Q27. Which of the following adjustments should Berenz make to account for the market value of long-term debt?

A)   Decrease long-term debt by $120 and increase equity by $120.

B)   Increase long-term debt by $120 and decrease equity by $120.

C)   Decrease long-term debt by $190 and increase equity by $190.

Q28. Which of the following adjustments should Berenz make to account for the operating lease?

A)   Add $277 to net fixed assets and $277 to long-term debt.

B)   Add $277 to net fixed assets and $277 to equity.

C)   Add $299 to net fixed assets and $299 to long-term debt.

Q29. Which of the following statements regarding adjustments that Berenz will make to Brenda’s Bakery Supply financial statement

     is most accurate?

A)   Brenda’s use of LIFO inventory accounting is an indicator of low earnings quality.

B)   Adjusting for the firm’s potential environmental clean up obligation will increase the financial leverage multiplier.

C)   Adjusting for the firm’s operating lease will serve to increase future cash flow from financing.

Q30. Regarding their conversation about comprehensive income:

A)   Douglas’ statement is correct; Berenz’s statement is incorrect.

B)   Douglas’ statement is incorrect; Berenz’s statement is incorrect.

C)   Douglas’ statement is incorrect; Berenz’s statement is correct.

Q31. Which of the following statements is correct when inventory prices are falling?

A)     LIFO results in higher COGS, lower earnings, higher taxes, and higher cash flows.

B)     LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows.

C)     LIFO results in lower COGS, lower earnings, lower taxes, and higher cash flows.

Q27. Which of the following adjustments should Berenz make to account for the market value of long-term debt? fficeffice" />

A)   Decrease long-term debt by $120 and increase equity by $120.

B)   Increase long-term debt by $120 and decrease equity by $120.

C)   Decrease long-term debt by $190 and increase equity by $190.

Correct answer is C)

Brenda’s reports that the current market value of its outstanding long-term debt is $2.5 million. Long-term debt and the current portion of long-term debt are reported on the balance sheet at $2.380 million and $0.310 million respectively, for a total of $2,690,000. (Don’t forget to include the current portion of long-term debt in the total!) Therefore, we need to adjust long-term debt downward and equity upward by $2,690 ? $2,500 = $190.

Q28. Which of the following adjustments should Berenz make to account for the operating lease?

A)   Add $277 to net fixed assets and $277 to long-term debt.

B)   Add $277 to net fixed assets and $277 to equity.

C)   Add $299 to net fixed assets and $299 to long-term debt.

Correct answer is C)

The existence of operating leases is essentially off-balance sheet financing. To adjust the balance sheet for operating leases, the present value of the lease payments is added to both assets and liabilities. The interest rate used in the present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease. In this case, Brenda’s financing rate is 7%, while the rate implicit in the lease is 9%, so we use 7% in our computation. Using our financial calculator, the present value of the lease payments is: N = 8; PMT = 50; I/Y = 7; FV = 0; CPT PV = $298.56. Therefore, we will increase net fixed assets by $299 and also increase long term debt by $299.

Q29. Which of the following statements regarding adjustments that Berenz will make to Brenda’s Bakery Supply financial statement

     is most accurate?

A)   Brenda’s use of LIFO inventory accounting is an indicator of low earnings quality.

B)   Adjusting for the firm’s potential environmental clean up obligation will increase the financial leverage multiplier.

C)   Adjusting for the firm’s operating lease will serve to increase future cash flow from financing.

Correct answer is B)

To account for the obligation of the environmental clean-up, Brenda’s would increase liabilities by $100 and decrease equity by $100. The financial leverage multiplier, which is calculated as (assets / equity) would increase as equity would be lower while assets would remain unchanged. Note that the other answers are incorrect. Capitalizing the operating lease will serve to increase future cash from operations and decrease cash flow from financing as part of the lease expense will be considered repayment of debt. Because prices are rising, the use of LIFO inventory accounting is considered conservative and indicates high earnings quality.

Q30. Regarding their conversation about comprehensive income:

A)   ffice:smarttags" />Douglas’ statement is correct; Berenz’s statement is incorrect.

B)   Douglas’ statement is incorrect; Berenz’s statement is incorrect.

C)   Douglas’ statement is incorrect; Berenz’s statement is correct.

Correct answer is B)

Comprehensive income (CI) is an income figure that allows for all changes in equity. CI aggregates all valuation changes to assets and liabilities in a component of the equity account called comprehensive income (loss). One of the criticisms of comprehensive income is that it is inherently volatile because of its dependence on valuation changes and is not a reliable measure of a firm’s earning power. Douglas’ statement is therefore incorrect – it appears Douglas is confused with another term, normalized earnings, which adjusts income for nonrecurring items in an effort to get a better idea of the firm’s earning power. Berenz’s statement is also incorrect. While comprehensive income under U.S. GAAP does not include an adjustment for a pension fund’s funding status, GAAP does dictate that a direct to equity adjustment be made for minimum pension liabilities determined under SFAS 87.

Q31. Which of the following statements is correct when inventory prices are falling?

A)     LIFO results in higher COGS, lower earnings, higher taxes, and higher cash flows.

B)     LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows.

C)     LIFO results in lower COGS, lower earnings, lower taxes, and higher cash flows.

Correct answer is B)

Remember, prices are falling.

thx