Q1. For firms that expense rather than capitalize costs, which of the following statements is least accurate?

A)   Net cash flows are the same regardless of which method is used.

B)   Higher debt/equity and debt/assets will occur because of lower asset and equity levels.

C)   Lower ROA and ROE will occur because of higher asset and equity levels in the early years.

Q2. Meyer Investment Advisory and Smith Brothers Investments are operationally identical except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is likely to have:

A)   higher debt/equity ratio and higher debt/assets ratio.

B)   higher cash flows from operations and lower cash flow from investing.

C)   lower profitability (ROA & ROE) in early years and higher in later years.

Q3. The management of Berger Investments has changed their policy and will capitalize some costs instead of expensing them. Due to the new policy, Berger will:

A)   report a smooth income pattern initially, but income variability will increase over time.

B)   have smoother reported income over time.

C)   have lower income variability as it grows, but the variability will increase as the firm matures.

Q4. Which of the following statements regarding firms that capitalize versus expense costs is least accurate?

A)   Marketing costs related directly to sales are capitalized.

B)   Cash flow from financing is the same whether costs are capitalized or expensed.

C)   Firms that capitalize costs initially have lower profitability ratios compared to expensing firms.

Q5. When comparing capitalizing versus expensing costs which of the following statements is most accurate?

A)   Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.

B)   Expensing costs creates lower 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.

Q6. Compared to firms that expense costs, firms that capitalize expenses will have:

A)   higher leverage ratios.

B)   lower income variablity.

C)   lower cash flow from operations.

答案和详解如下：

Q1. For firms that expense rather than capitalize costs, which of the following statements is least accurate?

A)   Net cash flows are the same regardless of which method is used.

B)   Higher debt/equity and debt/assets will occur because of lower asset and equity levels.

C)   Lower ROA and ROE will occur because of higher asset and equity levels in the early years.

Correct answer is C)

Firms that expense costs versus capitalize costs, they will have a lower ROE and ROA in early years because of lower profits and not due to higher assets and equity levels (actually the assets and equity are lower due to expensing the costs).

Q2. Meyer Investment Advisory and Smith Brothers Investments are operationally identical except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is likely to have:

A)   higher debt/equity ratio and higher debt/assets ratio.

B)   higher cash flows from operations and lower cash flow from investing.

C)   lower profitability (ROA & ROE) in early years and higher in later years.

Correct answer is B)

The net cash flow remains the same regardless of which accounting method is used. But components of cash flows change and cash flows from operations (CFO) will be higher when costs are capitalized and lower when expensed. On the other hand, cash flows from investing (CFI) will be lower when costs are capitalized and higher when expensed. Compared to firms expensing costs, firms that capitalize costs will have smaller debt to equity ratios and higher initial ROAs, but lower ROAs in the future.

Q3. The management of Berger Investments has changed their policy and will capitalize some costs instead of expensing them. Due to the new policy, Berger will:

A)   report a smooth income pattern initially, but income variability will increase over time.

B)   have smoother reported income over time.

C)   have lower income variability as it grows, but the variability will increase as the firm matures.

Correct answer is B)

If management decides to capitalize costs instead of expensing them, it will report smoother reported income over time. If the firm decided to expense costs as incurred, it will have greater variability in reported income. This variability declines as the firm matures and is lower for larger firms.

Q4. Which of the following statements regarding firms that capitalize versus expense costs is least accurate?

A)   Marketing costs related directly to sales are capitalized.

B)   Cash flow from financing is the same whether costs are capitalized or expensed.

C)   Firms that capitalize costs initially have lower profitability ratios compared to expensing firms.

Correct answer is C)         

In the early years, firms that expense costs will have lower profitability ratios such as return on assets (ROA) and return on equity (ROE). In later years as growth subsides, expensing firms will have lower asset and equity balances and hence higher profitability measures such as ROA and ROE.

Marketing costs that are NOT directly related to sales are expensed when incurred but marketing costs directly related to sales are capitalized.

Cash flow from financing is not affected by the expensing or capitalizing decision only cash flow from operations and cash flow from investing.

Q5. When comparing capitalizing versus expensing costs which of the following statements is most accurate?

A)   Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.

B)   Expensing costs creates lower 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.

Correct answer is A)

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.

Q6. Compared to firms that expense costs, firms that capitalize expenses will have:

A)   higher leverage ratios.

B)   lower income variablity.

C)   lower cash flow from operations.

Correct answer is B)

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.

thanks a lot!!!!

thx

CBBCAA