Test 2 Multiple Choice Questions Flashcards
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.
c. The excess of the purchase price of a business over the fair value of all net identifiable assets.
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
d. I, II, and III
- 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
c. $50 million gain in net income
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.
b. Double declining balance used for depreciating equipment.
- LIFO layers are created every year that sales are greater than purchases.
a. TRUE
b. FALSE
b. FALSE
- Purchases > sales
- Lifo LIQUIDATION occurs when sales > purchases
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
LIFO
________ 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
LIFO
List two reasons why a lender would include a tight debt covenant in a contract.
- Early warning of financial distress
- Protects from default
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
a. Convertible bonds that cause an increase in EPS
- Has an “antidilutive” effect, so is not included
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.
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
- Which of the following fixed assets are NOT depreciated?
a. Buildings
b. Land
c. Land Improvements
d. Equipment
b. Land
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.
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.
- 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
a. To take advantage of short-term price changes
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
b. Goodwill and intangibles with indefinite useful lives are always amortized on a 10-year basis
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
d. Re-issuing treasury stocks to the public
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
a. Permanent Book-Tax differences
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.
C. Lower under average cost than LIFO.
Which type of income is used to calculate taxes on the income statement?
Financial income subject to to tax
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.
D. Higher under FIFO than LIFO.
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.
c. Lower income tax expense due to higher reported costs.
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
C. The cost flow matches the physical flow.
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
A. Prices decreased.
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.
C. Lower under average cost than LIFO.
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.
A.FIFO.
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.
D. Higher under FIFO than LIFO.
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?
Land = 100,000 + 20,000 - 5,000 = 115,000
Building = 25,000 + 300,000 = 325,000
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.
A. Prices decreased.
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?
260,000 * 1.05 + 4,600 + 7,000 = 284,600
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.
A. FIFO.
How to calculate DDB?
Take SL Rate and double it
- straight line rate is cost of equipment (not including SV) / years
What are the 2 indefinite-life intangibles?
- Goodwill
- Trademarks
If a company simply disposes an asset worth 7,000 on the books, how does that impact the INCOME STATEMENT?
Loss on disposal of 7,000
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?
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
How does depreciation impact the 3 statements?
B/S - reduces PPE value and RE
I/S - depreciation expense
CF - is added back to net income
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?
260,000 x 1.05 + 4,600 + 7,000 = 284,600
Amortizable intangible assets include all of the following except
a. goodwill.
b. patents.
c. copyrights
a. goodwill.
How to calculate straight line rate? Then how to get DDB?
Price (without SV) / years
Multiply this x 2
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.
a. Physical existence.
How to calculate total OCI for two years?
Take Fair Value - Cost and compare from year 2 to year 1
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
a. Research and development costs.
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?
Just the 100 net income
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?
Just the net income, after adjustment, of 1000
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?
Just the dividends of 300 (and any gain/loss on the investment)
For an equity portfolio of trading securities, say the unrealized gain is 5,000. How much goes on OCI?
None, it is reported on Net Income
OCI is for available for sale debt securities
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.
c. Securities classified as held to maturity.
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
b. Debt securities held to maturity.
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
b. Equity securities that represent less than 20% ownership
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.
a. They measure the success or failure of taking advantage of short-term price changes.
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
a. Available for sale debt securities
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
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
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 _________
What does a debt ratio of 35% mean?
You borrowed 35% to buy your assets
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.
Loss
Purchase price of 800,000 + unamortized premium of 20,000 = 820,000
820 - 825 = loss of 5,000
How is a discount/premium on bonds payable accounted for on the balance sheet?
As a contra-account to bonds payable
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
d. Less than $900,000
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.
d. 7 months.
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.
d. Less than the rate stated on the bond.
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
a. I, III
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
b. used to determine book income but never used to determine taxable income.
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?
Muni bond interest not included in taxable income
So, 45000 - 500 = 44,500