Section 3 MCQs Flashcards
(132 cards)
1
Q
A qualified audit opinion is most likely required:
A
for a company with related-party transactions.
B
when the scope of the auditing process has not been limited.
C
in financial statements for the quarter after a major accounting policy change is implemented.
A
C
in financial statements for the quarter after a major accounting policy change is implemented.
2
Q
An independent audit report is most likely to provide:
A
absolute assurance about the accuracy of the financial statements.
B
reasonable assurance that the financial statements are fairly presented.
C
a qualified opinion with respect to the transparency of the financial statements
A
B
reasonable assurance that the financial statements are fairly presented.
3
Q
What type of audit opinion is preferred when analyzing financial statements?
A
Qualified.
B
Adverse.
C
Unqualified.
A
C
Unqualified.
4
Q
The role of financial statement analysis is best described as:
A
providing information useful for making investment decisions.
B
evaluating a company for the purpose of making economic decisions.
C
using financial reports prepared by analysts to make economic decisions.
A
B
evaluating a company for the purpose of making economic decisions.
5
Q
Which of the following best describes the role of financial statement analysis?
A
To provide information about a company’s performance
B
To provide information about a company’s changes in financial position
C
To form expectations about a company’s future performance and financial position
A
C
To form expectations about a company’s future performance and financial position
6
Q
Information about management and director compensation are least likely to be found in the:
A
auditor’s report.
B
proxy statement.
C
notes to the financial statements.
A
A
auditor’s report.
7
Q
Ratios are an input into which step in the financial statement analysis framework?
A
Process data.
B
Collect input data.
C
Analyze/interpret the processed data.
A
C
Analyze/interpret the processed data.
8
Q
A company that owns radio stations has sold one of its broadcast towers. The proceeds of this sale will most likely be recorded in which section of the company’s statement of cash flows?
A
Cash flows from operating activities
B
Cash flows from financing activities
C
Cash flows from investing activities
A
C
Cash flows from investing activities
9
Q
An analyst covering a company that adheres to US GAAP would most likely find its pension expense reported:
A
in other comprehensive income.
B
in the notes to the financial statements.
C
as a separate line on the income statement.
A
B
in the notes to the financial statements.
10
Q
A credit analyst is least likely to analyze a company’s financial statements for the purpose of:
A
assigning a credit rating.
B
determining the appropriate terms for a loan.
C
determining whether the company’s shares are trading at a price below their intrinsic value.
A
C
determining whether the company’s shares are trading at a price below their intrinsic value.
11
Q
A publicly-traded company will most likely issue a press release announcing its quarterly earnings:
A
after that quarter’s financial statements have been filed.
B
after a quarterly conference call between executives and equity analysts.
C
before its investor relations department publishes a presentation on that quarter’s performance.
A
C
before its investor relations department publishes a presentation on that quarter’s performance.
12
Q
Interim financial reports released by a company are most likely to be:
A
monthly.
B
unaudited.
C
unqualified.
A
B
unaudited.
13
Q
roviding information about the performance and financial position of companies so that users can make economic decisions best describes the role of:
A
0%
auditing.
B
financial reporting.
C
financial statement analysis.
A
B
financial reporting.
14
Q
Under US GAAP, a lessee that has the option to purchase the asset at the end of the term and will likely do so is most likely:
A
required to classify the lease as a finance lease.
B
required to classify the lease as a sales-type lease.
C
permitted to classify the lease as an operating lease if the term represents a substantial portion of the asset’s useful life.
A
A
required to classify the lease as a finance lease.
15
Q
Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements?
A
Current cost.
B
Historical cost.
C
Realizable value.
A
B
Historical cost.
16
Q
Which of the following is most accurately described as an association of national regulatory authorities?
A
The Securities and Exchange Commission
B
The International Accounting Standards Board
C
The International Organization of Securities Commissions
A
C
The International Organization of Securities Commissions
17
Q
Accounting standards boards should most likely maintain their:
A
commitment to confidentiality.
B
Responsibility to provide oversight of financial regulators.
C
operational independence by not seeking input from entities that are likely to be affected by their decisions.
A
A
commitment to confidentiality.
18
Q
Which of the following is least likely to be required in a company’s financial statements under IAS No. 1?
A
Financial ratios
B
Comparative information
C
A classified statement of financial position
A
A
Financial ratios
19
Q
Which of the following is least likely identified in the IASB’s 2010 Conceptual Framework as an enhancing qualitative characteristic of financial reports?
A
Relevance
B
Verifiability
C
Comparability
A
A
Relevance
20
Q
To ensure well-functioning capital markets, a financial regulatory body should most likely:
A
refuse to overrule an independent accounting standards board.
B
obtain the funds required to execute its responsibilities from the government.
C
require all companies that are registered in its jurisdiction to use the same set of accounting standards.
A
B
obtain the funds required to execute its responsibilities from the government.
21
Q
The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is:
A
current cost.
B
Present value.
C
realizable value.
A
C
realizable value.
22
Q
Which of the following statements is most accurate? A company that adheres to IFRS is:
A
prohibited from issuing financial statements that have not been prepared on a going concern basis.
B
required to provide an explicit statement of compliance with IFRS in the notes to its financial statements.
C
required to issue financial statements that meet all standards, but no explicit statement of compliance is necessary.
A
B
required to provide an explicit statement of compliance with IFRS in the notes to its financial statements.
23
Q
Regarding questions of how to faithfully represent a company’s economic reality in financial reports, various accounting standards boards most likely seek to:
A
eliminate the need for judgment.
B
limit the range of acceptable answers.
C
develop comprehensive rules-based standards that prescribe a single correct answer.
A
B
limit the range of acceptable answers.
24
Q
International financial reporting standards are currently developed by which entity?
A
The IFRS Foundation.
B
The International Accounting Standards Board.
C
The International Organization of Securities Commissions.
A
B
The International Accounting Standards Board.
25
A core objective of the International Organization of Securities Commissions is to:
A
eliminate systemic risk.
B
protect users of financial statements.
C
ensure that markets are fair, efficient, and transparent.
C
ensure that markets are fair, efficient, and transparent.
26
The purpose of the International Organization of Securities Commissions (IOSCO) is most likely to:
A
regulate securities and capital markets.
B
issue international financial reporting standards.
C
provide guidance on regulating securities and capital markets.
C
provide guidance on regulating securities and capital markets.
27
Considered in isolation, which of the following events is least likely to produce a difference between a company’s basic and diluted earnings per share?
A
A stock split
B
The issuance of convertible debt
C
The issuance of convertible preferred stock
A
A stock split
Basic EPS (earnings per share) is calculated as the reported earnings available to common shareholders of the parent company divided by the weighted average number of shares outstanding.
Diluted EPS is the EPS that results if all dilutive financial instruments are converted into common stock. Dilutive financial instruments include convertible bonds, convertible preferred stock, employee stock options, and warrants.
Stock splits have an equivalent impact on both basic EPS and diluted EPS.
28
A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for:
A
all prior periods.
B
current and future periods.
C
prior periods shown in a report.
C
prior periods shown in a report.
29
Which statement is most accurate? A common size income statement:
A
restates each line item of the income statement as a percentage of net income.
B
allows an analyst to conduct cross-sectional analysis by removing the effect of company size.
C
standardizes each line item of the income statement but fails to help an analyst identify differences in companies’ strategies.
B
allows an analyst to conduct cross-sectional analysis by removing the effect of company size.
30
A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company’s profitability initially appear:
A
lower.
B
unchanged.
C
higher.
C
higher.
C
higher.
31
Which one of the following items is least likely to be treated as other comprehensive income under both IFRS and US GAAP?
A
Foreign currency translation adjustments
B
Unealized gains or losses on derivatives contracts accounted for as hedges
C
Changes in the value of long-lived assets that are measured using the revaluation model
C
Changes in the value of long-lived assets that are measured using the revaluation model
Four types of items are treated as other comprehensive income under both IFRS and US GAAP.
Foreign currency translation adjustments
Unrealized gains or losses on derivatives contracts accounted for as hedges
Unrealized holding gains and losses on available-for-sale securities
Certain costs of a company’s defined benefit post-retirement plans that are not recognized in the current period
Changes in the value of long-lived assets that are measured using the revaluation model are treated as other comprehensive income under IFRS, but use of the revaluation model is not permitted by US GAAP.
32
Under IFRS, income includes increases in economic benefits from:
A
increases in liabilities not related to owners’ contributions.
B
enhancements of assets not related to owners’ contributions.
C
increases in owners’ equity related to owners’ contributions.
B
enhancements of assets not related to owners’ contributions.
33
When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders?
A
Stock options
B
Convertible debt that is dilutive
C
Convertible preferred stock that is dilutive
A
Stock options
34
Which of the following least accurately describes adjustments to a company's earnings per share to be made if it has outstanding convertible debt?
A
Add back after-tax interest paid on that convertible debt
B
Add the potential new shares to the total number of shares outstanding
C
Multiply the outstanding convertible debt by the percentage likely to convert
C
Multiply the outstanding convertible debt by the percentage likely to convert
35
Expenses on the income statement may be grouped by:
A
either function or nature.
B
function, but not by nature.
C
nature, but not by function.
A
either function or nature.
36
Under IFRS, a loss from the destruction of property in a fire would most likely be classified as:
A
continuing operations.
B
discontinued operations.
C
other comprehensive income.
A
continuing operations.
A fire may be infrequent, but it would still be part of continuing operations and reported in the profit and loss statement. Discontinued operations relate to a decision to dispose of an operating division.
37
Which inventory method is least likely to be used under IFRS?
A
First in, first out (FIFO).
B
Last in, first out (LIFO).
C
Weighted average.
B
Last in, first out (LIFO).
38
When preparing an income statement, which of the following items would most likely be classified as other comprehensive income?
A
A foreign currency translation adjustment
B
An unrealized gain on a security held for trading purposes
C
A realized gain on a derivative contract not accounted for as a hedge
A
A foreign currency translation adjustment
Other comprehensive income includes items that affect shareholders’ equity but are not reflected in the company’s income statement. In consolidating the financial statements of foreign subsidiaries, the effects of translating the subsidiaries’ balance sheet assets and liabilities at current exchange rates are included as other comprehensive income.
39
Which of the following would most likely impact a company's other comprehensive income?
A
Stock dividend payments
B
Unrealized gains on trading securities
C
Unrealized gains on available-for-sale securities
C
Unrealized gains on available-for-sale securities
Unrealized gains on available-for-sale securities are recorded as other comprehensive income. By contrast, unrealized gains on trading securities are recognized on a company's income statement.
40
Money received from customers for products to be delivered in the future is recorded as:
A
revenue and an asset.
B
an asset and a liability.
C
revenue and a liability.
B
an asset and a liability.
41
For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders’ equity?
A
They are not recognized.
B
They flow through retained earnings.
C
They are a component of accumulated other comprehensive income.
A
They are not recognized.
42
Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in:
A
the debt-to-equity ratio but not the total asset turnover.
B
the total asset turnover but not the debt-to-equity ratio.
C
both the debt-to-equity ratio and the total asset turnover.
C
both the debt-to-equity ratio and the total asset turnover.
mpairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.
43
Which of the following is most likely classified as a current liability?
A
Payment received for a product due to be delivered at least one year after the balance sheet date
B
Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle
C
Payment on debt due in six months for which the company has the unconditional right to defer settlement for at least one year after the balance sheet date
B
Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle
Payments due within one operating cycle of the business, even if they will be settled more than one year after the balance sheet date, are classified as current liabilities
44
Shareholders’ equity reported on the balance sheet is most likely to differ from the market value of shareholders’ equity because:
A
historical cost basis is used for all assets and liabilities.
B
some factors that affect the generation of future cash flows are excluded.
C
shareholders’ equity reported on the balance sheet is updated continuously.
B
some factors that affect the generation of future cash flows are excluded.
45
The difference between the fair value and the amortized cost for cash equivalents is most likely:
A
immaterial under both IFRS and US GAAP.
B
positive for companies that report in accordance with IFRS.
C
negative for companies that report in accordance with US GAAP.
A
immaterial under both IFRS and US GAAP.
46
The carrying value of inventories reflects:
A
their historical cost.
B
their current value.
C
the lower of historical cost or net realizable value.
C
the lower of historical cost or net realizable value.
47
The most likely company to use a liquidity-based balance sheet presentation is a:
A
bank.
B
computer manufacturer holding inventories.
C
software company with trade receivables and payables.
A
bank.
48
Which of the following is most likely to be classified as a contra account on a company's balance sheet?
A
Bad debt expense
B
Unearned revenue
C
Accumulated depreciation
C
Accumulated depreciation
49
A company's book value is most likely considered to be a poor proxy for its intrinsic value because:
A
balance sheet carrying values must be restated at fair value each period.
B
current accounting standards require the use of a mixed model of measurement.
C
current accounting standards require all assets and liabilities to be carried at their historical cost.
B
current accounting standards require the use of a mixed model of measurement.
50
The most likely costs included in both the cost of inventory and property, plant, and equipment are:
A
selling costs.
B
storage costs.
C
delivery costs.
C
delivery costs.
Both the cost of inventory and property, plant, and equipment include delivery costs, or costs incurred in bringing them to the location for use or resale.
51
The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet:
A
as a long-term liability.
B
separately, but as a part of shareholders’ equity.
C
as a mezzanine item between liabilities and shareholders’ equity.
B
separately, but as a part of shareholders’ equity.
52
Accrued expenses (accrued liabilities) are:
A
expenses that have been paid.
B
created when another liability is reduced.
C
expenses that have been reported on the income statement but not yet paid.
C
expenses that have been reported on the income statement but not yet paid.
53
For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity?
A
They are not recognized.
B
They flow through retained earnings.
C
They are a component of accumulated other comprehensive income.
C
They are a component of accumulated other comprehensive income.
54
n order to assess a company’s ability to meet its short-term obligations, which of the following ratios would an analyst most likely examine?
A
Payables turnover
B
Defensive interval ratio
C
Working capital turnover
B
Defensive interval ratio
Liquidity ratios measure the company’s ability to meet short-term obligations. Liquidity ratios include the current ratio, quick ratio, cash ratio, and defensive interval ratio.
Working capital turnover and payables turnover are activity ratios.
55
For non-financial firms, which of the following is most likely to be used as the base for a vertical common-size income statement?
A
Total assets
B
Net income
C
Total revenue
C
Total revenue
For vertical common-size income statements, total revenue is typically the base. Total assets may be used as the base for vertical common-size income statement analysis of financial institutions, but total revenue is more commonly used for this purpose.
56
Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by:
A
Zimt is too low.
B
Nutmeg is too low.
C
Nutmeg is too high.
A
Zimt is too low.
Zimt uses the FIFO method, so its cost of sales represents units purchased at a (no longer available) lower price. Nutmeg uses the LIFO method, so its cost of sales is approximately equal to the current replacement cost of inventory.
57
Which of the following statements is most accurate? All else equal, using LIFO rather than FIFO during a period of rising prices and stable inventory quantities results in a higher:
A
current ratio.
B
operating profit margin.
C
inventory turnover ratio.
C
inventory turnover ratio.
During periods of rising prices and stable inventory levels, the inventory turnover ratio (COGS / Average inventory) is higher under LIFO because COGS is higher and average inventory is lower.
58
Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by:
A
Zimt is too high.
B
Nutmeg is too low.
C
Nutmeg is too high.
B
Nutmeg is too low.
Nutmeg uses the LIFO method, and thus some of the inventory on the balance sheet was purchased at a (no longer available) lower price. Zimt uses the FIFO method, so the carrying value on the balance sheet represents the most recently purchased units and thus approximates the current replacement cost.
59
Carrying inventory at a value above its historical cost would most likely be permitted if:
Carrying inventory at a value above its historical cost would most likely be permitted if:
A
the inventory was held by a producer of agricultural products.
B
financial statements were prepared using US GAAP.
C
the change resulted from a reversal of a previous write-down.
A
the inventory was held by a producer of agricultural products.
IFRS allow the inventories of producers and dealers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to be carried at net realisable value even if above historical cost. (US GAAP treatment is similar.)
60
Inventory cost is least likely to include:
A
production-related storage costs.
B
costs incurred as a result of normal waste of materials.
C
transportation costs of shipping inventory to customers.
C
transportation costs of shipping inventory to customers.
Transportation costs incurred to ship inventory to customers are an expense and may not be capitalized in inventory
61
Corex, a producer of rare minerals used in various industrial processes, prepares its financial reports in accordance with IFRS. The company is most likely:
A
required to carry its inventory at the lower of cost or net realizable value.
B
permitted to carry its inventory at net realizable value even if this exceeds cost and there is not an active market for the minerals.
C
permitted to carry its inventory at net realizable value even if this exceeds cost, but only if the minerals trade in an active market.
B
permitted to carry its inventory at net realizable value even if this exceeds cost and there is not an active market for the minerals.
IFRS allow mineral producers to report their inventories at their net realizable value even when this is greater than cost. (Most companies that adhere to IFRS must report inventories at the lower of cost or net realizable value, but producers of certain commodities are exempt from this requirement.)
62
Fernando’s Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando’s inventory balance will most likely be:
A
higher if it complies with IFRS.
B
higher if it complies with US GAAP.
C
the same under US GAAP and IFRS.
A
higher if it complies with IFRS.
IFRS require the reversal of inventory write-downs if net realisable values increase; US GAAP do not permit the reversal of write-downs.
63
All else equal, which of the following cost methods will most likely produce the highest inventory balance at the end of a period during which prices have steadily risen?
A
Periodic LIFO
B
Periodic FIFO
C
Perpetual LIFO
B
Periodic FIFO
During periods of rising prices, the most recent purchases will be the most expensive. Last-in-first-out (LIFO) pushes those high-price purchases through the inventory to cost of goods sold, increasing expenses and decreasing inventory.
FIFO works the opposite way, resulting in lower expenses and high inventory values.
64
Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the results the company would have reported if the write-down had never occurred, Zimt’s reported 2018:
A
profit was overstated.
B
cash flow from operations was overstated.
C
year-end inventory balance was overstated.
A
profit was overstated.
The reversal of the write-down shifted cost of sales from 2018 to 2017. The 2017 cost of sales was higher because of the write-down, and the 2018 cost of sales was lower because of the reversal of the write-down. As a result, the reported 2018 profits were overstated
65
Compared to a company that uses the FIFO method, during periods of rising prices a company that uses the LIFO method will most likely appear more:
A
liquid.
B
efficient.
C
profitable.
B
efficient.
LIFO will result in lower inventory and higher cost of sales. Gross margin (a profitability ratio) will be lower, the current ratio (a liquidity ratio) will be lower, and inventory turnover (an efficiency ratio) will be higher.
66
A company uses a perpetual FIFO inventory valuation method. All else equal, if the company had used a periodic FIFO inventory valuation system, its cost of goods sold expense for the most recent year, during which input prices rose steadily, would most likely have been:
A
lower.
B
the same.
C
higher.
B
the same.
f the FIFO inventory valuation method is used, the cost of goods sold expense is unaffected by whether the system is periodic or perpetual.
67
Beschlund Industries, which adheres to IFRS, is currently carrying inventory at its historical cost of €50,000. If the company determines that inventory's net realizable value is €45,000, the €5,000 loss in value:
A
must be included as part of the cost of goods sold.
B
must be reported separately from cost of goods sold.
C
may be included as part of cost of goods sold or reported separately.
C
may be included as part of cost of goods sold or reported separately.
Under IFRS, inventory must be written down if its net realizable value is determined to be less than historical cost. The resulting loss in value may be reported as part of cost of goods sold or in a separate line on the income statement.
68
Eric’s Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at:
A
£550,000.
B
£1,000,000.
C
£3,000,000.
B
£1,000,000.
Under IFRS, the reversal of write-downs is required if net realisable value increases. The inventory will be reported on the balance sheet at £1,000,000. The inventory is reported at the lower of cost or net realisable value. Under US GAAP, inventory is carried at the lower of cost or market value. After a write-down, a new cost basis is determined and additional revisions may only reduce the value further. The reversal of write-downs is not permitted.
69
Company A adheres to US GAAP and Company B adheres to IFRS. Which of the following is most likely to be disclosed on the financial statements of both companies?
A
Any material income resulting from the liquidation of LIFO inventory
B
The amount of inventories recognized as an expense during the period
C
The circumstances that led to the reversal of a write down of inventories
B
The amount of inventories recognized as an expense during the period
Both US GAAP and IFRS require disclosure of the amount of inventories recognized as an expense during the period
70
Since it was founded 50 years ago, XYZ Corp. has not had to write down its inventories, nor has the company ever pledged its inventories as security for any of its liabilities. In its financial statements for the most recent year, the company disclosed its cost of goods sold (COGS), the total carrying amount of its inventories at fair value less cost to sell, as well as its chosen inventory valuation method. XYZ Corp. has most likely:
A
met the disclosure requirements under IFRS.
B
disclosed more information than required by IFRS.
C
failed to meet the disclosure requirements under IFRS.
C
failed to meet the disclosure requirements under IFRS.
International Financial Reporting Standards require companies to disclose the following information:
Which inventory valuation method has been used
Amount of inventories recognized as an expense (COGS)
Carrying amount of inventory at carried fair value less selling costs
Total carrying amount of inventories as well as the carrying amount in classifications (e.g., raw materials, work in progress)
Additional disclosures are required regarding write-downs and any inventories that have been pledged as security for liabilities
In this example, XYZ Corp. has not met the requirement to report separate amounts for different categories of inventory.
71
Which of the following statements is most accurate?
A
Inventory is recognized as an expense when goods are sold
B
Inventory is recognized as an expense at the time it is acquired
C
The timing of inventory expense recognition depends on which inventory valuation method is used
A
Inventory is recognized as an expense when goods are sold
72
LIFO reserve is most likely to increase when inventory unit:
A
costs are increasing.
B
costs are decreasing.
C
levels are decreasing.
A
costs are increasing.
LIFO reserve is the FIFO inventory value less the LIFO inventory value. In periods of rising inventory unit costs, the carrying amount of inventory under FIFO will always exceed the carrying amount of inventory under LIFO. The LIFO reserve may increase over time as a result of the increasing difference between the older costs used to value inventory under LIFO and the more recent costs used to value inventory under FIFO.
When inventory unit levels are decreasing, the company will experience a LIFO liquidation, reducing the LIFO reserve.
73
Carey Company adheres to US GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that:
A
Carey has reversed an inventory write-down.
B
Jonathan has reversed an inventory write-down.
C
Jonathan and Carey both use the FIFO inventory accounting method.
A
Carey has reversed an inventory write-down.
US GAAP do not permit inventory write-downs to be reversed.
74
According to IFRS, inventory write-downs must be recorded:
A
on the income statement for the period when the inventory is sold.
B
on the income statement for the period when the assessment is made.
C
directly on the balance sheet for the period when the assessment is made after bypassing the income statement.
B
on the income statement for the period when the assessment is made.
75
Valmore Mills manufactures forest products that are used in the construction of residential homes. The company's inventory currently has a net realizable value in excess of its historical cost. Valmore Mills would most likely be required to carry its inventories at cost under:
A
US GAAP only.
B
both IFRS and US GAAP.
C
neither IFRS nor US GAAP.
C
neither IFRS nor US GAAP.
For most companies that adhere to IFRS, inventories must be carried at the lower of cost or net realizable value. Producers of commodities such as agricultural goods, forest products, and minerals are exempt from this requirement and may measure their inventories at net realizable value even if this exceeds historical cost. US GAAP make similar allowances for these types of companies.
76
Under which of the following systems does current inventory most accurately represent replacement value?
A
Periodic LIFO
B
Perpetual LIFO
C
Perpetual FIFO
C
Perpetual FIFO
Under FIFO, the newest inventory purchases are left in the inventory account, as items from old purchases are sold first. The reported inventory carrying value will more accurately reflect replacement value than if the LIFO method (either periodic or perpetual) is used.
77
If inventory unit costs are increasing from period-to-period, a LIFO liquidation is most likely to result in an increase in:
A
gross profit.
B
LIFO reserve.
C
inventory carrying amounts.
A
gross profit.
When the number of units sold exceeds the number of units purchased, a company using LIFO will experience a LIFO liquidation. If inventory unit costs have been rising from period-to-period and a LIFO liquidation occurs, it will produce an increase in gross profit as a result of the lower inventory carrying amounts of the liquidated units (lower cost per unit of the liquidated units).
78
Which of the following statements is least accurate? During periods of rising costs, LIFO liquidations:
A
result in a higher gross profit margin.
B
result in a higher income tax expense.
C
occur due to rising inventory volumes.
C
occur due to rising inventory volumes.
LIFO liquidations occur when a firm’s inventory is declining because the number of units sold exceeds the number of units added to inventory. Relatively inexpensive older inventories are assumed to be sold, leading to a one-time increase in profits and income taxes.
79
Observing that a company recorded an impairment loss on a manufacturing plant, which reduced its carrying by 10 percent, an analyst comments: "The company's impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities.”
This comment is most likely incorrect with respect to the impact on the company's:
A
debt to total assets.
B
fixed asset turnover.
C
cash flow from operating activities.
C
cash flow from operating activities.
80
Which of the following assets is most likely to be amortized?
A
Goodwill
B
Machinery with a 5-year expected useful life
C
A purchased patent, set to expire in 10 years
C
A purchased patent, set to expire in 10 years
To be amortized, assets must have the following attributes:
Long-term
Intangible
Finite life
Goodwill is an intangible asset with an infinite lifetime. Rather than being amortized, it is tested annually for impairment.
Tangible assets, such as machinery, are depreciated rather than amortized. Conceptually, depreciation and amortization are essentially the same. The main distinction is that depreciation applies to tangible assets and amoriztation is used to expense the cost of intangible assets.
81
82
Executives of a company that is deciding whether to classify a newly-acquired building as property, plant, and equipment (PP&E) or an investment property are considering the following factors:
Factor 1: How long the company expects to use the building
Factor 2: How the company expects to use the building
Factor 3: How much the company paid for the building
Which of these factors are most likely relevant to the company's decision?
A
Factor 2 only
B
Factors 1 and 2 only
C
Factors 2 and 3 only
A
Factor 2 only
83
84
All else equal, capitalizing expenses rather than expensing them will most likely:
A
increase total asset turnover.
B
reduce net cash flow from operating activities.
C
increase cash outflows from investing activities.
C
increase cash outflows from investing activities.
85
Which of the following statements is most accurate? Under US GAAP, an impairment loss:
A
may only be reversed for assets held for sale.
B
may not be reversed under any circumstances.
C
may be reversed for both assets held for sale and assets held for use.
A
may only be reversed for assets held for sale.
Under US GAAP, impairment losses attributable to assets held for use cannot be reversed. However, reversals of impairment losses attributable to assets held for sale are permitted.
86
Which of the following statements is most accurate? The revaluation model may only be used for:
A
tangible assets.
B
non-operating assets.
C
assets that have a readily identifiable fair value.
C
assets that have a readily identifiable fair value.
87
Which of the following statements is most accurate?
A
IFRS permit the revaluation model to be used for tangible assets, but not for intangible assets
B
If the revaluation model is chosen for an asset class under IFRS, this model must be applied to all assets within that asset class
C
If a company chooses to use the revaluation model for one asset class, IFRS require the use of this model for all of its asset classes
B
If the revaluation model is chosen for an asset class under IFRS, this model must be applied to all assets within that asset class
88
When constructing an asset for sale, directly related borrowing costs are most likely:
A
expensed as incurred.
B
capitalized as part of inventory.
C
capitalized as part of property, plant, and equipment.
B
capitalized as part of inventory.
89
A transportation company has agreed to exchange ten vehicles from its current fleet for eight new vehicles in six months. The company is not able to estimate a fair value of the ten vehicles to be exchanged but is carrying them at $1.5 million total. Each of the new vehicles to be acquired in the trade has a fair value of $200,000. As a result of agreeing to this transaction, the company will most likely:
A
immediately record a loss of $100,000.
B
immediately record a gain of $100,000.
C
record a gain of $100,000 in six months.
C
record a gain of $100,000 in six months.
Long-lived assets that are to be exchanged for other assets are reclassified as held for use until the actual exchange occurs. Companies must continue to assess assets that they have classified as held for use for signs of impairment, just as they would for other long-lived assets being carried at amounts greater than zero.
90
Under the revaluation model for property, plant, and equipment and the fair model for investment property:
A
fair value of the asset must be able to be measured reliably.
B
net income is affected by all changes in the fair value of the asset.
C
net income is never affected if the asset increases in value from its carrying amount.
A
fair value of the asset must be able to be measured reliably.
91
Observing that a company revalued a manufacturing plant, which increased its reported carrying amount by 15 percent after there had been no previous downward revaluation of the plant, an analyst comments: “The company’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.”
This comment is most likely correct with respect to the impact on the company's:
A
return on equity.
B
return on assets.
C
debt to capital ratio.
A
return on equity.
92
Under IFRS, what must be disclosed under the cost model of valuation for investment properties?
A
Useful lives
B
The method for determining fair value
C
Reconciliation between beginning and ending carrying amounts of investment property
A
Useful lives
Under IFRS, when using the cost model for its investment properties, a company must disclose useful lives
93
A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record:
A
a deferred tax asset.
B
a deferred tax liability.
C
no deferred tax asset or liability.
B
a deferred tax liability.
94
Which of the following statements is most accurate? Under IFRS, a deferred tax asset:
A
must be classified as a current asset.
B
must be classified as a noncurrent asset.
C
may be classified as either a current asset or a noncurrent asset.
B
must be classified as a noncurrent asset.
95
When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record:
A
a deferred tax asset.
B
a deferred tax liability.
C
no deferred tax asset or liability.
A
a deferred tax asset.
The capitalization will result in an asset with a positive tax base and zero carrying value. The amortization means the difference is temporary. Because there is a temporary difference on an asset resulting in a higher tax base than carrying value, a deferred tax asset is created.
96
A company that has reported deferred tax assets in previous years records an increase to its valuation allowance in its latest financial statements. The most likely explanation for the use of this increase is that the company expects future taxable income to:
A
be higher than previously forecast.
B
offset the previously reported amount of its deferred tax asset.
C
be insufficient to utilize the previously reported amount of its deferred tax asset.
C
be insufficient to utilize the previously reported amount of its deferred tax asset.
A company reports a large amount of valuation allowance in its financial statements. The most likely implication of this valuation allowance in relation to future earnings prospects of the company is that the company does not expect to generate enough taxable profits to utilize the deferred tax assets.
97
Which of the following is most likely required for a deferred tax asset to be recognized with regard to a subsidiary of a parent company?
A
There is a probability the temporary difference will not reverse in the future
B
There are sufficient taxable profits against which the temporary difference can be used
C
The parent company is able to control the timing of the reversal of a temporary difference
B
There are sufficient taxable profits against which the temporary difference can be used
Deferred tax assets related to subsidiaries, branches, associates, and interests in joint ventures will only be recognized if both of the following conditions are met:
The temporary difference will reverse in the future
There are sufficient taxable profits against which the temporary difference can be used
98
Zimt AG presents its financial statements in accordance with US GAAP. In Year 3, Zimt discloses a valuation allowance of $1,101 against total deferred tax assets of $19,201. In Year 2, Zimt disclosed a valuation allowance of $1,325 against total deferred tax assets of $17,325. The change in the valuation allowance most likely indicates that Zimt’s:
A
deferred tax liabilities were reduced in Year 3.
B
expectations of future earning power has increased.
C
expectations of future earning power has decreased.
B
expectations of future earning power has increased.
The valuation allowance is taken against deferred tax assets to represent uncertainty that future taxable income will be sufficient to fully utilize the assets. By decreasing the allowance, Zimt is signaling greater likelihood that future earnings will be offset by the deferred tax asset.
99
When accounting standards require recognition of an expense that is not permitted under tax laws, the result is a:
A
deferred tax liability.
B
temporary difference.
C
permanent difference.
C
permanent difference.
100
Which of the following statements is most accurate? The carrying amount of a deferred tax asset:
A
must be stated in present value terms.
B
may change as a result of a reassessment of its recoverability.
C
will not change in the absence of changes in the amount of taxable temporary differences.
B
may change as a result of a reassessment of its recoverability.
101
When both the timing and amount of tax payments are uncertain, analysts should treat deferred tax liabilities as:
A
equity.
B
liabilities.
C
neither liabilities nor equity.
C
neither liabilities nor equity.
The deferred tax liability should be excluded from both debt and equity when both the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain.
102
Berkley Manufacturing collected $2.3 million in cash from a tenant renting one of its unused facilities. The company recognizes this as deferred revenue for accounting purposes and pays taxes based on the cash payment. This will most likely result in Berkley recording:
A
a deferred tax asset.
B
a deferred tax liability.
C
neither a deferred tax asset nor a deferred tax liability.
A
a deferred tax asset.
Because the rent received in advance is taxed on a cash basis, Berkley must include this in taxable income for the financial year received.
103
Analysts should treat deferred tax liabilities that are expected to reverse as:
A
equity.
B
liabilities.
C
neither liabilities nor equity.
B
liabilities.
104
Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a:
A
valuation allowance.
B
deferred tax asset.
C
temporary difference.
C
temporary difference.
105
A company has reported a significant deferred tax liability on its balance sheet. An analyst who expects the company to report negative net income for the foreseeable future will most likely treat the deferred tax liability as which of the following when calculating its debt-to-equity ratio?
A
Debt
B
Equity
C
An asset
B
Equity
Deferred tax liabilities are temporary accounts created due to differences between the tax obligations determined for financial reporting purposes and actual taxes paid. It is expected that companies will eventually eliminate these temporary accounts as they pay taxes on future reported net income. However, when a company is not expected to be profitable, there is no expectation of future tax payments and therefore the value of its deferred tax liability can be treated as equity for the purpose of calculating its debt-to-equity ratio.
106
Which of the following will most likely result in the creation of a deferred tax liability?
A
Taxable temporary differences only
B
Deductible temporary differences only
C
Both taxable temporary differences and deductible temporary differences
A
Taxable temporary differences only
Taxable temporary differences are created when either:
--> The carrying amount of an asset exceeds its tax base
--> The carrying amount of a liability is less than its tax base
A liability, which is temporarily recorded on the company's balance sheet, must be settled in a future period.
107
Deferred tax liabilities should be treated as equity when:
A
they are not expected to reverse.
B
the timing of tax payments is uncertain.
C
the amount of tax payments is uncertain.
A
they are not expected to reverse.
108
When certain expenditures result in tax credits that directly reduce taxes, the company will most likely record:
A
a deferred tax asset.
B
a deferred tax liability.
C
no deferred tax asset or liability.
C
no deferred tax asset or liability.
Tax credits that directly reduce taxes are a permanent difference, and permanent differences do not give rise to deferred tax.
109
A company has reported a significant deferred tax liability on its balance sheet. An analyst who expects the company to report negative net income for the foreseeable future will most likely treat the deferred tax liability as which of the following when calculating its debt-to-equity ratio?
A
Debt
B
Equity
C
An asset
B
Equity
Deferred tax liabilities are temporary accounts created due to differences between the tax obligations determined for financial reporting purposes and actual taxes paid. It is expected that companies will eventually eliminate these temporary accounts as they pay taxes on future reported net income. However, when a company is not expected to be profitable, there is no expectation of future tax payments and therefore the value of its deferred tax liability can be treated as equity for the purpose of calculating its debt-to-equity ratio.
110
Penben Corporation has a defined benefit pension plan. At 31 December, its pension obligation is €10 million and pension assets are €9 million. Under either IFRS or US GAAP, the reporting on the balance sheet would be closest to which of the following?
A
€10 million is shown as a liability, and €9 million appears as an asset.
B
€1 million is shown as a net pension obligation.
C
Pension assets and obligations are not required to be shown on the balance sheet but only disclosed in footnotes.
B
€1 million is shown as a net pension obligation.
111
Under IFRS, a transaction that requires the leased asset to be recorded on the lessor's balance sheet is most likely:
A
a finance lease.
B
an operating lease.
C
either a finance lease or a sales-type lease.
B
an operating lease.
A lessor will retain the asset on its balance sheet if the transaction is structured as an operating lease. For a finance lease, the asset is derecognized by the lessor and transferred to the lessee's balance sheet. Under IFRS, there is no separate classification of sales-type leases.
112
Beginning with fiscal year 2019, for leases with a term longer than one year, lessees report a right-to-use asset and a lease liability on the balance sheet:
A
only for finance leases.
B
only for operating leases.
C
for both finance and operating leases.
C
for both finance and operating leases.
113
Triton Mechanics is a major supplier of auto parts. If the company has a debt-to-capital ratio of 0.35, its debt-to-assets ratio is most likely:
A
less than 0.35.
B
equal to 0.35.
C
greater than 0.35.
A
less than 0.35.
114
Under US GAAP, a lessor’s reported revenues at lease inception will be highest if the lease is classified as:
A
a sales-type lease.
B
an operating lease.
C
a direct financing lease.
A
a sales-type lease.
A sales-type lease treats the lease as a sale of the asset, and revenue is recorded at the time of sale equal to the value of the leased asset.
115
An automobile manufacturer provides a defined-benefit pension plan to all of its employees. The company will most likely include pension costs attributable to its assembly line workers in which of the following categories on its income statement?
A
Cost of goods sold
B
Salaries and wages
C
Administrative expenses
A
Cost of goods sold
A manufacturing firm will count pension expenses attributable to production workers (as well as their salaries and other forms of compensation) toward inventory. This amount appears on the income statement as part of cost of goods sold as sales are recognized. Expenses incurred as compensation for employees who are not directly involved in the production process will be included with salaries or other administrative expenses.
116
The management of Bank EZ repurchases its own bonds in the open market. They pay €6.5 million for bonds with a face value of €10.0 million and a carrying value of €9.8 million. The bank will most likely report:
other comprehensive income of €3.3 million.
B
other comprehensive income of €3.5 million.
C
a gain of €3.3 million on the income statement.
C
a gain of €3.3 million on the income statement.
117
For a bond issued at a premium, using the effective interest rate method, the:
A
carrying amount increases each year.
B
amortization of the premium increases each year.
C
premium is evenly amortized over the life of the bond.
B
amortization of the premium increases each year.
The amortization of the premium equals the interest payment minus the interest expense. The interest payment is constant and the interest expense decreases as the carrying amount decreases. As a result, the amortization of the premium increases each year.
118
Which of the following statements about a defined-benefit pension plan is least accurate?
A
The sponsor promises to make periodic payments to participants after retirement
B
If the plan is underfunded, a net pension liability will be recorded on the sponsor’s balance sheet
C
The value of benefits received by participants depends on the performance of the plan’s assets
C
The value of benefits received by participants depends on the performance of the plan’s assets
119
Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other costs associated with its recent bond issue. It is most likely to record these costs on its financial statements as:
A
an asset under US GAAP and reduction of the carrying value of the debt under IFRS.
B
a liability under US GAAP and reduction of the carrying value of the debt under IFRS.
C
a cash outflow from investing activities under both US GAAP and IFRS.
Under US GAAP, expenses incurred when issuing bonds are generally recorded as an asset and amortised to the related expense (legal, etc.) over the life of the bonds.
120
Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely:
A
rise as the maturity date approaches.
B
decline as the maturity date approaches.
C
remain constant throughout the life of the bond.
A
rise as the maturity date approaches.
The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases. Higher relative debt and lower relative equity (through retained earnings) will cause the debt-to-equity ratio to increase as the zero-coupon bonds approach maturity.
121
According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company’s financial statements and footnotes except for:
A
fair value.
B
impairment loss.
C
amortization rate.
A
fair value.
IFRS do not require fair value of intangible assets to be disclosed.
122
All else equal, capitalizing expenses rather than expensing them will most likely:
A
increase total asset turnover.
B
reduce net cash flow from operating activities.
C
increase cash outflows from investing activities.
C
increase cash outflows from investing activities.
if costs were expensed, they would be recognized as an operating cash outflow. By capitalizing these costs, net cash flows from operating activities and cash outflows from investing activities are both increased.
Total asset turnover equals revenues divided by assets. Capitalizing an expenditure results in an increase in non-current assets. An increase in non-current assets leads to a decrease in the total asset turnover ratio.
123
Observing that a company has capitalised the interest costs associated with the construction of new manufacturing plants, an analyst comments: "The company's decision to capitalise its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio.”
This comment is most likely correct with respect to the:
A
interest coverage ratio.
B
fixed asset turnover ratio.
C
interest coverage and fixed asset turnover ratios.
B
fixed asset turnover ratio.
Alpha’s fixed asset turnover will be lower because the capitalised interest will appear on the balance sheet as part of the asset being constructed. Therefore, fixed assets will be higher and the fixed asset turnover ratio (total revenue/average net fixed assets) will be lower than if it had expensed these costs. Capitalised interest appears on the balance sheet as part of the asset being constructed instead of being reported as interest expense in the period incurred. However, the interest coverage ratio should be based on interest payments, not interest expense (earnings before interest and taxes/interest payments), and should be unchanged. To provide a true picture of a company’s interest coverage, the entire amount of interest expenditure, both the capitalised portion and the expensed portion, should be used in calculating interest coverage ratios.
124
A company reports in the notes to its 2022 financial statements that it uses the straight-line method of depreciation for both financial and tax reporting purposes to account for plant and equipment. What would be the most likely effect in 2023 if the company were to switch to an accelerated depreciation method for both financial and tax reporting?
A
Net profit margin would increase.
B
Total asset turnover would decrease.
C
Cash flow from operating activities would increase.
C
Cash flow from operating activities would increase.
125
n 2022, a company spent significant amounts on track replacement and similar improvements. The company expensed rather than capitalized a significant proportion of these expenditures. Which of the following is the most likely effect of management’s decision to expense rather than capitalise these expenditures?
A
2022 net profit margin is higher than if the expenditures had been capitalised.
B
2022 total asset turnover is lower than if the expenditures had been capitalised.
C
Future profit growth will be higher than if the expenditures had been capitalised.
C
Future profit growth will be higher than if the expenditures had been capitalised.
126
Which of the following statements is most accurate? Under US GAAP, an impairment loss:
A
may only be reversed for assets held for sale.
B
may not be reversed under any circumstances.
C
may be reversed for both assets held for sale and assets held for use.
A
may only be reversed for assets held for sale.
127
Under the revaluation model for property, plant, and equipment and the fair model for investment property:
A
fair value of the asset must be able to be measured reliably.
B
net income is affected by all changes in the fair value of the asset.
C
net income is never affected if the asset increases in value from its carrying amount.
A
fair value of the asset must be able to be measured reliably.
128
Which of the following assets is most likely to be amortized?
A
Goodwill
B
Machinery with a 5-year expected useful life
C
A purchased patent, set to expire in 10 years
C
A purchased patent, set to expire in 10 years
129
Which of the following is a required financial statement disclosure for long-lived intangible assets under US GAAP?
A
The useful lives of assets
B
The reversal of impairment losses
C
Estimated amortization expense for the next five fiscal years
C
Estimated amortization expense for the next five fiscal years
130
When constructing an asset for sale, directly related borrowing costs are most likely:
A
expensed as incurred.
B
capitalized as part of inventory.
C
capitalized as part of property, plant, and equipment.
B
capitalized as part of inventory.
When a company constructs an asset, borrowing costs incurred directly related to the construction are generally capitalized. If the asset is constructed for sale, the borrowing costs are classified as inventory.
131
Observing that a company recorded an impairment loss on a manufacturing plant, which reduced its carrying by 10 percent, an analyst comments: "The company's impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities.”
This comment is most likely incorrect with respect to the impact on the company's:
A
debt to total assets.
B
fixed asset turnover.
C
cash flow from operating activities.
C
cash flow from operating activities.
The impairment loss is a non-cash charge and will not affect cash flow from operating activities. The debt to total assets and fixed asset turnover ratios will increase, because the impairment loss will reduce the carrying amount of fixed assets and therefore total assets.
132
Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the carrying amount over the asset’s:
A
fair value.
B
recoverable amount.
C
undiscounted expected future cash flows.
B
recoverable amount.
