Test 2 Multiple Choice Questions

Question 1

Goodwill is:

a. Amortized over the greater of its estimated life or 40 years.

b. Only recorded by the seller of a business.

c. The excess of the purchase price of a business over the fair value of all net identifiable assets.

d. None of these answer choices are correct.

Answer 1

c. The excess of the purchase price of a business over the fair value of all net identifiable assets.

Question 2

When recording depreciation using the Double-Declining Balance method of depreciation, which financial statements are impacted?

I. Income Statement

II. Cash Flow Statement (using indirect method)

III. Balance Sheet

a. I only

b. III only

c. I and III

d. I, II, and III

e. None of the above

Answer 2

d. I, II, and III

Question 3

1. Nike’s portfolio of Trading Securities, originally purchased at $100 million, now has a market value of $150 million. How will this impact Nike’s financial statements?

a. $50 million gain in other comprehensive income

b. $50 million loss in other comprehensive income

c. $50 million gain in net income

d. $50 million loss in net income

e. Not recognized

Answer 3

c. $50 million gain in net income

Question 4

Which of the following may cause a temporary difference between taxable and pretax accounting income?

a. Expenses related to political contributions.

b. Double declining balance used for depreciating equipment.

c. Income from municipal bonds.

d. Life insurance proceeds received due to the death of an executive.

Answer 4

b. Double declining balance used for depreciating equipment.

Question 5

1. LIFO layers are created every year that sales are greater than purchases.

a. TRUE

b. FALSE

Answer 5

b. FALSE

• Purchases > sales
• Lifo LIQUIDATION occurs when sales > purchases

Question 6

During a period of inflation, which of the following inventory costing methods will result in the highest COGS?

a. LIFO

b. FIFO

c. Average

d. They will produce the same COGS

Answer 6

LIFO

Question 7

________ inventory costing method is used to derive a lower income tax expense when prices are rising.

a. FIFO.

b. LIFO.

c. Weighted Average.

d. Specific Identification

Answer 7

LIFO

Question 8

List two reasons why a lender would include a tight debt covenant in a contract.

Answer 8

1. Early warning of financial distress
2. Protects from default

Question 9

Which of the following would NOT be included when finding DILUTED earnings per share?

a. Convertible bonds that cause an increase in EPS

b. Options issued that are considered to be “in the money”

c. Convertible bonds 1 year away from maturity

d. Convertible preferred stock that is backed by secure collateral

Answer 9

a. Convertible bonds that cause an increase in EPS

• Has an “antidilutive” effect, so is not included

Question 10

How would a $2,000 restructuring charge that hasn’t been paid in cash impact the financial statements, with a tax rate of 20% and income subject to tax of $14,000?

a. The restructuring expense would be recorded on the balance sheet as an Income Tax Payable of $2,400.

b. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Asset of $400.

c. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Liability of $400.

d. Restructuring charges do not impact the balance sheet, they are only recorded on the income statement as an expense.

Answer 10

b. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Asset of $400.

• Restructuring charges have been incurred but not paid
• So, FI < TI = DTA

Question 11

1. Which of the following fixed assets are NOT depreciated?

a. Buildings

b. Land

c. Land Improvements

d. Equipment

Answer 11

b. Land

Question 12

Which of the following statements is CORRECT regarding Book-Tax Differences?

a. If straight-line is used for book depreciation and MACRS (double declining balance) is used for tax depreciation, this results in a deferred tax liability.

b. Permanent differences create deferred tax assets by decreasing or increasing the effective tax rate.

c. Income from municipal bonds and premiums paid for life insurance policies of key executives are all examples of income that is never taxed.

d. When financial income is greater than taxable income it is a deferred tax asset.

Answer 12

a. If straight-line is used for book depreciation and MACRS (double declining balance) is used for tax depreciation, this results in a deferred tax liability.

Question 14

1. What is a main reason for purchasing trading securities?

a. To take advantage of short-term price changes

b. To avoid risk and make safe investments

c. Trading securities are known for their guaranteed huge returns

d. Trading securities are the cheapest investments

Answer 14

a. To take advantage of short-term price changes

Question 15

Which of the following answer choices is NOT true about the amortization and impairment of intangible assets?

a. If the useful life of the intangible asset is determinable, we amortize the cost over the lesser of the useful life or legal life.

b. Goodwill and intangibles with indefinite useful lives are always amortized on a 10-year basis

c. If sum of future cash flows is greater than the book value for assets with a definite useful life, the asset is not impaired

d. We check for impairment on

Answer 15

b. Goodwill and intangibles with indefinite useful lives are always amortized on a 10-year basis

Question 16

Which of the following would cause a DECREASE in EPS?

a. Increase in Net Income

b. The purchase of common stock to keep in treasury

c. Having unrealized losses in available-for-sale debt securities

d. Re-issuing treasury stocks to the public

Answer 16

d. Re-issuing treasury stocks to the public

Question 17

What differentiates Pretax Financial Income from Financial Income Subject to Tax?

a. Permanent Book-Tax differences

b. Temporary Book-Tax differences

c. Financial Income Subject to Tax is synonymous with Pretax Financial Income

d. None of the Above

Answer 17

a. Permanent Book-Tax differences

Question 17

During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:

A. Higher under FIFO than LIFO.
B. Higher under FIFO than average cost.
C. Lower under average cost than LIFO.
D. Lower under LIFO than FIFO.

Answer 17

C. Lower under average cost than LIFO.

Question 18

Which type of income is used to calculate taxes on the income statement?

Answer 18

Financial income subject to to tax

Question 18

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

A. Higher under LIFO than FIFO.
B. Lower under average cost than LIFO.
C. Higher under average cost than FIFO.
D. Higher under FIFO than LIFO.

Answer 18

D. Higher under FIFO than LIFO.

Question 19

A company determines its costs using the LIFO inventory flow assumption. In a period of rising prices, how would their choice of inventory flow assumption affect their income tax expense?

a. Higher income tax expense due to higher reported costs.

b. Higher income tax expense due to a higher reported earnings before taxes.

c. Lower income tax expense due to higher reported costs.

d. Lower income tax expense due to lower reported costs.

Answer 19

c. Lower income tax expense due to higher reported costs.

Question 19

Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?

A. The potential for manipulation of net income is reduced.
B. There is no arbitrary allocation of costs.
C. The cost flow matches the physical flow.
D. Able to use on all types of inventory

Answer 19

C. The cost flow matches the physical flow.

Question 20

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods
sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when
inventory is valued using the LIFO method?

A. Prices decreased.
B. Prices remained unchanged.
C. Prices increased.
D. Price trend cannot be determined from information give

Answer 20

A. Prices decreased.

Question 20

During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:

A. Higher under FIFO than LIFO.
B. Higher under FIFO than average cost.
C. Lower under average cost than LIFO.
D. Lower under LIFO than FIFO.

Answer 20

C. Lower under average cost than LIFO.

Question 21

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending
inventory valuation is:

A.FIFO.
B. LIFO.
C. Weighted Average.
D. None of the above.

Answer 21

A.FIFO.

Question 21

During periods when costs are rising and inventory quantities are stable, ending inventory will be:

A. Higher under LIFO than FIFO.
B. Lower under average cost than LIFO.
C. Higher under average cost than FIFO.
D. Higher under FIFO than LIFO.

Answer 21

D. Higher under FIFO than LIFO.

Question 22

The Reid Co. acquired a piece of land to construct a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect’s fees for the factory were $25,000 and the contractor
received $300,000 for construction of the factory building.

1.What is the recorded cost of the land?

2.What is the recorded cost of the building?

Answer 22

Land = 100,000 + 20,000 - 5,000 = 115,000

Building = 25,000 + 300,000 = 325,000

Question 22

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

A. Prices decreased.
B. Prices remained unchanged.
C. Prices increased.
D. Price trend cannot be determined from information given.

Answer 22

A. Prices decreased.

Question 23

Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the
machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee
training cost on the new machine totaled $7,000. Staley also paid $2,000 for the annual insurance
premium relating to operating the machine. The state charged a 5% sales tax on the invoice price.

What is the capitalized cost of the machine?

Answer 23

260,000 * 1.05 + 4,600 + 7,000 = 284,600

Question 23

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending
inventory valuation is:

A. FIFO.
B. LIFO.
C. Weighted Average.
D. None of the above.

Answer 23

A. FIFO.

Question 24

How to calculate DDB?

Answer 24

Take SL Rate and double it

• straight line rate is cost of equipment (not including SV) / years

Question 24

What are the 2 indefinite-life intangibles?

Answer 24

1. Goodwill
2. Trademarks

Question 25

If a company simply disposes an asset worth 7,000 on the books, how does that impact the INCOME STATEMENT?

Answer 25

Loss on disposal of 7,000

Question 25

The Reid Co. acquired a piece of land to construct a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect’s fees for the factory were $25,000 and the contractor
received $300,000 for construction of the factory building.

What is the recorded cost of the land?

What is the recorded cost of the building?

Answer 25

What is the recorded cost of the land?
100,000 (cost) + 20,000 (demolition) – 5,000 (salvage) = 115,000

What is the recorded cost of the building?
25,000 (architect) + 300,000 (contractor) = $325,000

Question 26

How does depreciation impact the 3 statements?

Answer 26

B/S - reduces PPE value and RE
I/S - depreciation expense
CF - is added back to net income

Question 26

Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the
machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee
training cost on the new machine totaled $7,000. Staley also paid $2,000 for the annual insurance
premium relating to operating the machine. The state charged a 5% sales tax on the invoice price.

What is the capitalized cost of the machine?

Answer 26

260,000 x 1.05 + 4,600 + 7,000 = 284,600

Question 27

Amortizable intangible assets include all of the following except

a. goodwill.
b. patents.
c. copyrights

Answer 27

a. goodwill.

Question 27

How to calculate straight line rate? Then how to get DDB?

Answer 27

Price (without SV) / years

Multiply this x 2

Question 28

Which characteristic is not possessed by intangible assets?

a. Physical existence.
b. Long-lived.
c. Result in future benefits.
d. Expensed over current and/or future years.

Answer 28

a. Physical existence.

Question 28

How to calculate total OCI for two years?

Answer 28

Take Fair Value - Cost and compare from year 2 to year 1

Question 29

Which of the following costs incurred internally to create an intangible asset is generally
expensed?

a. Research and development costs.
b. Filing costs.
c. Legal costs.
d. All of these answer choices are correct

Answer 29

a. Research and development costs.

Question 29

For an EQUITY METHOD calculation, say you earn 100 in net income and 300 in dividends (both after adjustments) from a company. What goes on YOUR income statement?

Answer 29

Just the 100 net income

Question 30

For the equity method, let’s say a company you’re invested in pays you dividends of 300 and has net income (after equity method adjustment) of 1000. What amount will appear on YOUR income statement?

Answer 30

Just the net income, after adjustment, of 1000

Question 30

For an INSIGNIFICANT CONTROL equity calculation, say you earn 100 in net income and 300 in dividends (both after adjustments) from a company. What goes on YOUR income statement?

Answer 30

Just the dividends of 300 (and any gain/loss on the investment)

Question 31

For an equity portfolio of trading securities, say the unrealized gain is 5,000. How much goes on OCI?

Answer 31

None, it is reported on Net Income

OCI is for available for sale debt securities

Question 32

The investment category for which the investor’s “positive intent and ability to hold to the end date”
is important is:

a. Securities reported under the equity method.
b. Trading securities.
c. Securities classified as held to maturity.
d. Available for sale debt securities.

Answer 32

c. Securities classified as held to maturity.

Question 33

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its
balance sheet?

a. Common stock held by a company that management intends to hold for several years.
b. Debt securities held to maturity.
c. Preferred stock held as trading securities.
d. All of these answer choices are reported at fair value

Answer 33

b. Debt securities held to maturity.

Question 34

The income statement reports changes in fair value for which type of securities?

a. Securities reported under the equity method
b. Equity securities that represent less than 20% ownership
c. Held to maturity securities
d. Available for sale debt securities

Answer 34

b. Equity securities that represent less than 20% ownership

Question 35

Holding gains and losses on trading securities are included in earnings because:

a. They measure the success or failure of taking advantage of short-term price changes.
b. The IRS mandates the inclusion.
c. The SEC mandates the inclusion.
d. They measure the book value of the securities in the balance sheet date.

Answer 35

a. They measure the success or failure of taking advantage of short-term price changes.

Question 36

Accumulated Other Comprehensive Income in the shareholders’ equity section of the balance sheet reflects changes in the fair value of securities for which type of securities?

a. Available for sale debt securities
b. Trading securities
c. Consolidated securities
d. Held to maturity securities

Answer 36

a. Available for sale debt securities

Question 37

Which ONE of the following statements BEST describes a CONSOLIDATED balance sheet?

a. A balance sheet that includes the assets and liabilities of both the parent company and all of the subsidiaries controlled by the parent company
b. A balance sheet that includes the goodwill of both the parent company and all of the smaller
companies purchased by the parent company
c. A balance sheet that includes not only the assets and liabilities of the parent company but
also the retained earnings of the parent company
d. A balance sheet that reports both the replacement cost and the fair value of all property,
plant, and equipment of the parent company
e. A balance sheet that reports both the interest-bearing and the non-interest-bearing liabilities
of the parent company

Answer 37

a. A balance sheet that includes the assets and liabilities of both the parent company and all of the subsidiaries controlled by the parent company

Question 38

Fill in the blanks:

Which of the following statements accurately fills in the blanks with the most appropriate terms?

The ________ investments are carried at ___________ on the balance sheet; with unrealized
holding gains and losses reported in _________

Question 39

What does a debt ratio of 35% mean?

Answer 39

You borrowed 35% to buy your assets

Question 40

Butte Mountain Inc repurchased bonds by exercising a call provision for $825,000. The bonds have a face value of $800,000 and an unamortized premium of $20,000.

Determine the amount of any gain or loss on the repurchase.

Answer 40

Loss

Purchase price of 800,000 + unamortized premium of 20,000 = 820,000

820 - 825 = loss of 5,000

Question 41

How is a discount/premium on bonds payable accounted for on the balance sheet?

Answer 41

As a contra-account to bonds payable

Question 42

A bond issue with a face amount of $900,000 bears interest at the rate of 8%. The current market rate of
interest is 10%. These bonds will sell at a price that is:

a. More than $900,000.
b. The answer cannot be determined.
c. Equal to $900,000
d. Less than $900,000

Answer 42

d. Less than $900,000

Question 43

A bond issue on June 1, Year 6, has interest payment dates of April 1 and October 1. Bond interest
expense for the year ended December 31, Year 6, is for a period of:

a. 3 months.
b. 4 months.
c. 6 months.
d. 7 months.

Answer 43

d. 7 months.

Question 44

For a bond issue that sells for more than its face value, the market rate of interest is

a. Equal to the rate stated on the bond.
b. Dependent on the rate stated on the bond.
c. Higher than the rate stated on the bond.
d. Less than the rate stated on the bond.

Answer 44

d. Less than the rate stated on the bond.

Question 45

Which of the following is a reason that a lender would desire a loan contract that includes a debt
covenant?

I. To protect themselves from borrower default.
II. To lower the interest rate.
III. To lower the risk.

a. I, III
b. II, III
c. I, II
d. I, II, III

Answer 45

a. I, III

Question 46

Permanent book/tax differences is/are:

a. differences in book/tax income that will be reversed in following years.
b. used to determine book income but never used to determine taxable income.
c. depreciation expenses, warranty expenses, and unrealized gains on corporate stock held for
investment.
d. income/loss that is recorded for book purposes which is not recorded for tax purposes until the next year

Answer 46

b. used to determine book income but never used to determine taxable income.

Question 47

Company X reports pre-tax financial income of $45,000 which includes interest revenues of
$500 from a municipal bond. What is the amount of financial income subject to tax?

Answer 47

Muni bond interest not included in taxable income

So, 45000 - 500 = 44,500

Question 48

For tax questions, how to calculate net income?

Answer 48

Pre tax financial income - Total income tax expense

Question 49

For tax questions, how to calculate effective tax rate?

Answer 49

Total income tax expense / pre tax financial income

Question 50

When doing journal entries for stock options, what is the journal entry during the vesting years?

Answer 50

Debit Com Exp
Credit PIC

Question 51

How to calculate compensation expense for stock options?

Answer 51

use the fair value price

Question 52

When doing journal entries for stock options, what is the journal entry for the exercising of the stock options?

Answer 52

Debit cash (using strike price)
debit PIC (using FV price)
Credit common stock

Question 53

Total stockholders’ equity represents

a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by a company.
c. a claim against a portion of the total assets of a company.
d. only the amount of earnings that have been retained in the business.

Answer 53

c. a claim against a portion of the total assets of a company.

Question 54

Stockholders’ equity is generally classified into three major categories:

a. contributed capital, appropriated capital, and retained earnings.
b. appropriated capital, retained earnings, and accumulated other comprehensive income.
c. retained earnings, unappropriated capital, and earned capital.
d. earned capital, contributed capital, and accumulated other comprehensive income.

Answer 54

d. earned capital, contributed capital, and accumulated other comprehensive income.

Question 55

Treasury shares are shares:

a. held as an investment by the treasurer of the corporation.
b. held as an investment of the corporation.
c. issued and outstanding.
d. issued but not outstanding

Answer 55

d. issued but not outstanding

Question 56

The compensation associated with restricted stock under a stock award plan is:

a. The book value of an unrestricted share of the same stock times the number of shares
represented by the restricted stock.
b. Allocated to expense over the service period which usually is the vesting period.
c. The estimated fair value of a share of similar stock times the number of shares
represented by the restricted stock.
d. The book value of a share of similar stock times the number of shares represented by the
restricted stock

Answer 56

b. Allocated to expense over the service period which usually is the vesting period.

Question 57

The compensation associated with a stock option plan is the number of shares granted by the
option multiplied by:

a. The strike price at the grant date.
b. The market price at the grant date.
c. The expected market price at the exercise date.
d. The Black-Scholes value per share at the grant date.

Answer 57

d. The Black-Scholes value per share at the grant date.

Question 58

A treasury stock reissuance may have an impact on retained earnings if the company
reacquired the shares at a higher price than they reissued them.

a. True
b. False

Answer 58

a. True

Question 59

Diluted EPS is calculated for companies with complex capital structures only.

True
False

Answer 59

True

Question 60

An investor company must consolidate its financial statements with an investee company if it owns more than ______ of the voting stock of the investee company, and the portion not owned by the parent company is reflected as _______ on the balance sheet.

a. 50%, non-controlling interest
b. 50%, non-consolidated interest
c. 50%, controlling interest
d. 50%, consolidated interest

Answer 60

a. 50%, non-controlling interest

Question 61

If Apple Corporation owns 65% of Bee Inc., how much of Bee’s revenue will be reported on Apple’s Income statement in total revenues?

a. 0%
b. 65%
c. 50%
d. 100%

Answer 61

d. 100%

Question 62

Prepaid Insurance will result in:

a. Permanent differences
b. Deferred tax liabilities
c. Deferred tax assets
d. None of the items listed

Answer 62

b. Deferred tax liabilities

Question 63

3 deferred tax liabilities

Answer 63

1. Prepaid expenses
2. Depreciation differences (when tax uses DDB)
3. Goodwill

Question 64

Estimated Bad Debt Expenses recorded at the end of the year result in:

a. Deferred Tax Liabilities
b. Permanent differences
c. None of the items listed
d. Deferred Tax Assets

Answer 64

d. Deferred Tax Assets

Question 65

A company must pay dividends in cash at the time they are declared.

a. True
b. False

Answer 65

b. False

Question 66

Which of the following is NOT a reason for why a company might repurchase its own stock (Treasury Stock)?

a. To display doubt in the stock and that it is currently overvalued by the market.
b. To provide shares for incentive compensation and employee savings plans.
c. To remove some shares from the open market to protect against a hostile takeover.
d. To improve per share earnings by reducing the number of shares outstanding.

Answer 66

a. To display doubt in the stock and that it is currently overvalued by the market.

Question 67

The total par value of the common and preferred stock, along with the associated amounts of paid-in capital in excess of par, constitute a corporation’s contributed capital (including subtracting treasury stock).

a. True
b. False

Answer 67

a. True

Question 68

If a trading security that originally cost 300 is sold for 310, how much investment related income is reported on the income statement?

Answer 68

10

Question 69

How would a $2,000 restructuring charge that hasn’t been paid in cash impact the financial statements, with a tax rate of 20% and income subject to tax of $14,000?
a. The restructuring expense would be recorded on the balance sheet as an Income Tax Payable of $2,400.
b. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Asset of $400.
c. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Liability of $400.
d. Restructuring charges do not impact the balance sheet, they are only recorded on the income statement as an expense.

Answer 69

b. The restructuring charges would be recorded on the balance sheet as a Deferred Tax Asset of $400.

-

Question 70

Impairment testing is performed in the same way for indefinite-life intangibles and limited-life intangibles.

A. True
B. False

Answer 70

B. False

• Impairment testing for definites use depreciation, which indefinites do not have

Question 71

When a bond sells at a premium, interest expense will be:

A. none of these answer choices are correct.
B. greater than the bond interest payment.
C. less than the bond interest payment.
D. equal to the bond interest payment

Answer 71

C. less than the bond interest payment.

Question 72

Deferred tax expense is the:

A. amount of income taxes payable for the period.
B. increase in a deferred tax liability.
C. increase in a deferred tax asset.
D. decrease in a deferred tax liabilit

Answer 72

B. increase in a deferred tax liability.

Question 73

A deferred tax liability represents the…

A. decrease in taxes payable in future years as a result of taxable temporary differences.
B. increase in taxes saved in future years as a result of deductible temporary differences.
C. decrease in taxes saved in future years as a result of deductible temporary differences.
D. increase in taxes payable in future years as a result of taxable temporary difference

Answer 73

D. increase in taxes payable in future years as a result of taxable temporary differenc

Question 74

How to calculate Days’ Sales in Inventory?

Answer 74

365 / (COGS / Avg Inventory)

Question 75

Unrealized gains are based off of …. …

Realized gains are based off …

Answer 75

Fair value

Cost

Question 76

Under the equity method, how is income reported on the income statement?

Answer 76

As “equity method income”

Question 77

What inventory method to use and why during inflation?

Answer 77

• Fifo
• You want lower COGS to get higher net income, so don’t want to use newest, more expensive, inventory

Question 78

Main incentive to use LIFO

Answer 78

Tax savings

Question 79

3 downsides to LIFO

Answer 79

1. LIFO Layers
2. LIFO Liquidation
3. Higher COGs –> lower net income

Question 80

What can LIFO layers result in over time?

Answer 80

Significant difference better market value of inventory and the value of inventory on your B/S (lower)

Question 81

How to calculate LIFO reserve?

Answer 81

FIFO - LIFO

Question 82

What is LIFO liquidation?

Answer 82

When old layers of inventory need to be used to satisfy sales

Question 83

What can LIFO liquidation lead to?

Answer 83

Lower COGS, higher net income, but higher taxes (which is the main benefit of LIFO)

Question 84

How to calculate inventory turnover

Answer 84

COGS / Average Inventory

Question 85

How would FIFO affect inventory turnover and days in inventory?

Answer 85

Fifo = lower COGS

Lower COGS = lower inventory turnover

Lower inventory turnover = higher days in inventory

Question 86

How to calculate NRV of inventory?

Answer 86

Cost of inventory - completion - transportation - disposal

Question 87

How is inventory using LIFO recorded?

Answer 87

Lower of historical cost or market

Question 88

Tangible assets are … and then … over time

Answer 88

capitalized ; expensed

Question 89

What is the acquisition cost of an asset?

Answer 89

All costs incurred to bring an asset into use

Question 90

When to capitalize vs expense cost AFTER acquisition

Answer 90

1. Expense if costs MAINTAIN given level of service
2. Capitalize if costs IMPROVE given level of service

Question 91

Suppose that 9 years ago Imtel purchased an asset of $10,000. The current book value is $1,000 and they decide to scrap it because it’s useful life is over and it isn’t worth anything.

How should this disposal impact the…

Balance sheet effect?

Income statement effect?

Cash flow effect?

Answer 91

Balance Sheet

• Assets (ppe) decrease 1,000
• Equity decreases by 1,000 (loss on disposal)

Income Statement

• Loss of 1,000

Cash Flow

• No effect (Not a cash transaction)

Question 92

Suppose that 9 years ago Imtel purchased an asset of $10,000. The current book value is $1,000 and they decide to sell it for $600.

How should this sale impact the CASH FLOW statement?

Answer 92

Increase to investing section of 600

Question 93

Journal entry for impairment loss

Answer 93

Debit impairment loss (expense)
Credit PPE

Question 94

When using DDB, what does the last year have to have?

Answer 94

A depreciation amount so that the book value = salvage value

Question 95

4 types of intangibles

Answer 95

1. Rights
2. Relationships
3. Information
4. People

Question 96

Intangible assets are only recognized if they are …

Answer 96

purchased

Question 97

Internally-generated intangibles are … the balance sheet.

Purchased intangibles are … the balance sheet.

Answer 97

Off ; on

Question 98

2 exceptions to internally-generated intangibles not being expensed

Answer 98

R&D - if it creates technological feasibility

Legal fees - added on to price

Question 99

Purchased intangibles are capitalized as an …

Answer 99

asset

Question 100

How to calculate goodwill?

Answer 100

Purchase price - FVA

Question 101

Will the goodwill balance ever change?

Answer 101

Only if it is impaired, so it will go down.

Can never go up

Question 102

What is the test called for limited life intangibles?

Answer 102

Recoverability test

Question 103

These are all goals of what type of investment?

1. Influence their decisions (investing in a suppliers)
2. Control their decisions
3. Quick growth
4. Foothold in a new market, industry, geographic location
5. Acquire particular expertise, skill, product
6. Eliminate competition

Answer 103

In other companies

Question 104

How are held to maturity debt early redemption reported?

Answer 104

On I/S

Question 105

How are 50% + equity investments valued?

Answer 105

Using consolidation

Part not owned under “non-controlling interests” on B/S

Question 106

The equity method basically captures a … … of the change in the investee’s … …. during the year.

Answer 106

proportionate share ; retained earnings

Question 107

Equity Method: The investor reports its investment in the investee in a single investment account on the … …

Answer 107

balance sheet

Question 108

How does the equity method impact the financial statements?

Answer 108

Balance sheet: ending investment amount reported in RE

Income Statement: proportionate net income reported in Income

Cash flow: initial investment as cash outflow in investment section

Question 109

True/False: Unrealized gains and losses on equity method investments are ignored.

Answer 109

True

Question 110

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?

a. Common stock held by a company that management intends to hold for several years.

b. Debt securities held to maturity.

c. Preferred stock held as trading securities.

d. All of these answer choices are reported at fair value

Answer 110

b. Debt securities held to maturity.

Question 111

Why would companies need debt/credit for operating needs?

Answer 111

To cushion cyclical operating needs (as a buffer)

Question 112

How debt shows up on 3 financial statements

Answer 112

BS: current liabilities and long term liabilities

IS: interest expense

CF: cash paid for interest impact operating section, cash received from borrowing and paid on principal impacts financing section

Question 113

Bonds sold to the public are different from bank loans in a 3 ways:

Answer 113

1. have a market price
2. risk and maturity determine issue price
3. have a longer maturity

Question 114

How to calculate carrying value of bond

Answer 114

Face value -/+ Unamortized Discount/Premium

Question 115

What method is used to calculate the carrying value of a bond?

Answer 115

The Effective Interest Method

Question 116

Premiums … interest expense, whereas discounts …. interest expense

Answer 116

decrease ; increase

Question 117

When do you get a gain from buying back debt? When do you get a loss

Answer 117

Gain: Purchase Price < CV

Loss: Purchase price > CV

Question 118

Give two reasons why companies issue bonds that can be converted into equity and why an investor would purchase a bond with an equity feature.

Answer 118

Company: they don’t have to come up with cash to repay bonds when it matures. Can also command a higher price for the bonds because they are convertible

Investor: ownership, take advantage of stock appreciation

Question 119

Two types of credit risk

Answer 119

Short-term liquidity risk

Long-term solvency risk

Question 120

Utah Corp took out a 5% note for $500,000 on January 1, 20X4. The principal is to be paid back in installmentsof $100,000 at the end of each year for the next 5 years.

How will this note be reflected on the balance sheet at December 31, 20X4?

What is interest expense for the year ended 20X4? 20X5?

Answer 120

a. $100,000 will be included in Current Liabilities, $400,000 will be included in Long-term Liabilities

b. $500,000 x 5% = 25,000$400,000 x 5% = 20,000

Question 121

Goal of financial reporting (3)

Answer 121

predictive value, comparability, faithful representation

Question 122

What are permanent differences?

Answer 122

The financial accounting number will never factor into taxes

Question 123

Permanent differences increase/decrease the … … … by increasing or decreasing …. … … … … …

Answer 123

effective tax rate

pretax financial income subject to tax

Question 124

Examples of permanent differences: income that is NEVER taxed (3) - are subtracted from income

Answer 124

1. Income from municipal bonds
2. Life insurance proceeds on the death of a key executive
3. A portion of dividends received from other companies → to eliminate double taxation (since dividends are already post-tax)

Question 125

Expenses that are NEVER deducted for tax purposes (4)

Answer 125

1. Political contributions
2. Disallowed meals and entertainment
3. Premiums paid for life insurance policies of key executives
4. Payments and fines due to violations of the law.

Question 126

5 common DTAs

Answer 126

1. Unearned revenue (cash advances
2. Bad debt expense
3. Stock comp expense
4. Warranty expense
5. Loss carryforwards

Question 127

3 common DTLs

Answer 127

1. Depreciation
2. Prepaid expenses
3. Goodwill

Question 128

When is effective tax rate higher?

Answer 128

When financial income subject to tax is LOWER than pretax financial income

Question 129

Journal Entry for DTA

Answer 129

Debit Income Tax Expense
Debit Deferred Tax Asset

Credit Income Tax Payable

Question 130

What is it called when you do not take advantage of deferred tax assets?

Answer 130

Valuation allowance

Question 131

3 major components of equity

Answer 131

1. Contributed capital
2. Earned capital
3. Accumulated other comprehensive income (loss)

Question 132

4 primary equity transactions

Answer 132

1. Issue stock
2. Repurchase stock
3. Issue dividends
4. Close out net income

Question 133

4 Types of Share-Based Plans (and what each does)

Answer 133

1. Stock award plans (firm gives employees shares)
2. Stock option plans (firm gives employees option to purchase shares)
3. Share purchase plans (employees can buy shares directly from company and avoid broker)
4. Stock appreciation rights (firm pays cash bonuses to employees equal to appreciation of stock)

Question 134

What is the impact on the financial statements of the restricted stock awards on the grant date?

Answer 134

No impact

Question 135

The compensation associated with a stock option plan is the number of shares granted by the option multiplied by:

a. The strike price at the grant date.

b. The market price at the grant date.

c. The expected market price at the exercise date.

d. The Black-Scholes value per share at the grant date

Answer 135

d. The Black-Scholes value per share at the grant date

Question 136

Basic EPS Equation

Answer 136

(net income - preferred dividends) / weighted average common shares outstanding

Question 137

Do stock dividends/splits change overall SE?

Answer 137

No, just shares outstanding (but overall value remains the same)

Question 138

When do you subtract out preferred dividends with non-cumulative preferred stock?

Answer 138

Only if they have been DECLARED

Question 139

Simple vs Complex Capital Structures

Answer 139

Simple = only common shares, no dilution

Complex = securities could dilute shares

Question 140

2 ways that Basic EPS can be diluted

Answer 140

1. Convertibles
2. Options, warrants, and other dilutive securities

Question 141

4 steps to the treasury stock method:

Answer 141

1. Determine new shares from hypothetical exercise of ALL options
2. Determine the cash proceeds (# of options x strike price)
3. Determine number of shares that could be bought back (cash proceeeds / avg market price)
4. Increase denominator by difference between total number of shares from hypothetical and number of shares from repurchases