Accounting T/F, MC & Ratios Flashcards
Purchased goodwill is not recognized on the balance sheet.
False
Investing cash inflows increase equity.
False (Investing cash inflows is for things like purchase of fixed assets; if it was shareholders funding that increases equity, it would be financing cash flow)
A decrease in accounts receivable causes operating profit to be lower than operating cash flow (everything else equal).
True
A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
True (Probable – Provide; Possible – Contingent liability so disclose only; Remote – do nothing)
An impairment loss on a company’s inventory reduces its operating cash flows.
False (An impairment loss is not a cash transaction but it’s just an accounting adjustment so there is no impact on cash flow)
An item of machinery is purchased for €1000. It is estimated to have an 8-year useful life, with a residual value of €200. Straight-line depreciation is used. At what value is the machine recorded on the balance sheet at the end of year three if the recoverable amount of the machine is estimated to be €600 at the end of that year?
a. 500
b. 600
c. 700
d. 800
(1,000-200)/8 = 100 depreciation charge/ year
At the end of Y3, NBV = 1,000-(100x3) = 700
If recoverable amount is 600, NBV needs to be impaired down to 600
Answer: (b) 600
If a company spends cash of 90 to acquire plant and equipment, and if it also reports depreciation of 10 and an impairment loss of 30, by how much does the total value of its assets change?
a. -40
b. -90
c. +50
d. +80
90 – 10 – 30 = 50, but the question is about “change” of volume of assets. The answer then is a) -40
If a company reports operating cash flow of 800, investing cash flow of -100, financing cash flow of 60, depreciation of 80 and a decrease in accounts receivable of 40, how much profit did it report?
a. 540
b. 680
c. 760
d. 920
Operating profit (?) + Depreciation 80 + Decrease in accounts receivable 40 = 800
Operating profit = 800-80-40 =680
Answer: (b) 680
A company spends 220 on inventory and sells inventory worth 100. It also spends 240 on new machinery, while selling old equipment for 120. The company further spends 150 on repayment of a bank loan, 200 on research and development, 175 on employee wages and 80 on rent. What was the company’s investing cash flow?
a. -120
b. -320
c. -440
d. -470
Purchase of machinery and selling of old equipment are the only two “investing” cash flow items from the question. Net cash flow is therefore (240) + 120 = (120)
Answer: (a) (120)
A company runs a defined benefit pension scheme with a projected benefit obligation of 10,000 and pension plan assets of 6,000 as of the end of the previous financial year. The interest cost is 4% and the expected return on the plan assets is 5%. The service cost is 300 and the company pays 100 into the pension every year. What is the pension expense the company recognizes in its income statement?
a. 0
b. 100
c. 400
d. 700
DB scheme cost is:
Obligation 10,000 x 4% = (400) interest cost
Asset 6,000 x 5% = 300 return on plan assets
Service cost = (300)
Net P&L = (400) charge to the P&L
Note: Annual payment by company into the pension fund is not an expense for the year but it is paying down the net obligation (i.e. like paying down a mortgage balance as opposed to interest payment)
A financing cash outflow is a debit to the cash balance.
False
Revenue is a credit to equity.
True
Inventory is carried in the balance sheet at its market value.
False
Free cash flow is equal to Operating Cash Flow After Tax.
False
A reduction in working capital implies a reduction in operating cash flow.
False
Goodwill must be tested for impairment, but cannot be revalued upwards.
True
A parent company does not have to consolidate its subsidiary unless at least 50% of the equity is owned by the parent.
True
An issue of shares increases net assets.
True
A write-down of inventory reduces a company’s operating cash flows.
False
An increase in accounts payable causes operating profit to be higher than operating cash flow (everything else being equal).
False
All property plant and equipment is measured at historical cost on the balance sheet.
False
A possible obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
False
Purchased intangible assets are not recognized on the balance sheet.
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow (all else being equal)
True
All financial assets are are measured at fair value on the balance sheet.
False
Accrual accounting requires a business to recognize transactions when they occur, not when cash is received or paid.
True
An impairment of goodwill reduces a company’s operating cash flows.
False
Cash inflow of a business always affect it’s profits
False
Research and Development expenditure is normally capitalised
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow.
True
Accrual accounting requires a business to recognize economic events when they occur, not when cash is received or paid.
True
Software development costs can never be recognized as an asset on a balance sheet.
False
Dividends are considered an expense in running the business and reported in the income statement.
False
Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders’ equity to increase.
False
The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.
True
If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000.
False
The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records.
True
An impairment of goodwill reduces a company’s operating cash flows
False
If a company’s reported operating profit is higher than its operating cash flow, it might be the result of an increase in accounts receivables.
True
All intangible assets are amortised over their useful life.
False
A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
True
Accrual accounting requires a business to recognize transactions in financial statements when cash is received or paid.
False
An item of machinery is purchased for €1000. It is estimated to have a 4-year useful life, with a residual value of €200. Straight-line depreciation is used. What is the expense in the income statement in year two related to the machine if the recoverable amount of the machine is estimated to be €500?
a. 100
b. 200
c. 300
d. 400
c. 300
If a company reports operating cash flow of 1000, investing cash flow of -100, financing cash flow of +600, depreciation of 200 and an increase in accounts payable of 100, how much profit did it report?
a. 500
b. 700
c. 900
d. 1100
b. 700
At the start of the year the company has finished-goods inventory of 50 units with a book value of £10 per unit. During the year the company purchases a further 60 units at £15 per unit and sells 80 units at a price of £20 per unit. If the company uses the FIFO method to account for its inventory, what was the company’s gross profit for the year?
a. 650
b. 950
c. 1100
d. 1600
a. 650
