s industry.
C) Corporate press releases.

Answer 21

C) Corporate press releases.

Question 22

During 2007, Topeka Corporation entered into the following transactions:
Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account.
Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.
Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?

A) Neither should be recognized.
B) Only one should be recognized.
C) Both should be recognized.

Answer 22

B) Only one should be recognized.

Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is relected on the statement of changes in stockholders’ equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.

Question 23

Which of the following is NOT a requirement for revenue recognition to occur?

A) Earning activities are substantially completed.
B) Cash must have been received.
C) Transactions giving rise to revenue should be arms-length.

Answer 23

B) Cash must have been received.

Revenue from credit sales may be recognized when sales are on account.
Other conditions when revenues are also considered earned include when:revenue can be measured with reasonable accuracy, transactions are not subject to revocation, it is possible to measure the cost of provided goods (no significant contingent obligation), and there is assurance of payment (cash) or collectability.

Question 24

When the cost of goods and services used are recognized as an expense in the same period that its generated revenue is recognized, which of the following principle(s) is (are) being described?

A) The matching and accrual principles.
B) The accrual and expense recognition principles.
C) The matching principle for revenue and expense recognition.

Answer 24

C) The matching principle for revenue and expense recognition.

The accrual concept states that revenue is recognized when the earnings process is completed and cash receipt is assured.

Question 25

Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end of its life it will have an estimated salvage value of $15,000. Using the double-declining balance (DDB) method, depreciation expense in year 2 is closest to: A) $51,020. B) $58,750. C) $71,430.

Answer 25

A) $51,020.

Question 26

Pinto Corporation is an automobile manufacturer located in North America. Pinto owns a 5 percent interest in one of its suppliers, Continental Supply Company. Each year, Pinto receives a cash dividend from Continental. Pinto’s engine supplier, National Supply Company, recently increased prices on goods sold to all customers due to higher labor costs. Should Pinto report the dividends received from Continental and the price increase from National as an operating or nonoperating component on its year-end income statement? A) Both are nonoperating. B) Only one is operating. C) Both are operating.

Answer 26

B) Only one is operating. Since Pinto is a nonfinancial firm, dividends received would be considered a nonoperating component. An increase in cost of goods sold would be considered a part of normal operations.

Question 27

Which of the following statements regarding making changes in accounting principles is least accurate? A) A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted principle. The firm making the change must justify the change. B) Changes in accounting estimates are now treated the same as changes in accounting principles. C) The general rule is retrospective application.

Answer 27

B) Changes in accounting estimates are now treated the same as changes in accounting principles. Changes in accounting estimates are not treated the same as changes in principles. Changes in principles are treated retrospectively, whereas changes in accounting estimates are accounted for in the current and future periods. Both remaining statements are accurate.

Question 28

An analyst has gathered the following information about a company: 110,000 shares of common outstanding at the beginning of the year. The company repurchases 20,000 of its own common shares on July 1. Net income is $300,000 for the year. 10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that is not in arrears at the beginning or ending of the year. The company also has $1 million in 10 percent callable bonds outstanding. The company has declared a $0.50 dividend on the common. What is the company's basic Earnings Per Share? A) $3.00. B) $2.00. C) $1.00.

Answer 28

B) $2.00. Interest is already deducted from earnings

Question 29

Selected information from Feder Corp.’s financial activities for the year is as follows: Net income was $7,650,000. 1,100,000 shares of common stock were outstanding on January 1. The average market price per share was $62. Dividends were paid during the year. The tax rate was 40%. 10,000 shares of 6% $1,000 par value preferred shares convertible into common shares at a rate of 20 common shares for each preferred share were outstanding for the entire year. 70,000 options, which allow the holder to purchase 10 shares of common stock at an exercise price of $50 per common share, were outstanding the entire year. Feder Corp.’s diluted earnings per share (EPS) was closest to: A) $5.87. B) $5.32. C) $4.91.

Answer 29

B) $5.32. Feder’s basic earnings per share ((net income – preferred dividends) / weighted average shares outstanding) was (($7,650,000 – ($1,000 × 10,000 × 0.06)) / 1,100,000 =) $6.41. If the convertible preferred stock was converted to common stock at January 1, (10,000 × 20 =) 200,000 additional common shares would have been issued, dividends on the preferred stock would not have been paid, and Diluted EPS would have been ($7,650,000 / (1,100,000 + 200,000) = $5.88. Because $5.88 is less than basic EPS of $6.41, the preferred shares are dilutive.

Question 30

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the: A) net realizable value. B) net realizable value minus selling costs. C) market price minus selling costs minus normal profit margin.

Answer 30

C) market price minus selling costs minus normal profit margin.

Question 31

Are dividends paid to common shareholders and foreign currency translation gains and losses included in a firm’s other comprehensive income? Dividends paid / Foreign currency translation gains and losses  A) No Yes B) Yes Yes C) No No

Answer 31

 A) No Yes Other comprehensive income includes non-owner transactions that affect shareholders’ equity and are not recognized in net income. Dividends paid are transactions with the owners of the firm, so dividends paid are not included in other comprehensive income. Foreign currency translation gains and losses are non-owner transactions that are not recognized in net income. Thus, foreign currency translation gains and losses are included in other comprehensive income.

Question 32

Which of the following statements about a classified balance sheet is least likely accurate? A classified balance sheet: A) presents the net equity of each asset by subtracting its related liability. B) groups accounts by subcategories. C) distinguishes between current and noncurrent assets.

Answer 32

A) presents the net equity of each asset by subtracting its related liability. A classified balance sheet groups assets and liabilities by subcategories. It distinguishes between current and noncurrent assets and current and noncurrent liabilities. The assets and related liabilities are reported separately, they are not netted.

Question 33

When a firm recognizes revenue in excess of expenses on a product not covered by a warranty before cash is collected, what is the impact on the firm’s assets and liabilities, ignoring taxes? Assets Liabilities  A) Increase Increase B) No effect Increase C) Increase No effect

Answer 33

Increase No effect When a firm recognizes revenue before cash is collected, equity increases (retained earnings) and assets increase (accounts receivable). Liabilities would not be affected.

Question 34

According to the Financial Accounting Standards Board, what is the appropriate measurement basis for equipment used in the manufacturing process and inventory that is held for sale? Equipment Inventory A) Historical cost Historical cost B) Fair value Lower of cost or market C) Historical cost Lower of cost or market

Answer 34

C) Historical cost Lower of cost or market Equipment is reported in the balance sheet at historical cost less accumulated depreciation. Inventory is reported in the balance sheet at the lower of cost or market.

Question 35

At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security? Available-for-sale /Trading security  A) $2,000 $20,000 B) $0 $22,000 C) $2,000 $22,000

Answer 35

C) $2,000; $22,000 Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders’ equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.

Question 36

Common size balance sheets express all balance sheet accounts as a percentage of: A) stockholders equity. B) total assets. C) total liabilities.

Answer 36

B) total assets. Common size statements normalize balance sheet and income statements and allow the analyst to make easier comparisons of different sized firms. A common size balance sheet expresses all balances as a percentage of total assets.

Question 37

Which of the following is NOT a cash flow from operation? A) interest payments. B) dividends received. C) dividends paid to shareholders.

Answer 37

C) dividends paid to shareholders. Dividends paid are a financing cash flow. Dividends received and interest paid are both operating cash flows.

Question 38

Dart Corporation engaged in the following transactions earlier this year: Transaction #1: Retired long-term debenture bonds with a face amount of $10 million by issuing 500,000 shares of common stock to the bondholders. Transaction #2: Borrowed $5 million from a bank and used the proceeds to purchase equipment used in the manufacturing process. With respect to these transactions, should Dart report transaction #1 as a financing cash flow and/or transaction #2 as an investing cash flow? A) Neither should be reported as such. B) Both should be reported as such. C) Only one should be reported as such.

Answer 38

C) Only one should be reported as such. Retiring bonds by issuing common stock to the bondholders is a non-cash transaction and is disclosed separately in a note or supplementary schedule to the cash flow statement, rather than as a financing cash flow. The cash borrowed for the equipment purchase is a financing inflow and the cash cost of the equipment is reported as an investing cash flow in the cash flow statement. Had a bond been issued to the seller of the equipment, it would be treated as a non-cash transaction and reported only in the notes to the cash flow statement.

Question 39

The correct set of cash flow treatments as they relate to interest paid according to U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is: U.S. GAAP/ IAS GAAP A) CFF CFF B) CFO CFO or CFF C) CFO or CFF CFO

Answer 39

B) CFO; CFO or CFF U.S. GAAP treats interest paid as CFO whereas IAS GAAP treats interest paid as either CFO or CFF.

Question 40

The difference between cash flow from operations (CFO) under the direct method and CFO under the indirect method is: A) always equal to zero. B) balanced by an opposite difference in cash flow from investing. C) disclosed as a reserve in the footnotes to the cash flow statement.

Answer 40

A) always equal to zero. The direct and indirect methods are two ways of presenting the same total for cash from operations.

Question 41

Darth Corporation’s most recent income statement shows net sales of $6,000, and Darth’s marginal tax rate is 40%. The total expenses reported were $3,200, all of which were paid in cash. In addition, depreciation expense was reported at $800. A further examination of the most recent balance sheets reveals that accounts receivable during that period increased by $1,000. The cash flow from operating activities reported by Darth should be: A) $1,200. B) $1,000. C) $2,200.

Answer 41

B) $1,000. Net income is ($6,000 – 3,200 – 800)(1 – 0.4) = $1,200. Adjustments to reconcile net income to cash flow from operating activities will require that depreciation ($800) be added back, and increase in accounts receivable ($1,000) be subtracted: $1,200 + 800 – 1,000 = $1,000.

Question 42

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 – Each line item is expressed as a percentage of its base-year amount. Statement #2 – Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #3 – Each line item is expressed as a percentage of the prior year’s amount. Vertical analysis/ Horizontal analysis A) Statement #2/ Statement #1 B) Statement #1/ Statement #2 C) Statement #2/ Statement #3

Answer 42

 A) Statement #2 Statement #1 Horizontal common-size analysis involves expressing each line item as a percentage of the base-year figure. Vertical common-size analysis involves expressing each line item of the income statement as a percentage of revenue and each line item of the balance sheet as a percentage of ending total assets.

Question 43

Ratio analysis is most useful for comparing companies: A) in different industries that use the same accounting standards. B) of different size in the same industry. C) that operate in multiple lines of business.

Answer 43

B) of different size in the same industry. Ratio analysis is a useful way of comparing companies that are similar in operations but different in size. Ratios of companies that operate in different industries are often not directly comparable. For companies that operate in several industries, ratio analysis is limited by the difficulty of determining appropriate industry benchmarks.

Question 44

Comparing a company’s ratios with those of its competitors is best described as: A) cross-sectional analysis. B) longitudinal analysis. C) common-size analysis.

Answer 44

A) cross-sectional analysis. Comparing a company’s ratios with those of its competitors is known as cross-sectional analysis.

Question 45

The cash conversion cycle is the: A) length of time it takes to sell inventory. B) sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases. C) sum of the time it takes to sell inventory and the time it takes to collect accounts receivable.

Answer 45

B) sum of the time it takes to sell inventory and collect on accounts receivable, less the time it takes to pay for credit purchases. Cash conversion cycle = (average receivables collection period) + (average inventory processing period) − (payables payment period)

Question 46

The traditional DuPont equation shows ROE equal to: A) net income/sales × sales/assets × assets/equity. B) EBIT/sales × sales/assets × assets/equity × (1 – tax rate). C) net income/assets × sales/equity × assets/sales.

Answer 46

A) net income/sales × sales/assets × assets/equity. Profit margin × asset turnover × financial leverage. Although net income/assets × sales/equity × assets/sales also yields ROE, it is not the DuPont equation.

Question 47

In preparing a forecast of future financial performance, which of the following best describes sensitivity analysis and scenario analysis, respectively? Description #1 – A computer generated analysis based on developing probability distributions of key variables that are used to drive the potential outcomes. Description #2 – The process of analyzing the impact of future events by considering multiple key variables. Description #3 – A technique whereby key financial variables are changed one at a time and a range of possible outcomes are observed. Also known as “what-if” analysis. Sensitivity analysis/ Scenario analysis A) Description #3 Description #1 B) Description #2 Description #3 C) Description #3 Description #2

Answer 47

C) Description #3; Description #2 Sensitivity analysis develops a range of possible outcomes as specific inputs are changed one at a time. Sensitivity analysis is also known as “what-if” analysis. Scenario analysis is based on a specific set of outcomes for multiple variables. Computer generated analysis, based on developing probability distributions of key variables, is known as simulation analysis.

Question 48

Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldberg’s financial statements in the period incurred? A) Selling cost. B) Conversion cost. C) Freight costs on inputs.

Answer 48

A) Selling cost. Selling costs are expensed in the period incurred since they result in no future benefit (i.e. the inventory has been sold). Conversion costs and freight costs add value in assisting in the future sale of the related inventory. Therefore, these costs are not recognized until the inventory is ultimately sold.

Question 49

In an environment of increasing prices, the last-in first-out (LIFO) inventory cost method results in: A) cost of sales near current cost and inventory below replacement cost. B) inventory near replacement cost and cost of sales below current cost. C) cost of sales below current cost and inventory above replacement cost.

Answer 49

cost of sales near current cost and inventory below replacement cost. LIFO assumes the most recently purchased items are the first items sold. In an increasing or decreasing price environment, LIFO results in cost of sales that are nearer to current costs compared to other inventory cost methods, and inventory values based on outdated prices (below replacement cost if prices are increasing, above replacement cost if prices are decreasing).