Financial Reporting and Analysis 【Reading 30】Sample following, statements, 2012, comparing, versus

kim226

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.

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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.

terpsichorefan

thanks for sharing

karoliukas

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.

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Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capital appreciation, or both.

karoliukas

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.

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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.

karoliukas

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.

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Estimated amortization expense for the next five years is required by U.S. GAAP but is not required by IFRS.

karoliukas

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.

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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).

karoliukas

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.

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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).

karoliukas

An analyst determined the following information concerning Franklin, Inc.’s stamping machine:

• Acquired seven years ago for $22 million
• Straight line method used for depreciation
• Useful life estimated to be 12 years
• Salvage value originally estimated to be $4 million

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.

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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.

karoliukas

An impairment write-down is least likely to decrease a company's:

A) debt-to-equity ratio.

B) assets.

C) future depreciation expense.

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An impairment write-down reduces equity and has no effect on debt. The debt-to- equity ratio would therefore increase.

karoliukas

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.

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An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.