Mock Exam 2 - Revision Flashcards
Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets that are valued on the balance sheet at $600 million. This includes previously recognized revaluation losses of $80 million. In the most recent accounting period, the fair value of these assets in an active market is $690 million. Which of the following entries will Davis record under the IFRS revaluation model?
A)
Gain on income statement and a revaluation surplus.
Correct Answer
B)
Gain on income statement only.
Incorrect Answer
C)
Revaluation surplus only.
Under IFRS, firms may choose to report long-lived assets at fair value. Upward revaluations are permitted and will result in a gain recognized on the income statement to the extent it reverses a previously recognized loss.
Any excess is reported as a revaluation surplus, a direct adjustment to equity. In this case, the carrying value of the assets is $600 million and the fair value is $690 million. Of the $90 million excess of fair value over carrying value, $80 million is recognized as a gain on the income statement to reverse the $80 million loss that was previously recognized. The remaining $10 million is recorded as revaluation surplus in shareholders’ equity.
Compared with firms that expense costs, firms that capitalize costs can be expected to report:
A)
higher asset levels and higher equity levels in the early years of the asset’s life.
Correct Answer
B)
higher asset levels and lower equity levels in the early years of the asset’s life.
Incorrect Answer
C)
lower asset levels and higher equity levels in the early years of the asset’s life.
Incorrect Answer
The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset’s life.
The revaluation model for investment property is permitted under:
A)
IFRS, but not U.S. GAAP.
Incorrect Answer
B)
neither IFRS nor U.S. GAAP.
Correct Answer
C)
both IFRS and U.S. GAAP.
Incorrect Answer
For IFRS, allows cost model or fair value model for investment property)
“For investment property, however, an upward revaluation is recognized as a gain on the income statement.”
US GAAP, only allows the cost model valuation for LLA (no difference for investment property)
Under the cost model, investment properties are carried in the books of account at cost less accumulated depreciation and accumulated impairment losses.
Under the fair value model, investment properties are revalued at each year end or reporting date and the fair valuation gain or loss is recorded in the income statement.
R&D rules
US GAAP
- R&D: Expensed
- Exception for Software: “Follow IFRS”
IFRS:
- R is Expensed
- D is Capitalized
Component depreciation is required under:
A)
IFRS, but not U.S. GAAP.
Correct Answer
IFRS requires firms to use component depreciation, which refers to depreciating the identifiable components of an asset separately. U.S. GAAP permits component depreciation but does not require it.
(Module 23.2, LOS 23.d)
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)
Neither of these items is required to be disclosed.
Incorrect Answer
B)
Only one of these items is required to be disclosed.
Incorrect Answer
C)
Both of these items are required to be disclosed.
Correct Answer
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.
(Module 23.4, LOS 23.l)
Which of the following groups in the country of Minidonia would least likely be helped by the imposition of tariffs on Minidonian imports of transportation equipment?
A)
Minidonia’s government.
Incorrect Answer
B)
Trucking companies.
Correct Answer
C)
Automotive manufacturers.
Incorrect Answer
Tariffs on transportation equipment benefit the government in the form of tariff revenue, and benefit domestic producers and industry workers in the form of higher prices for transportation equipment.
The users (consumers) of transportation equipment, such as trucking companies, suffer from higher costs due to the higher prices of transportation equipment.
(Module 14.2, LOS 14.e)
balance of payments accounts
The BOP [balance of payments] includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
In contrast to gross domestic product (GDP), gross national product (GNP) includes income earned by:
A)
domestic capital invested abroad.
Correct Answer
B)
foreign capital invested domestically.
Incorrect Answer
C)
foreign labor working domestically. (included in GDP but not in GNP)
Incorrect Answer
GNP includes goods and services produced outside the country by domestic factors of production, both labor and capital.
(Module 14.1, LOS 14.a)
Ricardian vs Heckscher–Ohlin
Ricardian model: labor productivity
Heckscher–Ohlin model: Labor productivity and capital productivity
R2 (Coefficient of Determination)
The coefficient of determination for a linear regression describes the percentage of the variation in the dependent variable explained by the variation of the independent variable.
R2 = sum of squares regression / sum of squares total
“To find the correlation coefficient (R), you can just square roots the coefficient of determination.”
F = sum of squares regression / mean squared error
A simple linear regression is a model of the relationship between:
A)
one dependent variable and one independent variable.
Correct Answer
B)
one or more dependent variables and one or more independent variables.
Incorrect Answer
C)
one dependent variable and one or more independent variables.
Incorrect Answer
A simple linear regression is a model of the relationship between one dependent variable and one independent variable. A multiple regression is a model of the relationship between one dependent variable and more than one independent variable.
(Module 7.1, LOS 7.a)
Which of the following is least likely an assumption of linear regression?
A)
The error terms from a regression are positively correlated.
Correct Answer
B)
Values of the independent variable are not correlated with the error term.
Incorrect Answer
C)
The variance of the error terms each period remains the same.
Incorrect Answer
One assumption of linear regression is that the error terms are independently distributed. In this case, the correlations between error terms are expected to be zero.
Constant variance of the error terms and no correlation between the independent variable and the error term are assumptions of linear regression.
(Module 7.1, LOS 7.c)
In a simple regression model, the least squares criterion is to minimize the sum of squared differences between:
A)
the intercept term and the residual term.
Incorrect Answer
B)
the predicted and actual values of the dependent variable.
Correct Answer
C)
the estimated and actual slope coefficient.
Incorrect Answer
The least squares criterion defines the best-fitting linear relationship as the one that minimizes the sum of squared errors, the squared vertical distances between the predicted and actual values of the dependent variable.
(Module 7.1, LOS 7.b)
normal distribution
- The distribution is completely described by its mean and variance.
- Kurtosis is equal to 3.
- Approximately 68% of the observations fall within 1 standard deviation of the mean.
