Book 3_FinAn_Reading 31_ANALYZING BALANCE SHEETS

Question 1

Intangible assets created internally

Answer 1

expensed as incurred

Question 2

Purchased intangibles with finite lives

Answer 2

amortize or revaluation, treated in a way similar to tangible assets

Question 3

Purchased intangibles with indefinite lives

Answer 3

not amortized but must be tested for impairment periodically

Question 4

R&D Cost under IFRS

Answer 4

• research costs are expensed as incurred and development costs are capitalized if certain criteria are satisfied
• Capitalization cost = material + labor + overhead production (not include admin)

Question 5

R&D Cost under US GAAP

Answer 5

Both research and development costs are expensed

Question 6

Goodwill

Answer 6

• the excess of purchase price over the fair value of identifiable net assets in a business acquisition
• not amortized, but must be tested for impairment at least annually.

Question 7

Under IFRS
Debt securities, hold them to maturity

Answer 7

Amortized cost

Question 8

Under IFRS
Debt securities, collect interest payments but sell before maturity

Answer 8

Fair value through other comprehensive income

Question 9

Under IFRS
- Debt securities, sell them in the near term
- Equity securities and derivatives

Answer 9

Fair value through profit and loss.

Question 10

Choice to carry at fair value through F&L

Answer 10

• Under IFRS, firms can make an irrevocable choice to carry any financial asset at fair value through profit and loss. This choice is not available under U.S. GAAP

Question 11

Choice to carry at fair value through Other comprehensive income

Answer 11

• At the time of purchase: can choice to measure equity securities at fair value through other comprehensive income.
• Equity securities cannot be classified as available-for-sale under U.S. GAAP.

Question 12

Under U.S. GAAP
Unlisted equities investment + Loan and notes receivables

Answer 12

Historical cost

Question 13

Under U.S. GAAP
Held-to-maturity securities

Answer 13

reported at amortized cost
- Amortized cost = the original issue price - principal payments + amortized discount - amortized premium - impairment losses.
- Subsequent changes in market value are ignored.

Question 14

Under U.S. GAAP,
Trading securities, available-for-sale securities, and derivatives

Answer 14

• reported at fair value
• Unrealized gains and losses
  + Trading securities and derivatives: income statement
  + Available for sale securities: Other comprehensive income

Question 15

Under U.S. GAAP,
Equity securities

Answer 15

cannot be classified as available-for-sale.

Question 16

Long-term financial liabilities that are not issued at face value

Answer 16

• Are reported at amortized cost
• The liability will move toward par value at maturity as the premium or discount (relative to par) is amortized.

Question 17

Held-for-trading liabilities and derivative liabilities

Answer 17

are reported at fair value.

Question 18

Deferred tax liabilities

Answer 18

result from temporary timing differences between a firm’s tax reporting and its financial reporting.

Question 19

A vertical common-size balance sheet

Answer 19

expresses each item of the balance sheet as a percentage of total assets.

Question 20

Balance sheet ratios

Answer 20

evaluate a firm’s liquidity and solvency

Question 21

Liquidity ratios

Answer 21

• the firm’s ability to satisfy its short-term obligations as they come due
• the current ratio, the quick ratio, and the cash ratio

Question 22

Solvency ratios

Answer 22

• the firm’s ability to satisfy its long-term obligations.
• the long-term debt-to-equity ratio, the total debt-to-equity ratio, the debt ratio, and the financial leverage ratio.