FRA Questions

Question 1

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the:
A) initial trial balance.
B) general ledger.
C) general journal.

Answer 1

C (not B…)
Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the “general journal.”
*GJ contains JE in the order of dates
* general ledger is a complete record of financial transactions over the life of a company.

Question 2

Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use:
A)
straight-line depreciation methods will have higher book values for the assets on the balance sheet than companies that use accelerated depreciation.
B)
accelerated depreciation methods for tax purposes will decrease the amount of taxes paid in early years.
C)
accelerated depreciation methods will have lower asset turnover ratios than if they used straight line depreciation.

Answer 2

C

Accelerated depreciation will lead to lower book values and hence a higher asset turnover ratio.

Question 3

Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The:
A)
term of the lease is 75% or more of the estimated economic life of the leased property.
B)
lease contains a bargain purchase option.
C)
lessor retains ownership of the property at the end of the lease term.

Answer 3

C
If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a finance lease.

Question 4

Which of the following is most likely to be considered a barrier to developing one universally recognized set of reporting standards?
A)
GATT already requires sufficient agreement.
B)
Reluctance of firms to adhere to a single set of reporting standards.
C)
Different standard-setting bodies of different countries disagree on the best treatment of a particular issue.

Answer 4

C
A principal obstacle to agreement on a single set of reporting standards is that various standard-setting bodies and regulatory authorities disagree on what the standards should be. Firms generally support the idea because it would reduce the cost of reporting. GATT is the General Agreement on Tariffs and Trade and does not relate to financial reporting.

Question 5

Which of the following ratios would NOT be used to evaluate how efficiently management is utilizing the firm’s assets?
A) Gross profit margin.
B) Fixed asset turnover.
C) Payables turnover.

Answer 5

A

The gross profit margin is used to measure a firm’s operating profitability, not operating efficiency.

Question 6

The price to tangible book value ratio subtracts what components from equity?
A)
Goodwill and intangible assets.
B)
Goodwill and property, plant and equipment.
C)
Intangible assets and property, plant and equipment.

Answer 6

A
Price to tangible book value is calculated by removing goodwill and intangible assets from equity. This adjustment reduces assets and equity and produces a ratio that is not affected by differences in intangible asset values that may result from how the assets were acquired.

Question 7

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) $1,000.
B) $2,200.
C) $1,200.

Answer 7

A
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 8

A firm’s balance sheet prepared under IFRS is least likely to include:
A) market value of inventory.
B) fair value of firm PPE.
C) market value of the firm’s equity.

Answer 8

C
The market value of the firm’s common equity (common stock) is not included on the balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of inventory to be carried at their market values.

Question From: Session 7 > Reading 25 > LOS b

*IFRS Fair Value allowance, need to make a list

Question 9

A firm has a cash conversion cycle of 80 days. The firm’s payables turnover goes from 11 to 12, what happens to the firm’s cash conversion cycle? It:
A) may shorten or lengthen.
B) lengthens.
C) shortens.

**what is the formula for ccc? Formulas for its components?

Answer 9

B

Cash Conversion Cycle = collection period + Inv Period - Payment period

Inventory period = 365/inventory turnover
Payment period = 365 / payables turnover
Collection period = 365/receivables turnover

Question 10

In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:

A) is lower than the cost of the leased asset.
B) equals the sale price of the leased asset.
C) equals the cost of the leased asset.

Answer 10

C
In a direct-financing lease, the implicit rate is such that the present value of the MLPs equals the cost of the leased asset. Thus, at lease inception the total assets do not change and no gain is recognized.

Question 11

When comparing capitalizing versus expensing costs which of the following statements is most accurate?
A)
Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.
B)
Expensing costs creates lower cash flows from operations and lower cash flows from investing.
C)
Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.

Answer 11

C
Although net cash flows are not affected by the choice of capitalization or expensing, the components of cash flow are affected. Because, a firm that capitalizes classifies the expenditure as investing (not operations), cash flow from operations will be higher for firms that capitalize and investing cash flows will be lower than that of an expensing firm.
*First time picked A, thinking it was cash outflow…

Question 12

When calculating earnings per share (EPS) for firms with complex capital structures, convertible preferred stock is ordinarily considered to be a:
A) antidilutive security.
B) potentially dilutive security.
C) non-equity security.

Answer 12

B
Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities. Note that if diluted EPS when considering the convertible preferred stock is greater than basic EPS, the convertible preferred stock would be antidilutive and should not be treated as common stock in computing diluted EPS.

*it is potentially dilutive, but could be antidilutive

Question 13

Which of the following items would NOT be included in cash flow from investing?
A) Proceeds related to acquisitions.
B) Buying or selling a building.
C) Selling stock of the company.

Answer 13

C (it is financing cashflow)

Question 14

Which of the following accounting warning signs is most likely to indicate manipulation of reported operating cash flows?
A)
More aggressive revenue recognition methods than comparable firms.
B)
Higher estimated salvage values than are typical in a firm’s industry.
C)
Capitalizing purchases that comparable firms typically expense.

Answer 14

C
Capitalizing purchases that other firms expense increases reported CFO (operating) by classifying the cash outflows as CFI (investing). Revenue recognition methods and accounting estimates may affect reported income but are unlikely to affect the amount or classification of cash flows.

Question 15

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) Conversion cost.
B) Freight costs on inputs.
C) Selling cost.

Answer 15

C
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.

which costs should be included in inventory and only recog in COGS

Question 16

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) Both should be reported as such.
B) Only one should be reported as such.
C) Neither should be reported as such.

Answer 16

B

Question 17

The process of developing one universally accepted set of accounting standards is best described as:
A) IASB.
B) unification.
C) convergence.

Answer 17

C

Question 18

A U.S. GAAP firm writes down inventory to net realizable value. In the period of the writedown, what is the most likely effect on cost of goods sold?
A) Decrease.
B) No effect.
C) Increase.

Answer 18

C
A write-down of inventory to net realizable value is typically recognized under U.S. GAAP as an increase in cost of goods sold in the period of the write-down. Consider the inventory equation:

ending inventory = beginning inventory + purchases - cost of goods sold

A write-down to NRV decreases ending inventory, with no effect on beginning inventory or purchases. For the inventory equation to hold, cost of goods sold must increase.

Question 19

Which of the following statements about financial reporting standards is least accurate? Reporting standards:
A)
are disclosed on Form 8K by publicly traded firms in the United States.
B)
narrow the range within which management estimates can be seen as reasonable.
C)
ensure that the information is “useful to a wide range of users.”

Answer 19

A
Reporting standards ensure that the information is “useful to a wide range of users,” including security analysts, by making financial statements comparable to one another and narrowing the range within which management’s estimates can be seen as reasonable. Securities & Exchange Commission Form 8K addresses acquisitions, divestitures, etc. and not reporting standards.
*10Q or 10K is the quarterly and annual FS, 8K is not..

Question 20

Using the following data, find the return on equity (ROE).

Net Income=2$
Total Assets=10$
Sales=$10
Equity=$8

A) 100%.
B) 20%.
C) 25%.

Answer 20

C
Net Income / Equity = ROE
2 / 8 = 25%

Question 21

A temporary difference between income tax expense and taxes payable result in a(n):

A) gain or loss in comprehensive income.
B) adjustment to the effective tax rate.
C) deferred tax item.

Answer 21

C
Taxes payable is defined as the taxes due to the government as determined by taxable income and the tax rate, while income tax expense is the amount recognized on the income statement. A temporary difference results in a deferred tax liability if income tax expense is greater than taxes payable, or a deferred tax asset if income tax expense is less than taxes payable. A permanent difference results in an adjustment to the firm’s effective tax rate. Neither results in a gain or loss.

Question 22

Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?

Characteristic #1 - Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 - Settlement will require the use of cash within one year or operating cycle, whichever is greater.
Characteristic #1 Characteristic #2
A) No Yes
B) No No
C) Yes No

Answer 22

B
A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services.

Question 23

First in, first out (FIFO) inventory equals:
A) LIFO inventory + LIFO reserve.
B) change in LIFO reserve − ending LIFO reserve.
C) LIFO cost of goods sold − change in LIFO reserve.

Answer 23

A

To convert LIFO inventory balances to a FIFO basis, simply add the LIFO reserve to LIFO inventory.

Question 24

A common-size cash flow statement is least likely to provide payments to employees as a percentage of:
A) revenues for the period.
B) operating cash flow for the period.
C) total cash outflows for the period.

Answer 24

B
There are two formats for a common-size cash flow statement, expressing each type of outflow as a percentage of total cash outflows or as a percentage of total revenue for the period. Operating cash flow for the period mixes inflows and outflows and is not used to calculate percentage flows for payment made.

Question 25

How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share? A) Increase EPS. B) Either decrease or increase EPS depending upon if the security is dilutive or antidilutive. C) Decrease EPS.

Answer 25

C Dilutive securities such as convertibles and options are found in a complex capital structure and always decrease EPS. Convertibles and options may also be antidilutive, which will increase EPS hence the name antidilutive. The only way to know if a security is dilutive or antidilutive is to compare the basic EPS to diluted EPS. If the diluted EPS is higher than the basic EPS then the security is antidilutive and should not be included when determining diluted EPS.

Question 26

Which of the following circumstances is most likely indicative of an increase in a company's future earnings? A) Work-in-process inventory increasing faster than finished goods inventory. B) Finished goods inventory increasing faster than sales. C) Finished goods inventory increasing faster than work-in-process inventory.

Answer 26

A Work-in-process inventory increasing faster than finished goods inventory is a likely indicator that a firm expects demand to increase, which should increase future revenues and earnings. Finished goods inventory increasing faster than sales or work-in-process inventory may indicate that demand is decreasing. Analysts should refer to sources such as management's commentary to further examine the reasons for an increase in finished goods inventory.

Question 27

Which of the following statements is CORRECT? Income tax expense: A) includes taxes payable and deferred income tax expense. B) is the reported net of deferred tax assets and liabilities. C) is the amount of taxes due to the government.

Answer 27

A Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Taxes payable are the amount of taxes due the government.

Question 28

``` In the financial statement analysis framework, using the data to address the objectives of the analysis and deciding what conclusions or recommendations the information supports is best described as: A) reporting the conclusions. B) processing the data. C) analyzing and interpreting the data. *what are the six steps? ```

Answer 28

The financial statement analysis framework consists of six steps: 1 - State the objective and context. Determine what questions the analysis is meant to answer, the form in which it needs to be presented, and what resources and how much time are available to perform the analysis. 2 - Gather data. Acquire the company's financial statements and other relevant data on its industry and the economy. Ask questions of the company's management, suppliers, and customers, and visit company sites. 3 - Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets. 4 - Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports. 5 - Report the conclusions or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations. 6 - Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary.

Question 29

Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it became more likely than not that $2,000,000 of the asset's value may never be realized because of the uncertainty of future income. Graphics, Inc. should: A) reverse the asset account permanently by $2,000,000. B) reduce the asset by establishing a valuation allowance of $2,000,000 against the asset. C) not make any adjustments until it is certain that the tax benefits will not be realized.

Answer 29

B If it becomes more likely than not that deferred tax assets will not be fully realized, a valuation allowance that reduces the asset and also reduces income from continuing operations should be established.

Question 30

Train, Inc.'s cash flow from operations (CFO) in 20X8 was $14 million. Train paid $8 million cash to acquire a franchise at the beginning of 20X8 that was expensed in 20X8. If Train had elected to amortize the cost of the franchise over eight years, 20X8 cash flow from operations (CFO) would have been: A) $22 million. B) $21 million. C) $14 million.

Answer 30

A !! Amortization is a non-cash expense If Train decided to amortize the cost, the franchise would be capitalized as a balance sheet asset and the cash outflow would have been classified as CFI. As a result CFO would have been $8 million higher, or $14 million + $8 million = $22 million. Amortization would be a non-cash expense.

Question 31

The cash conversion cycle is the: A) sum of the time it takes to sell inventory and the time it takes to collect accounts receivable. 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) length of time it takes to sell inventory.

Answer 31

B Cash conversion cycle = (average receivables collection period) + (average inventory processing period) − (payables payment period)

Question 32

Determine the cash flow from operations given the following table. Item Amount Cash payment of dividends $30 Sale of equipment $25 Net income $25 Purchase of land $15 Increase in accounts payable $20 Sale of preferred stock $25 Increase in deferred taxes $5 Profit on sale of equipment $15 A) $35. B) $45. C) $20.

Answer 32

A Using the indirect method, CFO = Net income 25 + increase in accounts payable 20 + increase in deferred taxes 5 − profit on sale of equipment 15 = $35. Increases in accounts payable and deferred taxes are sources of operating cash that are not included in net income and must be added. Profit on sale of equipment is a CFI item that must be removed from net income. No adjustment needs to be made for cash payment of dividends (CFF), sale of preferred stock (CFF), or purchase of land (CFI) because they are not included in net income. Only the profit on sale of equipment, not the full proceeds from sale, is included in net income.

Question 33

An analyst has gathered the following information about a company: Cost of goods sold = 65% of sales. Inventory of $450,000. Sales of $1 million. What is the value of this firm's average inventory processing period using a 365-day year? A) 252.7 days. B) 0.7 days. C) 1.4 days.

Answer 33

A COGS = (0.65)($1,000,000) = $650,000 Inventory turnover = CGS / Inventory = $650,000 / $450,000 = 1.4444 Average Inventory Processing Period = 365 / 1.4444 = 252.7 days

Question 34

An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used? A) Percentage-of-completion method. B) Installment sales method. C) Completed contract method.

Answer 34

A The percentage-of-completion method is appropriate in this case because payment is assured when dealing with the U.S. government, and cost and price estimates are assumed reliable due to the ongoing and routine nature of the contract.

Question 35

Liquidity-based presentation of a balance sheet is most likely to be used by a: A) retailer. B) bank. C) manufacturer.

Answer 35

B

Question 36

Required financial statements, according to International Accounting Standard (IAS) No. 1, include a(n): A) balance sheet and explanatory notes. B) cash flow statement and auditor's report. C) income statement and working capital summary. what else are required? (total of 6)

Answer 36

A Financial statements that are required by IAS No. 1 include - a balance sheet, - a statement of comprehensive income, - a cash flow statement, - a statement of changes in owners' equity, - and explanatory notes that include a summary of the company's accounting policies.

Question 37

MJ Inc. reported cost of goods sold of $80,000 for the year under the LIFO inventory valuation method. MJ had a beginning LIFO reserve of $8,000 and an ending LIFO reserve of $11,000. Cost of goods sold under the FIFO inventory valuation method is: A) $77,000. B) $83,000. C) $91,000.

Answer 37

A To convert the LIFO inventory to FIFO, you take LIFO Inv. + LIFO Reserve. ==> LIFO Inv + LIFO Reserve To convert COGS LIFO to COGS FIFO, you take COGS FIFO and subtract the increase in LIFO reserve. ==> COGS FIFO - Increase in LIFO reserve (no need to convert FIFO to LIFO, at least in exam)

Question 38

If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax: A) must be reduced by a valuation allowance. B) should be considered an increase in equity. C) should be considered an asset or liability.

Answer 38

B If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities. If, however, they are not expected to reverse in the future, then they should be classified as equity. Question From: Session 8 > Reading 30 > LOS b

Question 39

Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using the revaluation model. Edgewater needs to determine 1) what Pfaff's carrying value of property, plant and equipment would be under the historical cost model, and 2) which of Pfaff's intangible assets have finite useful lives. Will these items be disclosed in Pfaff's financial statements? A) Only one of these items is required to be disclosed. B) Both of these items are required to be disclosed. C) Neither of these items is required to be disclosed.

Answer 39

B Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historical cost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite.

Question 40

A zero coupon bond, compared to a bond issued at par, will result in higher: A) interest expense. B) cash flows from operations (CFO). C) cash flows from financing (CFF).

Answer 40

B (Not C, since interest expense is operating) The zero-coupon bond will have higher cash flows from operations, as the cash interest expense in this case is zero and no cash is paid until maturity. Candidates should remember that any bond issued at a discount will have more cash flow from operations and less cash flow from financing.

Question 41

When bonds are issued at a premium: A) coupon interest paid decreases each period as bond premium is amortized. B) earnings of the firm increase over the life of the bond as the bond premium is amortized. C) earnings of the firm decrease over the life of the bond as the bond premium is amortized.

Answer 41

B As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond.

Question 42

An oil exploration company has been contracted to dig 100 exploratory holes for $200,000. The cost to complete this job is estimated to be $150,000, but the company doesn't recognize any of the $50,000 profit until the job is completed. Which revenue recognition method is being used? A) Cost recovery method. B) Percentage-of-completion method. C) Completed contract method.

Answer 42

C The completed contract method doesn't recognize revenue and expense until the contract is completed. The percentage-of-completion method would have recognized a portion of the $50,000 profit prior to completion.

Question 43

Capitalizing interest costs related to a company's construction of assets for its own use is required by: A) both IFRS and U.S. GAAP. B) IFRS only. C) U.S. GAAP only.

Answer 43

A Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during a the construction of capital assets for their own use.

Question 44

A firm with a capital structure consisting of only common stock and non-convertible bonds is said to have a: A) non-diluted capital structure. B) simple capital structure. C) straight capital structure.

Answer 44

B A simple capital structure is one that contains no securities that have the potential to dilute a firm's earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

Question 45

A firm revalues its long-lived assets upward. All other things equal, which of the following financial impacts is least likely to occur? A) Higher profitability in the periods after revaluation. B) Higher earnings in the revaluation period. C) Lower solvency ratios. *(what's solvency ratio's formula)

Answer 45

A A - Because the asset has now been increased to a higher depreciable base, there will now be higher depreciation expense and therefore, lower profitability in the periods after revaluation. B - There could be higher earnings in the revaluation period because there may be impairment losses that can be reversed on the income statement. Otherwise, there will be an adjustment to earnings through other comprehensive income. C - Solvency ratios (i.e. debt to equity) will decrease since the increase in assets will be balanced by an increase in equity. Higher denominators and unchanged numerators will result in lower solvency ratios.

Question 46

United Corporation and Intrepid Company are similar firms operating in the same industry. United follows U.S. Generally Accepted Accounting Principles and Intrepid follows International Financial Reporting Standards. At the end of last year, Intrepid had a higher inventory turnover ratio than United. Are the following plausible explanations for the difference? Explanation #1 - United accounts for its inventory using the first-in, first-out method and Intrepid uses the last-in, first-out method. Explanation #2 - United recognized an upward valuation of inventory that had been previously written down. Intrepid does not revalue its inventory upward. Explanation #1 Explanation #2 A) No Yes B) Yes No C) No No

Answer 46

C (need to read which company uses GAAP vs IFRS!!) While the LIFO firm will typically report lower average inventory (higher inventory turnover), Intrepid cannot be a LIFO firm because LIFO is not permitted under IFRS. An upward revaluation of inventory would lower the inventory turnover ratio; however, United cannot revalue its inventory upward because it follows U.S. GAAP. U.S. GAAP prohibits upward inventory revaluations (except in very limited circumstances which are beyond the scope of the Level I exam).

Question 47

Larry Purcell, an entry-level fixed income analyst at Knowlton & Smeades LLC, was discussing debt covenants with his supervisor, Andy Holzman. During the meeting Purcell made the following statements regarding bond covenants: Statement 1: If a firm violates any of its debt covenants, the company will immediately go into bankruptcy and the creditors of the firm will take over the liquidation of its assets. Statement 2: Debt covenants are important in evaluating a firm's credit risk and to better understand how the restrictions of the covenants can affect the firm's growth prospects and choice of accounting policies. With respect to these statements: A) both are incorrect. B) only one is correct. C) both are correct.

Answer 47

B Lenders and other creditors use debt covenants in their lending agreements to restrict the activities of the debtor that could adversely impact the creditors' position. If any bond covenant is violated, the firm is in technical default on its debt. The creditors can demand payment of the debt, however, the terms are generally renegotiated. As such, the company does not automatically enter into bankruptcy and have its assets liquidated by the creditors.

Question 48

return on equity=?

Answer 48

Return on equity = net income / average equity | ROE = net profit margin × asset turnover × leverage ratio

Question 49

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change: A) retrospectively, because it is a change in accounting principle. B) prospectively, with LIFO layers calculated from past purchases and sales. C) prospectively, with the carrying value as the first LIFO layer.

Answer 49

C Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.

Question 50

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as: A) lower ROA in the current period and higher ROA in later periods. B) higher ROA in the current period and lower ROA in later periods. C) lower ROA in the current period and no effect on ROA in later periods.

Answer 50

A Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA.

Question 51

Orchard Supply Company uses LIFO inventory valuation. Orchard had a cost of goods sold of $1 million for the most recent year. Inventory was $500,000 at the beginning of the year and $600,000 at the end of the year. Orchard Supply's LIFO reserve was $100,000 at the beginning of the year and $200,000 at the end of the year. What is Orchard Supply's cost of goods sold using FIFO inventory valuation? A) $1.1 million. B) $800,000. C) $900,000. *what's FIFO ending inventory?

Answer 51

C FIFO COGS = LIFO COGS − change in LIFO reserve = $1 million − $100,000 = $900,000 *600K+200K=800K FIFO inventory = LIFO inventory + LIFO reserve.

Question 52

When a reliable estimate of costs exists, ultimate payment is assured, and revenue is earned as costs are incurred, which of the following revenue recognition methods should be used? A) Cost recovery method. B) Percentage-of-completion method. C) Installment sales method.

Answer 52

B C - The installment sales method recognizes revenue and associated cost of goods sold only when cash is received. Gross profit (sales - cost of goods sold) reflects the proportion of cash received. A - The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

Question 53

Which description of the objective of financial statements is most accurate? The objective of financial statements is: A) to provide economic decision makers with useful information about a firm's financial performance and changes in financial position. B) to provide a wide range of users with information about a firm's financial prospects. C) to provide securities analysts with objective data about a firm's financial prospects.

Answer 53

A (pay attention to "prospect" - that's associated with analyst) The objective of financial statements is to provide economic decision makers with useful information about a firm's financial performance and changes in financial position. Assessing its prospects is the responsibility of analysts. Financial statements fall under the purview of the FASB in the US, not the IASB. The SEC does not set the objectives of financial statements, it is a regulatory authority.

Question 54

Which of the following statements regarding deferred taxes is NOT correct? A) If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced. B) Only those components of deferred tax liabilities that are likely to reverse should be considered a liability. C) If deferred taxes are not expected to reverse in the future then they should be classified as equity.

Answer 54

A (注意B和C选项，都是正确的） When deferred tax liabilities are included in equity, it will reduce the debt-to-equity ratio (by increasing the denominator), in some cases considerably.

Question 55

On January 1, 20X4, Cayman Corporation bought manufacturing equipment for $30 million. On December 31, 20X6, Cayman determined the equipment was impaired and recognized a $5 million impairment loss in its income statement. As of December 31, 20X7, the fair value of the equipment exceeded the book value by $7 million. Cayman may recognize a gain in its 20X7 income statement if it reports under: A) neither IFRS nor U.S. GAAP. B) IFRS, but not U.S. GAAP. C) either IFRS or U.S. GAAP.

Answer 55

B U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the recovery is reported in the income statement to the extent that the previous downward adjustment (loss) was reported in net income. Any further increase in value is reported as revaluation surplus in shareholders' equity.

Question 56

A tax rate that has been substantively enacted is used to determine the balance sheet values of deferred tax assets and deferred tax liabilities under: A) both IFRS and U.S. GAAP. B) IFRS only. C) U.S. GAAP only.

Answer 56

B Under IFRS, a tax rate that has been enacted or substantively enacted is used to measure deferred tax items. Under U.S. GAAP, only a tax rate that has actually been enacted can be used.

Question 57

GTO Corporation purchased all of the common stock of Charger Company for $4 million. At the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the acquisition date, the fair value of Charger's assets was $3.5 million and the fair value of Charger's liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the acquisition and is it necessary for GTO to amortize the goodwill? Goodwill Amortization required A) $1.8 million Yes B) $2.2 million No C) $1.8 million No

Answer 57

C The acquisition goodwill is equal to $1.8 million [$4 million purchase price - $2.2 million fair value of net assets acquired ($3.5 million assets at fair value - $1.3 million liabilities at fair value)]. Under IFRS or U.S. GAAP, goodwill is not amortized but is subject to an annual impairment test. *Goodwill not amortize but subject to impairment test

Question 58

Under which financial reporting standards is a firm required to discuss the circumstances when reversing an inventory writedown? A) Neither IFRS nor U.S. GAAP. B) IFRS, but not U.S. GAAP. C) Both IFRS and U.S. GAAP.

Answer 58

B (reverse is not allowed under GAAP!!) Reversals of inventory writedowns are permitted under IFRS but not under U.S. GAAP. If an IFRS reporting firm reverses an inventory writedown, the firm is required to discuss the circumstances of the reversal.

Question 59

Young Distributors, Inc. issued convertible bonds two years ago, and those bonds are the only potentially dilutive security Young has issued. In 20X5, Young's basic earnings per share (EPS) and diluted EPS were identical, but in 20X4 they were different. Which of the following factors is least likely to explain the difference between basic and diluted EPS? The: A) bonds were redeemed by Young Distributors at the beginning of 2005. B) bonds were antidilutive in 2005 but not in 2004. C) average market price of Young common stock increased in 20X5.

Answer 59

C Average stock price is not a factor in determining whether convertible bonds are dilutive or antidilutive. If Young redeemed the bonds, they would have no potentially dilutive securities outstanding in 20X5 and diluted EPS, if the company reported it, would equal basic EPS. Basic and diluted EPS would also be equal in 20X5 if the bonds were antidilutive in that year.

Question 60

An analyst compares two companies that are identical except that Company X uses finance leases and Company Y uses operating leases. The analyst would expect Company X's debt-to-equity ratio, relative to Company Y's, to be: A) higher. B) lower. C) the same.

Answer 60

A Lease capitalization adds both current and noncurrent liabilities to debt, resulting in a corresponding increase in the debt-to-equity and other leverage ratios. Thus, Company X's (Debt + Lease)/Equity is greater than Company Y's Debt/Equity.

Question 61

Connecticut, Inc.'s stock transactions during the year 20X5 were as follows: January 1: 360,000 common shares outstanding. April 1: 1 for 3 reverse stock split. July 1: 60,000 common shares issued. When computing for earnings per share (EPS) computation purposes, what is Connecticut's weighted average number of shares outstanding during 20X5? A) 140,000. B) 210,000. C) 150,000.

Answer 61

C Connecticut's January 1 balance of common shares outstanding is adjusted retroactively for the 1 for 3 reverse stock split, meaning there are (360,000 / 3) = 120,000 "new" shares treated as if they had been outstanding since January 1. The weighted average of the shares issued in July, (60,000 × 6 / 12) = 30,000 is added to that figure, for a total of 150,000.

Question 62

When analyzing profitability ratios, which inventory accounting method is preferred? A) Weighted average. B) Last in, first out (LIFO). C) First in, first out (FIFO).

Answer 62

B (第一次有选对但理由不一样） Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented.

Question 63

In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in: A) higher cost of sales, lower income, higher cash flows, and lower inventory. B) lower cost of sales, higher income, identical cash flows, and lower inventory. C) higher cost of sales, lower income, lower cash flows, and lower inventory.

Answer 63

``` A In periods of rising prices and stable or increasing inventory quantities, the LIFO method will result in - higher cost of sales, - lower taxes, - lower net income, - lower inventory balances, - lower working capital, and - higher cash flows. ```

Question 64

Quick ratio vs. current ratio?

Answer 64

Quick ratio = (cash + marketable securities + receivables) / current liabilities Current ratio = (cash + marketable securities + receivables + inventory) / current liabilities

Question 65

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon's interest coverage ratio? A) 3 times. B) 1 time. C) 4 times.

Answer 65

C ICR = operating profit ÷ Interest = EBIT ÷ Interest = 100,000 ÷ 25000 = 4

Question 66

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) Only one is operating. B) Both are operating. C) Both are nonoperating.

Answer 66

A 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 67

Selected information from Kentucky Corp.'s financial statements for the year ended December 31 was as follows (in $ millions): Property, Plant & Equip. = 10 Deferred Tax Liability = 0.6 Accumulated Depreciation= (4) The balances were all associated with a single asset. The asset was permanently impaired and has a present value of future cash flows of $4 million. After Kentucky writes down the asset, Kentucky's tax accounts will be affected as follows (the tax rate is 40%): A) taxes payable will decrease $800,000. B) deferred tax liability will be eliminated and deferred tax assets will increase $1.4 million. C) deferred tax liability will be eliminated and deferred tax assets will increase $200,000.

Answer 67

C （remember it is a permanent write down but the asset is not disposed) A permanently impaired asset must be written down to the present value of its future cash flows. The asset's carrying value of ($10 − $4 =) $6 million must be reduced by $2 million to $4 million. An impaired value write-down reduces net income for accounting purposes, but not for tax purposes until the asset is sold or disposed of, so taxes payable do not decrease. At a 40% tax rate, the eventual writedown for tax purposes of $2 million will cause $800,000 of changes in deferred tax items. The $600,000 deferred tax liability associated with this asset is eliminated and a deferred tax asset of $200,000 is established.

Question 68

Crawford Corp. and Vernon Corp. are lessors who have leased assets on identical terms to firms with similar credit ratings. Crawford reports its lease as a sales-type lease and Vernon reports its lease as a direct financing lease. It is most likely that: ``` A) Crawford retains the leased asset on its balance sheet. B) Vernon reports under IFRS. C) both firms report under U.S. GAAP. ```

Answer 68

C For a lessor, under U.S. GAAP, a capital lease may be reported as either a sales-type or direct financing lease. This distinction is not made for a financing (capital) lease under IFRS.

Question 69

Which of the following is least likely to be a motivation for managers to issue financial reports of low quality? A) Enhancement of the manager's career. B) Keeping earnings above the same period in the prior year. C) Accounting controls are weak within the company.

Answer 69

C (this is an opportunity, not motivation) Weak accounting controls may offer an opportunity to issue low quality reports but is not in itself a motivation to do so. The other two choices are motivations that might cause management to issue low quality financial reports.

Question 70

A company must report separate financial information for any segment of their business which: A) accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business. B) is more than 20% of a firm's revenues. C) is located in a country other than the firm's home country.

Answer 70

A Financial statement items must be reported separately for any segment of a firm's business that is greater than 10% of revenue or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business. Requirements for reporting of geographic segments have the same size threshold and the segment must operate in a business environment that is different from that of the firm's other segments.

Question 71

For the year ended December 31, 2007, Gremlin Corporation reported the following transactions: Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million. Purchased a patent for $3.3 million cash. Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank. Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade. Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million. Calculate Gremlin's cash flow from investing activities and cash flow from financing activities for the year ended December 31, 2007. Cash flow from investing activities Cash flow from financing activities A) $1.7 million inflow $1.3 million outflow B) $6.0 million outflow $2.7 million inflow C) $2.7 million outflow $6.0 million inflow

Answer 71

B Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement.

Question 72

Under U.S. GAAP, if a reliable estimate of total costs of a long-term contract does not exist, which of the following revenue recognition methods should be used? A) Percentage-of-completion method. B) Completed contract method. C) Cost recovery method.

Answer 72

B The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated. If the total cost of a long-term contract cannot be estimated reliably, U.S. GAAP requires the completed contract method to be used for revenue recognition. The cost recovery method is used for installment sales when future cash collections are not assured.

Question 73

For publicly traded firms in the United States, the Management Discussion and Analysis (MD&A) portion of the financial disclosure is least likely required to discuss: A) results of operations. B) unusual or infrequent items. C) capital resources and liquidity. *MD&A should include which parts (3)

Answer 73

B For publicly traded U.S. firms, the MD&A portion of the financial disclosure is required to discuss results of operations, capital resources and liquidity and a general business overview based on known trends. A discussion of unusual or infrequent items may be included in the MD&A, but is not required.

Question 74

Formula for quick ratio and current ratio?

Answer 74

``` quick = (cash + AR) / (current liabilities) current = current assets/current liabilities ```

Question 75

According to the converged standards for revenue recognition issued in May 2014, a promise to transfer a distinct good or service is most accurately described as a: A) performance obligation. B) transaction. C) contract.

Answer 75

A

Question 76

Under IFRS, if a firm reports investment property using the fair value model, unrealized gains and losses on investment property are: A) recognized in other comprehensive income. B) recognized on the income statement. C) disclosed in the financial statement notes.

Answer 76

B

Question 77

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

Answer 77

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

Question 78

Over time, the reported amount of the annual interest expense on a long-term bond issued at a discount will: A) remain constant. B) increase. C) decrease.

Answer 78

B A portion of the discount must be amortized to the interest expense each year. The amortized amount is debited to interest expense and credited to debt. So debt goes up. The interest expense is debt times the effective interest rate. Thus, interest expense will increase over time.

Question 79

Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets that are valued on the balance sheet at $600 million. This includes previously recognized revaluation losses of $80 million. In the most recent accounting period, the fair value of these assets in an active market is $690 million. Which of the following entries will Davis record under the IFRS revaluation model? A) Gain on income statement only. B) Gain on income statement and a revaluation surplus. C) Revaluation surplus only.

Answer 79

B Under IFRS, firms may choose to report long-lived assets at fair value. Upward revaluations are permitted and will result in a gain recognized on the income statement to the extent it reverses a previously recognized loss. Any excess is reported as a revaluation surplus, a direct adjustment to equity. In this case, the carrying value of the assets is $600 million and the fair value is $690 million. Of the $90 million excess of fair value over carrying value, $80 million is recognized as a gain on the income statement to reverse the $80 million loss that was previously recognized. The remaining $10 million is recorded as revaluation surplus in shareholders' equity. Question From: Session 8 > Reading 29 > LOS h

Question 80

Which of the following situations will most likely require a company to record a valuation allowance on its balance sheet? A) A firm is unlikely to have future taxable income that would enable it to take advantage of deferred tax assets. B) A firm has differences between taxable and pretax income that are never expected to reverse. C) To report depreciation, a firm uses the double-declining balance method for tax purposes and the straight-line method for financial reporting purposes.

Answer 80

A A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. If a firm is unlikely to have future taxable income, it would be unlikely to ever use its deferred tax assets, and therefore must record a valuation allowance. Session 8 > Reading 30 > LOS g

Question 81

Under which financial reporting standards is the full amount of a deferred tax asset shown on the balance sheet, regardless of its probability of being realized fully? A) IFRS, but not U.S. GAAP. B) Neither IFRS nor U.S. GAAP. C) U.S. GAAP, but not IFRS.

Answer 81

C Under U.S. GAAP, the full amount of a DTA is shown on the balance sheet, with a contra account (valuation allowance) if it is likely that the full amount of the DTA will not be realized in the future. Under IFRS, the reported value of a DTA is reduced if there is a positive probability that the full amount of the DTA will not be realized in the future.

Question 82

Which of the following is least likely one of the general requirements for financial statements under IFRS? A) Statements should be prepared under a going concern assumption. B) Statements should be prepared at least quarterly. C) No offsetting of income against expenses unless a standard permits or requires it.

Answer 82

B | IFRS require reporting at least annually. The other two choices are requirements included in IAS No. 1.

Question 83

For impaired long-lived assets, a firm reporting under IFRS is least likely required to disclose the: A) estimated probabilities of reversing impairment losses. B) amounts of impairment losses and reversals by asset class. C) circumstances that caused the impairment losses or reversals.

Answer 83

A Under IFRS, firms with impaired assets must disclose the amounts of impairment losses and reversals by asset class, the circumstances that caused the impairment losses or reversals, and where the losses or reversals are recognized on the income statement.

Question 84

For a firm that uses the LIFO inventory cost method, a LIFO liquidation occurs if: A) inventory quantity decreases during a reporting period. B) the firm changes to a different inventory cost method. C) sales decrease during a reporting period.

Answer 84

A LIFO liquidation occurs when the quantity of inventory decreases during a reporting period. In an increasing price environment this results in older, lower costs being included in COGS for the period.

Question 85

Which type of a capital structure contains no dilutive securities? A) Complex. B) Basic. C) Simple.

Answer 85

C A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities. There is no basic capital structure but there are basic earnings per share which does NOT consider the effects of any dilutive securities in the computation of EPS.

Question 86

If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst's point of view are provided by: A) FIFO inventory and FIFO cost of goods sold. B) FIFO inventory and LIFO cost of goods sold. C) LIFO inventory and FIFO cost of goods sold.

Answer 86

B Whether prices are increasing or decreasing, LIFO cost of goods sold and FIFO inventory are preferred because they are the closest estimates of current costs.

Question 87

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 $22,000 B) $0 $22,000 C) $2,000 $20,000

Answer 87

A 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 88

Under U.S. GAAP, which of the following statements regarding the disclosure of deferred taxes in a company's balance sheet is most accurate? A) Current deferred tax liability, current deferred tax asset, noncurrent deferred tax liability and noncurrent deferred tax asset are each disclosed separately. B) Current deferred tax liability and noncurrent deferred tax asset are netted, resulting in the disclosure of a net noncurrent deferred tax liability or asset. C) There should be a combined disclosure of all deferred tax assets and liablities. *what about IFRS?

Answer 88

A Under U.S. GAAP, deferred tax assets and liabilities are classified as current or noncurrent, based on the underlying asset or liability. Under IFRS, deferred tax items are classified as noncurrent.

Question 89

A firm determines that inventory of manufactured goods with a cost of €10 million has a net realizable value of €9 million and writes down its carrying value to this amount. One period later, the firm determines that the net realizable value of this inventory has increased to €11 million. Under IFRS, the carrying value of this inventory: A) must remain valued at €9 million. B) may be revalued up to €10 million. C) may be revalued up to €11 million. *how about GAAP?

Answer 89

B Under IFRS, inventory is measured at the lower of cost or net realizable value. Inventory that has been written down can later be revalued upward if its net realizable value recovers, but only to the extent that reverses the writedown (i.e., no higher than cost). Under U.S. GAAP, inventory that has been written down may not be revalued upward.

Question 90

An IFRS-reporting firm reclassifies a building it owns from "owner-occupied" to "investment property." The fair value of the building is greater than its carrying value. Under the fair value model for investment property, the firm will recognize a gain: A) only if it reverses a previously recognized loss B) equal to the difference between fair value and carrying value. C) in other comprehensive income but not on the income statement.

Answer 90

A When reclassifying a property from owner-occupied to investment property and using the fair value model for valuation of investment property, IFRS specifies that the firm should treat the event as a revaluation, recognizing a gain only if it reverses a previously recognized loss.

Question 91

Guidance from the U.S. Securities and Exchange Commission regarding the criteria for revenue recognition least likely specifies that there must be: A) reasonable assurance that the product will be delivered or the service will be rendered. B) a determined or determinable price. C) evidence of an arrangement between the buyer and the seller. *What are the criteria (4)

Answer 91

A Criteria: - The product has been delivered or the service has been rendered. - The other criteria are evidence of an arrangement between the buyer and seller; - The price has been determined or is determinable; - and the seller is reasonably assured of collecting money.

Question 92

The approach to revenue recognition in the converged accounting standards that were issued in May 2014 is best described as: A) objectives-based. B) principles-based. C) rules-based.

Answer 92

B | Question From: Session 7 > Reading 24 > LOS d

Question 93

Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher? A) Asset turnover. B) Debt/equity. C) Return on equity.

Answer 93

B The debt/equity ratio will be higher because the finance lease requires the creation of a long-term liability on the balance sheet.

Question 94

gross profit margin = ? | Operating profit margin = ?

Answer 94

Gross profit margin = gross profit / net sales | Operating profit margin = EBIT / net sales

Question 95

Christophe Inc. is an electronics manufacturing firm. It owns equipment with a tax basis of $800,000 and a carrying value of $600,000 as the result an impairment charge. It also has a tax loss carryforward of $300,000 that is expected to be utilized within the next year or two. The tax rate on these items is 40% but the tax rate will decrease to 35%. Which of the following is closest to the effect on the income statement of the change in tax rate? A) Decrease income tax expense by $5,000. B) Increase income tax expense by $25,000. C) Increase income tax expense by $5,000.

Answer 95

B The $200,000 difference between the tax base and the carrying value of the equipment gives rise to a deductible temporary difference that leads to a deferred tax asset (DTA) of $80,000 ($200,000 × 40%). The tax loss carryforward of $300,000 also leads to a DTA but for $120,000 ($300,000 × 40%). The decrease in the tax rate from 40% to 35% will reduce the DTA of the equipment by $10,000 ($200,000 × 5%). It will reduce the DTA of the tax loss carryforward by $15,000 ($300,000 × 5%). In total, the DTA will decrease by $25,000. The decrease in the value of the DTA will increase income tax expense by $25,000 in the period when the DTA is decreased.

Question 96

To adjust for operating leases before calculating financial statement ratios, what value should an analyst add to a firm's liabilities? A) Sum of future operating lease obligations. B) Present value of future operating lease payments. C) Difference between present values of lease payments and the asset's future earnings.

Answer 96

B

Question 97

What would be the impact on a firm's return on assets ratio (ROA) of the following independent transactions, assuming ROA is less than one? Transaction #1 - A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in the fair value of these securities. Transaction #2 - A firm owned investment securities that were classified as trading securities and there was recent increase in the fair value of the securities. Transaction #1 Transaction #2 A) Higher Lower B) Lower Higher C) Higher Higher

Answer 97

C Available-for-sale securities are reported on the balance sheet at fair value and any unrealized gains and losses bypass the income statement and are reported as an adjustment to equity. Thus, a decrease in fair value will result in a higher ROA ratio (lower assets). Trading securities are also reported on the balance sheet at fair value; however, the unrealized gains and losses are recognized in the income statement. Therefore, an increase in fair value will result in higher ROA. In this case, both the numerator and denominator are higher; however, since the ratio is less than one, the percentage change of the numerator is greater than the percentage change of the denominator, so the ratio will increase.

Question 98

Mechanisms that enforce discipline over financial reporting quality least likely include: A) government securities regulators. B) counterparties to private contracts. C) accounting standard-setting bodies.

Answer 98

C Accounting standard-setting bodies issue financial reporting standards but do not enforce compliance with them. Securities regulators and counterparties to private contracts are among the mechanisms that discipline financial reporting quality.

Question 99

If management is manipulating financial reporting to avoid breaching an interest coverage ratio covenant on the firm's debt, they are most likely to: A) overstate earnings. B) understate assets. C) capitalize leases. *what's interest coverage ratio?

Answer 99

A Interest Coverage Ratio = EBIT/interest exp Debt covenants may require a firm to maintain a minimum interest coverage ratio (EBIT / interest expense). Manipulating the financial statements to increase the interest coverage ratio would most likely involve overstating earnings, or possibly understating liabilities (for example by using operating leases instead of capital leases) to decrease interest expense. Understating or overstating assets would not affect the interest coverage ratio.

Question 100

At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is: A) $13,000. B) $26,000. C) zero.

Answer 100

C The carrying value of the warranty liability is $26,000 (the same amount is recorded as a liability on the balance sheet and as an expense on the income statement). The tax base is equal to the carrying value less any amounts deductible in the future. Therefore, the tax base is $0 ($26,000 − $26,000) since the warranty expense will be deductible when the work is performed next year. Question From: Session 8 > Reading 30 > LOS c

Question 101

LIFO liquidation may result when: A) purchases are more than goods sold. B) purchases are less than goods sold. C) cost of goods sold is less than the available inventory.

Answer 101

B For LIFO companies, when more goods are sold than are purchased during a period, the goods held in opening inventory are in included in COGS. This will result in LIFO liquidation.

Question 102

Which of the following statements about tax deferrals is NOT correct? A) A deferred tax liability is expected to result in future cash outflow. B) Taxes payable are determined by pretax income and the tax rate. C) Income tax paid can include payments or refunds for other years.

Answer 102

B Taxes payable are the taxes due to the government and are determined by taxable income and the tax rate. Note that pretax income is income before tax expense and is used for financial reporting. Taxable income is the income based upon IRS rules that determines taxes due and is used for tax reporting.

Question 103

Which of the following financial reporting choices is permitted under IFRS but not under U.S. GAAP? A) Excluding actuarial gains and losses from balance sheet pension items. B) Netting deferred tax assets with deferred tax liabilities. C) Revaluing plant and equipment upward.

Answer 103

C Upward revaluation of long-lived assets is permitted under IFRS. Under U.S. GAAP, most assets (other than certain financial instruments) may not be revalued upward. Neither netting deferred tax assets with deferred tax liabilities nor excluding actuarial gains and losses from balance sheet pension items is permitted under IFRS or U.S. GAAP.

Question 104

In calculating the numerator for diluted earnings per share, the dividends on convertible preferred stock are: A) added to earnings available to common shareholders without an adjustment for taxes. B) added to earnings available to common shareholders with an adjustment for taxes. C) subtracted from earnings available to common shareholders without an adjustment for taxes.

Answer 104

A Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options or warrants)]

Question 105

Interest coverage ratio = ? | Net profit margin = ?

Answer 105

Interest coverage ratio = (EBIT / interest expense) | Net profit margin = (net income / net sales)

Question 106

Which of the following ratios would least likely measure liquidity? A) Current ratio. B) Quick ratio. C) Return on assets (ROA). *Ratios that measure liquidity? (6)

Answer 106

C ROA = (EBIT / average total assets) which measures management's ability and efficiency in using the firm's assets to generate operating profits. Ratios that measure liquidity (if a company can pay its current bills): - quick ratio = (cash + marketable securities + AR) / current liabilities - cash ratio = cash and cash equivalents / current liabilities - current ratio = current assets / current liabilities - receivables turnover = sales / avg AR - inventory turnover = COGS / avg inventory - payables turnover = supplier purchase / avg AP

Question 107

For a company uses the LIFO inventory valuation method, a financial analyst can adjust the current ratio to the FIFO method by: A) adding the LIFO reserve to current assets. B) subtracting the LIFO reserve from current assets. C) adding the LIFO reserve to current liabilities.

Answer 107

A FIFO inventory = LIFO inventory + LIFO reserve, and inventory is included in current assets, the numerator in the current ratio.

Question 108

Compared to a firm that purchases a PP&E asset for cash and capitalizes the asset, a firm that leases the same asset with an operating lease will have lower: A) current liabilities. B) long-term liabilities. C) long-lived assets.

Answer 108

C With an operating lease, the lessee does not recognize a long-lived asset on its balance sheet. Neither an operating lease nor a capitalized purchase for cash involves a balance sheet liability.

Question 109

An analyst gathers the following information about a firm: ``` Last in, first out (LIFO) inventory = $10,000 Beginning LIFO reserve = $2,500 Ending LIFO reserve = $4,000 LIFO cost of goods sold = $15,000 LIFO net income = $1,500 Tax rate is 40% ``` To convert the financial statements to a FIFO basis, the amount the analyst should add to the stockholders' equity is closest to: A) $2,800. B) $4,000. C) $2,400.

Answer 109

C If the firm had used FIFO inventory cost, tax liability would be higher by (LIFO reserve × tax rate) and retained earnings would be higher by [LIFO reserve × (1 − tax rate)]. (LIFO reserve)(1 − t) = $4,000(1 − 0.4) = $2,400. To convert a firm's financial statements from LIFO to what they would have been under FIFO: - Add the LIFO reserve to LIFO inventory. - Subtract the change in the LIFO reserve for the period from COGS. - Decrease cash by LIFO reserve × tax rate. - Increase retained earnings (equity) by LIFO reserve × (1 - tax rate).

Question 110

Jerry Krome, CFA, is an equity analyst. The head of research at Krome's firm composes a memo that contains the following statements: - To the extent that management has discretion over the firm's revenue recognition, an analyst should consider policies that recognize revenue later to be more conservative than policies that recognize revenue sooner. - When comparing the performance of companies, an analyst can always use the information in the financial statement disclosures to adjust the financial statements for differences in revenue recognition policies. With regard to the implications of revenue recognition policies for financial analysis, Krome should agree with: A) only one of these statements. B) both of these statements. C) neither of these statements.

Answer 110

A (picked both the first time, can't always adjust, can only use the info to better understand the difference) **always = warning sign Because revenue recognition often relies on judgment and estimates from management, it is not always possible to calculate the appropriate adjustments that would account for the differences between companies' revenue recognition policies. An analyst should use the policies disclosed in companies' financial statement footnotes to understand the degree to which their revenue recognition is conservative or aggressive. In general, recognizing revenue sooner is considered aggressive and recognizing revenue later is considered conservative.

Question 111

Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least accurate? A) The present value of the lease payments is at least 80% of the fair market value of the asset. B) A bargain purchase option exists. C) Title is transferred at the end of the lease period.

Answer 111

Under IFRS, if substantially all the rights and risks of ownership are transferred to the lessee, the lease is treated as a finance lease by both the lessee and lessor. Otherwise, the lease is an operating lease. Under U.S. GAAP, the lessee must treat a lease as a capital (finance) lease if any one of the following criteria is met: - Title to the leased asset is transferred to the lessee at the end of the lease period. - A bargain purchase option exists. - The lease period is 75% or more of the asset's economic life. - The present value of the lease payments is 90% or more of the fair value of the leased asset. Under U.S. GAAP, the lessor capitalizes the lease if any one of the finance lease criteria for lessees is met, collectability of lease payments is reasonably certain, and the lessor has substantially completed performance. For further reference: SchweserNotes: Book 3 p.282

Question 112

If a lease is treated as a finance lease, as compared to being treated as an operating lease, the effect on the lessee's current ratio and the debt/equity ratio will be an: Current Ratio Debt/Equity Ratio A) Increase Increase B) Decrease Increase C) Increase Decrease

Answer 112

B - With finance leases the lessee's assets, current liabilities, and long-term liabilities will be greater than if the lease was an operating lease A finance lease is, in substance, a purchase of an asset that is financed with debt. At any point in time, the lease liability is equal to the present value of the remaining lease payments. From the lessee's perspective, finance lease expense consists of depreciation of the asset and interest on the loan. The finance lease payment consists of an operating outflow of cash (interest expense) and a financing outflow of cash (principal reduction). An operating lease is simply a rental arrangement; no asset or liability is reported by the lessee. The rental payment is reported as an expense and as an operating outflow of cash. From the lessor's perspective, a finance lease is either a sales-type lease or a direct financing lease. In either case, a lease receivable is created at the inception of the lease, equal to the present value of the lease payments. The lease payments are treated as part interest income (CFO) and part principal reduction (CFI). With a sales-type lease, the lessor recognizes gross profit at the inception of the lease and interest income over the life of the lease. With a direct financing lease, the lessor recognizes interest income only. For further reference: SchweserNotes: Book 3 p.283

Question 113

An analyst has decided to identify value stocks for investment by screening for companies with high book-to-market ratios and high dividend yields. A potential drawback of using these screens to find value stocks is that the firms selected may: A) be those that have significantly underperformed the market. B) have unsustainable dividend payments. C) be concentrated in specific industries.

Answer 113

C A screen for firms with high dividend yields and high book-to-market ratios would likely result in an inordinate proportion of financial services companies and add a significant element of industry (sector) risk. Uncertainty about sustainability of dividend payments and recent market underperformance are typical characteristics of value stocks in general and not a drawback to using this screen to identify them. Question From: Session 9 > Reading 33 > LOS d

Question 114

An analyst gathered the following information about a company: Taxable income = $100,000. Pretax income = $120,000. Tax rate = 20%. Assuming the difference between taxable income and pretax income will reverse in the future, the effect these events on the company's financial statements will be to report income tax expense of: A) $24,000 and a decrease in deferred tax assets of $4,000. B) $22,000 with no change in deferred tax items. C) $24,000 and an addition to deferred tax liabilities of $4,000. *What's the formula for tax expense?

Answer 114

C Deferred tax liability = (120,000 − 100,000) × 0.2 = 4,000 !! Tax expense = current tax rate × taxable income + change in deferred tax liability 0.2 × 100,000 + 4,000 = 24,000

Question 115

Reading the footnotes to a company's financial statements and the Management Discussion & Analysis is least likely to help an analyst determine: A) the detailed information that underlies the company's accounting system. B) how well the financial statements reflect the company's true performance. C) the various accruals, adjustments and assumptions that went into the financial statements.

Answer 115

A An analyst doesn't have access to the detailed information that flows through a company's accounting system, but only sees its end product, the financial statements. The analyst needs to understand the various accruals, adjustments, and management assumptions that went into the financial statements. Much of this is often explained in the footnotes to the statements and in Management's Discussion and Analysis, which is why it is crucial for an analyst to review these parts of the presentation. 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.

Question 116

In an increasing price environment, what effect does a LIFO liquidation have on a firm's gross profit? A) No effect. B) Increase. C) Decrease.

Answer 116

B In an increasing price environment, a LIFO liquidation increases gross profit because COGS includes older inventory layers of units at a cost lower than their current (replacement) cost. This increase is unsustainable because a firm can only sell from inventory until it is exhausted.

Question 117

The main difference between the current ratio and the quick ratio is that the quick ratio excludes: A) assets. B) inventory. C) cost of goods sold.

Answer 117

B Current ratio = (current assets / current liabilities) = [cash + marketable securities + receivables + inventory] / current liabilities Quick ratio = [cash + marketable securities + receivables] / current liabilities

Question 118

Aggressive accounting choices by management are most likely to: A) comply with generally accepted accounting principles. B) report sustainable earnings. C) produce decision-useful financial reporting.

Answer 118

A Management may follow generally accepted accounting principles and still make biased (i.e., aggressive or conservative) accounting choices. Biased accounting choices diminish the decision-usefulness of financial reporting. Aggressive accounting choices are those that increase earnings, revenues, or operating cash flows in the current period (and likely reduce them in later periods).

Question 119

A mechanism to discipline financial reporting quality for securities that trade in the United States that is not typically imposed on security issuers elsewhere is that: A) management must attest to the effectiveness of the firm's internal controls. B) financial statements must be audited by an independent party. C) the firm must provide a signed statement by the person responsible for preparing the financial statements.

Answer 119

A A signed management statement about the effectiveness of the firm's internal controls is required by U.S. regulators for securities that trade in the U.S., but not elsewhere. The other two items are typically required by securities regulators worldwide.

Question 120

How does decreasing accounts payable turnover affect a company's cash flow from financing activities and is this source of cash sustainable? Financing cash flow Sustainable source A) Increase No B) No impact No C) No impact Yes

Answer 120

B (pay attention to explanation for source of income - first time thought it was an outflow, not an inflow..>.

Question 121

Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm's pre-tax financial income? Lincoln Corporation Continental Incorporated A) Last-in, first-out Last-in, first-out B) First-in, first-out First-in, first-out C) Last-in, first-out Average cost

Answer 121

C - LIFO not allowed under IFRS! LIFO will result in the lowest pre-tax financial income and FIFO will result in the highest pre-tax income. Average cost pre-tax financial income will fall in the middle. LIFO is allowed under U.S. GAAP but is not allowed under IFRS. Thus, Lincoln should choose LIFO and Continental should choose average cost in order to minimize pre-tax financial income.

Question 122

According to the IASB Conceptual Framework for Financial Reporting, one of the qualitative characteristics of financial statements is: A) timeliness. B) faithful representation. C) going concern. ==> fundamental vs enhancing qualitative characteristics? ==> primary assumptions that underlie the preparation of financial statements ==> constrains of financial state preparation

Answer 122

B - The fundamental qualitative characteristics of financial statements are relevance and faithful representation. The enhancing characteristics include comparability, verifiability, timeliness, and understandability. - going concern and accrual basis - cost versus benefit and the difficulty of capturing non-quantifiable information in financial statements.

Question 123

Convenience Travel Corp.'s financial information for the year ended December 31, 20X4 included the following: Property Plant & Equipment - $15,000,000 Accumulated Depreciation - 9,000,000 The only asset owned by Convenience Travel in 20X5 was a corporate jet airplane. The airplane was being depreciated over a 15-year period on a straight-line basis at a rate of $1,000,000 per year. On December 31, 20X5 Convenience Travel sold the airplane for $10,000,000 cash. Net income for the year ended December 31, 20X5 was $12,000,000. Based on the above information, and ignoring taxes, what is cash flow from operations (CFO) for Convenience Travel for the year ended December 31, 20X5? A) $11,000,000. B) $13,000,000. C) $8,000,000.

Answer 123

C Using the indirect method, CFO is net income increased by 20X5 depreciation ($1,000,000) and decreased by the gain recognized on the sale of the plane [$10,000,000 sale price − ($15,000,000 original cost − $10,000,000 accumulated depreciation including 20X5) = $5,000,000]. $12,000,000 + $1,000,000 − $5,000,000 = $8,000,000. *The indirect method of calculating CFO begins with net income and adjusts it for gains or losses related to investing or financing cash flows, noncash charges to income, and changes in balance sheet operating items.

Question 124

Which of the following data are least likely to be read directly from a common-size income statement? A) Effective tax rate. B) Net profit margin. C) Ratio of SG&A expense to sales.

Answer 124

A The effective tax rate is income tax expense as a percentage of pretax income. Items on a common-size income statement are stated as a percentage of revenue (sales). Net profit margin is net income as a percentage of revenue.

Question 125

The year-end financial statements for a firm using LIFO inventory accounting show an inventory level of $5,000, cost of goods sold of $16,000, and inventory purchases of $14,500. If the LIFO reserve is $4,000 at year-end and was $1,500 at the beginning of the year, what would the cost of goods sold have been using FIFO inventory accounting? A) $12,000. B) $13,500. C) $18,500.

Answer 125

B FIFO COGS = LIFO COGS − change in LIFO reserve = $16,000 − ($4,000 − $1,500) = $13,500.

Question 126

A company changes from an incorrect method of accounting to an acceptable one. Which of the following statements about this change is most accurate? A) It is an unusual or infrequent item and is reported in net income from continuing operations. B) It requires restatement of any prior period results that are presented in the current financial statements. C) It is a change in accounting principle and is reported below the line net of taxes.

Answer 126

B This is the correct treatment of this change. The company must disclose the nature of the error and its effect on net income and restate any prior period results that are presented in the current financial statements. ** no more infrequent / unusual reporting??

Question 127

On the lessee's cash flow statement, the principal portion of a finance lease payment is a: A) investing cash flow. B) operating cash flow. C) financing cash flow.

Answer 127

C The principal portion of a finance lease payment is a financing cash outflow for the lessee. The interest portion is an operating cash outflow.

Question 128

The difference between the fair value of a defined benefit pension plan's assets and its estimated benefit obligation is recognized: A) as an actuarial adjustment in other comprehensive income. B) on the income statement as pension expense. C) on the balance sheet as a net pension asset or liability.

Answer 128

C A firm reports a net pension liability on its balance sheet if the fair value of a defined benefit plan's assets is less than the estimated pension obligation, or a net pension asset if the fair value of the plan's assets is greater than the estimated pension obligation. The change in the net pension asset or liability is reflected in a firm's comprehensive income each year. Under IFRS, service costs (including past service costs) and interest income or expense on the beginning plan balance are included in pension expense on the income statement. Remeasurements are recorded in other comprehensive income. These include actuarial gains or losses and the difference between the actual return and the expected return on plan assets. Under U.S. GAAP, service costs, interest income or expense, and the expected return on plan assets are included in pension expense. Past service costs and actuarial gains or losses are recorded in other comprehensive income and amortized over time to the income statement. Pension expense for a defined contribution pension plan is equal to the employer's contributions.

Question 129

A debt covenant is most likely to restrict a firm from: A) decreasing its common dividends. B) issuing new common shares. C) repurchasing common shares.

Answer 129

C Debt covenants exist to protect creditors. Repurchasing common shares is a use of cash that rewards equity investors but might harm creditors by reducing the firm's solvency. Decreasing dividends or issuing new shares would increase the cash available to repay creditors.

Question 130

Aggressive accounting choices include: A) increasing the valuation allowance of a deferred tax asset. B) classifying interest paid as an investing cash flow. C) decreasing the estimated useful life of an asset.

Answer 130

B Aggressive accounting choices are those that increase earnings, operating cash flows, or asset values in the current period. Classifying interest paid as an investing cash flow, rather than as an operating cash flow, results in higher CFO and lower CFI. The other choices are examples of conservative accounting choices because they decrease earnings in the current period.

Question 131

Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets? A) Both IFRS and U.S. GAAP. B) U.S. GAAP. C) IFRS.

Answer 131

B | Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.

Question 132

Which ratio is used to measure a company's internal liquidity? A) Current ratio. B) Total asset turnover. C) Interest coverage.

Answer 132

A | Total asset turnover measures operating efficiency and interest coverage measures a company's financial risk.

Question 133

Compared to firms that expense costs, firms that capitalize expenses will have: - ____ variability of income. - ____ cash flow from operations. - ____ leverage ratios.

Answer 133

lower variability of income. lower cash flow from operations. higher leverage ratios. Firms that capitalize expenses have less variability of net income because the capitalized expense becomes an asset that is depreciated over years instead of all at once which happens when costs are expensed. Capitalizing expenses will result in higher cash flows from operations because capitalizing an expense becomes an investing cash flow instead of an operating cash flow which occurs when expenditures are expensed. Firms that capitalize expenses have lower leverage ratios because assets and equity are increased so any leverage ratio that have assets and equity in the denominator will decrease.

Question 134

For the year ended December 31, 2007, Cobra Company reported the following financial information: Revenue $100,000 Cost of goods sold 40,000 Operating expenses 20,000 Unrealized gain from foreign currency translation 5,000 Unrealized loss on cash flow hedging derivatives 3,000 Dividends paid to common shareholders 7,500 Realized gain on sale of equipment 1,000 Ignoring taxes, calculate Cobra's net income and comprehensive income for 2007. Net income Comprehensive income A) $40,000 $43,000 B) $41,000 $43,000 C) $41,000 $2,000

Answer 134

B Net income is equal to $41,000 ($100,000 revenue - $40,000 COGS - $20,000 operating expenses + $1,000 realized gain on sale of equipment). ~Comprehensive income includes all transactions that affect stockholders' equity except transactions with shareholders. ~Comprehensive income includes net income, unrealized gains and losses from available-for-sales securities, unrealized gains and losses from cash flow hedging derivatives, and gains and losses from foreign currency translation. ~Dividends paid is a transaction with shareholders and is not included in comprehensive income. Thus, comprehensive income is equal to $43,000 ($41,000 net income + $5,000 unrealized gain from foreign currency translation - $3,000 unrealized loss from cash flow hedging derivatives).

Question 135

For the year ended 31 December 2004, Pick Co's pretax financial statement income was $400,000 and its taxable income was $300,000. The difference is due to the following: Interest on tax-exempt municipal bonds $140,000 Premium expense on key person life insurance $(40,000) Total $100,000 Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should Pick report as current provision for tax payable? A) $102,000. B) $120,000. C) $90,000.

Answer 135

According to SFAS 109, Current provision = statutory rate × taxable income = 0.30 × $300,000 = $90,000

Question 136

A company redeems $10,000,000 of bonds that it issued at par value for 101% of par or $10,100,000. In its statement of cash flows, the company will report this transaction as a: A) $10,100,000 CFO outflow. B) 10,100,000 CFF outflow. C) $10,000,000 CFF outflow and $100,000 CFO outflow.

Answer 136

B | Cash paid to redeem a bond is classified as a cash flow from financing activities.

Question 137

If a company chooses to write down inventory, which ratio is most likely to improve? A) Total asset turnover. B) Debt-to-equity ratio. C) Operating profit margin.

Answer 137

A Total asset turnover should improve, as the numerator (sales) would not be affected while the denominator (total assets) would be lower. Profitability ratios and the debt-to-equity ratio would be worse due to lower profits and lower equity due to the inventory writedown.

Question 138

An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of: A) cash flows. B) comprehensive income. C) financial position.

Answer 138

A - The statement of cash flows describes a firm's inflows and outflows of cash during a reporting period from operating, investing, and financing activities. Financing transactions such as issuance of debt or stock are shown on the statement of cash flows. - The statement of financial position (balance sheet) presents the firm's assets, liabilities, and equity at a point in time. - The statement of comprehensive income (income statement) does not directly reflect a firm's financing transactions. Cash raised is not included in a firm's revenues and dividends paid and debt principal repaid are not included in its expenses.

Question 139

Ivo Company has a $10 million face value bond issue outstanding. These bonds include a call option that permits Ivo to redeem the bonds at any time for 101% of par. These bonds were issued at a premium and have a carrying value of $10,200,000. If Ivo calls the bonds, its income statement will reflect: A) neither a gain nor a loss on redemption. B) a gain on redemption. C) a loss on redemption.

Answer 139

B The firm can call the bonds for 101% of $10 million, or $10,100,000. Redeeming bonds for less than the carrying value of the bond liability results in a gain.

Question 140

Compared with firms that expense costs, firms that capitalize costs can be expected to report: A) higher asset levels and lower equity levels in the early years of the asset's life. B) higher asset levels and higher equity levels in the early years of the asset's life. C) lower asset levels and higher equity levels in the early years of the asset's life.

Answer 140

B The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset's life.

Question 141

A firm needs to adjust its financial statements for a change in the tax rate. Taxable income is $80,000 and pretax income is $120,000. The current tax rate is 50%, and the new tax rate is 40%. The effect on taxes payable of adjusting the tax rate is closest to: A) $4,000. B) $16,000. C) $8,000.

Answer 141

C "Pretax income" denotes earnings before taxes for financial reporting. "Taxable income" is earnings before taxes for computing taxes payable, where taxes payable refers to the actual tax liability to the government. Since taxable income is $80,000, the difference in taxes payable is ($80,000)(0.5) - ($80,000)(0.4) = $8,000.

Question 142

An analyst has gathered the following information about a firm: ``` Net sales of $500,000. Cost of goods sold = $250,000. EBIT of $150,000. EAT of $90,000. What is this firm's operating profit margin? ``` A) 18%. B) 50%. C) 30%.

Answer 142

C | Operating profit margin = (EBIT / net sales) = ($150,000 / $500,000) = 30%

Question 143

Pastel Company operates in the following lines of business which management believes have distinguishable return and risk characteristics: Revenues Assets Food 500 2,000 Beverages 1,300 6,000 Entertainment 2,500 10,000 Lodging 5,000 20,000 Services 22,000 28,000 International 700 3,000 Totals 32,000 69,000 For which of these lines is Pastel required to report segment data? A) Services and International. B) International only. C) Entertainment, Lodging, and Services.

Answer 143

C 10% rule: A business or geographic segment is a portion of a firm that has risk and return characteristics distinguishable from the rest of the firm and accounts for more than 10% of the firm's sales or assets. (for both GAAP and IFRS)

Question 144

Converged accounting standards issued in May 2014 addressed: A) revenue recognition. B) depreciation of tangible assets. C) inventory valuation.

Answer 144

A

Question 145

An analyst has gathered the following data about a company: Average receivables collection period of 37 days. Average payables payment period of 30 days. Average inventory processing period of 46 days. What is their cash conversion cycle? A) 45 days. B) 53 days. C) 113 days.

Answer 145

B Cash conversion cycle = average receivables collection period + average inventory processing period - payables payment period = 37 + 46 - 30 = 53 days.

Question 146

According to the installment method of accounting, gross profit on an installment sale is recognized: A) after cash collections equal to the cost of sales have been received. B) on the date the final cash collection is received. C) in proportion to the cash collection.

Answer 146

C

Question 147

Under the cost recovery method, profit is recognized: A) as collection occurs. B) after the amount of cost has been collected. C) at time of delivery.

Answer 147

B The cost recovery method is used when the costs to provide goods or services are not known. Under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

Question 148

Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of $600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be utilized in the foreseeable future. Deferred tax items on the balance sheet are based on a tax rate of 30%. Based only on this information, an increase in future tax rates to 35% will cause Habel's total liabilities-to-equity ratio to: A) increase. B) remain unchanged. C) decrease.

Answer 148

A The $200,000 difference between the tax base and the carrying value of the equipment gives rise to a taxable temporary difference that leads to a deferred tax liability of $200,000 × 30% = $60,000. The tax loss carryforward of $200,000 leads to a deferred tax asset of $200,000 × 30% = $60,000. Because these amounts are equal, the increase in the tax rate will increase the associated DTA and DTL by the same amounts, leaving equity unchanged. Therefore, the total liabilities-to-equity ratio will increase because of the increase in the deferred tax liability.

Question 149

Consider the following: Statement #1 : One approach to presenting a common-size cash flow statement is to express each inflow of cash as a percentage of total cash inflows and each outflow of cash as a percentage of total cash outflows. Statement #2 : Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows. Which of these statements regarding a common-size cash flow statement is (are) CORRECT? A) Both statements are correct. B) Only statement #2 is correct. C) Only statement #1 is correct.

Answer 149

A A cash flow statement can be presented in common-size format by expressing each line item as a percentage of total revenue or by expressing each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows. Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows since revenue usually drives the forecast.

Question 150

Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income? Inventory write-down Acquisition of treasury stock A) No Yes B) Yes No C) No No

Answer 150

B Comprehensive income includes all transactions that affect shareholders' equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.

Question 151

Mammoth, Inc. reports under U.S. GAAP. Mammoth has begun a long-term project to develop inventory control software for external sale. On its financial statements, Mammoth should: A) expense all costs of this project until technological feasibility has been established. B) capitalize all costs of this project. C) expense all costs of this project in the periods incurred.

Answer 151

Under IFRS and U.S. GAAP, costs of developing software are expensed until technological feasibility is established, and capitalized after technological feasibility has been established.

Question 152

Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be: A) a decrease in deferred tax liability and a decrease in tax expense. B) a decrease in deferred tax liability and an increase in tax expense. C) an increase in deferred tax liability and an increase in tax expense. *what's the formula that relates tax exp to DTA/DTL

Answer 152

C An increase in tax rates will increase future deferred tax liability, and the impact of the increase in liability will be reflected in the income statement of the year in which the tax rate change is effected. Income tax expense and taxes payable are related through the change in the DTA and the change in the DTL: income tax expense = taxes payable + ΔDTL - ΔDTA.

Question 153

For a firm to use the revaluation model for balance sheet reporting of long-lived assets: A) the firm must report under U.S. GAAP. B) the firm must choose which assets of each type to revalue, and which to report at cost. C) an active market must exist for the assets.

Answer 153

C Under IFRS, a firm may use the revaluation model for long-lived assets that have an active market which can be used to determine the fair value of the assets. The firm must use the same model for all assets of a similar type. U.S. GAAP reporting firms must use the cost model for long-lived assets.

Question 154

In an increasing price environment, an analyst who wants to consider tax effects when converting a LIFO firm's balance sheet to a FIFO basis is most likely to decrease the LIFO firm's: A) retained earnings. B) inventories. C) cash.

Answer 154

C To adjust a LIFO firm's financial statements to a FIFO basis including tax effects, an analyst should - increase inventory by the LIFO reserve, - decrease cash by (LIFO reserve × tax rate), - and increase retained earnings by [LIFO reserve × (1 - tax rate)].

Question 155

Moore Ltd. uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was $800. A footnote in its financial statements reads: "Using FIFO, inventories would have been $70 higher in 20X8 and $80 higher in 20X7." Moore's COGS if FIFO inventory costing were used in 20X8 is closest to: A) $810. B) $790. C) $730.

Answer 155

The ending LIFO reserve is $70 and the beginning LIFO reserve is $80. FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve) $800 − ($70 − $80) = $810 *change of reserve doesn't always > 0

Question 156

A firm is more solvent if it has: A) low leverage and coverage ratios. B) low leverage ratios and high coverage ratios. C) high leverage and coverage ratios. *what are some coverage ratios?

Answer 156

B Low leverage ratios suggest the firm has relatively little debt compared to its equity and assets. High coverage ratios suggest the firm generates enough earnings to meet its interest payments. Coverage ratios, such as interest coverage and fixed charge coverage, focus on the income statement. - Interest coverage = EBIT / interest payments - Fixed charge coverage = (EBIT + lease payments) / (interest payments + lease payments)

Question 157

If a lessee enters into a finance lease rather than an operating lease, it can expect to have a: A) lower debt-to-equity ratio. B) higher debt-to-equity ratio. C) higher return on assets.

Answer 157

B Leasing the asset with an operating lease avoids recognition of the debt on the lessee's balance sheet. Having fewer assets and liabilities on the balance sheet than would exist if the assets were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., debt-to-equity ratio). In the case of a finance lease, the assets are reported on the balance sheet and are depreciated.

Question 158

The term "convergence" is most accurately used to describe: A) when expected return and required return are equal. B) the process of developing one universally accepted set of accounting standards. C) the reduction of the premium on a bond as it nears maturity.

Answer 158

B

Question 159

Would an increase in net profit margin or in the firm's dividend payout ratio increase a firm's sustainable growth rate? Net profit margin Dividend payout ratio A) Yes No B) No No C) Yes Yes *what are the formula for net profit margin and sustainable growth rate?

Answer 159

A The sustainable growth rate is equal to ROE multiplied by the retention rate. According to the Dupont formula, an increase in net profit margin will result in higher ROE. Thus, an increase in net profit margin will result in a higher growth rate. The retention rate is equal to 1 minus the dividend payout ratio. Thus, an increase in the dividend payout ratio will lower the retention rate and lower the growth rate.

Question 160

``` How would the collection of accounts receivable most likely affect the current and cash ratios? Current ratio Cash ratio A) No effect Increase B) Increase Increase C) No effect No effect *what are the formulas? ```

Answer 160

A Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts receivable increases the cash ratio. *(Cash + Cash equivalents) ÷ Current liabilities = cash ratio *current ratio = current asset / current liabilities, and current assets equals cash + cash equivalent + AR + inventory

Question 161

While evaluating the financial statements of Omega, Inc., the analyst observes that the effective tax rate is 7% less than the statutory rate. The source of this difference is determined to be a tax holiday on a manufacturing plant located in South Africa. This item is most likely to be: A) continuous in nature, so the termination date is not relevant. B) sporadic in nature, but the effect is typically neutralized by higher home country taxes on the repatriated profits. C) sporadic in nature, and the analyst should try to identify the termination date and determine if taxes will be payable at that time.

Answer 161

C As the name suggests, a tax holiday is usually a temporary exemption from having to pay taxes in some tax jurisdiction. Because of the temporary nature, the key issue for the analyst is to determine when the holiday will terminate, and how the termination will affect taxes payable in the future.

Question 162

Which of the following statements regarding the capitalization of an expense is least accurate? A) Capitalizing an expense lowers current period net income. B) Capitalized expenses increases equity. C) Capitalizing an expense creates an asset.

Answer 162

A Capitalizing expenses reduces current period expenses by the amount capitalized. The amount capitalized is added to assets which increases equity by increasing net income and retained earnings in the current period.

Question 163

Given the following information, what is the adjustment to net income when calculating cash flow from operations using the indirect method? ``` Increase in accounts payable of $25. Sold one share of stock for $15. Paid dividends of $10 to shareholders. Depreciation expense of $100. Increase in inventory of $20. ``` A) +$105. B) -$50. C) -$95.

Answer 163

A (first picked C, need to remember for US GAAP, paying dividend is financing, receiving is operating. paying and receiving interests are both operating. If it different and more complicated for IFRS) Using the indirect method, the increase in accounts payable is a source of cash from operations (+25), depreciation expense is a non-cash expense added back in computing cash from operations (+100), and increase in inventory is a use of cash from operations (-20) = 25 + 100 - 20 = 105. The sale of stock and the dividends paid are financing cash flows that are not included in net income, so they do not require adjustment when calculating CFO.

Question 164

Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy's liabilities? Bad debt expense Warranty expense A) No effect Increase B) Increase Increase C) No effect No effect

Answer 164

A The recognition of bad debt expense has no effect on liabilities, current revenues are reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net income and reduces assets. The recognition of expected warranty expense decreases net income (following the matching principle), and since it is not currently paid (doesn't reduce assets) it creates or increases a liability at the time of sale.

Question 165

JME purchased 400 units of inventory that cost $4.00 each. Later the firm purchased an additional 500 units that cost $5.00 each. JME sold 700 units of inventory for $7.00 each. If JME uses a first in, first out (FIFO) cost flow method, the amount of gross profit appearing on the income statement is: A) $1,800. B) $3,100. C) $2,400.

Answer 165

A (units sold × sales price) - [(inventory cost × unit cost) + (inventory cost × unit cost)] = sales - COGS = gross profit (700 × 7.00) - [(400 × 4.00) + (300 × 5.00)] = 1,800

Question 166

Joe Carter, CFA, believes Triangle Equipment, a maker of large, specialized industrial equipment, has overstated the salvage value of its equipment. This would: A) understate earnings. B) overstate liabilities. C) overstate earnings.

Answer 166

C | Overstating the salvage value reduces depreciation expense, which in turn increases earnings.

Question 167

Selected financial ratios from Mulroy Company's common-size income statements are as follows: 20X1 20X2 20X3 Gross profit margin 22% 24% 26% Operating profit margin 18% 20% 22% Pretax margin 15% 14% 13% Net profit margin 11% 10% 9% Relative to sales, it is most likely that Mulroy's: A) income tax expense is increasing. B) operating expenses are increasing. C) nonoperating expenses are increasing.

Answer 167

C Nonoperating expenses are equal to the difference between operating profit and pretax profit. Based on the given profit margins, Mulroy's nonoperating expenses increased from 3% of sales in 20X1 to 9% of sales in 20X3. Because gross profit margin is increasing, cost of goods sold is decreasing as a percentage of sales. Other operating expenses and income tax expense, as a percentage of sales, were stable over the period shown. *gross profit and operating profit increase, but pretax margin decrease. So non-operating expenses must have increased

Question 168

Which of the following is one of circumstances that is conducive to issuing low-quality financial reports? A) Balance sheet values are likely to violate debt covenants. B) There is a large range of acceptable accounting treatments. C) Earnings per share are highly variable from year to year.

Answer 168

B (first picked A. 其实题目出得比较模棱两可。。conductive就是lead to啊，所以其实几个选项都可以。用排除法吧) A large range of acceptable accounting treatments is conducive to manager bias affecting the quality of financial reporting. In such a circumstance, misleading estimates and accounting choices that do not flow from the economic reality of a firm's transactions fall more into the category of mistakes rather than fraudulent reporting. A - Potentially violating debt covenants is considered a motivation for low quality financial reporting. C - Variability of earnings could be a motivating factor for earnings smoothing but are not necessarily conducive to low quality financial reporting.

Question 169

A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to affect which accounts? Purchase Sale A) Assets and expenses Assets, revenue, expenses, owners' equity B) Assets only Assets and revenues only C) Assets only Assets, revenue, expenses, owners' equity

Answer 169

C The purchase will be a decrease in cash and an increase in inventory, both asset accounts. The expense is not recorded until the chairs are sold. The sale will be a decrease in inventory and an increase in cash (assets), an increase in sales (revenues), an increase in cost of goods sold (expenses), and an increase in retained earnings (owners' equity) for the $250 profit.

Question 170

Compared to issuing a bond at par value, and holding all else equal, when a company issues a bond at a premium, its effect on the debt/equity ratio will be: A) a decreasing trend in the ratio over the life of the bond. B) no effect on the ratio over the life of the bond. C) an increasing trend in the ratio over the life of the bond.

Answer 170

A Net book value of debt decreases over the life of the bond because the premium amortizes. Stockholders' equity increases over the life of the bond because interest expense decreases each period. This results in a decreasing trend in the debt/equity ratio over the life of the bond, compared to the trend if a bond had been issued at par value.

Question 171

For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates? A) Debt-to-equity ratio. B) Cash flow from financing. C) Interest paid.

Answer 171

A For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. (BC - interest paid doesn't need to be adjusted since interest expenses are fixed.)

Question 172

Under normal circumstances, intangible assets with indefinite lives are: A) amortized over a reasonable period but not subject to impairment. B) amortized over a reasonable period and subject to impairment. C) not amortized but subject to impairment.

Answer 172

C Intangible assets with indefinite lives are not amortized but are subject to impairment charges. Under such situations, there may be in impairment in the asset value where events and circumstances indicate that the firm may not be able to recover the carrying value through future use. Examples include significant declines in market value of the asset or significant deterioration in the asset's physical condition.

Question 173

Portsmouth Industries has stated that in the market for their medical imaging product, their strategy is to grow their market share in the premium segment by leveraging their research and development capabilities to produce machines with greater resolution for the most challenging cases of spinal degeneration. An analyst examining their financials for subsequent periods would most likely conclude that they are successfully pursuing this strategy if she finds: A) increasing research and development expense and decreasing operating margins. B) an increase in revenue and operating margins. C) an increase in gross margins greater than the increase in operating margins.

Answer 173

C (didn't understand the question...) A shift to premium, rather than commodity-like, products should result in higher gross margins, higher average revenue per unit (selling price per unit), and an increase In gross margins relative to operating margins (because of the increase in R&D and marketing expenditures). A successful shift to a premium product should increase operating margins rather than increase operating income through increased unit sales. Revenue would not necessarily increase as the company shifted to premium products.

Question 174

Which of the following is the best description of the flow of information in an accounting system? A) Trial balance, general ledger, general journal, financial statements. B) General ledger, trial balance, general journal, financial statements. C) Journal entries, general ledger, trial balance, financial statements

Answer 174

C

Question 175

The primary difference between basic EPS and diluted EPS is that: A) proprietors and partners report basic EPS but corporations report diluted EPS. B) discontinued operations are omitted from basic EPS but included in diluted EPS. C) diluted EPS includes the potential effects of convertible securities while basic EPS does not.

Answer 175

C

Question 176

What is the impact on accounts receivable if sales exceed cash collections and what is the impact on accounts payable if cash paid to suppliers exceeds purchases? A) Only accounts payable will increase. B) Only accounts receivable will increase. C) Both accounts payable and accounts receivable will increase.

Answer 176

B If a firm sells more than it collects, accounts receivable will increase. If a firm pays suppliers more than it purchases, accounts payable will decrease.

Question 177

Statement #1 - As compared to the price-to-earnings ratio, the price-to-cash flow ratio is easier to manipulate because management can easily control the timing of the cash flows. Statement #2 - A firm with earnings per share of $2 is more profitable than a firm with earnings per share of $1. With respect to these statements: A) both are incorrect. B) only one is correct. C) both are correct.

Answer 177

C Although manipulation of cash flow can occur, the P/E ratio is easier to manipulate because earnings are based on the numerous estimates and judgments of accrual accounting. EPS does not facilitate direct comparisons of profitability. Two firms may have the same amount of earnings but their number of shares outstanding may differ significantly.

Question 178

Significant accounting choices are most likely to be disclosed in the management commentary under: A) U.S. GAAP only. B) IFRS only. C) both U.S. GAAP and IFRS.

Answer 178

C Significant accounting policies and estimates that require management judgment must be disclosed in the management commentary (sometimes called Management Discussion and Analysis) under both IFRS and U.S. GAAP.

Question 179

What type of ratio is revenue divided by average working capital and what type of ratio is average total assets divided by average total equity? A) Activity ratio Solvency ratio B) Profitability ratio Solvency ratio C) Activity ratio Liquidity ratio

Answer 179

A Revenue divided by average working capital, also known as the working capital turnover ratio, is an activity ratio. Average total assets divided by average total equity, also known as the financial leverage ratio, is a solvency ratio.

Question 180

For purposes of financial analysis, an analyst should: A) always consider deferred tax liabilities as stockholder's equity. B) always consider deferred tax liabilities as a liability. C) determine the treatment of deferred tax liabilities on a case-by-case basis.

Answer 180

C For financial analysis, an analyst must decide on the appropriate treatment of deferred taxes on a case-by-case basis. These can be classified as liabilities or stockholder's equity, depending on various factors. Sometimes, deferred taxes are just ignored altogether.

Question 181

Three years ago, Ranchero Corporation purchased equipment for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the equipment was greater than its book value. No impairment losses have been recognized on the equipment. Assuming Ranchero follows International Financial Reporting Standards, what is the impact on its total asset turnover ratio and return on equity of reporting the value of the equipment on the balance sheet at fair value? A) Both will decrease. B) Only one will increase. C) Both will increase. *should this company increase asset value?

Answer 181

A Increasing the value of the equipment on the balance sheet will increase assets and thus decrease the total asset turnover ratio (higher denominator). Increasing the value of the equipment will also increase equity, otherwise, the balance sheet equation would not balance. Increasing equity will result in lower ROE (higher denominator). The increase in the value of the equipment is not recognized in the income statement unless it is reversing a previously recognized write-down.

Question 182

Which balance sheet accounts are most closely related to the operating activities on a firm's cash flow statement? A) Working capital. B) Equity and non-current liabilities. C) Non-current assets.

Answer 182

A Typically, operating activities on the cash flow statement are most closely related to the working capital accounts (current assets and current liabilities) on the balance sheet. Investing activities are typically related to non-current assets. Financing activities are typically related to non-current liabilities for transactions with creditors, or equity for transactions with shareholders.

Question 183

Which of the following ratios is NOT part of the original DuPont system? A) Debt to total capital. B) Asset turnover. C) Equity multiplier. *what is the DuPont ROE formula?

Answer 183

ROE = asset turnover (=sales/asset) x profit margin (= NI/sales) x equity multiplier (=assets/equity)

Question 184

Which of the following would NOT be a component of cash flow from investing? A) Purchase of equipment. B) Dividends paid. C) Sale of land.

Answer 184

B Dividends paid is not a component of cash flow from investing, it is a component of cash flow from financing. The other items are all components of cash flow from investing.

Question 185

Which of the following statements about the impact of leases on the financial statements of the lessee is least accurate? A) A finance lease results in higher liabilities compared to an operating lease. B) Cash flow from investing is higher for a finance lease than an operating lease. C) Net income is lower in the early years of a finance lease than an operating lease.

Answer 185

B Cash flow from investing is not affected by a lease being either a finance or an operating lease. Finance leases reduce cash flow from operations by only the portion of the lease payment attributed to interest expense. Cash flow from financing is reduced by the rest of the finance lease payment which is the principal part of the payment.

Question 186

A company reports a gain of €100,000 on the sale of an asset and a loss of €100,000 due to foreign currency translation adjustment. Which of these items will be included in the company's comprehensive income? A) Both of these items are included in comprehensive income. B) Only one of these items is included in comprehensive income. C) Neither of these items is included in comprehensive income.

Answer 186

A Both items are included in comprehensive income. Comprehensive income includes all items that affect owners' equity except transactions with the company's owners. Any items that are included in net income are also included in comprehensive income. The gain on sale is reported in net income. The foreign currency translation loss is taken directly to owners' equity (i.e., not reported in the income statement).

Question 187

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) cost of sales below current cost and inventory above replacement cost. C) inventory near replacement cost and cost of sales below current cost.

Answer 187

A 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).

Question 188

An impairment write-down is least likely to decrease a company's: A) debt-to-equity ratio. B) assets. C) future depreciation expense.

Answer 188

A | An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.

Question 189

When comparing capitalizing versus expensing costs which of the following statements is most accurate? A) Expensing costs creates lower cash flows from operations and lower cash flows from investing. B) Capitalizing costs creates higher cash flows from operations and lower cash flows from investing. C) Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.

Answer 189

B Although net cash flows are not affected by the choice of capitalization or expensing, the components of cash flow are affected. Because, a firm that capitalizes classifies the expenditure as investing (not operations), cash flow from operations will be higher for firms that capitalize and investing cash flows will be lower than that of an expensing firm.

Question 190

When a publicly traded U.S. company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form: A) DEF-14A. B) 144. C) 8-K.

Answer 190

A Form DEF-14A: When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form DEF-14A. Form 8-K: Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, financial statements, or the markets on which its securities trade. Form 144: A company can issue securities to certain qualified buyers without registering the securities with the SEC, but must notify the SEC that it intends to do so.

Question 191

Comet Corporation is a capital intensive, growing firm. Comet operates in an inflationary environment and its inventory quantities are stable. Which of the following accounting methods will cause Comet to report a lower price-to-book ratio, all else equal? Inventory method Depreciation method A) First-in, First-out Straight-line B) First-in, First-out Accelerated C) Last-in, First-out Accelerated

Answer 191

A FIFO results in higher assets and higher equity in an inflationary environment as compared to LIFO. Equity is higher because COGS is lower (and inventory higher) under FIFO. Straight-line depreciation will result in greater assets and equity compared to accelerated depreciation for a stable or growing firm. Equity is greater because depreciation expense is less with straight-line depreciation. Greater equity will result in greater book value per common share, the denominator of the price-to-book ratio. Greater book value per share will result in a lower price-to-book ratio.

Question 192

According to the IASB conceptual framework, characteristics that enhance relevance and faithful representation include: A) assurance and understandability. B) timeliness and verifiability. C) comparability and thoroughness.

Answer 192

B The four characteristics that enhance relevance and faithful representation are comparability, verifiability, timeliness, and understandability.

Question 193

Which of the following statements regarding footnotes to the financial statements is least accurate? Financial statement footnotes: A) typically include a discussion of the firm's past performance and future outlook. B) provide information about assumptions and estimates used by management. C) may contain information regarding contingent losses.

Answer 193

A | Discussion of a firm's past performance and future outlook is most likely to be found in management's commentary.

Question 194

Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory: Depreciation: straight-line; double-declining balance (DDB) Inventory: first in, first out (FIFO); last in, first out (LIFO) Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1? A) DDB; FIFO. B) Straight-line; LIFO. C) Straight-line; FIFO.

Answer 194

B For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

Question 195

How would a stock split be reported on the statement of cash flows? A stock split would: A) not be reported on the statement of cash flows because it is a non-cash event. B) be reported as a use of cash in the cash flows from financing. C) be reported as a source of cash in the cash flows from financing.

Answer 195

A

Question 196

When calculating cash flow from operations (CFO) using the indirect method which of the following is most accurate? A) In using the indirect method, each item on the income statement is converted to its cash equivalent. B) When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. C) The indirect method requires an additional schedule to reconcile net income to cash flow.

Answer 196

B When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. This is because the gain would be double counted in the investing section and in net income. Therefore, the gain must be removed from net income. Also, depreciation is added to net income in order to calculate CFO using the indirect method. A - The direct method of cash flow calculation converts the income statement items to their cash equivalents, not the indirect method.

Question 197

Which of the following items for a financial services company is least likely to be considered an operating item on the income statement? A) Interest income. B) Financing expenses. C) Income tax expense.

Answer 197

C For a financial services company, interest income, interest expense, and financing expenses are likely considered operating activities. For both financial and nonfinancial companies, income tax expense is a non-operating item that is reported within "income from continuing operations" as opposed to "operating profit" as with the other answer choices. Therefore, of the three choices, income tax expense is least likely to be considered an operating item.

Question 198

In analyzing disclosures related to the financing liabilities of a company, which of the following disclosures would be least helpful to the analyst? A) The present value of the future bond payments discounted at the coupon rate of the bonds. B) The interest expense for the period as provided on the income statement or in a footnote. C) Filings with the Securities and Exchange Commission (SEC) that disclose all outstanding securities and their features.

Answer 198

A When analyzing disclosures related to financing liabilities, analysts would review the balance sheet and find the present value of the promised future liability payments. These payments would then be discounted at the rate in effect at issuance (i.e., the yield to maturity), not the coupon rate of the bonds.

Question 199

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

Answer 199

B Whether or not the company is adhering to GAAP is addressed in the auditor's opinion, not the footnotes. AC - 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.

Question 200

According to U.S. GAAP, which of the following would least likely require a lessee to capitalize a lease? A) The lessee has an option to purchase the asset for its fair market value at the end of the lease. B) The present value of the minimum lease payments is 90% or more of the fair value of the leased asset. C) The lease term is 75% or more of the estimated life of the leased asset.

Answer 200

A | Under U.S. GAAP, a lease must be capitalized if it contains a bargain purchase option, not just a purchase option.

Question 201

Which of the following is least likely a routinely used operating profitability ratio? A) Sales/Total Assets B) Gross profit/net sales. C) Net income/net sales.

Answer 201

A (picked B...) | Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability.

Question 202

An analyst is examining the operating performance ratios for a company. A summary of the company's data for the three most recent fiscal years along with the industry averages are shown below: ``` Industry 20X5 20X4 20X3 Return on total capital (ROTC) 24.0% 26.6% 27.3% 28.4% Return on common equity 10.0% 12.6% 15.5% 20.2% Return on equity (ROE) 8.0% 12.1% 14.7% 18.9% ``` Based on the above data, the analyst's most appropriate conclusion is that the trend in ROE: A) relative to ROTC implies increasing leverage and financial risk. B) relative to return on common equity implies declining leverage and financial risk. C) relative to the industry average reflects underperformance due to weak management.

Answer 202

A Return on equity (net income / average total equity) includes both common equity and preferred equity in the denominator, but not debt. Return on total capital (EBIT / average total debt + average total equity) includes both equity and debt. An increasing spread between ROE and ROTC implies increasing debt in the capital structure, which reflects increasing leverage and financial risk.

Question 203

In 20X8, Oliver Ltd. received $80,000 cash from a customer for goods that it could not deliver until the next year and established a liability for unearned revenue. Oliver reports under U.S. GAAP, faces a 40% tax rate, and is located in a tax jurisdiction where unearned revenue is taxed as received. On their balance sheet for 20X8, what change in deferred tax should Oliver record as a result of this transaction? A) A deferred tax asset of $32,000. B) There is no effect on deferred tax items from this transaction. C) A deferred tax liability of $32,000.

Answer 203

A Oliver has paid tax on the $80,000 revenue in 20X8, but has not recorded the revenue on it for financial statement purposes. This results in a temporary difference of $32,000, which is a deferred tax asset. The tax asset will be realized when the company recognizes the revenue on its financial statements in the subsequent period.

Question 204

An analyst is comparing a company that uses the LIFO inventory cost method to companies that use FIFO for inventories. The analyst should adjust the LIFO firm's cost of goods sold by subtracting the: A) LIFO reserve. B) change in the LIFO reserve. C) LIFO reserve, net of tax. *how about ending inventory, cash, RE?

Answer 204

B FIFO cost of goods sold equals LIFO cost of goods sold minus the change in the LIFO reserve. * inventory: Add the LIFO reserve to LIFO inventory. - Decrease cash by LIFO reserve × tax rate. - Increase retained earnings (equity) by LIFO reserve × (1 - tax rate).

Question 205

When evaluating the differences between two revenue recognition policies, an analyst should view the policy as more conservative which: A) results in less leverage on the balance sheet. B) recognizes revenue later. C) is more dependent on management estimates.

Answer 205

B Recognizing revenue later rather than sooner is considered more conservative. More aggressive (less conservative) revenue recognition can result in less leverage by increasing assets.

Question 206

Which of the following statements regarding basic and diluted earnings per share (EPS) is most accurate? A) To calculate diluted EPS, use net income less preferred dividends in the numerator. B) If diluted EPS is less than basic EPS then the convertible securities are said to be antidilutive. C) Diluted EPS does not include antidilutive securities in its computation.

Answer 206

C To calculate diluted EPS, dividends on convertible preferred stock and the after tax interest on convertible debt need to be added to net income in the numerator. If diluted EPS are more than basic EPS, the convertible securities are antidilutive and should not be used in computing diluted EPS.

Question 207

Are the following ratios best classified as profitability ratios? Ratio #1 - Cash plus short-term marketable investments plus receivables divided by average daily cash expenditures. Ratio #2 - Earnings before interest and taxes divided by average total assets. A) Only one of the ratios is a profitability ratio. B) Neither of the ratios is a profitability ratio. C) Both of the ratios are profitability ratios.

Answer 207

A !! (Cash + short-term marketable investments + receivables) divided by average daily cash expenditures is known as the defensive interval ratio. The defensive interval ratio is a liquidity ratio that measures the firm's ability to pay cash expenditures in the absence of external cash flows, but does not directly measure profitability. EBIT / average total assets is one variation of the return on assets ratio. Return on assets is a profitability ratio that measures the efficiency of managing assets and generating profits.

Question 208

Companies are required to report segment data under: A) U.S. GAAP but not IFRS. B) both IFRS and U.S. GAAP. C) IFRS but not U.S. GAAP.

Answer 208

B (picked C)

Question 209

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are: A) historical cost and going concern. B) accrual accounting and historical cost. C) going concern and accrual accounting.

Answer 209

C The two underlying assumptions of financial statements according to the conceptual framework are accrual accounting and the going concern assumption. Historical cost is one of several measurement bases that may be used for financial reporting.

Question 210

Assuming all else equal, if the coupon rate offered on a bond is less than the corresponding market rate of interest, the bond will be issued at: A) a discount. B) a premium. C) par.

Answer 210

A

Question 211

At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following data relates to the project: Contract price: $100 million Costs incurred in 2007: $50 million Progress billings: $40 million Collection of progress billings: $37 million Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However, Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue should Thunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)? U.S. GAAP IFRS A) $37 million $40 million B) $0 $0 C) $0 $50 million

Answer 211

C (picked B, did not know about the IFRS thing) The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliably estimate the project's cost. Under the completed-contract method, no revenue is recognized until the project is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized to the extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in 2007, $50 million of revenue is recognized.

Question 212

The ZZT Company went public on June 1, 2004, by issuing 25 million shares of common stock. In 2005, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2005? A) 25,000,000. B) 14,583,333. C) 10,416,667.

Answer 212

A The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Since no new common shares were issued in 2005, and there were 25 million shares at the end of 2004, there are 25 million shares at the end of 2005. Note that the preferred stock shares do not affect the common shares outstanding.

Question 213

An accounting entry that updates the historical cost of an asset to current market levels is best described as: A) a valuation adjustment. B) a contra account. C) accumulated depreciation.

Answer 213

A In some cases, accounting standards require balance sheet values of certain assets to reflect their current market values. Accounting entries that update these assets' values from their historical cost are called valuation adjustments. To keep the accounting equation in balance, changes in asset values are also changes in owners' equity, through gains or losses on the income statement or in "other comprehensive income."

Question 214

Which, if any, of the following statements about the installment sales method and cost recovery method is correct? Statement 1: The cost recovery method recognizes revenue and associated costs of goods sold only when cash is received, based on gross profit margin. Statement 2: The installment sales method recognizes sales when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected. A) Only one of these statements is correct. B) Neither statement is correct. C) Both statements are correct.

Answer 214

B (picked A, thought 2 is correct) Neither statement is correct because the definitions are reversed. - Under the cost recovery method, a business does not recognize any income related to a sale transaction until such time as the cost element of the sale has been paid in cash by the customer. Once the cash payments have recovered the seller's costs, all remaining cash receipts (if any) are recorded in income as received. - Under installment method, the gross margin on a sale transaction is deferred until the actual receipt of cash. When accounts receivable are eventually collected, a portion of the deferred gross profit from the following calculation is recognized: Gross profit % x Cash collected

Question 215

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A) Return on equity (ROE). B) Leverage ratio. C) Return on assets (ROA).

Answer 215

C The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity. Return on equity and the leverage ratio (assets/equity) would both be affected.

Question 216

Common size income statements express all income statement items as a percentage of: A) sales. B) assets. C) net income.

Answer 216

A Common size income statements express all income statement items as a percentage of sales. B - Note that common size balance sheets express all balance sheet accounts as a percentage of total assets.

Question 217

Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of common stock issued, and 1.8 million shares of common stock outstanding. How many shares of treasury stock does Ascot own and is the treasury stock reported as an asset in Ascot's balance sheet? Treasury shares Reported as an asset A) 1.6 million No B) 600,00 No C) 600,000 Yes

Answer 217

B Shares that were issued previously but are not outstanding are treasury shares (owned by the firm). Thus, there are 600,000 treasury shares (2.4 million issued - 1.8 million outstanding). Treasury shares are reported as a reduction in shareholders' equity on the balance sheet. Treasury stock is not an asset.

Question 218

During periods of declining prices, which inventory method would result in the highest net income? A) FIFO. B) Average Cost. C) LIFO.

Answer 218

C | When prices are declining and LIFO is used the COGS is smaller than if FIFO is used leading to a larger net income.

Question 219

The primary purpose of bond covenants is to: A) define bond characteristics. B) clearly define the responsibilities of the borrower and the lender. C) protect bondholders from the actions of equity owners.

Answer 219

C The primary purpose of bond covenants is to protect bondholders from actions by the equity owners that would tend to reduce the value of their claims against the company. The other choices are purposes of a bond indenture.

Question 220

Which of the following factors is least likely to cause a difference between a firm's effective tax rate and statutory rate? A) Non-deductible expenses. B) Tax credits. C) Deductible expenses.

Answer 220

C Permanent tax differences such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences in the effective and statutory tax rates.

Question 221

Maine Company's stock transactions during the year are described below: - January 1 100,000 common shares outstanding - March 1 2 for 1 stock split - August 1 10% stock dividend The weighted average number of shares outstanding used to calculate earnings per share is: A) 201,666. B) 211,111. C) 220,000.

Answer 221

C The January 1 balance of common shares outstanding is adjusted retroactively for both stock dividends and stock splits. The weighted average shares outstanding for the year = 100,000 × 2 × 1.1 = 220,000.

Question 222

A firm that capitalizes rather than expensing costs will have: A) lower cash flows from investing. B) lower cash flows from operations. C) lower profitability in the earlier years.

Answer 222

A A firm that capitalizes costs classifies them as an investing cash flow rather than an operating cash flow. Investing cash flows will be lower and cash flow from operations will be higher when costs are capitalized.

Question 223

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 #1 Statement #2 B) Statement #2 Statement #3 C) Statement #2 Statement #1

Answer 223

C 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 224

For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an "indefinite reversal criterion" under: A) both IFRS and U.S. GAAP. B) IFRS, but not U.S. GAAP. C) U.S. GAAP, but not IFRS.

Answer 224

C Undistributed profits from a subsidiary do not require the creation of a deferred tax liability under U.S. GAAP if the subsidiary meets the indefinite reversal criterion. For IFRS, there are circumstances where a DTL is not created but the test for this treatment is not called or equivalent to the indefinite reversal criterion detailed in U.S. GAAP.

Question 225

In calculating the numerator for diluted Earnings Per Share, the interest on convertible debt is: A) added to earnings available to common shareholders. B) subtracted from earnings available to common shareholders after an adjustment for taxes. C) added to earnings available to common shareholders after an adjustment for taxes.

Answer 225

C Formula = Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]

Question 226

In a period of rising prices, LIFO liquidation results in: A) higher inventory. B) higher earnings. C) lower earnings.

Answer 226

B A LIFO liquidation occurs when a firm using LIFO sells more inventory during a period than it produces. During periods of rising prices, this drawdown in inventory reduces cost of goods sold because the lower cost of previously produced inventory is used, resulting in an unsustainable increase in gross profit margin. Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

Question 227

Making a profitable sale on credit is most likely to have which of the following effects? A) Increase assets and increase equity. B) Increase assets and decrease liabilities. C) Decrease assets and increase equity.

Answer 227

A Making a profitable sale on credit will increase accounts receivable and decrease inventory. Given that the sale is profitable, the increase in accounts receivable will be greater than the decrease in inventory, resulting in a net increase in assets. Profit (due to sales being greater than cost of goods sold) will increase net income and retained earnings (equity).

Question 228

``` According to U.S. Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) GAAP, should dividends paid be treated as a cash flow from financing (CFF) or as a cash flow from operations (CFO)? U.S. GAAP IAS GAAP A) CFF CFF or CFO B) CFO CFF C) CFF or CFO CFO ```

Answer 228

A U.S. GAAP treats dividends paid as CFF whereas IAS GAAP treats dividends paid as either CFO or CFF (as long as it is consistent).

Question 229

Interest expense is reported on the income statement as a function of: A) the unamortized bond discount. B) the market rate. C) the coupon payment.

Answer 229

B Interest expense is always equal to the book value of the bond at the beginning of the period multiplied by the market rate at issuance.

Question 230

``` The CORRECT set of cash flow treatments as they relate to interest and dividends received according to U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) is: U.S. GAAP IFRS A) CFI or CFO CFI B) CFI CFO C) CFO CFI or CFO ```

Answer 230

C U.S. GAAP treats interest and dividends received as CFO whereas under IFRS interest and dividends received may be treated as either CFO or CFI (as long as it is consistent).

Question 231

Earlier this year, Ponca Corporation purchased non-dividend paying equity securities which it classified as trading securities. Information related to the securities follows: Security Cost Fair value at year-end X $400,000 $435,000 Y $550,000 $545,000 What amounts should Ponca report in its year-end income statement and balance sheet as a result of its investment in securities X and Y? Income Statement Balance Sheet A) $30,000 unrealized gain $980,000 B) No gain or loss $980,000 C) $30,000 unrealized gain $950,000

Answer 231

A Trading securities are reported in the balance sheet at fair value. At the end of the year, the fair value of the securities was $980,000 ($435,000 + $545,000). The unrealized gains and losses from trading securities are recognized in the income statement. Thus, Ponca would recognize an unrealized gain of $30,000 ($980,000 fair value - $950,000 cost).

Question 232

Which of the following statements for a bond issued with a coupon rate above the market rate of interest is least accurate? A) The bond will be shown on the balance sheet at the premium value. B) The value of the bond will be amortized toward zero over the life of the bond. C) The associated interest expense will be lower than that implied by the coupon rate.

Answer 232

B | The value of the bond's premium will be amortized toward zero over the life of the bond, not the value of the bond.

Question 233

If Jackson Ski Company issues common stock, and uses the proceeds to purchase fixed assets such as equipment: A) both cash flow from operations and cash flow from financing would increase. B) cash flow from financing would decrease and cash flow from investing would increase. C) cash flow from financing would increase and cash flow from investing would decrease.

Answer 233

C Cash flow from financing increases when stock is issued, while cash flow from investing decreases when spending for purchases of fixed assets.

Question 234

A firm acquires investment property for €3 million and chooses the fair value model for financial reporting. In Year 1 the market value of the investment property decreases by €150,000. In Year 2 the market value of the investment property increases by €200,000. On its financial statements for Year 2, the firm will recognize a: A) €150,000 gain on its income statement and a €50,000 revaluation surplus in shareholders' equity. B) €200,000 gain on its income statement. C) 150,000 increase in shareholders' equity.

Answer 234

B (first picked A, that is IFRS for PPE) Under the fair value model, all gains and losses from changes in the value of investment property are recognized on the income statement. The firm will recognize a loss of €150,000 in Year 1 and a gain of €200,000 in Year 2.

Question 235

Which of the following statements regarding basic and diluted EPS is least accurate? A) A simple capital structure contains no potentially dilutive securities. B) Antidilutive securities decrease EPS if they are exercised or converted. C) Dilutive securities decrease EPS if they are exercised or converted to common stock.

Answer 235

B | Antidilutive securities increase EPS if exercised or converted to common stock.

Question 236

Compared to a finance lease, an operating lease is most likely to be favored when: A) management compensation is not based on returns on invested capital. B) at the end of the lease, the lessee may be better able to sell the asset than the lessor. C) the lessee has bond covenants relating to financial policies.

Answer 236

C If the lessee has bond covenants (e.g., debt-to-equity ratio) relating to its financial policies that it must follow, it is best to have an operating lease due to the fact that the operating lease will keep the asset off of the balance sheet resulting in less liabilities.

Question 237

An analyst can find a company's accounting policies that require significant judgement or estimates in: A) only the footnotes. B) both the footnotes and in the auditor's opinion. C) both the footnotes to the financial statements and Management's Discussion and Analysis.

Answer 237

C Companies that prepare financial statements under IFRS or U.S. GAAP must disclose their accounting policies and estimates in the footnotes and address those policies and estimates where significant judgment was required in Management's Discussion and Analysis. The auditor's opinion discusses whether policies have been applied appropriately, but does not include the estimates and policies themselves.

Question 238

An analyst prepares the following common-size income statements for Perez Company: 20X1 20X2 20X3 Sales 100% 100% 100% COGS 50% 52% 53% Selling and admin exp 16% 12% 9% Interest income 4% 4% 4% Pretax income 30% 32% 34% Income tax expense 15% 16% 17% Net income 15% 16% 17% Based only on this information, Perez's improving net profit margin is most likely a result of: A) improving gross margins. B) controlling operating expenses. C) greater financial leverage.

Answer 238

B The improvement in net profit margin from 15% to 17% appears to result mainly from the firm reducing selling and administrative expense from 16% of sales to 9% of sales, thus decreasing operating expenses from 66% to 62% of sales. Gross margin is decreasing over this period because cost of goods sold is increasing as a percentage of sales. While financial leverage cannot be determined directly from the income statement, the fact that interest expense is a constant percentage of sales suggests financial leverage is stable.

Question 239

The First National Bank is a commercial bank that specializes in consumer financing, particularly automobile loans. The majority of the loans are funded from customer deposits. In addition, the bank purchases various investment securities with available cash. The investments are debt securities and have an average maturity date of less than 30 days. Should First National Bank report the interest received from the consumer loans and the interest received from the investment securities as an operating or as a nonoperating component in its year-end income statement? Consumer loans Investment securities A) Nonoperating Operating B) Operating Operating C) Operating Nonoperating

Answer 239

B (picked C) Interest received from customers and interest received from investments are a part of normal operations of a financial institution. Thus, the First National Bank will report the interest income from both sources as components of operating income.

Question 240

Which of the following statements about financial statement analysis and reporting is least accurate? A) Providing information about changes in a company's financial position is a role of financial reporting. B) Deciding whether to recommend a company's securities to investors is a role of financial statement analysis. C) Financial statement analysis focuses on the way companies show their financial performance to investors by preparing and presenting financial statements.

Answer 240

C Financial reporting refers to the way companies show their financial performance to investors, creditors, and other interested parties by preparing and presenting financial statements, including information about changes in a company's financial position. The role of financial statement analysis is to use the information in a company's financial statements, along with other relevant information, to make economic decisions, such as whether to invest in the company's securities or recommend them to other investors. Analysts use financial statement data to evaluate a company's past performance and current financial position in order to form opinions about the company's ability to earn profits and generate cash flow in the future.

Question 241

The inventory turnover ratio and the number of days in inventory are least likely used to evaluate the: A) age of a firm's inventory. B) effectiveness of a firm's inventory management. C) stability of a firm's inventory levels.

Answer 241

C Neither metric is directly relevant in evaluating the stability of a firm's inventory levels. Determining stability would presumably require other information such as purchase and sales levels, for example. The inventory turnover ratio and the number of days in inventory can be used to evaluate the relative age of a firm's inventory as well as the effectiveness of a firm's inventory management.

Question 242

Football Contractors, Inc., which reports under U.S. GAAP, has contracted to build a stadium for the City of Washburn. The contract price is $100 million and costs are estimated at $60 million. Costs are not assured, however, because there is a material risk, which Football Contractors has assumed, that ground water problems might slow construction and increase costs by as much as $40 million. In 2004, the first year of the agreement, Football Contractors, Inc. billed $30 million, received a $20 million payment, and incurred $15 million in costs. For 2004 Football Contractors, Inc. should recognize revenue from the City of Washburn transaction in the amount of: A) $0. B) $20 million. C) $30 million.

Answer 242

A Under U.S. GAAP, the completed contract method is used when a reliable estimate of the total costs cannot be determined until the contract is finished. Because of the significant uncertainty surrounding the ground water costs, the completed contract method should be used in this transaction, and no revenue should be recognized in 2004 or any later year until the contract is completed or the cost uncertainty is resolved.

Question 243

When calculating earnings per share (EPS) for firms with complex capital structures, stock options are ordinarily considered to be: A) antidilutive securities. B) derivative securities. C) potentially dilutive securities.

Answer 243

C Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. When the exercise price is less than the average market price, stock options are considered to be dilutive, Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities.

Question 244

For a firm with a simple capital structure, all of the following are necessary to measure basic earnings per share (EPS) EXCEPT: A) dividends paid to common shareholders. B) the timing and number of shares issued or repurchased during the year. C) dividends paid to preferred shareholders.

Answer 244

A Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders equals net income minus preferred dividends.

Question 245

Taking an impairment of long-lived assets will result in: A) higher deferred tax liabilities. B) higher future return on assets. C) a lower debt-to-equity ratio.

Answer 245

B In future years, less depreciation expense is recognized on the written-down asset, resulting in higher net income and return on assets since ROA = NI/Total Assets. A - Deferred tax liabilities related to the asset decrease because the impairment cannot be deducted from taxable income until the asset is sold or disposed of. C - The debt-to-equity ratio increases because equity decreases while debt is unchanged.

Question 246

An analyst is least likely to use disclosures of accounting policies and estimates to evaluate: A) what policies are discussed. B) what policies are likely to be modified in future periods. C) whether the disclosures have changed since the prior period.

Answer 246

B Companies that prepare financial statements under IFRS or U.S. GAAP must disclose their accounting policies and estimates in the footnotes and Management's Discussion and Analysis. An analyst should use these disclosures to evaluate what policies are discussed, whether they cover all the relevant data in the financial statements, which policies required management to make estimates, and whether the disclosures have changed since the prior period.

Question 247

Characteristics of a coherent financial reporting framework are best described as: A) transparency, consistency, and comprehensiveness. B) consistency, materiality, and transparency. C) materiality, comprehensiveness, and aggregation.

Answer 247

A The three characteristics of a coherent financial reporting framework are transparency, comprehensiveness, and consistency. Materiality and aggregation are two of the features for preparing financial statements listed in International Accounting Standard No. 1.

Question 248

Which of the following is least likely disclosed in the financial statement footnotes of a lessee? A) The lease interest rate. B) A general description of the leasing arrangement. C) The lease payments to be paid in each of the next five years. *what needs to be disclosed? (5)

Answer 248

A Both lessees and lessors are required to disclose useful information about finance leases and operating leases in the financial statements or in the footnotes, including: - General description of the leasing arrangement. - The nature, timing, and amount of payments to be paid or received in each of the next five years. Lease payments after five years can be aggregated. - Amount of lease revenue and expense reported in the income statement for each period presented. - Amounts receivable and unearned revenues from lease arrangements. - Restrictions imposed by lease agreements.

Question 249

On a spectrum for assessing financial reporting quality, which of the following represents the highest quality? A) Reporting is compliant with GAAP and decision useful but earnings are not sustainable. B) Reporting is not compliant with GAAP but the numbers presented reflect the company's actual activities. C) Reporting is compliant with GAAP but reporting choices and estimates are biased.

Answer 249

A A firm can have high financial reporting quality even if its earnings quality is low, such as a firm that recognizes one-time gains in a period and identifies them clearly. Biased accounting choices and non-compliance with GAAP represent lower-quality financial reporting.

Question 250

An employer offers a defined benefit pension plan and a defined contribution pension plan. The employer's balance sheet is most likely to present an asset or liability related to: A) both of these pension plans. B) the defined benefit plan. C) the defined contribution plan.

Answer 250

B Only a defined benefit plan has a funded status that would appear on the balance sheet as an asset or liability. Employer payments into a defined contribution plan are recognized as expenses in the period incurred.

Question 251

An IFRS-reporting firm includes in its financial statements a measure that is not defined under IFRS. The firm is least likely required to: A) reconcile this measure with the most comparable IFRS measure. B) show this measure for all periods presented. C) define and explain the relevance of this measure.

Answer 251

B (picked A, was choosing between A and B) IFRS require firms that present a non-GAAP (i.e., non-IFRS) measure in their financial reports to define the measure and explain its relevance, and to reconcile the differences between this measure and the most comparable IFRS measure.

Question 252

Which of the following financial reporting choices is permitted under IFRS but not under U.S. GAAP? A) Netting deferred tax assets with deferred tax liabilities. B) Excluding actuarial gains and losses from balance sheet pension items. C) Revaluing plant and equipment upward.

Answer 252

C Upward revaluation of long-lived assets is permitted under IFRS. Under U.S. GAAP, most assets (other than certain financial instruments) may not be revalued upward. Neither netting deferred tax assets with deferred tax liabilities nor excluding actuarial gains and losses from balance sheet pension items is permitted under IFRS or U.S. GAAP.

Question 253

Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts? Accumulated depreciation Treasury stock A) Contra-asset Contra-equity B) Contra-asset Equity C) Liability Equity

Answer 253

A Accumulated depreciation is a contra-asset account to the asset account property, plant & equipment. Treasury stock is a contra-equity account to common stock or additional paid-in capital.

Question 254

Which of the following statements about inventory presentation and disclosures is most accurate? A) An analyst must determine which inventory cost method was used by examining the firm's current and historical inventory values. B) IFRS permits reversals of inventory writedowns but the firm must disclose the circumstances of the reversal in its financial statements. C) Changing from FIFO to LIFO is a change in accounting principle that must be applied retrospectively.

Answer 254

B IFRS requires a firm that reverses an inventory writedown to discuss the circumstances that led to the reversal. A - Both IFRS and U.S. GAAP require firms to disclose the inventory cost flow method they use. C - While a change to LIFO from another inventory cost method is a change in accounting principle, under U.S. GAAP this change is not applied retrospectively. The carrying value of inventory is considered to be the first LIFO layer.

Question 255

With regard to a firm's financial reporting quality, an analyst should most likely interpret as a warning sign a focus by management on an increase in the firm's: A) cash from operations. B) pro forma earnings. C) asset turnover ratios.

Answer 255

B One potential warning sign of low-quality financial reporting is management's focus on "pro forma" or non-GAAP measures of earnings. A&C - Increases in operating cash flows or asset turnover ratios are not typically viewed as warning signs of poor financial reporting quality.

Question 256

Under U.S. GAAP, an asset is impaired when: A) the present value of future cash flows exceeds the carrying amount of the asset. B) accumulated depreciation plus salvage value exceeds acquisition costs. C) the firm can no longer fully recover the carrying amount of the asset.

Answer 256

C

Question 257

Which of the following reasons is least likely a valid limitation of ratio analysis? A) Determining the target or comparison value for a ratio is difficult. B) It is difficult to find comparable industry ratios. C) Calculation of ratios involves a large degree of subjectivity.

Answer 257

C There is not a great deal of subjectivity involved in calculating ratios. The mechanical formulas for the calculations are fairly standard and objective for the activity, liquidity, solvency, and profitability ratios, for instance. On the other hand, determining the target or comparison value for a ratio is difficult as it requires some range of acceptable values and that introduces an element of subjectivity. Conclusions cannot be made from viewing one set of ratios as all ratios must be viewed relative to one another in order to make meaningful conclusions. It can be difficult to find comparable industry ratios, especially when analyzing companies that operate in multiple industries.

Question 258

Which of the following statements regarding a direct financing lease is least accurate? A) Interest revenue on the lessor's income statement equals the implicit interest rate times the lease payment. B) The principal portion of the lease payment is a cash inflow from investing on the lessor's cash flow statement. C) The lessor recognizes no gross profit at the inception of the lease.

Answer 258

A Interest revenues are calculated by multiplying the implicit interest rate by net receivables at the beginning of the period.

Question 259

Which of the following is NOT a category on the statement of cash flows? Cash flow from: A) operations. B) financing. C) sales.

Answer 259

C | There are only three types of cash flows: financing, investing, and operating.

Question 260

According to the Financial Accounting Standards Board, what is the appropriate balance sheet treatment for available-for-sale securities and where are the unrealized gains and losses reported? Balance sheet Unrealized gains and losses A) Fair value Net income B) Fair value Other comprehensive income C) Amortized cost Other comprehensive income

Answer 260

B Available-for-sale securities are reported on the balance sheet at fair value. The unrealized gains and losses bypass the income statement and are reported as a component of stockholders' equity as a part of other comprehensive income.

Question 261

When the market rate is greater than the coupon rate, the bond is called a: A) premium bond. B) par bond. C) discount bond.

Answer 261

C When the market rate is greater than the coupon rate, the bond will sell at a discount as investors will only buy the bond at a price which is less than fair value due to the coupon being lower than the market rate.

Question 262

Marcel Inc. is a large manufacturing company based in the U.S. but also operating in several European countries. Marcel has long-lived assets currently in use that are valued on the balance sheet at $600 million. This includes previously recognized impairment losses of $80 million. The original cost of the assets was $750 million. The fair value of the assets was determined in a professional appraisal to be $690 million. Assuming that Marcel reports under U.S. GAAP, the new appraisal of the assets' value most likely results in: A) an $80 million gain on income statement and $10 million gain in other comprehensive income. B) no change to Marcel's financial statements. C) a $90 million gain in other comprehensive income.

Answer 262

B (picked A, forgot it is US GAAP) Under U.S. GAAP, long-lived assets are reported on the balance sheet at depreciated cost less any impairment losses ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss, for a net amount of $600 million). Increases are generally prohibited with the exception of assets held for sale. Since these assets are currently in use, this exception does not apply. Therefore, Marcel may not revalue the assets upward.

Question 263

Which of the following is an analyst least likely to rely on as objective information to include in a company analysis? A) Government agency statistical data on the economy and the company's industry. B) Corporate press releases. C) Proxy statements.

Answer 263

B Corporate reports and press releases are written by management and are often viewed as public relations or sales materials. An analyst should review information on the economy and the company's industry and compare the company to its competitors. This information can be acquired from sources such as trade journals, statistical reporting services, and government agencies. Securities and Exchange Commission (SEC) filings include Form 8-K, which a company must file to report events such as acquisitions and disposals of major assets or changes in its management or corporate governance and proxy statements, which are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options.

Question 264

Other things equal, which of the following firm characteristics are most likely to be viewed favorably by credit rating agencies? A) Large size, diverse product lines, concentrated geographic regions. B) Large size, diverse product lines, many geographic regions. C) Small size, focused product lines, concentrated geographic regions.

Answer 264

B

Question 265

Are the following statements about common-size financial statements correct or incorrect? Statement #1 - Expressing financial information in a common-size format enables the analyst to make better comparisons between two firms of similar size that operate in different industries. Statement #2 - Common-size financial statements can be used to highlight the structural changes in the firm's operating results and financial condition that have occurred over time. With respect to these statements: A) both are incorrect. B) both are correct. C) only one is correct:

Answer 265

C Vertical common-size statements enable the analyst to make better comparisons of two firms of different sizes that operate in the same industry. Horizontal common-size financial statements express each line as a percentage of the base year figure; thus, horizontal common-size statements can be used to identify structural changes in a firm's operating results and financial condition over time.

Question 266

A tax loss carryforward is best described as the: A) net taxable loss that can be used to reduce taxable income in the future. B) difference of deferred tax liabilities and deferred tax assets. C) net taxable loss that can be used to refund paid taxes from the previous year.

Answer 266

A | A tax loss carryforward is the net taxable loss that can be used to reduce taxable income in the future.

Question 267

Determine the cash flow from investing given the following table: ``` Item Amount Cash payment of dividends $30 Sale of equipment $25 Net income $25 Purchase of land $15 Increase in accounts payable $20 Sale of preferred stock $25 Increase in deferred taxes $5 ``` A) -$5. B) $10. C) -$10.

Answer 267

B Item Amount Cash payment of dividends CFF -$30 Sale of equipment CFI +$25 Net income CFO +$25 Purchase of land CFI -$15 Increase in accounts payable CFO +$20 Sale of preferred stock CFF +$25 Increase in deferred taxes CFO +$5 CFI = Sale of Equipment (+25) + Purchase of Land (-15) = $10.

Question 268

Which of the following is least likely to be considered a characteristic of a coherent financial reporting framework? A) Stability. B) Transparency. C) Comprehensiveness.

Answer 268

A Financial reporting should be transparent and comprehensive. Stability of accounting information is not a characteristic of a coherent reporting framework.

Question 269

In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under: A) both IFRS and U.S. GAAP. B) U.S. GAAP but not IFRS. C) IFRS but not U.S. GAAP.

Answer 269

A

Question 270

Current assets that arise from the accrual process most likely include: A) marketable securities. B) accounts receivable. C) cash equivalents.

Answer 270

B (picked C, did not look at accrual) The accrual process refers to accounting for transactions when revenue or expense recognition does not coincide with the exchange of cash. Accounts receivable, for example, represent sales of goods and services that have been recognized as revenue, but for which the firm has not yet been paid cash. C - Cash equivalents are highly liquid marketable securities, such as Treasury bills, in which a firm typically invests its short-term cash balances.

Question 271

Noncurrent assets on the balance sheet are most closely linked to which part of the cash flow statement? A) Operating cash flows. B) Investing cash flows. C) Financing cash flows.

Answer 271

B Investing cash flows are most closely linked with a firm's noncurrent assets. For example, purchases and sales of property, plant, and equipment are classified as investing cash flows.

Question 272

A firm has deferred tax assets of $315,000 and deferred tax liabilities of $190,000. If the tax rate increases, adjusting the value of the firm's deferred tax items will: A) have no effect on income tax expense. B) increase income tax expense. C) decrease income tax expense.

Answer 272

C An increase in the tax rate increases the values of both DTAs and DTLs. Because the firm's DTAs are greater than its DTLs, the net effect of adjusting their values for an increase in the tax rate will be to decrease income tax expense.

Question 273

Determine the cash flow from financing given the following table: ``` Item Amount Cash payment of dividends $30 Sale of equipment $25 Net income $25 Purchase of land $15 Increase in accounts payable $20 Sale of preferred stock $25 Increase in deferred taxes $5 ``` A) $20. B) $15. C) -$5.

Answer 273

C | CFF = 25(Sale of Stock) − 30(Div Paid) = -$5

Question 274

Other things equal, and ignoring issuance costs, a firm that raises cash by issuing a new bond is most likely to: A) decrease its leverage ratios and increase its coverage ratios. B) increase its leverage ratios and decrease its coverage ratios. C) increase its leverage ratios and increase its coverage ratios.

Answer 274

B Leverage ratios will increase because debt increases while equity remains unchanged, and (assuming equity is positive) debt increases proportionally by more than assets. Coverage ratios decrease because interest payments increase while EBIT is unchanged.

Question 275

Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No. 1? A) Disclosures of material events. B) A summary of accounting policies. C) Statement of changes in owners' equity.

Answer 275

A International Accounting Standard (IAS) No. 1 defines which financial statements are required and how they must be presented. The required financial statements are: * Balance sheet. * Statement of comprehensive income. * Cash flow statement. * Statement of changes in equity. * Explanatory notes, including a summary of accounting policies. Disclosures of material events that affect the company are required by the Securities and Exchange Commission (Form 8-K) for firms that are publicly traded in the United States.

Question 276

For an organization with a simple capital structure, the computation of earnings per share is least likely to consider: A) the weighted average number of preferred shares outstanding. B) the weighted average number of common shares outstanding. C) net income.

Answer 276

A The equation for Basic EPS (net income - preferred dividends / weighted average number of common shares outstanding) does not include the number of preferred shares outstanding, because the objective is to determine the earnings available to the common shareholder.

Question 277

Which of the following is least likely to be disclosed in the financial statements of a bond issuer? A) Collateral pledged as security in the event of default. B) The amount of debt that matures in each of the next five years. C) The market rate of interest on the balance sheet date.

Answer 277

C The market rate on the balance sheet date is not typically disclosed. The amount of principal scheduled to be repaid over the next five years and collateral pledged (if any) are generally included in the footnotes to the financial statements.

Question 278

Disagreements that inhibit development of a coherent financial reporting framework are least likely to involve which of the following? A) Transparency. B) Standard setting. C) Valuation.

Answer 278

A 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 279

Intangible assets with finite useful lives are: A) amortized over their actual lives. B) amortized over their expected useful lives. C) not amortized, but are tested for impairment at least annually.

Answer 279

B Intangible assets with finite lives are amortized over their expected useful lives, which is an estimate. Actual lives of intangible assets are often not known in advance. Intangible assets with infinite lives are not amortized, but are tested for impairment at least annually.

Question 280

The lessee has an incentive to classify a lease as an operating lease, rather than as a finance lease, because an operating lease: A) has no risk involved because the lessor assumes all risk. B) has payments that are less than a capital lease's payments. C) does not appear on the balance sheet.

Answer 280

C Having less assets and liabilities on the balance sheet than would exist if the asset were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., the debt to equity ratio).

Question 281

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

Answer 281

B

Question 282

A firm recognizes a goodwill impairment in its most recent financial statement, reducing goodwill from $50 million to $40 million. How should an analyst most appropriately adjust this financial statement for goodwill when calculating financial ratios? A) Decrease assets and increase earnings. B) Make no adjustments to assets or earnings because both reflect the impairment. C) Decrease earnings but make no adjustment to assets.

Answer 282

A!! The recommended adjustment for goodwill before calculating financial ratios is to remove goodwill from the balance sheet (decreasing assets) and reverse any losses recognized due to goodwill impairment (increasing earnings).

Question 283

On January 1, 20X7, Omega Corporation paid $45,000 to renew its property insurance for 3 years. What amount of insurance expense should Omega report for the year-ended December 31, 20X7 and what is the balance of Omega's prepaid insurance account on December 31, 20X8? Insurance expense Prepaid insurance A) $45,000 $15,000 B) $15,000 $30,000 C) $15,000 $15,000

Answer 283

C At the beginning of 20X7, the prepaid insurance account (asset) will have a balance of $45,000. Insurance expense will be recognized at a rate of $15,000 per year. At the end of 20X8, one year's insurance remains; thus, the balance of the prepaid insurance account will equal $15,000 ($45,000 beginning balance - $15,000 insurance expense for 20X7 - $15,000 insurance expense for 20X8).

Question 284

Compared to an operating lease, a lessee using a finance lease is least likely to have: A) higher cash flow from financing during the lease period. B) lower net income in the earlier years of the lease. C) a lower current ratio.

Answer 284

A Since a portion of the lease payment is treated as repayment of principal under a finance lease, cash flow from financing will be lower.

Question 285

Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers explains to Blackmon, "Even though we don't have access to the detailed transactions that underlie the financial statements, we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters." Rivers is: A) correct. B) incorrect because deviation from appropriate accounting parameters is addressed in the auditor's report, so a qualified opinion in the auditor's report ensures that management is not manipulating earnings. C) incorrect because even within appropriate accounting parameters, management can manipulate earnings through the assumptions that rely on their discretion.

Answer 285

C 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. A clean auditor's report does not ensure that management is unable to manipulate earnings, and a qualified opinion expresses reservations about the appropriateness of accounting policies. An analyst doesn't have access to the detailed information that flows through a company's accounting system, but only sees its end product, the financial statements.