SS 9. FR&A: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities

Question 1

U.S. GAAP requires that long term contracts whose outcomes can be reliably measured should be accounted for using:

Answer 1

the percentage-of-completion method

Question 2

A deferred tax liability occurs when taxable income is (more/less) than pretax income and this will reverse in future

Answer 2

Less

Question 3

LIFO reserve =

Answer 3

Inventory (FIFO) – Inventory (LIFO).

Question 4

Installment method calculation =

Answer 4

Gross profit % x Cash collected

Question 5

Given some inflation, a LIFO liquidation is most likely to have what impact on profitability ?

Answer 5

Increase

Question 6

Off balance sheet financing refers to the practice of:

Answer 6

raising liabilities without recognizing them on the balance sheet.

Question 7

The tax base is equal to:

Answer 7

The purchase price of the asset less any accumulated tax depreciation

Question 8

Regarding statutory and effective tax rates, the effective tax rate will be different if:

Answer 8

the company has permanent differences originating during the year.

Timing differences are adjusted via deferred tax charges/credits. Permanent differences are not adjusted and hence will cause the effective rate will be different to the statutory.

Question 9

The difference between taxable income and pre-tax income (ignoring any permanent differences) equals:

Answer 9

deferred tax expense
/
statutory tax rate

Question 10

Differences in taxable income and pre-tax accounting income that will not be offset by corresponding differences or ‘turn around’ in future periods are called:

Answer 10

Permanent differences

Question 11

Give 5 examples of a temporary difference on income tax expense:

Answer 11

1. Impairment of Assets
2. The result from using different inventory valuation methods
3. Restructuring costs
4. Post-employment benefits
5. Deferred compensation

Question 12

What is the U.S. GAAP treatment of computer software development?

Answer 12

Once feasibility and economic viability has been established all further costs associated with software - whether for internal use or external resale - must be capitalized.

Question 13

Expensing instead of capitalizing increases the _______ _______ as the income recorded in an expensing year will be much lower than the proceeding years.

Answer 13

Income variability

Question 14

Which of the inventory methods is acceptable under US GAAP but not IASB?

Answer 14

LIFO

Question 15

A valuation allowance (increases/reduces) deferred tax (assets/liabilities) if management deems they might not materialise

Answer 15

Reduces; Assets

Question 16

Pre-tax income =

Answer 16

Taxable income
+ (Increase in deferred tax liabilites/ Tax rate)
- (Increase in deferred tax assets / Tax rate)

Question 17

The tax base of an asset is:

Answer 17

The amount that will be deductible (against taxable income) in future periods.

Question 18

The balance sheet tax amount that is expected to be recovered from future operations is the definition of the:

Answer 18

Deferred tax asset

Question 19

When a firm is not confident about recovering the carrying amount of an asset, the asset has to be:

Answer 19

Impaired

U.S. GAAP requires that an asset is impaired if its future cash flows (un-discounted) are less than its carrying value.

Question 20

Income tax expense =

Answer 20

Income tax payable - Income tax recoverable - Change in deferred tax assets + Change in deferred tax liabilites

Question 21

The tax return loss that can be used to reduce taxable income in future years =

Answer 21

Tax loss carry forward

Question 22

What adjustment should an analyst make if he expects that a deferred tax liability cannot be reversed in future?

Answer 22

The DTL should be treated as equity

Question 23

All else being equal, if the purchase price of inventory is increasing, a company that accounts for its inventory under last-in, first-out (LIFO) instead of first-in, first-out (FIFO) is most likely to have a higher:

Answer 23

Debt to Equity ratio

With rising costs of inventory, a company using LIFO compared with FIFO will report a higher cost of sales and lower profits. This scenario will result in lower increments to retained earnings and a higher debt-to-equity ratio.

Question 24

LIFO reserve =

Answer 24

FIFO inventory - LIFO inventory

Question 25

Why might a company prefer an operating to a financing lease ?

Answer 25

It reduces reported debt

In spite of the binding commitment, an operating lease does not involve any debt being reported

Question 26

Under US GAAP only debt issue costs are:

Answer 26

Shown as an asset (a deferred charge)

Question 27

Which accounting standard(s) is/are most likely to require deferred tax in relation to temporary differences arising from investments in domestic subsidiaries or joint ventures, after 1992 but not before 1992?

Answer 27

US GAAP

Question 28

Effective Tax Rate (ETR) =

Answer 28

Income Tax Expense / Pre-Tax Income

Question 29

Which reporting standard requires deferred tax assets and liabilities to be reported under noncurrent balance sheet items?

Answer 29

IFRS

not GAAP

Question 30

Under US GAAP convertible issues are accounted for as a:

Answer 30

Liability

The conservative assumption is that they will not necessarily be converted, so will have to be repaid like other debt

Question 31

FIFO COGS =

Answer 31

LIFO COGS - (change in LIFO reserve)

Question 32

Tax Expense =

Answer 32

Pre-Tax Income - Net Income

Question 33

Pre-Tax Income =

Answer 33

Taxable Income + (DTL/Tax Rate) - (DTA/Tax Rate)

Question 34

Asset Turnover =

Answer 34

Sales
/
Total Assets

Question 35

Adjusted Interest Coverage Ratio =

Answer 35

Adjusted EBIT
/
Adjusted Interest

Question 36

Valuation allowances are set aside to cover:

Answer 36

the likelihood that deferred tax assets may not be realised

Question 37

A defined benefit pension plan is most likely to be valued according to:

Answer 37

Expected rates of return

Question 38

Capitalizing an expense results in higher (1) ___ _____ and lower (2) ____ _____.

Answer 38

1. net income

2. debt ratio

Question 39

A sales type lease is recorded on the lessor’s balance sheet at which price, and a finance lease at which price?

Answer 39

Carrying Value, Carrying Value

As far as the balance sheet is concerned, lessors account for both types of leases as the present value of cashflows. Different treatment arises on the income statement.

Question 40

US GAAP is most likely to require tax rates and tax laws to have been:

Answer 40

Enacted

IFRS in contrast allows for the possibility that further approvals are needed to enact the laws.

Question 41

What is the most likely impact of an increase in the valuation allowance a company recognizes against a deferred tax asset?

Answer 41

A decrease in total assets and a decrease in net income.

Question 42

The accrual of income tax expense expected to be paid (or recovered) in future years is the definition of:

Answer 42

Deferred income tax expense

Question 43

What are the 3 criteria that an identifiable intangible asset must meet under IFRS?

Answer 43

1. Must be identifiable
2. Must be under control of the company
3. Must be expected to generate future economic benefits

Question 44

The tax return liability resulting from current period taxable income is the definition of:

Answer 44

Taxes payable

Question 45

If tax deductible-expenses are lower than accounting expenses, then taxable income will be (higher/lower) than accounting income. This would result in a (DTA/DTL).

Answer 45

Higher; DTA

Question 46

Under US GAAP, the reconciliation of actual and expected tax expense is most likely to be required for which types of companies?

Answer 46

Public companies

Disclosure and reporting requirements are nearly always more onerous for public than for private companies.

Question 47

Under U.S. GAAP, a lease must be classified by the lessee as a finance (capital) lease if any one of the following four criteria is met:

Answer 47

• The title is transferred to the lessee at the end of the lease period.
• A bargain purchase option exists.
• The lease period is at least 75% of the asset’s life.
• The present value of the lease payments is at least 90% of the fair value of the asset.

Question 48

Name 4 advantages to leasing assets rather than acquiring.

Answer 48

1. Less costly financing
2. Reduced risk of obsolescence
3. Less restrictive provisions compared to other forms of financing
4. Off-balance sheet item in case of operating lease which increases leverage

Question 49

Regarding long-term assets currently in use, US GAAP is most likely to allow for:

Answer 49

Neither upwards asset revaluations, nor reversals of asset write downs

Question 50

Double-declining-balance method:

Annual depreciation Expense =

Answer 50

Net Book Value * (2 / Useful life in years)

Question 51

Accounting profit is most likely to be described as:

Answer 51

Income before taxes

Question 52

When outcome cannot be reliably measured, which method is used?

Answer 52

The completed contract method

Question 53

‘A retirement plan in which the firm promises to make periodic payments to employees after retirement. Because the employee’s future benefit is defined, the employer assumes the investment risk.’

This describes:

Answer 53

Defined benefit plan

Question 54

Under which accounting standard are firms required to disclose estimated amortization expense for the next five years on intangible assets?

Answer 54

U.S. GAAP

Question 55

A deferred tax asset occurs if taxable income is (more/less) than pretax income and this will reverse in future

Answer 55

More

Question 56

With regards to the lessor, the leased asset is brought to the balance sheet and continues to be depreciated when the lease is classified as a(n):

Answer 56

Operating lease

In an operating lease the underlying asset remains on the balance sheet of the lessor. With the other types of lease, the lease receivable is the asset on the balance sheet. Not the leased asset. Remember that will be on the leasee’s balance sheet.

Question 57

When the market rate is greater than the coupon rate, a bond is issued at:

Answer 57

A discount

Question 58

An increase in tax rates has what impact on deferred tax assets, and what impact on deferred tax liabilities?

Answer 58

Increases, increases

Question 59

‘A retirement plan in which the firm contributes a
sum each period to the employee’s retirement account. The investment decisions are left to the employee, who assumes all of the investment risk.’

This describes:

Answer 59

Defined contribution plan

Question 60

Assets and liabilities are most likely to be taxed on what basis, and accounted for on what basis?

Answer 60

Tax base, carrying amounts

Question 61

Give 5 examples of Period Costs. How are they recorded?

Answer 61

unallocated overhead, abnormal waste, most storage costs, administrative costs, and selling costs.

They are expensed.

Question 62

US GAAP Impairment Test:

Answer 62

Step 1: Assess recoverability: Compare carrying amount with undiscounted future net cash flows.
If recoverability test is not satisfied, an impairment loss is required.

Step 2: Determine impairment loss: (carrying amount - fair value)

Estimated depreciation in xx15 =

(New carrying value - revised residual value)
/
Revised useful life

Question 63

Income tax expense is:

Answer 63

An expense that is recognised in financial statements calculated on the basis of pretax income.

Question 64

When analysing ratios, the general FIFO/LIFO decision should be:

Answer 64

use LIFO numbers for ratios that are income related and use FIFO for ratios that are balance-sheet related