karoliukas

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.

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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.

karoliukas

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.

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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.

karoliukas

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

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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.

kim226

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.

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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.

kim226

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.

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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.

kim226

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.

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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.

kim226

Capitalized interest costs are typically reported in the cash flow statement as an outflow from:

A) investing.

B) operating.

C) financing.

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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.

kim226

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.

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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.

kim226

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.

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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.

kim226

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.

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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.