Reading 28: Integration of Financial Statement Analysis Techn methods, statements, accounting, class

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Session 7: Financial Reporting and Analysis: Earnings Quality Issues and Financial Ratio Analysis
Reading 28: Integration of Financial Statement Analysis Techniques

LOS d: Predict the impact on financial statements and ratios, given a change in accounting rules, methods, or assumptions.

 

 

Due to a change in accounting standards, TRK Construction’s QSPE must now be consolidated. Assume the current ratio before consolidation is 1.10. Consolidation will most likely result in which of the following:

A) a decrease in the current ratio.

B) an increase in the current ratio.

C) no change in the current ratio.

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The correct treatment for consolidation of the QSPE would be an increase in assets and in liabilities by the same amount. If the current ratio is greater than one, consolidation would decrease the current ratio.

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Assume that inventory costs are increasing in line with an overall inflation rate of 3 percent. If a firm reports inventory using the last in, first out (LIFO) method, which of the following is most accurate?

A) The less expensive inventory is flowing out to COGS.

B) LIFO reserve measures the accumulation of taxes paid.

C) Lower profits and lower taxes are reported because new inventory is flowing out to COGS.

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LIFO firm reports lower profits and lower taxes because all of the new, mores expensive inventory is flowing out to COGS thus, LIFO reserve measures the accumulation of taxes not paid and profits not recognized.