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标题: Financial Reporting and Analysis 【Reading 30】Sample [打印本页]
作者: kim226    时间: 2012-3-27 13:59     标题: [2012 L1] Financial Reporting and Analysis 【Session 9 - Reading 30】Sample

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.


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.
作者: kim226    时间: 2012-3-27 14:00

Which of the following statements regarding capitalizing versus expensing costs is least accurate?
A)
Capitalization results in higher profitability initially.
B)
Total cash flow is higher with capitalization than expensing.
C)
Cash flow from investing is higher with expensing than with capitalization.


Total cash flow is higher with capitalization than expensing is least accurate because total cash flow would be the same under both methods, not considering tax implications.
作者: kim226    时间: 2012-3-27 14:00

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


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.
作者: kim226    时间: 2012-3-27 14:00

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


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.
作者: kim226    时间: 2012-3-27 14:01

Capitalized interest costs are typically reported in the cash flow statement as an outflow from:
A)
investing.
B)
operating.
C)
financing.


Capitalized interest costs are reported as CFI on the statement of cash flows, as they are treated as part of the cost of the constructed capital asset.
作者: kim226    时间: 2012-3-27 14:01

Dobkin Company decides to expense costs that it would have otherwise capitalized. Compared to capitalizing, expensing these costs will result in:
A)
lower asset levels and lower equity levels.
B)
lower asset levels and higher equity levels.
C)
lower asset levels and lower liability levels.


Expensing instead of capitalizing results in lower assets. Since the entire expense is recognized in the current period (whereas only a portion of the expenditure is amortized when capitalizing), net income (and therefore equity, via retained earnings) is lower with expensing than with capitalizing. Liabilities are unaffected.
作者: kim226    时间: 2012-3-27 14:01

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.


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.
作者: kim226    时间: 2012-3-27 14:02

Which of the following items is least likely an example of an intangible asset with an indefinite life?
A)
Goodwill.
B)
Acquired patents.
C)
Trademarks that can be renewed at minimal cost.


Acquired patents are most likely purchased with the intent to use over a specific period of time and therefore would be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with an indefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with infinite lives.
作者: karoliukas    时间: 2012-3-27 14:03

During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was €10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the purchase price. According to International Financial Reporting Standards, should Big 4 recognize an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its balance sheet due to the acquisition?
Extraordinary loss Negative goodwill
A)
No No
B)
Yes No
C)
No Yes


IFRS does not permit income statement items to be recognized as “extraordinary” in the income statement. Negative goodwill is not reported on the balance sheet; rather, the excess of fair value over the price paid in an acquisition is recognized as a gain in the income statement.
作者: karoliukas    时间: 2012-3-27 14:03

Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use:
A)
accelerated depreciation methods will decrease the amount of taxes in early years.
B)
the units-of-production method to depreciate assets will overstate income during periods of low production.
C)
accelerated depreciation methods will increase the total amount of depreciation expense over the life of an asset.


Accelerated depreciation methods will not change the total amount of depreciation expense over the life of an asset. Accelerated depreciation methods will increase the amount of depreciation expense in the early years of the asset’s life, but the depreciation expense will be less in the latter years of the asset’s life.
作者: karoliukas    时间: 2012-3-27 14:04

A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company’s:
A)
total assets on the balance sheet.
B)
fixed asset turnover ratio.
C)
net income/sales ratio.


The use of an accelerated depreciation method will increase depreciation expenses early in the asset’s life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed assets) will increase, because the book value of the fixed assets will be lower.
作者: karoliukas    时间: 2012-3-27 14:04

Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery?
A)
Historically, economic depreciation was overstated.
B)
Lakeside Co. will owe back taxes.
C)
Historically, economic depreciation was understated.


Historically, economic depreciation was understated. If an asset becomes obsolete and its useful life is less than expected, accounting methods for depreciation have understated the economic depreciation. In addition, if there is no salvage value when positive salvage value was expected, the understatement problem is compounded.
作者: karoliukas    时间: 2012-3-27 14:04

Novak, Inc. owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvage value of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is:
A)
$2,200.
B)
$2,880.
C)
$3,000.


DDB depreciation in each year is 2/5 of the carrying value at the beginning of the year, until the carrying value reaches the estimated salvage value.Year 1 DDB depreciation = $20,000 × 2/5 = $8,000
Carrying value = $20,000 – $8,000 = $12,000 Year 2 DDB depreciation = $12,000 × 2/5 = $4,800
Carrying value = $12,000 – $4,800 = $7,200 Year 3 DDB depreciation = $7,200 × 2/5 = $2,880
Because $7,200 – $2,880 = $4,320 would depreciate the equipment below its salvage value, depreciation in Year 3 is limited to $7,200 – $5,000 = $2,200.
作者: karoliukas    时间: 2012-3-27 14:05

Czernezyk Company buys a delivery vehicle for €60,000. Czernezyk expects to drive the vehicle 400,000 kilometers over 4 years, at the end of which the firm expects to be able to sell the vehicle for €10,000. At the end of Year 2, the vehicle has been driven 250,000 kilometers. If Czernezyk depreciates the vehicle by the units of production method, its carrying value at the end of Year 2 is:
A)
€28,750.
B)
€15,000.
C)
€31,250.


Depreciation per unit of production = (€60,000 – €10,000) / 400,000 km = €0.125 per kilometer. Through year 2, depreciation expense = €0.125 × 250,000 = €31,250. Carrying value at the end of Year 2 = €60,000 – €31,250 = €28,750.
作者: karoliukas    时间: 2012-3-27 14:05

Component depreciation is required under:
A)
IFRS, but not U.S. GAAP.
B)
both IFRS and U.S. GAAP.
C)
U.S. GAAP, but not IFRS.


IFRS requires firms to use component depreciation, which refers to depreciating the identifiable components of an asset separately. U.S. GAAP permits component depreciation but does not require it.
作者: karoliukas    时间: 2012-3-27 14:05

This information pertains to equipment owned by Brigade Company. The accumulated depreciation at the end of year 3 is:
A)
$1,600.
B)
$4,800.
C)
$5,200.


Accumulated depreciation at the end of year 3 = [($10,000 − $2,000) / 5] × 3 = $4,800
作者: karoliukas    时间: 2012-3-27 14:06

JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006?
A)
$6,000.
B)
$15,000.
C)
$12,000.


first two years = (60,000 − 0) / 10 =  6,000 per year
yr. 2006 = (60,000 − 12,000 − 3,000) / 3  = 15,000
作者: karoliukas    时间: 2012-3-27 14:06

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

Year

2 / Depreciable Life

× Book Value at
Beginning of the Year

= Depreciation

1

0.2857

250,000

71,429

2

0.2857

178,571

51,020

作者: karoliukas    时间: 2012-3-27 14:06

Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500. Its salvage value is estimated at $500.What is the depreciation expense for the second year, assuming Slovac uses the double-declining balance method of depreciation?
A)
$1,406.
B)
$1,438.
C)
$1,875.


double-declining balance depreciation rate = 2 × 1/8 = ¼ or 25%
first year deprecation will be $7,500 × 0.25 = $1,875
second year deprecation will be ($7,500 − $1,875) × 0.25 = $1,406
作者: karoliukas    时间: 2012-3-27 14:07

On January 1, 2004, JME purchased a truck that cost $24,000. The truck had an estimated useful life of 5 years and $4,000 salvage value. The amount of depreciation expense recognized in 2006 assuming that JME uses the double declining balance method is:
A)
$3,456.
B)
$5,760.
C)
$4,000.


yr. 2004 = 24,000 × 2/5 = 9,600
yr. 2005 = (24,000 − 9,600) × 2/5 = 5,760
yr. 2006 = (24,000 − 9,600 − 5,760) × 2/5 = 3,456
作者: karoliukas    时间: 2012-3-27 14:07

Allocating an intangible asset’s cost to the income statement over time is known as:
A)
depreciation.
B)
depletion.
C)
amortization.


Allocating an intangible asset’s cost to the income statement over time is known as amortization. The same process is known as depreciation for tangible assets. For natural resources, allocation of cost to the income statement over time is commonly referred to as depletion.
作者: karoliukas    时间: 2012-3-27 14:07

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


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.
作者: karoliukas    时间: 2012-3-27 14:08

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


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.
作者: karoliukas    时间: 2012-3-27 14:08

Schubert, Inc. acquires 100% of another firm. As a result of the acquisition, Schubert reports on its balance sheet 1) a patent with five years remaining and a carrying value of $2 million and 2) goodwill with a carrying value of $4 million. Using the straight-line method, total amortization expense in the first year for these two intangible assets is:
A)
$800,000.
B)
$1,200,000.
C)
$400,000.


Amortization expense for the patent is $2 million / 5 = $400,000. Goodwill is an intangible asset with an indefinite life and is not amortized.
作者: karoliukas    时间: 2012-3-27 14:08

Davis Inc. is a large manufacturing company operating in several European countries. Davis 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 by in independent appraisal to be $690 million. Which of the following entries may Davis record under IFRS?
A)
$90 million gain on income statement.
B)
$80 million gain on income statement and a $10 million revaluation surplus.
C)
$90 million revaluation surplus.


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 ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss). 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 impairment loss that was previously recognized. The remaining $10 million is recorded as a revaluation surplus in shareholders' equity.
作者: karoliukas    时间: 2012-3-27 14:09

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 leverage ratios.


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. 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. Leverage 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 leverage ratios.
作者: karoliukas    时间: 2012-3-27 14:09

Which of the following statements about accounting treatments under IFRS and U.S. GAAP are most accurate regarding the periodic valuation of identifiable intangible assets and marketable securities classified as available for sale, respectively?
Identifiable intangible assets Available-for-sale securities
A)
U.S. GAAP permits upward revaluation Carried at market value
B)
U.S. GAAP permits upward revaluation Carried at amortized cost
C)
IFRS permits upward revaluation Carried at market value


Under IFRS and U.S. GAAP, identifiable intangible assets are reported on the balance sheet at their cost less accumulated amortization. However, a significant difference is that U.S. GAAP does not permit upward revaluations of intangible assets.
The accounting treatment for available-for-sale securities is the same under IFRS and U.S. GAAP. These securities are carried on the balance sheet at their fair market values. Unrealized gains and losses are not recognized on the income statement, but are included in other comprehensive income.
作者: karoliukas    时间: 2012-3-27 14:09

On January 1, 2004, Cayman Corporation bought manufacturing equipment for $30 million. On December 31, 2006, Cayman determined the equipment was impaired and recognized a $5 million impairment loss in its income statement. As of December 31, 2007, the fair value of the equipment exceeded the book value by $7 million. What amount of the recovery in value can Cayman recognize in its 2007 income statement under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and under International Financial Reporting Standards (IFRS)?
U.S. GAAP IFRS
A)
$0 $7 million
B)
$0 $5 million
C)
$5 million $7 million


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. Otherwise, the increase in value is reported as an adjustment to equity. Thus, under IFRS, $5 million will be reported in 2007 net income and $2 million will be directly added to to equity (as an adjustment to equity).
作者: karoliukas    时间: 2012-3-27 14:10

Three years ago, Ranchero Corporation purchased a patent for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the patent was greater than its book value. No impairment losses have been recognized on the patent. 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 patent on the balance sheet at fair value?
A)
Only one will increase.
B)
Both will decrease.
C)
Both will increase.


Increasing the value of the patent on the balance sheet will increase assets and thus decrease the total asset turnover ratio (higher denominator). Increasing the value of the patent 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 patent is not recognized in the income statement unless it is reversing a previously recognized write-down.
作者: karoliukas    时间: 2012-3-27 14:10

As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate?
A)
The write-downs are reported as a component of income from continuing operations.
B)
Write-downs taken on asset values can be reversed in later years if market conditions improve.
C)
During the year of the write-downs, retained earnings and deferred taxes will decrease.


Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.
作者: karoliukas    时间: 2012-3-27 14:10

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)
no change to Marcel’s financial statements.
B)
a $90 million gain in other comprehensive income.
C)
an $80 million gain on income statement and $10 million gain in other comprehensive income.


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.
作者: karoliukas    时间: 2012-3-27 14:11

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


An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.
作者: karoliukas    时间: 2012-3-27 14:11

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



An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.
作者: karoliukas    时间: 2012-3-27 14:12

An analyst determined the following information concerning Franklin, Inc.’s stamping machine:
The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. Under U.S. GAAP, the stamping machine is:
A)
not impaired.
B)
impaired because its carrying value exceeds expected future cash flows.
C)
impaired because expected salvage value has declined.


The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired.
作者: karoliukas    时间: 2012-3-27 14:12

Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The original cost of the machinery was $500,000 and to date has generated accumulated depreciation of $140,000. Which of the following must Spenser record on the income statement if it decides to abandon the asset?
A)
Gain of $40,000.
B)
Loss of $100,000.
C)
Loss of $360,000.


With an abandonment of an asset, the carrying value of the machinery is removed from the balance sheet and a loss of that amount is recognized in the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000).
作者: karoliukas    时间: 2012-3-27 14:12

Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000?
A)
Gain of $40,000.
B)
Loss of $100,000.
C)
Loss of $360,000.


With a sale of an asset to a third party, the difference between the proceeds and carrying value is reported as a gain or loss on the income statement. The carrying value is $360,000, which equals the original cost ($500,000) less the accumulated depreciation ($140,000). Therefore, the gain is equal to $40,000 ($400,000 proceeds less $360,000 carrying value).
作者: karoliukas    时间: 2012-3-27 14:12

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


Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.
作者: karoliukas    时间: 2012-3-27 14:13

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)
Both of these items are required to be disclosed.
B)
Neither of these items is required to be disclosed.
C)
Only one of these items is required to be disclosed.


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.
作者: karoliukas    时间: 2012-3-27 14:13

A building owned by a firm is most likely to be classified as investment property if:
A)
space in the building is rented to other firms.
B)
the firm uses the building for its corporate headquarters.
C)
the building is a manufacturing plant or distribution center.


Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capital appreciation, or both.
作者: terpsichorefan    时间: 2013-4-9 21:32

thanks for sharing



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