Module 22

Question 1

When a company constructs an asset, borrowing costs incurred directly related to the construction are:

Answer 1

generally capitalized

Question 2

When a company constructs an asset for sale, the borrowing costs are classified as:

Answer 2

inventory

Question 3

Borrowing costs can be capitalized under IFRS until the tangible asset:

Answer 3

is ready for use

Question 4

Capitalizing an asset will have what effect on ROA?

Answer 4

Lower ROA because the denominator (total asset) to be higher to account for the non-current asset on the balance sheet

Question 5

Firms that capitalize costs can be expected to report: _____ asset levels and _____ equity levels in the early years of the asset’s life

Answer 5

higher
lower
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

Question 6

Internally developed costs are generally _____ when incurred

Answer 6

expensed
GAAP: R&D both expensed (except for software which can be capitalized)
IFRS: R expensed, D can be capitalized

Question 7

Purchased intangible assets can be beneficial for financial reporting purposes, due to it’s impact on BS and CF by:

Answer 7

non-current asset
investing cash outflow (instead of OCF which is used in many valuation ratios)

Question 8

Under IFRS & GAAP, if an item is acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset it is:

Answer 8

Goodwill