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Question #1 of 200 Question ID: 1590360

On December 31, 20X3 Okay Company issued 10,000 $1000 face value 10-year, 9% bonds to
yield 7%. The bonds pay interest semi-annually. On its financial statements (prepared under
U.S. GAAP) for the year ended December 31, 20X4, the effect of this bond on Okay's cash
flow from operations is:

A) -$755,735.
B) -$900,000.
C) -$700,000.

Explanation

The coupon payment is a cash outflow from operations. ($10,000,000 × 0.09) = $900,000.

(Module 21.2, LOS 21.b)

Question #2 of 200 Question ID: 1590050

Liquidity-based presentation of a balance sheet is most likely to be used by a:

A) bank.
B) manufacturer.
C) retailer.

Explanation

The liquidity-based format of balance sheet presentation is most common in the banking
industry.

(Module 16.2, LOS 16.c)

Question #3 of 200 Question ID: 1590267

The most likely result of increasing the estimated useful life of a depreciable asset is that:

A) asset turnover will increase.

B) net profit margin will increase.
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C) return on assets will decrease.

Explanation

The longer the estimated useful life of an asset, the lower the annual depreciation expense
charged to operations. Lower depreciation expense results in higher net income, profit
margins, and contributions to shareholder's equity.

(Module 19.2, LOS 19.e)

Question #4 of 200 Question ID: 1590094

Under U.S. GAAP, which of the following least likely represents a cash flow relating to
operating activity?

A) Cash received from customers.

B) Dividends paid to stockholders.
C) Interest paid to bondholders.

Explanation

U.S. GAAP requires dividends paid to stockholders to be classified as cash flow relating to
financing activity, and interest paid to bondholders to be classified an operating activity.

(Module 17.1, LOS 17.a)

Question #5 of 200 Question ID: 1590304

The Puchalski Company reported the following:

Year 1 Year 2 Year 3 Year 4

Income before taxes $1,000 $1,000 $900 $800

Taxable income $800 $900 $900 $1,000

The differences between income before taxes and taxable income are the result of using
accelerated depreciation for tax purposes on an asset purchased in Year 1. Puchalski had no
deferred tax liability prior to Year 1. If the tax rate is 40%, what is the amount of the deferred
tax liability reported at the end of Year 4?
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A) $40.
B) $80.
C) $120.

Explanation

Year 1 Year 2 Year 3 Year 4

Income tax expense $400 $400 $360 $320
Taxes paid $320 $360 $360 $400
Deferred tax liability $80 $120 $120 $40

(Module 20.1, LOS 20.b)

Question #6 of 200 Question ID: 1573614

A firm revalues its long-lived assets upward. All other things equal, which of the following
financial impacts is least likely to occur?

A) Higher earnings in the revaluation period.

B) Higher profitability in the periods after revaluation.
C) Lower solvency ratios.

Explanation

Because the asset has now been increased to a higher depreciable base, there will now be
higher depreciation expense and therefore, lower profitability in the periods after
revaluation. There could be higher earnings in the revaluation period because there may
be impairment losses that can be reversed on the income statement. Otherwise, there will
be an adjustment to earnings through other comprehensive income. Solvency ratios (i.e.
debt to equity) will decrease since the increase in assets will be balanced by an increase in
equity. Higher denominators and unchanged numerators will result in lower solvency
ratios.

(Module 35.2, LOS 35.b)

Question #7 of 200 Question ID: 1590325

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Which of the following statements regarding differences between taxable and pretax income
is most accurate? Differences between taxable and pretax income that:

A) result in deferred tax assets or liabilities are called temporary differences.

B) are not reversed for five or more years are called permanent differences.
C) increase or decrease the effective tax rate are called temporary differences.

Explanation

Temporary differences between taxable income (for tax reporting) and pretax income (for
financial statement reporting) result in deferred tax assets or liabilities. Permanent
differences result in a company's effective tax rate being different from the statutory tax
rate. There is no time limit on temporary differences to reverse.

(Module 20.3, LOS 20.d)

Question #8 of 200 Question ID: 1590371

Ivo Company has a $10 million face value bond issue outstanding. These bonds include a call
option that permits Ivo to redeem the bonds at any time for 101% of par. These bonds were
issued at a premium and have a carrying value of $10,200,000. If Ivo calls the bonds, its
income statement will reflect:

A) neither a gain nor a loss on redemption.

B) a gain on redemption.
C) a loss on redemption.

Explanation

The firm can call the bonds for 101% of $10 million, or $10,100,000. Redeeming bonds for
less than the carrying value of the bond liability results in a gain.

(Module 21.3, LOS 21.c)

Question #9 of 200 Question ID: 1590060

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Consider the following:

Statement #1 – Copyrights and patents are tangible assets that can be separately identified.

Statement #2 – Purchased copyrights and patents are amortized on a straight line basis over
30 years.

With respect to the statements about copyrights and patents acquired from an independent
third party:

A) both are incorrect.

B) only statement #1 is incorrect.
C) only statement #2 is incorrect.

Explanation

Acquired copyrights and patents are intangible assets that can be separately identified.
Identifiable intangible assets are amortized over their useful lives.

(Module 16.3, LOS 16.e)

Question #10 of 200 Question ID: 1590270

For a firm to use the revaluation model for balance sheet reporting of long-lived assets:

the firm must choose which assets of each type to revalue, and which to report at
A)
cost.
B) the firm must report under U.S. GAAP.
C) an active market must exist for the assets.

Explanation

Under IFRS, a firm may use the revaluation model for long-lived assets that have an active
market which can be used to determine the fair value of the assets. The firm must use the
same model for all assets of a similar type. U.S. GAAP reporting firms must use the cost
model for long-lived assets.

Question #11 of 200 Question ID: 1590051

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Which of the following statements about a classified balance sheet is least likely accurate? A
classified balance sheet:

A) distinguishes between current and noncurrent assets.

B) groups accounts by subcategories.
C) presents the net equity of each asset by subtracting its related liability.

Explanation

A classified balance sheet groups assets and liabilities by subcategories. It distinguishes

between current and noncurrent assets and current and noncurrent liabilities. The assets
and related liabilities are reported separately, they are not netted.

(Module 16.2, LOS 16.c)

Question #12 of 200 Question ID: 1590289

Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of
20X8. Based on past experience, it recognizes an provision for doubtful debt equal to 10% of
its credit sales outstanding. For tax purposes, the doubtful debts cannot be deducted until
written off. The tax base of Alter's accounts receivable at the end of 20X8 is closest to:

A) $3,500.
B) $31,500.
C) $35,000.

Explanation

For tax purposes, bad debt expense cannot be deducted until the receivables are deemed
worthless. Therefore, the tax base is $35,000 since no bad debt expense has been
deducted on the tax return. Note that the carrying value would be $31,500 since bad debt
expense is reflected on the income statement.

(Module 20.1, LOS 20.a)

Question #13 of 200 Question ID: 1590083

Under U.S. GAAP, the actual coupon payment on a bond is reported on the statement of
cash flow as:
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A) an operating cash outflow.

B) a financing cash outflow.
C) an investing cash outflow.

Explanation

The coupon payment is recorded on the statement of cash flows as an operating cash
outflow under U.S. GAAP.

(Module 17.1, LOS 17.a)

Question #14 of 200 Question ID: 1590135

In an environment of increasing prices, the last-in first-out (LIFO) inventory cost method
results in:

A) cost of sales below current cost and inventory above replacement cost.
B) cost of sales near current cost and inventory below replacement cost.
C) inventory near replacement cost and cost of sales below current cost.

Explanation

LIFO assumes the most recently purchased items are the first items sold. In an increasing
or decreasing price environment, LIFO results in cost of sales that are nearer to current
costs compared to other inventory cost methods, and inventory values based on outdated
prices (below replacement cost if prices are increasing, above replacement cost if prices
are decreasing).

(Module 18.1, LOS 18.b)

Question #15 of 200 Question ID: 1590085

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An examination of the cash receipts and payments of Xavier Corporation reveals the
following:

Cash paid to suppliers for purchase of merchandise $5,000

Cash received from customers 14,000

Cash paid for purchase of equipment 22,000

Dividends paid 2,000

Cash received from issuance of preferred stock 10,000

Interest received on short-term investments 1,000

Wages paid 4,000

Repayment of loan to the bank 5,000

Cash from sale of land 12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI)
will be:

CFF CFI

A) $10,000 $12,000

B) $3,000 -$10,000

C) $3,000 $12,000

Explanation

Cash flow relating to financing activities includes dividends paid, cash received from
preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000.

Cash flow relating to investing activities includes cash paid for equipment and cash from
sale of land. -22,000 + 12,000 = -10,000.

(Module 17.1, LOS 17.a)

Question #16 of 200 Question ID: 1590198

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MJ Inc. reported cost of goods sold of $80,000 for the year under the LIFO inventory
valuation method. MJ had a beginning LIFO reserve of $8,000 and an ending LIFO reserve of
$11,000. Cost of goods sold under the FIFO inventory valuation method is:

A) $91,000.
B) $77,000.
C) $83,000.

Explanation

COGS = 80,000 − (11,000 − 8,000) = 77,000.

(Module 18.3, LOS 18.f)

Question #17 of 200 Question ID: 1590220

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to
LIFO. The firm must apply this change:

A) prospectively, with LIFO layers calculated from past purchases and sales.
B) prospectively, with the carrying value as the first LIFO layer.
C) retrospectively, because it is a change in accounting principle.

Explanation

Changing the inventory cost flow assumption to LIFO is an exception to the retrospective
application of changes in accounting principle. This change is applied prospectively, with
the carrying value of inventory on the date of the change as the first LIFO layer.

(Module 18.4, LOS 18.i)

Question #18 of 200 Question ID: 1590012

When a firm recognizes revenue in excess of expenses on a product before cash is collected,
what is the impact on the firm's assets and liabilities, ignoring taxes?

Assets Liabilities

A) Increase No effect

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B) No effect Increase

C) Increase Increase

Explanation

When a firm recognizes revenue before cash is collected, equity increases (retained
earnings) and assets increase (accounts receivable). When a product is sold on credit,
accounts receivable (an asset) increases and inventory (also an asset) decreases. As long
as the sale price of the product is more than the expense (reduction of inventory on the
balance sheet), total assets will increase. Liabilities are not affected.

(Module 15.3, LOS 15.d)

Question #19 of 200 Question ID: 1590347

Under U.S. GAAP, which of the following statements about the financial statement effects of
issuing bonds is least accurate?

Periodic interest payments decrease cash flow from operations by the amount of
A)
interest paid.
B) Issuance of debt has no effect on cash flow from operations.
Payment of debt at maturity decreases cash flow from operations by the face value
C)
of the debt.

Explanation

Issuing debt results in a cash inflow from financing. Payment of debt at maturity has no
effect on cash flow from operations but decreases cash flow from financing by the face
value of the debt.

(Module 21.1, LOS 21.a)

Question #20 of 200 Question ID: 1590194

An analyst is comparing a company that uses the LIFO inventory cost method to companies
that use FIFO for inventories. The analyst should adjust the LIFO firm's inventories by adding
the:

A) change in the LIFO reserve.

B) LIFO reserve.

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C) LIFO reserve, net of tax.

Explanation

FIFO inventory equals LIFO inventory plus the LIFO reserve.

(Module 18.3, LOS 18.f)

Question #21 of 200 Question ID: 1590043

Which of the following characteristics are required for recognition of a balance sheet asset?

Characteristic #1: Future economic benefits to the firm are probable.

Characteristic #2: The asset is tangible and is obtained at a cost.

Characteristic #1 Characteristic #2

A) No No

B) Yes No

C) No Yes

Explanation

An asset is recognized on the balance sheet only if it is probable that it will provide future
economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired
without cost, but will be reported to the extent that they will provide future economic
benefit, and thus have value.

(Module 16.1, LOS 16.a)

Question #22 of 200 Question ID: 1590268

Which of the following statements is least accurate regarding impairments under U.S. GAAP?

If an impaired asset’s fair market value subsequently recovers, its carrying value
A)
may only be increased up to the asset’s historical cost.
The recoverability test compares balance sheet value of the asset to the
B)
undiscounted cash flows from its use and residual value.

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The impairment loss is the difference between the asset’s carrying value and its fair
C) market value, or the present value of the cash flows from its usage and residual
value.

Explanation

U.S. GAAP does not allow impairments to be reversed.

(Module 19.3, LOS 19.f)

Question #23 of 200 Question ID: 1590384

Other things equal, which of the following firm characteristics are most likely to be viewed
favorably by credit rating agencies?

A) Large size and diverse product lines.

B) Focused product line in widespread geographic regions.
C) Large size in a concentrated geographic region.

Explanation

Other things equal, credit rating agencies tend to rate larger companies and those with
diversified product lines and greater geographic diversification to be better credit risks.

(Module 22.2, LOS 22.c)

Question #24 of 200 Question ID: 1590112

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For the year ended December 31, 2007, Gremlin Corporation reported the following
transactions:

Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million.
Purchased a patent for $3.3 million cash.
Acquired 40% of the common stock of an affiliate for $2.7 million cash which was
borrowed from a bank.
Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1
million. The exchange was an even trade.
Converted bonds payable with a book value of $5 million to 50,000 shares of common
stock with a fair value of $6 million.

Calculate Gremlin's cash flow from investing activities and cash flow from financing activities
for the year ended December 31, 2007.

Cash flow from investing Cash flow from financing

activities activities

A) $2.7 million outflow $6.0 million inflow

B) $6.0 million outflow $2.7 million inflow

C) $1.7 million inflow $1.3 million outflow

Explanation

Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of
the patent for $3.3 million are included in cash flow from investing activities. Since the
acquisition of the stock purchase was financed with a bank loan, $2.7 million will be
reported as a financing inflow. Both remaining transactions are non-cash transactions and
are disclosed in the notes to or in a supplementary schedule to the cash flow statement.

(Module 17.1, LOS 17.b)

Question #25 of 200 Question ID: 1590048

A firm's balance sheet prepared under IFRS is least likely to include:

A) market value of the firm’s equity.

B) fair value of firm PPE.
C) market value of inventory.

Explanation

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The market value of the firm's common equity (common stock) is not included on the
balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of
inventory to be carried at their market values.

(Module 16.2, LOS 16.b)

Question #26 of 200 Question ID: 1589988

Which of the following statements most accurately describes the general features of
financial statements under IFRS?

A) All of the required financial statements are prepared using accrual accounting.
Prior-period information may only be presented when specifically permitted or
B)
required by a standard.
Assets may not be offset against liabilities unless specifically permitted or required
C)
by a standard.

Explanation

One of the general requirements stated in IAS No. 1 is that firms not offset assets against
liabilities unless a specific standard permits or requires it. The statement of cash flows is
not prepared using accrual accounting. IAS No. 1 states that firms should present
comparative information for prior periods unless a specific standard states otherwise.
(Module 82.1, LOS 82.c)

Question #27 of 200 Question ID: 1590307

A company purchased a new pizza oven for $12,676. It will work for 5 years and has no
salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial
reporting, the straight-line depreciation method is used, but for tax purposes depreciation is
35% of original cost in years 1 and 2 and the remaining 30% in Year 3. For this question
ignore all expenses other than depreciation.

What is the deferred tax liability as of the end of year one?

A) $780.
B) $1,129.
C) $1,909.

Explanation

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Pretax Income = $7,192 − $2,535 = $4,657

Taxable Income = $7,192 − $4,437 = $2,755

Deferred Tax liability = ($4,657 − $2,755)(0.41) = $780.

Alternative solution:

Difference in depreciation at the end of year one is $12,676 × (0.35 − 0.20) = $1,901

Deferred tax liability = difference in depreciation × tax rate = $1,901 × 0.41 = $780.

(Module 20.1, LOS 20.b)

Question #28 of 200 Question ID: 1590362

A company issues an annual-pay bond with the following characteristics:

Face value $67,831

Maturity 4 years

Coupon 7%

Market interest rates 8%

What is the unamortized discount at the end of the first year?

A) $499.
B) $1,209.
C) $1,750.

Explanation

Face value of bonds = $67,831

Proceeds from bond sale: I/Y = 8; N = 4; PMT = $67,831 × 0.07 = $4,748.17; FV = $67,831;
CPT PV = $65,582

Unamortized discount at issuance = $67,831 – $65,582 = $2,249.

First year interest expense = $65,582 × 0.08 =$5,247

Coupon payment = $67,831 × 0.07 = $4,748

Change in discount = $5,247 – $4,748 = $499

Unamortized discount at end of first year = $2,249 – $499 = $1,750.

(Module 21.2, LOS 21.b)

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Question #29 of 200 Question ID: 1590314

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has
no salvage value. For financial reporting, the straight-line depreciation method is used, but
for tax purposes depreciation is 35% of original cost in Years 1 and 2 and the remaining 30%
in Year 3. Annual revenues are constant at $14,384 over these five years. A change in the tax
law was enacted in Year 3, reducing the tax rate from 41% to 31% for Years 4 and 5. What is
the deferred tax liability as of the end of Year 3?

A) $3,144.
B) $2,948.
C) $1,039.

Explanation

Straight-line depreciation = $25,352 / 5 = $5,070. Income (Years 1, 2, and 3) using straight-

line depreciation = $14,384 − $5,070 = $9,314.

Accelerated depreciation (Years 1 and 2) = 0.35($25,352) = $8,873. Income (Years 1 and 2) =

$14,384 − $8,873 = $5,511.

Accelerated depreciation (Year 3) = 0.3($25,352) = $7,606. Income (Year 3) = $14,384 −

$7,606 = $6,778.

Cumulative difference in income at end of Year 3 = 3($9.314) − [2($5,511) + $6,778] =

$10,142.

DTL value at new tax rate = 0.31($10,142) = $3,144.

(Module 20.1, LOS 20.b)

Question #30 of 200 Question ID: 1590174

During periods of rising prices, which of the following is most likely to occur?

A) LIFO cost of sales > FIFO cost of sales, therefore LIFO net income > FIFO net income.
B) LIFO cost of sales > FIFO cost of sales, therefore LIFO net income < FIFO net income.
C) LIFO cost of sales < FIFO cost of sales, therefore LIFO net income < FIFO net income.

Explanation

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With rising prices and using the LIFO inventory cost method, the most expensive units go
to cost of sales, resulting in lower net income compared to the FIFO inventory cost
method.

(Module 18.2, LOS 18.d)

Question #31 of 200 Question ID: 1590097

Which of the following items would least likely be included in cash flow from financing?

A) Dividends paid to shareholders.

B) Purchase of treasury stock.
C) Gain on sale of stock of a subsidiary.

Explanation

Gains or losses will be found in cash flow from investments.

(Module 17.1, LOS 17.a)

Question #32 of 200 Question ID: 1590039

Which of the following items would affect owners' equity and also appear on the income
statement?

A) Unrealized gains and losses on available-for-sale securities.

B) Unrealized gains and losses on trading securities.
C) Dividends paid to shareholders.

Explanation

Unrealized gains and losses from trading securities are reflected in the income statement
and affect owners' equity. However, unrealized gains and losses from available-for-sale
securities are included in other comprehensive income. Transactions included in other
comprehensive income affect equity but not net income. Dividends paid to shareholders
reduce owners' equity but not net income.

(Module 15.4, LOS 15.i)

Question #33 of 200 Question ID: 1590283

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Aries Industries reports under IFRS and owns a warehouse that it rents to a construction
company. Aries has the option to report this asset using either:

A) the cost model or the revaluation model.

B) the cost model or the fair value model.
C) the cost model, the revaluation model, or the fair value model.

Explanation

Under IFRS, a warehouse owned primarily to earn rental income is classified as investment
property. A firm may choose the cost model or the fair value model for reporting
investment property.

Question #34 of 200 Question ID: 1590177

In an inflationary environment, a company's:

A) assets will be lower if it uses LIFO than if it uses FIFO.

B) net income will be larger if it uses LIFO than if it uses FIFO.
C) Cost of goods sold will be lower if it uses LIFO than if it uses FIFO.

Explanation

In an inflationary period, assets will be lower under LIFO since the last, higher priced items
are charged to the income statement.

(Module 18.2, LOS 18.d)

Question #35 of 200 Question ID: 1590338

Proceeds from issuing a bond are recorded on the statement of cash flows as an inflow
from:

A) operations.
B) investing.
C) financing.

Explanation

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Issuing securities is a financing activity. Cash from financing (CFF) is increased by the
amount of the proceeds.

(Module 21.1, LOS 21.a)

Question #36 of 200 Question ID: 1590178

If all else holds constant in periods of rising prices and inventory levels:

A) LIFO firms have higher gross profit margins than FIFO firms.
B) FIFO firms will have greater stockholder's equity than LIFO firms.
C) FIFO firms have higher debt to equity ratios than LIFO firms.

Explanation

The FIFO method of inventory accounting assigns the cost of the earliest units acquired to
goods transferred out and the cost of most recent acquisitions to ending inventory. When
prices are rising, the cheaper goods in beginning inventory reflecting earlier purchases are
assigned to COGS (hence, higher income and higher shareholder's equity through retained
earnings.)

In periods of rising prices and inventory levels (all else constant), FIFO firms have lower
debt to equity ratios than LIFO firms because stockholder's equity is higher and debt is
unaffected. LIFO firms have lower gross profit margins because the more expensive last
purchases are assigned to COGS, decreasing the numerator.

(Module 18.2, LOS 18.d)

Question #37 of 200 Question ID: 1590149

The exhibit below provides relevant data and financial statement information about Acme's
inventory purchases and sales of inventory for the last year.

Units Unit Price

Beginning Inventory 699 $5.00

Purchases 710 $8.00

Sales 806 $15.00

The cost of goods sold using the average cost method is closest to:

A) $4,130.

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B) $6,160.
C) $5,250.

Explanation

Average cost of units available for sale = (699 × $5 + 710 × $8) / (699 + 710) = $6.51

Cost of goods sold = $6.51 × 806 = $5,247

(Module 18.1, LOS 18.c)

Question #38 of 200 Question ID: 1589969

The major benefit of financial reporting standards is that they:

A) prevent management from manipulating financial results.

B) ensure that financial reports are usable by a wide range of audiences.
enable direct comparisons between companies by requiring them to use standard
C)
formats and methods.

Explanation

The importance of reporting standards is that they ensure that financial reports are usable
by a wide range of audiences, including analysts. Reporting standards limit the range of
presentation formats and accounting methods but do not require all firms to use the same
format or methods. Reporting standards do not eliminate management discretion in
choosing methods and making estimates, so they do not fully prevent manipulation of
financial results.

(Module 14.1, LOS 14.a)

Question #39 of 200 Question ID: 1590273

Dubois Company bought land for company use five years ago for €2 million and presents its
balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million,
Dubois will:

A) recognize a loss of €400,000 and decrease shareholders’ equity by €200,000.

B) decrease shareholders’ equity by €400,000 but will not recognize a loss.
C) recognize a loss of €200,000 and decrease shareholders’ equity by €400,000.

Explanation

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Because the land is valued above its historical cost on the balance sheet, Dubois is using
the revaluation model. The land's revaluation up to €2.2 million would have been reflected
in shareholders' equity with a revaluation surplus of €200,000. The decrease in fair value
to €1.8 million will reduce the revaluation surplus to zero, and the amount of the
writedown below historical cost (€2 million – €1.8 million = €200,000) will be recognized as
a loss on Dubois's income statement. This loss, combined with the removal of the
revaluation surplus, will decrease shareholders' equity by €400,000. Note that the land
was purchased for company use and therefore would not be classified as investment
property.

Question #40 of 200 Question ID: 1590041

Resources controlled as a result of past transactions that are expected to provide future
benefits are referred to as:

A) liabilities.
B) assets.
C) equity.

Explanation

Assets are resources that are expected to provide future benefits and are controlled as a
result of past transactions. Liabilities are obligations resulting from past events that are
expected to require a future outflow of resources. Equity is a residual interest in assets
after deducting liabilities.

(Module 16.1, LOS 16.a)

Question #41 of 200 Question ID: 1590341

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates
are 8%. Assume semi-annual compounding.

What is the firm's initial liability and the value of the liability in six months?

Initial Liability Liability in 6 months

A) $3,675,149 $3,675,149

B) $3,653,451 $3,799,589

C) $5,000,000 $5,000,000

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Explanation

The initial liability is: N = 8, I/Y = 4%, PMT = 0, FV = $5,000,000, Compute PV = -$3,653,451.

The value of the liability 6 months is: [$3,653,451 + {0.04($3,653,451)}] = $3,799,589

(Module 21.1, LOS 21.a)

Question #42 of 200 Question ID: 1589989

A company's operating revenues for a reporting period are most likely to be shown on its:

A) balance sheet.
B) cash flow statement.
C) income statement.

Explanation

Revenues for a reporting period are presented on a company's income statement. They
can be, but are not required to be, classified as operating and nonoperating revenues.
Cash from operating activities is presented on the company's statement of cash flows, but
this is not necessarily equal to operating revenues because revenue might be recognized
in a different period than cash is collected. The balance sheet displays a company's
financial position at a fixed point in time.

(Module 14.3, LOS 14.e)

Question #43 of 200 Question ID: 1590013

Which costs are least likely to be reported as an expense in the current accounting period?

A) Loan interest that has not yet been paid.

B) Period costs.
C) Costs of producing inventory.

Explanation

Inventory costs are expensed when items are sold under the matching principle. As an
extreme example, if no sales are made, no costs of inventory production are expensed for
the period. Period costs are expensed during the period. Under the accrual method,
interest accrued during the period is expensed, regardless of whether it has been paid
during the period.

(Module 15.3, LOS 15.d)

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Question #44 of 200 Question ID: 1590128

Interest paid is reported as an operating cash outflow under:

A) U.S. GAAP, but may be reported as a financing cash flow under IFRS.
B) IFRS, but may be reported as an investing cash flow under U.S. GAAP.
U.S. GAAP, but must be reported as either an investing or financing cash flow under
C)
IFRS.

Explanation

Interest paid is an operating cash flow under U.S. GAAP but may be reported as either an
operating or financing cash flow under IFRS.

Question #45 of 200 Question ID: 1590015

For a non-financial company, interest and dividends received, and gains and losses on the
disposal of investments, should most likely be reported as:

A) non-operating income.
B) income from operating activities.
C) unusual or infrequent items.

Explanation

Operating activities include the results from day-to-day core operating activities. For a
company outside the financial services industry, interest, dividends, and gains and losses
on investments are non-operating activities.

(Module 15.3, LOS 15.e)

Question #46 of 200 Question ID: 1590053

A classified balance sheet categorizes assets and liabilities based on whether they are:

A) measured at cost or fair value.

B) current or non-current items.
C) internally generated or acquired.

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Explanation

Classified balance sheets have categories for current assets, non-current assets, current
liabilities, and non-current liabilities.

(Module 16.2, LOS 16.c)

Question #47 of 200 Question ID: 1590258

Intangible assets with finite useful lives are:

A) amortized over their actual lives.

B) amortized over their expected useful lives.
C) not amortized, but are tested for impairment at least annually.

Explanation

Intangible assets with finite lives are amortized over their expected useful lives, which is
an estimate. Actual lives of intangible assets are often not known in advance. Intangible
assets with infinite lives are not amortized, but are tested for impairment at least annually.

(Module 19.2, LOS 19.d)

Question #48 of 200 Question ID: 1590111

Maritza, Inc., is involved in an exchange of debt for equity. In which of the following sections
of the cash flow statement would Maritza record this transaction?

A) Investing activities section.

B) Footnotes to the cash flow statement.
C) Financing activities section.

Explanation

This transaction results in a reduction of debt and an increase in equity. However, since no
cash is involved, it is not reported as a financing activity in the cash flow statement, but
will be disclosed in the notes to the cash flow statement.

(Module 17.1, LOS 17.b)

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Question #49 of 200 Question ID: 1590046

The balance sheet is most likely to provide an analyst with information about a firm's:

A) solvency.
B) investing and financing activities.
C) operating profitability.

Explanation

An analyst can use the balance sheet to assess a firm's solvency and liquidity. Operating
profitability can be assessed by examining the income statement. Information on a firm's
investing and financing activities appears in a firm's statement of cash flows.

(Module 16.2, LOS 16.b)

Question #50 of 200 Question ID: 1589976

The two primary assumptions in preparing financial statements under IFRS are:

A) going concern and reasonable accuracy.

B) reasonable accuracy and accrual accounting.
C) accrual accounting and going concern.

Explanation

In the IFRS framework, the two assumptions that underlie the preparation of financial
statements are accrual accounting and the going concern assumption.

(Module 14.2, LOS 14.c)

Question #51 of 200 Question ID: 1590193

In an increasing price environment, an analyst who wants to consider tax effects when
converting a LIFO firm's balance sheet to a FIFO basis is most likely to decrease the LIFO
firm's:

A) cash.
B) inventories.
C) retained earnings.

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Explanation

To adjust a LIFO firm's financial statements to a FIFO basis including tax effects, an analyst
should increase inventory by the LIFO reserve, decrease cash by (LIFO reserve × tax rate),
and increase retained earnings by [LIFO reserve × (1 – tax rate)].

(Module 18.3, LOS 18.f)

Question #52 of 200 Question ID: 1590225

Which of the following ratio levels would suggest that a company is holding obsolete
inventory?

A) Low inventory value compared to cost of goods sold.

B) Low number of days in inventory.
C) Low inventory turnover ratio.

Explanation

Low inventory turnover (high number of days in inventory) may be a sign of slow-moving
or obsolete inventory, especially when coupled with low or declining revenue growth
compared to the industry. Low inventory value compared to cost of goods sold, however,
implies a high inventory turnover ratio. This suggests much less risk of obsolescence.

(Module 18.5, LOS 18.k)

Question #53 of 200 Question ID: 1590122

According to U.S. Generally Accepted Accounting Principles (GAAP) and International

Accounting Standards (IAS) GAAP, should dividends paid be treated as a cash flow from
financing (CFF) or as a cash flow from operations (CFO)?

U.S. GAAP IAS GAAP

A) CFF CFF or CFO

B) CFF or CFO CFO

C) CFO CFF

Explanation

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U.S. GAAP treats dividends paid as CFF whereas IAS GAAP treats dividends paid as either
CFO or CFF.

(Module 17.1, LOS 17.d)

Question #54 of 200 Question ID: 1590280

A building owned by a firm is most likely to be classified as investment property if:

A) the building is a manufacturing plant or distribution center.

B) the firm uses the building for its corporate headquarters.
C) space in the building is rented to other firms.

Explanation

Under IFRS, investment property is an asset that is owned for the purpose of earning
income from rentals, capital appreciation, or both.

Question #55 of 200 Question ID: 1590148

The exhibit below provides Acme's inventory, purchases, and sales for the last period.

Units Unit Price

Beginning Inventory 699 $5.00

Purchases 710 $8.00

Sales 806 $15.00

Ending inventory using the FIFO method is:

A) $6,160.
B) $4,582.
C) $4,824.

Explanation

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Using FIFO, the 806 units sold are assumed to consist of the 699 units in beginning
inventory and another 806 – 699 = 107 units that were purchased during the period.
Because all of beginning inventory units are assumed to have been sold, the 699 + 710 –
806 = 603 items left in inventory are all assumed to be units that were purchased during
the period. Ending inventory value = 603 × $8 = $4,824.

(Module 18.1, LOS 18.c)

Question #56 of 200 Question ID: 1590158

Inventory, cost of sales, and gross profit can be different under periodic and perpetual
inventory systems if a firm uses which inventory cost method?

A) FIFO or weighted average cost, but not LIFO.

B) LIFO or FIFO, but not weighted average cost.
C) LIFO or weighted average cost, but not FIFO.

Explanation

The LIFO and weighted average cost methods can provide different values for inventory,
cost of sales, and gross profit depending on whether the firm uses a periodic or perpetual
inventory system. FIFO produces the same values from either a periodic or perpetual
inventory system.

(Module 18.1, LOS 18.c)

Question #57 of 200 Question ID: 1590187

LIFO liquidation may result when:

A) cost of goods sold is less than the available inventory.

B) purchases are less than goods sold.
C) purchases are more than goods sold.

Explanation

For LIFO companies, when more goods are sold than are purchased during a period, the
goods held in opening inventory are in included in COGS. This will result in LIFO
liquidation.

(Module 18.3, LOS 18.e)

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Question #58 of 200 Question ID: 1590368

Harter Corporation issued $95 million of 10-year 8% coupon bonds in 20X5. In 20X5, the
marketinterest rate was 6%. The current market interest rate is 9%. Harter has generated
unexpectedly strong profits over the last several years. Given a high cash balance, the
company is considering repurchasing the entire bond issue. If Harter repurchases the bonds,
what is the immediate effect in Harter's income statement?

A) No gain or loss is recognized.

B) A loss is recognized.
C) A gain is recognized.

Explanation

The bonds were issued at a premium in 20X5 because the 8% coupon rate exceeded the
6% market interest rate. Since the current market interest rate of 9% is above the coupon
rate, Harter can repurchase the bonds at a price below the carrying value. When the
carrying value exceeds the reacquisition price, a gain is recognized in the income
statement.

(Module 21.3, LOS 21.c)

Question #59 of 200 Question ID: 1590376

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Baetica Company reported the following selected financial statement data for the year
ended December 31, 20X7:

in millions % of Sales

For the year ended December 31, 20X7: $500 100%

Sales

Cost of goods sold (300) 60%

Selling and administration expenses (125) 25%

Depreciation (50) 10%

Net income $25 5%

As of December 31, 20X7:

Non-cash operating working capitala $100 20%

Cash balance $35 N/A

aNon-cash operating working capital = Receivables + Inventory – Payables

Baetica expects that sales will increase 20% in 20X8. In addition, Baetica expects to make
fixed capital expenditures of $75 million in 20X8. Ignoring taxes, calculate Baetica's expected
cash balance, as of December 31, 2008, assuming all of the common-size percentages
remain constant.

A) $80 million.
B) $40 million.
C) $30 million.

Explanation

2008 sales are expected to be $600 million ($500 million 2007 sales × 1.2) and 20X8 net
income is expected to be $30 million ($600 million 20X8 sales × 5%). 2008 non-cash
operating working capital is expected to be $120 million ($600 million 20X8 sales × 20%).
The change in cash is expected to be –$5 million ($30 million 20X8 net income + $60
million 20X8 depreciation – $20 million increase in non-cash operating working capital –
$75 million 20X8 capital expenditures). The 20X8 ending balance of cash is expected to be
$30 million ($35 million beginning cash balance – $5 million decrease in cash).

(Module 22.1, LOS 22.b)

Question #60 of 200 Question ID: 1590139

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Given the following purchases and ending inventory of 15 items:

Date Number of units Price per unit ($)

January 1 Opening inventory 12 240

January 10 Purchase 6 250

January 15 Purchase 7 255

January 23 Purchase 8 256

What is the value of inventory and the cost of goods sold using LIFO and a monthly periodic
inventory accounting system?

A) $3,733 $4,583

B) $3,733 $4,480

Inventory COGS
C)
$3,630 $4,583

Explanation

Units available for sale are 12 + 6 + 7 + 8 = 33.

Because 15 units are in inventory at the period end, units sold = 33 − 15 = 18.

LIFO ending inventory is the 15 oldest units: 12 × $240 + 3 × $250 = $3,630.

LIFO cost of goods sold is the 18 units most recently purchased: 3 × $250 + 7 × $255 + 8 ×
$256 = $4,583.

(Module 18.1, LOS 18.c)

Question #61 of 200 Question ID: 1590367

Maya, Inc. repurchases and retires a series of its corporate bonds for $990,000. The liability
at the time of the repurchase was $975,000. Maya's balance sheet also shows a prepaid
asset of $25,000 relating to issuance costs of these bonds. Under U.S. GAAP, Maya should
record a loss of:

A) $10,000.
B) $15,000.
C) $40,000.

Explanation
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Maya paid $990,000 – $975,000 = $15,000 more than the balance sheet liability to retire
the bonds. In addition, Maya must write off the $25,000 prepaid asset for unamortized
issuance costs. The income statement loss is $15,000 + $25,000 = $40,000.

(Module 21.3, LOS 21.c)

Question #62 of 200 Question ID: 1590337

XYZ Company has decided to issue $10 million of unsecured bonds. If issued today, the 4%
semi-annual coupon bonds would require a market interest rate of 12%. Under U.S. GAAP,
how will these bonds affect XYZ's statement of cash flows?

The coupon payments and the discount amortization will decrease financing cash
A)
flow each year.
The periodic interest expense will decrease operating cash flow and the discount will
B)
decrease financing cash flow at maturity.
The coupon payments will decrease operating cash flow each year and the discount
C)
will decrease financing cash flow at maturity.

Explanation

It is the coupon payment, not the interest expense, that results in an outflow of cash. The
difference between the coupon payment and interest expense is the discount
amortization. The amortization does not result in a cash outflow. Under U.S. GAAP, the
coupon payment is reported as an operating cash flow. The discount, when paid at
maturity, is reported as a financing cash flow.

(Module 21.1, LOS 21.a)

Question #63 of 200 Question ID: 1590253

A company is switching from straight-line depreciation to an accelerated method of

depreciation. Assuming all other revenue and expenses are at the same levels for the next
period, switching to an accelerated method will most likely increase the company's:

A) fixed asset turnover ratio.

B) net income/sales ratio.
C) total assets on the balance sheet.

Explanation

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The use of an accelerated depreciation method will increase depreciation expenses early
in the asset's life. The book value of the asset will be lower. Fixed asset turnover ratio
(sales/fixed assets) will increase, because the book value of the fixed assets will be lower.

(Module 19.2, LOS 19.b)

Question #64 of 200 Question ID: 1590293

Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting,
Corcoran will depreciate the asset using the straight-line method over a 10-year period with
no salvage value. For tax purposes the asset will be depreciated straight line for five years
and Corcoran's effective tax rate is 30%. Corcoran's deferred tax liability for 2004 will:

A) decrease by $15,000.
B) decrease by $50,000.
C) increase by $15,000.

Explanation

Straight-line depreciation per financial reports = 500,000 / 10 = $50,000

Tax depreciation = 500,000 / 5 = $100,000

Temporary difference = 100,000 − 50,000 = $50,000

Deferred tax liability will increase by $50,000 × 30% = $15,000

(Module 20.1, LOS 20.b)

Question #65 of 200 Question ID: 1590022

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Royster Company presents the following income statement:

Sales $12,000

Cost of goods sold $6,000

Selling and administrative expense $1,200

Interest expense $600

Pretax income $4,200

Income tax expense $1,470

Net income $2,730

Which of the following line items would appear on a common-size income statement for this
period?

A) Income tax expense 54%.

B) Net income 65%.
C) Pretax income 35%.

Explanation

Common-size income statements express each line item as a percentage of sales.

Sales 100%
Cost of goods sold 50%
Selling and administrative expense 10%
Interest expense 5%
Pretax income 35%
Income tax expense 12.25%
Net income 22.75%

(Module 15.4, LOS 15.f)

Question #66 of 200 Question ID: 1590186

In a period of rising prices, LIFO liquidation results in:

A) higher earnings.
B) higher inventory.

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C) lower earnings.

Explanation

Since older layers of inventory that are liquidated were purchased at lower prices, the cost
of goods sold will be lower and earnings will be higher.

(Module 18.3, LOS 18.e)

Question #67 of 200 Question ID: 1590201

Brigham Corporation uses the last-in, first-out (LIFO) method of accounting for inventory. For
the year 20X5, the following is provided:

Cost of goods sold (COGS): $24,000

Beginning inventory: $6,000
Ending inventory: $7,500
The notes accompanying the financial statements indicate that the LIFO reserve at the
beginning of the year was $2,250 and at the end of the year was $6,000

If Brigham had used first-in, first-out (FIFO), cost of goods sold for 20X5 would be:

A) $29,250.
B) $3,750.
C) $20,250.

Explanation

FIFO COGS = LIFO COGS − change in LIFO reserve. Therefore, $24,000 − ($6,000 − 2,250) =
$20,250.

(Module 18.3, LOS 18.f)

Question #68 of 200 Question ID: 1590214

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately
described as:

A) higher ROA in the current period and lower ROA in later periods.
B) lower ROA in the current period and higher ROA in later periods.

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C) lower ROA in the current period and no effect on ROA in later periods.

Explanation

Writing down inventory to net realizable value decreases both net income and total assets
in the period of the writedown. Because net income is most likely less than assets, the
result in the period is a decrease in ROA. In later periods, lower-valued inventory will
decrease COGS and increase net income. Combined with a lower value of total assets, this
will increase ROA.

(Module 18.4, LOS 18.h)

Question #69 of 200 Question ID: 1590071

Which of the following statements regarding treasury stock is most accurate?

In proxy votes, the firm’s management decides how to vote shares held as treasury
A)
stock.
B) Treasury stock is shares that have been reacquired by the firm but not retired.
C) Acquiring treasury stock using the firm’s cash leaves owners’ equity unchanged.

Explanation

Treasury stock represents shares that the company has repurchased but not retired. An
increase in treasury stock reduces owners' equity. Treasury stock is not owned by external
shareholders and, as a result, does not have voting and dividend rights.

(Module 16.5, LOS 16.f)

Question #70 of 200 Question ID: 1590150

The exhibit below provides relevant data and financial statement information about Acme's
inventory purchases and sales of inventory for the last year.

Units Unit Price

Beginning Inventory 699 $5.00

Purchases 710 $8.00

Sales 806 $15.00

The value of the ending inventory level in dollars using the last-in-first-out (LIFO) method is:
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A) $4,824.
B) $3,015.
C) $6,160.

Explanation

There are (699 + 710 – 806) = 603 items left in inventory. Ending inventory = 603 × $5 =
$3,015.

(Module 18.1, LOS 18.c)

Question #71 of 200 Question ID: 1590394

A firm recognizes a goodwill impairment in its most recent financial statement, reducing
goodwill from $50 million to $40 million. How should an analyst most appropriately adjust
this financial statement for goodwill when calculating financial ratios?

A) Make no adjustments to assets or earnings because both reflect the impairment.

B) Decrease assets and increase earnings.
C) Decrease earnings but make no adjustment to assets.

Explanation

The recommended adjustment for goodwill before calculating financial ratios is to remove
goodwill from the balance sheet (decreasing assets) and reverse any losses recognized due
to goodwill impairment (increasing earnings).

(Module 22.2, LOS 22.e)

Question #72 of 200 Question ID: 1590234

For balance sheet purposes, inventories based on:

FIFO are preferable to those based on LIFO, as they more closely reflect current
A)
costs.
LIFO are preferable to those based on average cost, as they more closely reflect the
B)
current costs.
LIFO are preferable to those based on FIFO, as they more closely reflect the current
C)
costs.

Explanation
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The inventories based on FIFO are preferable to those presented under LIFO or average
cost for balance sheet purposes. Under FIFO, the older inventories are taken out first, and
the ending inventory balance consists of the recent purchases and thus most closely
reflect the current (economic) value.

(Module 18.5, LOS 18.l)

Question #73 of 200 Question ID: 1589984

Financial statements required under IFRS least likely include a statement of:

A) changes in owners’ equity.

B) changes in pension liabilities.
C) comprehensive income.

Explanation

The statement of comprehensive income and the statement of changes in owners' equity
are required under IFRS. A reconciliation of opening and closing pension liability is typically
disclosed in the footnotes but is not a financial statement specifically required under IFRS.

(Module 14.2, LOS 14.d)

Question #74 of 200 Question ID: 1590264

After acquiring a subsidiary, Lafleur Company adds to its balance sheet a patent that expires
in five years and a trademark that can be renewed every three years. Lafleur
should amortize:

A) the patent over five years and the trademark over three years.
B) the patent over five years, but should not amortize the trademark.
C) neither the patent nor the trademark, but must test them for impairment annually.

Explanation

Because the trademark can be renewed, it should be considered to have an indefinite life
and therefore should not be amortized. The patent has an expiration date and should be
amortized over its remaining life.

(Module 19.2, LOS 19.d)

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Question #75 of 200 Question ID: 1590259

Under normal circumstances, intangible assets with indefinite lives are:

A) not amortized.
B) amortized over a period chosen by management.
C) amortized over a period specified in the accounting standards.

Explanation

Intangible assets with indefinite lives are not amortized, but are subject to impairment
charges. An intangible asset is impaired if events and circumstances indicate that the firm
may not be able to recover its carrying value through future use. Examples include
significant declines in market value of the asset or significant deterioration in the asset's
physical condition.

(Module 19.2, LOS 19.d)

Question #76 of 200 Question ID: 1590312

Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A
change in tax laws has increased future tax rates for Nespa. The impact of this increase in
tax rate will be:

A) a decrease in deferred tax liability and a decrease in tax expense.

B) an increase in deferred tax liability and an increase in tax expense.
C) a decrease in deferred tax liability and an increase in tax expense.

Explanation

An increase in tax rates will increase future deferred tax liability, and the impact of the
increase in liability will be reflected in the income statement of the year in which the tax
rate change is affected.

(Module 20.1, LOS 20.b)

Question #77 of 200 Question ID: 1589993

Declaration and payment of a dividend during the most recent accounting period would be
shown on a company's statements of:
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A) cash flows and comprehensive income.

B) cash flows and changes in equity.
C) changes in equity and comprehensive income.

Explanation

Declaration of a dividend will be recorded as a decrease in equity, and payment of a

dividend will be shown on a company's cash flow statement, but neither affects income or
comprehensive income. (Module 81.1, LOS 81.b)

Question #78 of 200 Question ID: 1590374

Portsmouth Industries has stated that in the market for their medical imaging product, their
strategy is to grow their market share in the premium segment by leveraging their research
and development capabilities to produce machines with greater resolution for the most
challenging cases of spinal degeneration. An analyst examining their financials for
subsequent periods would most likely conclude that they are successfully pursuing this
strategy if she finds:

A) an increase in gross margins greater than the increase in operating margins.

B) an increase in revenue and operating margins.
C) increasing research and development expense and decreasing operating margins.

Explanation

A shift to premium, rather than commodity-like, products should result in higher gross
margins, higher average revenue per unit (selling price per unit), and an increase in gross
margins relative to operating margins (because of the increase in R&D and marketing
expenditures). A successful shift to a premium product should increase operating margins
rather than increase operating income through increased unit sales. Revenue would not
necessarily increase as the company shifted to premium products.

(Module 22.1, LOS 22.a)

Question #79 of 200 Question ID: 1590044

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Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over
36 months for customers who make a minimum down payment of 10%. Historically, Galaxy
has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month
unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3%
of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty
expense at the time of sale affect Galaxy's liabilities?

Bad debt expense Warranty expense

A) Increase No effect

B) No effect No effect

C) No effect Increase

Explanation

The recognition of bad debt expense has no effect on liabilities, current revenues are
reduced by the expected amount of uncollectable accounts. Bad debt expense reduces net
income and reduces assets. The recognition of expected warranty expense decreases net
income (following the matching principle), and since it is not currently paid (doesn't reduce
assets) it creates or increases a liability at the time of sale.

(Module 16.1, LOS 16.a)

Question #80 of 200 Question ID: 1590090

Which of the following transactions is least likely to be classified as cash flow from investing?

A) Equipment purchased.
B) Land sold.
C) Dividends paid.

Explanation

Under U.S. GAAP, dividends paid are classified as financing cash flows. Under IFRS,
dividends paid may be classified as operating or financing cash flows. Purchases and sales
of long-lived assets such as equipment or land are examples of investing cash flows.

(Module 17.1, LOS 17.a)

Question #81 of 200 Question ID: 1590233

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Sean Derry is a junior analyst comparing the inventory management of two firms in the auto
industry. Awatar Autos indicate relatively high inventory turnover compared to auto industry
averages. Vishal Vehicles shows both high inventory turnover and sales growth that is lower
than the industry average. Derry should most appropriately conclude that:

A) Vishal may be losing sales due to insufficient inventory levels.

B) Awatar may be suffering from inventory obsolescence.
C) Vishal is operating an efficient inventory management system.

Explanation

Generally, high inventory turnover (low days of inventory) is desirable. However, inventory
turnover can be too high if a firm is not carrying enough inventory to satisfy customers'
needs. This can cause the firm to lose sales. High inventory turnover may also indicate that
inventory writedowns have occurred. Writedowns are usually the result of poor inventory
management. To assess the explanation for high inventory turnover, an analyst can look at
inventory turnover relative to sales growth within the firm and industry. High turnover,
together with slower growth, may indicate inadequate inventory. Alternatively, sales
growth at or above the industry average supports the conclusion that high inventory
turnover reflects greater efficiency.

(Module 18.5, LOS 18.l)

Question #82 of 200 Question ID: 1590221

Under which financial reporting standards is a firm required to discuss the circumstances
when reversing an inventory writedown?

A) IFRS, but not U.S. GAAP.

B) Both IFRS and U.S. GAAP.
C) Neither IFRS nor U.S. GAAP.

Explanation

Reversals of inventory writedowns are permitted under IFRS but not under U.S. GAAP. If an
IFRS reporting firm reverses an inventory writedown, the firm is required to discuss the
circumstances of the reversal.

(Module 18.4, LOS 18.i)

Question #83 of 200 Question ID: 1590396

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A firm that uses higher estimates of assets' useful lives or salvage values relative to its peers
will report:

A) lower depreciation expense and lower net income.

B) higher depreciation expense and higher net income.
C) lower depreciation expense and higher net income.

Explanation

Estimates of useful lives or salvage values that are too high will result in lower
depreciation expense and higher net income.

(Module 22.2, LOS 22.e)

Question #84 of 200 Question ID: 1590003

The "All Faiths" church is building a new church for $2 million on land acquired several years
ago. The contractor estimates the cost at $1.3 million and the project is to be completed
over a 2-year period with the payments split evenly between the 2 years. During the first
year, the total costs incurred were $700,000. During the second year the contractor
experienced cost overruns and costs incurred were $1.0 million. Using the percentage-of-
completion method, how much revenue and income should the contractor recognize in the
second year of the project?

Revenue Income

A) $1,000,000 $0

B) $1,076,923 $376,923

C) $923,077 -$76,923

Explanation

During the first year, the revenue was 700,000 / 1,300,000 × 2,000,000 = 1,076,923

The total revenue for both years = $2,000,000

The second year revenue was 2,000,000 – 1,076,923 = $923,077

The second year income = revenues − costs = 923,077 – 1,000,000 = $-76,923

(Module 15.2, LOS 15.c)

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Question #85 of 200 Question ID: 1590344

A company issued a bond with a face value of $67,831, maturity of 4 years, and 7% annual-
pay coupon, while the market interest rates are 8%.

What is the unamortized discount when the bonds are issued?

A) $498.58.
B) $2,246.65.
C) $1,748.07.

Explanation

Coupon payment = ($67,831)(0.07) = $4,748.17.

Present value of bond: FV = $67,831, N = 4, I = 8, PMT = $4,748.17, CPT PV = $65,584.35.

Discount = $67,831 - $65,584.35 = $2,246.65.

(Module 21.1, LOS 21.a)

Question #86 of 200 Question ID: 1589978

According to the IASB conceptual framework, characteristics that enhance relevance and
faithful representation include:

A) timeliness, comparability, and verifiability.

B) assurance, timeliness, and understandability.
C) comparability, understandability, and thoroughness.

Explanation

The four characteristics that enhance relevance and faithful representation are
comparability, verifiability, timeliness, and understandability.

(Module 14.2, LOS 14.c)

Question #87 of 200 Question ID: 1589983

According to the IASB conceptual framework, which of the following is least likely a
characteristic that enhances the usefulness of the two fundamental qualitative
characteristics that make financial information useful?

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A) Relevance.
B) Timeliness.
C) Understandability.

Explanation

Relevance and faithful representation are the two fundamental qualitative characteristics
that make financial information useful. The four enhancing characteristics are
comparability, timeliness, verifiability, and understandability. (Module 82.1, LOS 82.b)

Question #88 of 200 Question ID: 1590142

Given the following inventory data about a firm:

Beginning inventory 20 units at $50/unit

Purchased 10 units at $45/unit
Purchased 35 units at $55/unit
Purchased 20 units at $65/unit
Sold 60 units at $80/unit

What is the inventory value at the end of the period using LIFO?

A) $1,575.
B) $1,225.
C) $3,450.

Explanation

Ending inventory equals 20 + 10 + 35 + 20 – 60 = 25 of the first units purchased equals:

(20 units)($50/unit) + (5 units)($45/unit) =

$1,000 + $225 = $1,225

(Module 18.1, LOS 18.c)

Question #89 of 200 Question ID: 1590331

In the context of deferred tax items, what is the impact on net income of an increase in the
valuation allowance?

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A) Decrease net income.

B) No effect on net income.
C) Increase net income.

Explanation

The valuation allowance is a contra asset account that reduces the value of a deferred tax
asset. This increases income tax expense and decreases net income. Valuation allowances
are used to reduce the asset when future taxable income is deemed to be insufficient to
fully use the DTA.

(Module 20.3, LOS 20.f)

Question #90 of 200 Question ID: 1590292

Xanos Corporation faced a 50% marginal tax rate last year and showed the following
financial and tax reporting information:

Deferred tax asset of 1,000.

Deferred tax liability of 5,000.

Based only on this information and the news that the tax rate will decline to 40%, Xanos
Corporation's deferred tax:

A) asset will be reduced by 200 and income tax expense will be reduced by 1,000.
B) liability will be reduced by 1,000 and income tax expense will be reduced by 800.
C) asset will be reduced by 400 and deferred tax liability will be reduced by 2,000.

Explanation

There is a 20% reduction in the tax rate [(40% − 50%) / 50% = –0.2]. Hence, the deferred tax
asset will be 800 = 1,000(1 − 0.2), the deferred tax liability will be 4,000 = 5,000(1 − 0.2),
and the income tax expense will fall by the net amount of the decline in the asset and
liability balances (1,000 – 200 = 800).

(Module 20.1, LOS 20.b)

Question #91 of 200 Question ID: 1590025

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An analyst prepares the following common-size income statements for Perez Company:

20X1 20X2 20X3

Sales 100% 100% 100%

Cost of goods
50% 52% 53%
sold

Selling and
administrative 16% 12% 9%
expense

Interest
4% 4% 4%
income

Pretax
30% 32% 34%
income

Income tax
15% 16% 17%
expense

Net income 15% 16% 17%

Based only on this information, Perez's improving net profit margin is most likely a result of:

A) greater financial leverage.

B) controlling operating expenses.
C) improving gross margins.

Explanation

The improvement in net profit margin from 15% to 17% appears to result mainly from the
firm reducing selling and administrative expense from 16% of sales to 9% of sales, thus
decreasing operating expenses from 66% to 62% of sales. Gross margin is decreasing over
this period because cost of goods sold is increasing as a percentage of sales. While
financial leverage cannot be determined directly from the income statement, the fact that
interest expense is a constant percentage of sales suggests financial leverage is stable.

(Module 15.4, LOS 15.g)

Question #92 of 200 Question ID: 1590040

Liabilities are best described as:

A) obligations that are expected to require a future outflow of resources.

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B) residual ownership interest in an entity’s assets.

C) resources that are expected to provide future benefits.

Explanation

Liabilities are obligations resulting from past events that are expected to require a future
outflow of resources. Assets are resources that are expected to provide future benefits.
Equity is residual ownership interest in an entity's assets (i.e., assets minus liabilities).

(Module 16.1, LOS 16.a)

Question #93 of 200 Question ID: 1590164

Prices have been rising and Build-it Corporation's accountant has found that the company's
reported net income for the quarter will be different for each of three inventory costing
methods. It is most likely that net income will be the lowest if the firm uses:

A) last-in, first-out and a perpetual inventory system.

B) last-in, first-out and a periodic inventory system.
C) first-in, first-out and a periodic inventory system.

Explanation

With increasing prices, COGS is higher using LIFO compared to FIFO. With LIFO, using a
periodic inventory system can result in higher COGS compared to a perpetual inventory
system. The method with the highest COGS will result in the lowest gross and net profit.

(Module 18.1, LOS 18.c)

Question #94 of 200 Question ID: 1590387

The most likely problem with using financial statement ratios to screen for stocks to include
in a portfolio is that:

A) specific industries are often over-represented.

B) firms with undesirable characteristics will be included.
C) firm characteristics are not identified well by financial statement measures.

Explanation

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It is often the case a screening metric, such as low P/E, high dividend yield, or high ROE,
will identify many stocks in the same industry. Undesirable characteristics can be avoided
by including additional screening metrics. Financial statement measures provide a great
amount of information about a firm's characteristics.

(Module 22.2, LOS 22.d)

Question #95 of 200 Question ID: 1590369

A firm can recognize a gain or loss on derecognition of a bond the firm has issued:

A) at maturity, but not before maturity.

B) before maturity, but not at maturity.
C) either before maturity or at maturity.

Explanation

If a firm redeems a bond before maturity for a price that is different from the carrying
value of the bond liability, the firm will recognize the difference as a gain or a loss. At
maturity, the carrying value of the bond liability is equal to the face value of the bond,
therefore the firm does not experience a gain or loss by repaying the face value.

(Module 21.3, LOS 21.c)

Question #96 of 200 Question ID: 1590159

McKay Company uses a periodic inventory system and the FIFO inventory cost method. In
the most recent period, McKay had beginning inventory of $4,200, purchases of $1,400, cost
of sales $1,300, and ending inventory of $4,300. If McKay had used a perpetual inventory
system, its ending inventory would have been:

A) $4,300.
B) $4,200.
C) $4,400.

Explanation

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For a firm that uses the FIFO inventory cost method, cost of sales and ending inventory are
unaffected by the choice between periodic and perpetual inventory systems.

(Module 18.1, LOS 18.c)

Question #97 of 200 Question ID: 1590229

Selected information from Jenner, Inc.'s financial statements for the year ended December
31 included the following (in $):

Cash $200,000 Accounts Payable $300,000

Accounts Receivable 300,000 Deferred Tax Liability 600,000

Inventory 1,500,000 Long-term Debt 8,100,000

Property, Plant & Equip. 11,000,000 Common Stock 2,200,000

Total Assets 13,000,000 Retained Earnings 1,800,000

Total Liabilities & Equity $13,000,000

LIFO Reserve at Jan. 1 400,000

LIFO Reserve at Dec. 31 600,000

Net Income (after 40% tax rate) 800,000

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner had used
first in, first out (FIFO), return on total equity would:

A) increase to 21.1%.
B) decrease to 18.3%.
C) increase to 23.0%.

Explanation

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Return on total equity (net income / total equity) was $800,000 / ($2,200,000 + $1,800,000)
= 20%. Under FIFO, net income increases by the increase in the LIFO reserve multiplied by
(1 – tax rate). FIFO net income was $800,000 + ($600,000 – $400,000) (1 – 0.40) = $920,000.
Total equity increases by the amount of accumulated FIFO profits that are added to
retained earnings, which is calculated by multiplying the amount of the ending LIFO
reserve by (1 – tax rate) for an increase of ($600,000) × (1 – 0.40) = $360,000. Total equity is
$2,200,000 + $1,800,000 + $360,000 = $4,360,000. FIFO return on total equity is $920,000 /
$4,360,000 = 21.1%.

(Module 18.5, LOS 18.k)

Question #98 of 200 Question ID: 1590004

The JME Jumpers, a professional volleyball team, sells season tickets to all home games. The
cost of a season ticket is $1,000 and the team plays 20 home games, which run from April
through August. For the year ended June 30, 2005, JME sold 1,200 tickets, collected 80
percent of the amount owed, and played 12 home games. How much revenue should JME
recognize?

A) $720,000.
B) $960,000.
C) $1,200,000.

Explanation

(1,200 × $1,000 × 12/20) = $720,000

(Module 15.2, LOS 15.c)

Question #99 of 200 Question ID: 1590152

Given the following inventory data about a firm:

Beginning inventory 20 units at $50/unit

Purchased 10 units at $45/unit
Purchased 35 units at $55/unit
Purchased 20 units at $65/unit
Sold 60 units at $80/unit

What is the inventory value at the end of the period using first in, first out (FIFO)?

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A) $1,575.
B) $3,100.
C) $3,475.

Explanation

Ending inventory equals 20 + 10 + 35 + 20 – 60 = 25 of last units purchased in inventory.

(20 units)($65/unit) + (5 units)($55/unit) = $1,300 + $275 = $1,575

(Module 18.1, LOS 18.c)

Question #100 of 200 Question ID: 1590349

Which of the following statements regarding the impact on the financial statements of
issuing zero-coupon bonds is most accurate?

A) No interest expense is recognized during the life of a zero-coupon bond.

Implicit interest on zero-coupon bonds is classified as a cash flow from operations
B)
under U.S. GAAP.
C) Interest expense increases in each period of the life of a zero-coupon bond.

Explanation

Even though the coupon is zero interest, expense is recognized on the income statement
over the life of the bond via the amortization of the discount. As with all discount bonds,
the amortization increases over the bond's life as the liability increases toward par value.
Under U.S. GAAP, the cash flows for a zero-coupon bond (proceeds at issuance and
repayment of principal at maturity) are both financing cash flows.

(Module 21.2, LOS 21.b)

Question #101 of 200 Question ID: 1590160

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A firm booked revenue of $2.25 million during 20X6 on unit sales of 150. The replacement
cost per unit of inventory is currently $9,300.

Inventory purchases:

Date Quantity Unit Cost

Begin inventory 50 units $7,000

4/1/X6 80 units 7,500

7/1/X6 30 units 8,100

10/1/X6 20 units 8,700

Assuming the FIFO inventory costing method and a perpetual inventory system are used, the
firm's gross profit and ending inventory are closest to:

Ending
Gross profit
inventory

A) $1,112,000 $279,000

B) $1,138,000 $279,000

C) $1,138,000 $255,000

Explanation

The table in the problem can be used to tabulate the cost of goods available for sale.

Date Quantity Unit Cost Total Cost

Begin inv. 50 units × $7,000 = $350,000
4/1/X6 80 units × 7,500 = 600,000
7/1/X6 30 units × 8,100 = 243,000
10/1/X6 20 units × 8,700 = 174,000
180 units $1,367,000

Note that COGS and inventory under FIFO are the same under either a perpetual and
periodic inventory system.

COGS = $350,000 + $600,000 + (20 × $8,100) = $1,112,000

gross profit = net sales – COGS = $2,250,000 – $1,112,000 = $1,138,000.

Ending inventory under FIFO will include the most recently purchased inventory.

ending inventory = $174,000 + (10 × $8,100) = $255,000.

(Module 18.1, LOS 18.c)

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Question #102 of 200 Question ID: 1590232

During periods of inflation and increasing inventory quantities, which of the following
statements is least accurate?

A) Cash flow is higher under LIFO and lower under FIFO.

B) Income taxes are higher under LIFO and lower under FIFO.
C) Income before taxes is higher under FIFO and lower under LIFO.

Explanation

Income taxes are lower and cash flow is higher under LIFO because of tax savings. Pretax
income, and therefore taxes, are higher under FIFO.

(Module 18.5, LOS 18.l)

Question #103 of 200 Question ID: 1590223

Which of the following circumstances is most likely indicative of an increase in a company's

future earnings?

A) Finished goods inventory increasing faster than sales.

B) Finished goods inventory increasing faster than work-in-process inventory.
C) Work-in-process inventory increasing faster than finished goods inventory.

Explanation

Work-in-process inventory increasing faster than finished goods inventory is a likely

indicator that a firm expects demand to increase, which should increase future revenues
and earnings. Finished goods inventory increasing faster than sales or work-in-process
inventory may indicate that demand is decreasing. Analysts should refer to sources such
as management's commentary to further examine the reasons for an increase in finished
goods inventory.

(Module 18.4, LOS 18.j)

Question #104 of 200 Question ID: 1590077

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Consider the following statements.

Statement #1: Par value is a nominal dollar value assigned to shares of stock in a
corporation's charter.

Statement #2: The par value of common stock represents the amount the corporation
received when the stock was issued.

With respect to these statements:

A) both statements are correct.

B) only statement #1 is correct.
C) only statement #2 is correct.

Explanation

The par value of common stock is the stated or nominal value assigned to the stock. Par
value has no relationship to market value. The amount the corporation receives from the
issuance of common stock is equal to the par value plus the additional paid-in-capital
(proceeds in excess of par).

(Module 16.5, LOS 16.f)

Question #105 of 200 Question ID: 1590106

Depreciation expense would be classified as:

A) having no cash flow impact.

B) investing cash flow.
C) operating cash flow.

Explanation

Depreciation expense has no cash flow impact.

(Module 17.1, LOS 17.a)

Question #106 of 200 Question ID: 1590078

The statement of changes in equity is least likely to provide information on the firm's:
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A) payment of dividends.
B) repayment of bond principal.
C) comprehensive income.

Explanation

The statement of changes in equity shows a firm's comprehensive income (net income and
other comprehensive income) and transactions with shareholders, such as dividends paid
and issuance or repurchases of stock. Repayment of bond principal is not a change in
equity: assets (cash) decrease and liabilities (long-term debt) decrease.

(Module 16.5, LOS 16.f)

Question #107 of 200 Question ID: 1590036

Are dividends paid to common shareholders and foreign currency translation gains and
losses included in a firm's other comprehensive income?

Foreign currency translation

Dividends paid
gains and losses

A) No No

B) No Yes

C) Yes Yes

Explanation

Other comprehensive income includes non-owner transactions that affect shareholders'

equity and are not recognized in net income. Dividends paid are transactions with the
owners of the firm, so dividends paid are not included in other comprehensive income.
Foreign currency translation gains and losses are non-owner transactions that are not
recognized in net income. Thus, foreign currency translation gains and losses are included
in other comprehensive income.

(Module 15.4, LOS 15.i)

Question #108 of 200 Question ID: 1590123

Independence, Inc. reports interest received and dividends paid as part of its cash flow from
operations. This treatment is acceptable under:

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A) either IFRS or U.S. GAAP.

B) IFRS but not under U.S. GAAP.
C) U.S. GAAP but not under IFRS.

Explanation

IFRS permits interest received to be reported as either cash flow from operations or cash
flow from investing, and permits dividends paid to be reported as either cash flow from
operations or cash flow from financing. U.S. GAAP requires interest received to be
reported as cash flow from operations, but requires dividends paid to be reported as cash
flow from financing.

(Module 17.1, LOS 17.d)

Question #109 of 200 Question ID: 1590088

Which of the following items is NOT found in the financing cash flow part of the statement of
cash flows?

A) Change in long-term debt.

B) Change in retained earnings.
C) Dividends paid.

Explanation

Changes in retained earnings are not included in the calculation of financing cash flows.

(Module 17.1, LOS 17.a)

Question #110 of 200 Question ID: 1590238

During periods of rising prices:

A) LIFO COGS > Weighted Average COGS > FIFO COGS.

B) LIFO COGS > Weighted Average COGS < FIFO COGS.
C) LIFO COGS < Weighted Average COGS < FIFO COGS.

Explanation

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During periods of rising prices, the last units purchased are more expensive than the
existing units. Under LIFO, the cost of the last units purchased is assigned to cost of goods
sold. This higher cost of goods sold results in lower income, as compared to the FIFO
method. As the name suggests, the weighted average method is based on mathematical
averages rather than timing of purchase/use. Thus, cost of goods sold using this method
falls between that of LIFO and FIFO.

(Module 18.5, LOS 18.l)

Question #111 of 200 Question ID: 1590035

Items that appear in other comprehensive income, but are excluded from the income
statement, include:

A) gains and losses due to foreign currency translation.

B) unrealized gains and losses on trading securities.
C) losses due to expropriation of assets.

Explanation

Other comprehensive income includes unrealized gains and losses on available-for-sale

securities, foreign currency translation gains and losses, minimum pension liability
adjustments, and unrealized gains and losses on derivatives used for cash flow hedging.

Unrealized gains and losses on held-for-trading securities are included in net income on
the income statement. Losses due to expropriation of assets would be included in net
income, most likely as an unusual or infrequent item.

(Module 15.4, LOS 15.i)

Question #112 of 200 Question ID: 1590134

A U.S. company uses the LIFO method to value its inventory for their income tax return. For
its financial statements prepared for shareholders, the company may:

A) only use the LIFO method.

use any other inventory method under generally accepted accounting principles
B)
(GAAP).
C) use the FIFO method, but must disclose a LIFO reserve.

Explanation

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The LIFO conformity rule in the U.S. requires firms to use LIFO for their financial
statements if they use LIFO for income tax purposes.

(Module 18.1, LOS 18.b)

Question #113 of 200 Question ID: 1590356

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates
are 8%. Assuming semiannual compounding periods, the total interest on this bond is:

A) $1,200,000.
B) $1,346,549.
C) $1,600,000.

Explanation

The interest paid on the bond will be the difference between the future value of the bond
of $5,000,000 and the proceeds of the bond when it was originally issued.

First find the present value of the bond found by N = 8; FV = 5,000,000; I = 4; PMT = 0; CPT
→ PV = –3,653,451. This is the amount of money the bond generated when it was originally
issued.

Then take the difference between the $5,000,000 future price and the $3,653,451 from the
proceeds = $1,346,549 which is the interest paid on the bond.

(Module 21.2, LOS 21.b)

Question #114 of 200 Question ID: 1590185

First in, first out (FIFO) inventory equals:

A) LIFO cost of goods sold − change in LIFO reserve.

B) change in LIFO reserve − ending LIFO reserve.
C) LIFO inventory + LIFO reserve.

Explanation

To convert LIFO inventory balances to a FIFO basis, simply add the LIFO reserve to LIFO
inventory.

(Module 18.3, LOS 18.e)

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Question #115 of 200 Question ID: 1590276

An IFRS-reporting firm reclassifies a building it owns from "owner-occupied" to "investment

property." The fair value of the building is greater than its carrying value. Under the fair
value model for investment property, the firm will recognize a gain:

A) in other comprehensive income but not on the income statement.

B) only if it reverses a previously recognized loss.
C) equal to the difference between fair value and carrying value.

Explanation

When reclassifying a property from owner-occupied to investment property and using the
fair value model for valuation of investment property, IFRS specifies that the firm should
treat the event as a revaluation, recognizing a gain only if it reverses a previously
recognized loss.

Question #116 of 200 Question ID: 1590361

At the beginning of 20X3, Creston Company issues $10 million face amount of 6% coupon
bonds when the market rate of interest is 7%. The bonds mature in four years and pay
interest annually. Assuming the effective interest rate method, what is the bond liability
Creston will report at the end of 20X3?

A) $9,661,279.
B) $9,737,568.
C) $10,346,511.

Explanation

Under the effective interest rate method, the bond liability is equal to the present value of
the remaining cash flows discounted at the market rate of interest at the issue date. At the
end of this year, there are 3 annual payments of $600,000 and one payment of
$10,000,000 remaining. Using your financial calculator, the present value is $9,737,568 (N
= 3, I = 7, PMT = 600,000, FV = 10,000,000, Solve for PV).

(Module 21.2, LOS 21.b)

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Question #117 of 200 Question ID: 1590066

At the beginning of the year, Alpha Corporation, which reports under U.S. GAAP, purchased
bonds with a market value of $200,000. During the year, these bonds paid $2,000 cash
interest. At the end of the year, the bonds had a market value of $220,000. What amount
should Alpha recognize in its year-end income statement if the investment is treated as an
available-for-sale security and what amount should be recognized in the income statement if
the investment is treated as a trading security?

Available-for-sale Trading security

A) $2,000 $22,000

B) $0 $20,000

C) $0 $22,000

Explanation

Unrealized gains and losses from trading securities are recognized in the income
statement while unrealized gains and losses from available-for-sale securities bypass the
income statement and are reported as other comprehensive income, a component of
stockholders' equity. Cash interest is recognized in the income statement for both trading
and available-for-sale securities. Thus, Alpha will recognize only the $2,000 interest if the
bonds are considered available-for-sale and will recognize $22,000 ($2,000 interest +
$20,000 unrealized gain) if the bonds are considered trading securities.

(Module 16.3, LOS 16.e)

Question #118 of 200 Question ID: 1590363

A company issues $10,000,000 face value of 5% annual coupon, 3-year bonds on January 1,
20X1, raising $8,000,000 in cash proceeds. Using the effective interest method, and ignoring
issuance costs, interest expense for the year ending December 31, 20X2 is closest to:

A) $1,084,000.
B) $500,000.
C) $1,163,000.

Explanation

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Cash interest paid each year is 5% × $10,000,000 = $500,000. To calculate the effective
interest rate: N = 3; PV = 8,000,000; FV = –10,000,000; PMT = –500,000; CPT I/Y = 13.55%

The initial bond liability equals the proceeds raised of $8,000,000. Interest expense for
20X1 = 13.55% × $8,000,000 = $1,084,000. The bond liability amortizes (toward face value
at maturity) by the difference between interest expense and cash interest paid: $1,084,000
– $500,000 = $584,000.

The bond liability at the beginning of 20X2 = $8,000,000 + $584,000 = $8,584,000. Interest
expense for 20X2 = 13.55% × $8,584,000 = $1,163,132.

(Module 21.2, LOS 21.b)

Question #119 of 200 Question ID: 1590324

Which of the following statements about deferred taxes is most accurate? Deferred tax
liabilities:

A) arise primarily due to differences between financial and tax accounting.

B) can relate to either permanent or temporary differences.
C) should be treated as debt when calculating financial statement ratios.

Explanation

Deferred tax liabilities result from temporary differences between financial accounting and
tax accounting that cause income tax expense for a period to be larger than taxes due.
Permanent differences do not result in deferred tax items. Whether to treat deferred tax
liabilities as debt or equity depends on whether they are expected to reverse in the
foreseeable future.

(Module 20.3, LOS 20.d)

Question #120 of 200 Question ID: 1590213

Victor Electronics, a manufacturer of electronic components, reports inventory using the

FIFO costing method. In the prior period, Victor wrote its inventory down from cost of $2
million to its net realizable value of $1 million. During the current period, net realizable value
increased to $4 million because of a shortage of computer chips. For the current period,
Victor would most appropriately report an inventory value of:

A) $2 million under both IFRS or U.S. GAAP.

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B) $2 million under IFRS and $1 million under U.S. GAAP.

C) $2 million under U.S. GAAP and $4 million under IFRS.

Explanation

Under IFRS, a firm that has written down inventory to net realizable value may record any
subsequent reversal (limited to the original writedown amount) as a gain on the income
statement. Under U.S. GAAP, reversals of inventory writedowns are not permitted.

(Module 18.4, LOS 18.g)

Question #121 of 200 Question ID: 1590372

Forman, Inc., and Swoft, Inc., both operate within the same industry. Forman's stated
strategy is to differentiate its premium products relative to its competitors, while Swoft is a
low-cost producer. Given the companies' stated strategies, Forman most likely has:

A) lower research and development expenses relative to Swoft.

B) higher gross margins relative to Swoft.
C) lower advertising expenses relative to Swoft.

Explanation

An analyst can use the historical trend in a firm's financial ratios as well as an industry
relative comparison to assess the firm's business strategy. A firm producing premium
products with a strategy of differentiation should have higher gross margins, higher
advertising expenses, and higher research and development expenses relative to firms in
its industry that pursue a low-cost-of-production strategy.

(Module 22.1, LOS 22.a)

Question #122 of 200 Question ID: 1590236

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United Corporation and Intrepid Company are similar firms operating in the same industry.
United follows U.S. Generally Accepted Accounting Principles and Intrepid follows
International Financial Reporting Standards. At the end of last year, Intrepid had a higher
inventory turnover ratio than United. Are the following plausible explanations for the
difference?

Explanation #1 – United accounts for its inventory using the first-in, first-out method and
Intrepid uses the last-in, first-out method.

Explanation #2 – United recognized an upward valuation of inventory that had been

previously written down. Intrepid does not revalue its inventory upward.

Explanation #1 Explanation #2

A) Yes No

B) No Yes

C) No No

Explanation

While the LIFO firm will typically report lower average inventory (higher inventory
turnover), Intrepid cannot be a LIFO firm because LIFO is not permitted under IFRS. An
upward revaluation of inventory would lower the inventory turnover ratio; however,
United cannot revalue its inventory upward because it follows U.S. GAAP. U.S. GAAP
prohibits upward inventory revaluations (except in very limited circumstances which are
beyond the scope of the Level I exam).

(Module 18.5, LOS 18.l)

Question #123 of 200 Question ID: 1590184

For a firm that uses the LIFO inventory cost method, the LIFO reserve is:

A) a provision for taxes when FIFO is required for tax reporting.

B) the difference between LIFO cost of sales and FIFO cost of sales.
C) the difference between LIFO inventory and FIFO inventory.

Explanation

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LIFO reserve is the difference between inventory under the LIFO cost method and
inventory under the FIFO cost method.

(Module 18.3, LOS 18.e)

Question #124 of 200 Question ID: 1590395

LIFO ending inventory can be adjusted to a FIFO basis by:

A) adding the change in the LIFO reserve.

B) subtracting the change in the LIFO reserve.
C) adding the LIFO reserve.

Explanation

LIFO ending inventory can be adjusted to a FIFO basis by adding the LIFO reserve, which a
firm using LIFO must disclose in the notes to its financial statements.

(Module 22.2, LOS 22.e)

Question #125 of 200 Question ID: 1590330

Deferred tax items should be measured based on the:

A) firm’s effective tax rate at the time when the temporary difference reverses.
B) statutory tax rate at the time when the temporary difference is recognized.
C) tax rate that will apply when the temporary difference reverses.

Explanation

Measurement of deferred tax items is based on the tax rate that will apply when the
temporary difference reverses. In some cases this may depend on how a temporary
difference is settled, which determines whether a capital gains tax rate or income tax rate
will apply.

(Module 20.3, LOS 20.e)

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Question #126 of 200 Question ID: 1590138

Given the following purchases and ending inventory of 15 items:

Date Number of units Price per unit ($)

January 1 Opening inventory 12 240

January 10 Purchase 6 250

January 15 Purchase 7 255

January 23 Purchase 8 256

What is the value of ending inventory and the cost of goods sold using weighted average
cost and a monthly periodic inventory accounting system?

Inventory VNC sale

A) $3,733 $4,480

B) $3,630 $4,583

C) $3,630 $4,480

Explanation

Units available for sale are 12 + 6 + 7 + 8 = 33.

Because 15 units are in inventory at the period end, units sold = 33 − 15 = 18.

Both the items sold and those remaining in inventory will be valued at the weighted
average price: (12 × $240 + 6 × $250 + 7 × $255 + 8 × $256) / 33 = $248.88.

Ending inventory = 15 × $248.88 = $3,733.20. COGS = 18 × $248.88 = $4,479.84.

(Module 18.1, LOS 18.c)

Question #127 of 200 Question ID: 1590373

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National Scooter Company and Continental Chopper Company are motorcycle

manufacturing companies. National's target market includes consumers that are switching
to motorcycles because of the high cost of operating automobiles and they compete on price
with other manufacturers. The average age of National's customers is 24 years.

Continental manufactures premium motorcycles and aftermarket accessories and competes

on the basis of quality and innovative design. Continental is in the third year of a five-year
project to develop a customized hybrid motorcycle. Which of the two firms would most likely
report higher gross profit margin, and which firm would most likely report higher operating
expense stated as a percentage of total cost?

Higher percentage
Higher gross profit margin
operating expense

A) Continental National

B) Continental Continental

C) National Continental

Explanation

Continental likely has the highest gross profit margin percentage since it is selling a
customized product and does not compete primarily based on price. Because of the
research and development costs of developing a new hybrid motorcycle, Continental likely
has the higher operating expense stated as a percentage of total cost.

(Module 22.1, LOS 22.a)

Question #128 of 200 Question ID: 1590217

A U.S. GAAP firm writes down inventory to net realizable value. In the period of the
writedown, what is the most likely effect on cost of goods sold?

A) Decrease.
B) Increase.
C) No effect.

Explanation

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A write-down of inventory to net realizable value is typically recognized under U.S. GAAP as
an increase in cost of goods sold in the period of the write-down. Consider the inventory
equation:

ending inventory = beginning inventory + purchases – cost of goods sold

A write-down to NRV decreases ending inventory, with no effect on beginning inventory or

purchases. For the inventory equation to hold, cost of goods sold must increase.

(Module 18.4, LOS 18.h)

Question #129 of 200 Question ID: 1590089

Which of the following should be classified as cash flows from investing (CFI) by Elegant, Inc.,
which reports under U.S. GAAP?

A) Dividends received by Elegant, Inc. from an investment in another firm.

B) Elegant's payment to purchase equipment to be used in its business.
Interest received by Elegant, Inc. on a bond Elegant, Inc. purchased from an outside
C)
investor.

Explanation

Purchases of equipment are considered to be cash flows from investing. Interest paid or
received and dividends received are considered to be cash flows from operations under
U.S. GAAP.

(Module 17.1, LOS 17.a)

Question #130 of 200 Question ID: 1590008

The first-in-first-out (FIFO) expense recognition method for inventories best describes the
physical flow of goods if customers typically purchase units:

A) from the top of a stack.

B) in the same order the units are produced.
C) selectively from among all units for sale.

Explanation

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The FIFO cost flow method best approximates the physical flow of goods if customers
typically purchase units in the order the units are produced, such as goods with a limited
shelf life. Last-in-first-out (LIFO) best approximates the flow of goods if customers
purchase units from the top of a stack, as with raw materials such as coal or gravel. If
customers choose individual units selectively from among all the units for sale, the flow of
goods may be unclear and the average cost method may describe it best.

(Module 15.3, LOS 15.d)

Question #131 of 200 Question ID: 1590171

During periods of decreasing prices, a firm using a periodic inventory system will report
higher gross profit if its inventory cost assumption is:

FIFO because during periods of decreasing prices, COGS will be lower, resulting in a
A)
higher gross profit.
FIFO because during periods of decreasing prices, COGS will be higher, resulting in a
B)
higher gross profit.
LIFO because during periods of decreasing prices, COGS will be lower, resulting in a
C)
higher gross profit.

Explanation

In periods of falling prices, LIFO results in lower COGS, and therefore higher gross profit
than FIFO, because LIFO assumes the most recently purchased (lower cost) goods are sold
first.

(Module 18.2, LOS 18.d)

Question #132 of 200 Question ID: 1590110

The acquisition of a machine with financing provided by the seller affects which area of the
cash flow statement at the time of purchase?

A) Cash flows from investing.

B) No impact on cash flow statement.
C) Cash flows from financing.

Explanation

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At the time of purchase, this is a noncash transaction.

(Module 17.1, LOS 17.b)

Question #133 of 200 Question ID: 1590262

La Crosse Partners LLC has a franchise agreement with Arnolds Crispy Fry that expires in
seven years, but is renewable at each expiration date for a nominal fee. If the franchise
agreement is initially valued at $60,000:

A) amortization expense in the sixth year will be zero.

an accelerated amortization method is more appropriate than the straight-line
B)
method.
C) amortization expense in the first year will be one-seventh of $60,000.

Explanation

Because the franchise agreement is renewable for a nominal fee, it is treated as an

intangible asset with an indefinite life and therefore not amortized but tested for
impairment regularly.

(Module 19.2, LOS 19.d)

Question #134 of 200 Question ID: 1590018

Red Oak Corporation is a furniture manufacturer located in Canada. Red Oak is financed
with a combination of debt and equity. The debt consists of unsecured zero-coupon bonds
that mature in 20 years. For income tax purposes, interest on the bonds is deductible when
accrued. Red Oak's equity consists of common stock and preferred stock. No dividends have
ever been paid on Red Oak's common stock; however, dividends are paid quarterly to the
preferred shareholders. Should the accrued interest on the zero-coupon bonds and the
dividends paid to the preferred shareholders be reported as a nonoperating component of
Red Oak's net income?

Accrued interest Preferred dividends

A) No Yes

B) Yes No

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C) Yes Yes

Explanation

Since Red Oak is a nonfinancial firm, the accrued interest is considered a nonoperating
activity, related to how the firm is financed. Dividends paid to preferred shareholders do
not affect net income.

(Module 15.3, LOS 15.e)

Question #135 of 200 Question ID: 1590197

Moore Ltd. uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was
$800. A footnote in its financial statements reads: "Using FIFO, inventories would have been
$70 higher in 20X8 and $80 higher in 20X7." Moore's COGS if FIFO inventory costing were
used in 20X8 is closest to:

A) $730.
B) $790.
C) $810.

Explanation

The ending LIFO reserve is $70 and the beginning LIFO reserve is $80.

FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve)

$800 − ($70 − $80) = $810

(Module 18.3, LOS 18.f)

Question #136 of 200 Question ID: 1590192

Bone, Inc., uses the LIFO method and pays tax at 30%. For the year, Bone showed a gross
profit of $100,000 and a LIFO reserve at year-end of $5,000. The LIFO reserve increased by
$1,000 during the year. Gross profit under the FIFO method would have been:

A) $100,700.
B) $101,000.

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C) $103,500.

Explanation

Gross profit is affected by cost of sales but not tax. Under FIFO, gross profit would be
higher by the increase in the LIFO reserve: $100,000 + $1,000 = $101,000.

(Module 18.3, LOS 18.f)

Question #137 of 200 Question ID: 1590190

Burger, Inc., uses the LIFO method and ending inventory is valued at $5,000 at year-end. If
the LIFO reserve is $1,000, ending inventory if the firm used the FIFO method is:

A) $5,000.
B) $6,000.
C) $4,000.

Explanation

FIFO ending inventory = LIFO ending inventory + LIFO reserve

$5,000 + $1,000 = $6,000.

(Module 18.3, LOS 18.f)

Question #138 of 200 Question ID: 1590102

Under U.S. GAAP, taxes paid are classified in the statement of cash flows:

A) according to the transaction that created the tax liability.

B) as operating cash flow.
C) as having no cash flow impact.

Explanation

Taxes paid are classified as operating cash outflows under U.S. GAAP.

(Module 17.1, LOS 17.a)

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Question #139 of 200 Question ID: 1590351

On December 31, 2004, Newberg, Inc. issued 5,000 $1,000 face value seven percent bonds to
yield six percent. The bonds pay interest semi-annually and are due December 31, 2011. On
its December 31, 2005, income statement, Newburg should report interest expense of:

A) $316,448.
B) $350,000.
C) $300,000.

Explanation

Newberg, upon issuance of the bonds, recorded bonds payable of N = 2 × 7 = 14, PMT =
$175,000, I/Y = 6/2 = 3, FV = $5,000,000, CPT PV = $5,282,402. Interest expense June 30,
2005, was $5,282,402 × (0.06 / 2) = $158,472. The coupon payment was $175,000, reducing
bonds payable to $5,282,402 – ($175,000 - $158,472) = $5,265,874. Interest expense
December 31, 2005, was $5,265,874 × (0.06 / 2) = $157,976. Total interest expense in 2005
was $158,472 + $157,976 = $316,448.

(Module 21.2, LOS 21.b)

Question #140 of 200 Question ID: 1590271

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.

B) Gain on income statement only.
C) Revaluation surplus only.

Explanation

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.

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Question #141 of 200 Question ID: 1590327

Deferred tax liabilities may result from:

A) pretax income greater than taxable income due to permanent differences.

B) pretax income greater than taxable income due to temporary differences.
C) pretax income less than taxable income due to temporary differences.

Explanation

Deferred tax liabilities result from temporary differences that cause pretax income and
income tax expense (on the income statement) to be greater than taxable income and
taxes due (on the firm's tax form). Temporary differences that cause pretax income to be
less than taxable income are recognized as deferred tax assets. Permanent differences do
not result in deferred tax items; instead they cause the effective tax rate to differ from the
statutory tax rate.

(Module 20.3, LOS 20.d)

Question #142 of 200 Question ID: 1590124

Fricks Ltd. is a gold mining company headquartered in Indonesia with operations throughout
the world. Fricks reports under IFRS. When subsidiaries located in the United States and
Canada pay dividends to the Indonesian parent company, Fricks may classify the dividends
as:

A) cash flow from either investing or operations.

B) cash flow from financing only.
C) cash flow from investing only.

Explanation

Under IFRS, interest and dividends received may be shown as either cash flow from
operations or cash flow from investing.

(Module 17.1, LOS 17.d)

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Question #143 of 200 Question ID: 1590080

An increase in which of the following accounts will increase shareholders' equity?

A) Treasury stock.
B) Revaluation surplus.
C) Valuation allowance.

Explanation

Revaluation surplus is an account in shareholders' equity that reflects cumulative

increases in the fair value of long-lived assets above their historical cost, when a firm uses
the revaluation model under IFRS. Treasury stock is a contra account in shareholders'
equity that increases when a firm repurchases its own shares. Under U.S. GAAP, a
valuation allowance is a contra account in assets that reflects a decrease in the realizable
value of a deferred tax asset. An increase in a valuation allowance increases income tax
expense and decreases shareholders' equity.

(Module 16.5, LOS 16.f)

Question #144 of 200 Question ID: 1590305

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Given the following data regarding two firms under different scenarios, determine the
amount of any deferred tax liability or asset.

Firm 1:

Tax Reporting Financial Reporting

Revenue $500,000 Revenue $500,000

Depreciation $100,000 Depreciation $50,000

Taxable income $400,000 Pretax income $450,000

Taxes payable $160,000 Tax expense $180,000

Net income $240,000 Net income $270,000

Firm 2:

Tax Reporting Financial Reporting

Revenue $500,000 Revenue $500,000

Warranty expense $0 Warranty expense $10,000

Taxable income $500,000 Pretax income $490,000

Taxes payable $200,000 Tax expense $196,000

Net income $300,000 Net income $294,000

Firm 1 Deferred Tax Firm 2 Deferred Tax

A) $20,000 Asset $6,000 Liability

B) $30,000 Asset $6,000 Asset

C) $20,000 Liability $4,000 Asset

Explanation

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A deferred tax liability and asset is created when an income or expense item is treated
differently on financial statements than it is on the company's tax returns.

A deferred tax liability is when that difference results in greater tax expense on the
financial statements than taxes payable on the tax return.

The deferred tax liability for firm 1 = $180,000 tax expense - $160,000 taxes payable =
$20,000

A deferred tax asset is when that difference results in lower taxes payable on the financial
statements than on the tax return.

The deferred tax asset for firm 2 = $200,000 taxes payable - $196,000 tax expense = $4,000

(Module 20.1, LOS 20.b)

Question #145 of 200 Question ID: 1590120

What is the difference between the direct and the indirect method of calculating cash flow
from operations?

Balance sheet items are not included in the cash flow from operations for the direct
A)
method, while they are included for the indirect method.
The direct method starts with sales and follows cash as it flows through the income
B) statement, while the indirect method starts with net income and adjusts for non-
cash charges and other items.
The indirect method starts with gross income and adjusts to cash flow from
C) operations, while the direct method starts with gross profit and flows through the
income statement to calculate cash flows from operations.

Explanation

The main difference between the direct and indirect methods of calculating cash flows is
the way that cash flow from operations is calculated. The direct method starts with sales
and follows cash as it flows through the income statement, while the indirect method
starts with income after taxes and adjusts backwards for non-cash and other items. Both
methods will have the same result for operating cash flows. The direct and indirect
method calculates the financing and investing cash flows the same way and both methods
will result in the same cash flow figure.

(Module 17.1, LOS 17.d)

Question #146 of 200 Question ID: 1590287

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At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in
the future on goods already sold. For tax purposes, warranty expense is not deductible until
the work is actually performed. The firm believes that the warranty work will be required
over the next two years. The tax base of the warranty liability at the end of 20X8 is:

A) zero.
B) $26,000.
C) $13,000.

Explanation

The carrying value of the warranty liability is $26,000 (the same amount is recorded as a
liability on the balance sheet and as an expense on the income statement). The tax base is
equal to the carrying value less any amounts deductible in the future. Therefore, the tax
base is $0 ($26,000 − $26,000) since the warranty expense will be deductible when the
work is performed next year.

(Module 20.1, LOS 20.a)

Question #147 of 200 Question ID: 1590350

Interest expense is reported on the income statement as a function of:

A) the unamortized bond discount.

B) the coupon payment.
C) the market rate.

Explanation

Interest expense is always equal to the book value of the bond at the beginning of the
period multiplied by the market rate at issuance.

(Module 21.2, LOS 21.b)

Question #148 of 200 Question ID: 1590045

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Duster Company reported the following financial information at the end of 2007:

in millions

Unearned revenue $240

Common stock at par 30

Capital in excess of par 440

Accounts payable 1,150

Treasury stock 2,000

Retained earnings 5,160

Accrued expenses 830

Accumulated other comprehensive loss 210

Long-term debt 1,570

Calculate Duster's liabilities and stockholders' equity as of December 31, 2007.

Stockholders'
Liabilities
equity

A) $3,550 million $7,840 million

B) $3,790 million $3,420 million

C) $3,790 million $7,420 million

Explanation

Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long-term
debt + $1,150 accounts payable + $830 accrued expenses). Stockholders' equity is equal to
$3,420 million ($30 common stock at par + $440 capital in excess of par – $2,000 treasury
stock + $5,160 retained earnings – $210 accumulated other comprehensive loss).

(Module 16.1, LOS 16.a)

Question #149 of 200 Question ID: 1590034

Which of the following items affects owners' equity but is not included as a component of
net income?

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A) Foreign currency translation gains and losses.

B) Depreciation.
C) Dividends received on shares of another company classified as available for sale.

Explanation

Foreign currency translation gains and losses are not reported on the income statement as
a component of net income, but affect owners' equity because they are included as other
comprehensive income. The other items are included on the income statement so they
affect both net income and owners' equity.

(Module 15.4, LOS 15.i)

Question #150 of 200 Question ID: 1589998

The income statement and statement of other comprehensive income can be combined into
a single statement under:

A) only IFRS.
B) only U.S. GAAP.
C) both IFRS and U.S. GAAP.

Explanation

The income statement and statement of other comprehensive income can be combined
into a single statement of comprehensive income under both IFRS and U.S. GAAP.

(Module 15.1, LOS 15.a)

Question #151 of 200 Question ID: 1590281

A manufacturing firm shuts down production at one of its plants and offers the facility for
rent. Based on the market for similar properties, the firm determines that the fair value of
the plant is €500,000 more than its carrying value. If this firm uses the cost model for plant
and equipment and the fair value model for investment property, should it recognize a gain
on its income statement?

A) No, because the increase in value does not reverse a previously recognized loss.
B) Yes, because the plant will be reclassified as investment property.

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C) No, because the firm must continue to use the cost model for valuation of this asset.

Explanation

According to IFRS, property held for the purpose of earning rental income is classified as
investment property. However, when a property is transferred from owner-occupied to
investment property, a firm using the fair value model must treat any increase in the
property's value as a revaluation. That is, the firm may only recognize a gain on the income
statement to the extent that it reverses a previously recognized loss.

Question #152 of 200 Question ID: 1590143

Units Unit Price

Beginning Inventory 709 $2.00

Purchases 556 $6.00

Sales 959 $13.00

Sales Expenses $2,649 per annum

Ignoring taxes, what is profit using the weighted average method?

A) $6,213.98.
B) $5,676.00.
C) $6,027.56.

Explanation

weighted average cost per unit = (709 units)($2/unit) + (556 units)($6/unit) = $4,754 / 1,265
units = $3.7581

weighted average COGS = ($3.7581)(959 units) = $3,604.02

Sales = (959 units)($13/unit) = $12,467

Profit = Sales – COGS – Sales Expenses = 12,467 – 3,604.02 – 2,649 = $6,213.98

(Module 18.1, LOS 18.c)

Question #153 of 200 Question ID: 1590099

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Which of the following choices most accurately illustrates an operating liability and which
most accurately illustrates a financing liability?

Operating liabilities Financing liabilities

A) Customer advances Accrued liabilities

Current portion of long-term

B) Accounts payable
debt

Short-term note Current portion of long-term

C)
payable debt

Explanation

Operating liabilities result from the operations of the firm and consist of operating and
trade liabilities such as accounts payable, customer advances, and accrued liabilities.
Financing liabilities are a result of prior financing inflows. Financing liabilities (current)
include short-term notes payable and the current maturities of long-term debt.

(Module 17.1, LOS 17.a)

Question #154 of 200 Question ID: 1590224

Tim Rogers is senior equity analyst with White Capital LLP. While analyzing the inventory
disclosures of Drako Toys Inc., a toy manufacturer based in Cleveland, Ohio, Rogers
concludes that Drako is expected to see above-average sales growth over the next three
years. Which of the following disclosures would most likely support Rogers's conclusion?

A) Finished goods inventory growing faster than sales in the last two years.
Increase in raw-materials and work-in-progress inventory and corresponding decline
B)
in finished goods inventory over the last two years.
Increase in finished goods inventory and corresponding decline in raw-materials and
C)
work-in-progress inventory over the last two years.

Explanation

An increase in raw materials and/or work-in-process inventory is likely an indication of an

expected increase in demand. Conversely, an increase in finished goods inventory, while
raw materials and work-in-process are decreasing, may be an indication of decreasing
demand. Finished goods inventory that is growing faster than sales may be an indication
of declining demand.

(Module 18.4, LOS 18.j)

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Question #155 of 200 Question ID: 1590301

All-Star Enterprises purchased a machine on January 1. The company uses straight-line

depreciation for financial reporting and accelerated depreciation for tax purposes.
Depreciation for tax purposes during the year was $36,000 greater than depreciation for
financial reporting. Assuming a 30% tax rate will apply in the future, how much will be
recorded as a deferred tax liability during the year?

A) $10,800.
B) $25,200.
C) $36,000.

Explanation

Deferred tax liability = $36,000 × 30% = $10,800.

(Module 20.1, LOS 20.b)

Question #156 of 200 Question ID: 1590290

A firm buys an asset with an estimated useful life of five years for $100,000 at the beginning
of the year. The firm will depreciate the asset on a straight-line basis with no salvage value
on its financial statements and will use double declining balance depreciation for tax. The
tax base for this asset at the end of the first year is closest to:

A) $60,000.
B) $40,000.
C) $80,000.

Explanation

The asset's tax base is reduced by the DDB depreciation (2/5 × 100,000 = 40,000) from
$100,000 to $60,000.

(Module 20.1, LOS 20.a)

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Question #157 of 200 Question ID: 1590318

Inka Corporation has deferred tax assets of $20 million and deferred tax liabilities of $50
million. The corporate tax rate decreases from 40% to 35%. What effect will the tax rate
change have on net income?

A) No effect on net income.

B) Decrease net income.
C) Increase net income.

Explanation

The reduction in the tax rate decreases the values of both the deferred tax asset and the
deferred tax liability. A decrease in the value of a DTL decreases income tax expense, and
a decrease in the value of a DTA increases income tax expense. Because Inka's DTL is
larger than its DTA, the net effect will be a decrease in income tax expense, which
increases net income.

(Module 20.2, LOS 20.c)

Question #158 of 200 Question ID: 1590157

A company that uses the LIFO inventory cost method records the following purchases and
sales for an accounting period:

Beginning inventory, July 1: $5,000, 10 units

July 8: Purchase of $2,600 (5 units)

July 12: Sale of $2,200 (4 units)

July 15: Purchase of $2,800 (5 units)

July 21: Sale of $1,680 (3 units)

The company's cost of goods sold using a perpetual inventory system is:

A) $3,500.
B) $3,760.
C) $3,780.

Explanation

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With a perpetual inventory system, units purchased and sold are recorded in inventory in
the order that the purchases and sales occur. Cost of goods sold for the July 12 sale uses 4
of the units purchased on July 8: 4 × ($2,600 / 5) = $2,080. Cost of goods sold for the July 21
sale uses 3 of the units purchased on July 15: 3 × ($2,800 / 5) = $1,680. COGS = $2,080 +
$1,680 = $3,760.

(Module 18.1, LOS 18.c)

Question #159 of 200 Question ID: 1589994

Using the following data:

Sales 300,000

Interest expense 50,000

Additional paid-in capital 200,000

Operating expenses 40,000

Prepaid expenses 20,000

Tax provision 50,000

Cost of goods sold 160,000

Notes payable 50,000

Operating profit for the period is:

A) €100,000.
B) €50,000.
C) €80,000.

Explanation

Operating profit = sales − COGS − operating expenses = €300,000 − 160,000 − 40,000 =

€100,000.

(Module 15.1, LOS 15.a)

Question #160 of 200 Question ID: 1590119

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The difference between cash flow from operations (CFO) under the direct method and CFO
under the indirect method is:

A) disclosed as a reserve in the footnotes to the cash flow statement.

B) balanced by an opposite difference in cash flow from investing.
C) always equal to zero.

Explanation

The direct and indirect methods are two ways of presenting the same total for cash from
operations.

Question #161 of 200 Question ID: 1590189

Vish, Inc., uses the LIFO method and pays tax at 30%. For the year, Vish showed a net profit
of $200,000 and a LIFO reserve that increased by $2,000 to a year-end level of $10,000. Net
profit under the FIFO method would have been closest to:

A) $201,400.
B) $202,000.
C) $207,000.

Explanation

Under FIFO, cost of sales would be $2,000 lower (increase in the LIFO reserve) and tax
would be $600 higher (additional profit of $2,000 taxed at 30%). As a result, net income
would increase by $2,000 – $600 = $1,400.

(Module 18.3, LOS 18.f)

Question #162 of 200 Question ID: 1590386

An analyst has decided to identify value stocks for investment by screening for companies
with high book-to-market ratios and high dividend yields. A potential drawback of using
these screens to find value stocks is that the firms selected may:

A) have unsustainable dividend payments.

B) be concentrated in specific industries.
C) be those that have significantly underperformed the market.

Explanation
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A screen for firms with high dividend yields and high book-to-market ratios would likely
result in an inordinate proportion of financial services companies and add a significant
element of industry (sector) risk. Uncertainty about sustainability of dividend payments
and recent market underperformance are typical characteristics of value stocks in general
and not a drawback to using this screen to identify them.

(Module 22.2, LOS 22.d)

Question #163 of 200 Question ID: 1590147

The exhibit below provides relevant data and financial statement information about Acme's
inventory purchases and sales of inventory for the last year.

Units Unit Price

Beginning Inventory 699 $5.00

Purchases 710 $8.00

Sales 806 $15.00

Cost of goods sold using the weighted average cost method is closest to:

A) $4,350.
B) $4,980.
C) $5,250.

Explanation

Weighted average = cost of goods available / total units available.

[(699 × 5) + (710 × 8)] / (699 + 710) = 6.51171

COGS = Units sold × Weighted average cost = 806 × 6.51171 = $5,248.44.

(Module 18.1, LOS 18.c)

Question #164 of 200 Question ID: 1590352

Assume a city issues a $5 million semiannual-pay bond to build a new arena. The bond has a
coupon rate of 8% and will mature in 10 years. When the bond is issued, its yield to maturity
is 9%. Interest expense in the second semiannual period is closest to:

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A) $200,000.
B) $210,336.
C) $210,833.

Explanation

Step 1: Compute the proceeds raised (i.e., the present value of the bond): Since the yield is
above the coupon rate the bond will be issued at a discount.
FV = $5,000,000; N = (10 × 2) = 20; PMT = (0.08 / 2)(5 million) = $200,000; I/Y = (9 /
2) = 4.5; CPT → PV = -$4,674,802

Step 2: Compute the interest expense at the end of the first period.
= (0.045)(4,674,802) = $210,366

Step 3: Compute the interest expense at the end of the second period.
= (new balance sheet liability)(current interest rate)

= $4,674,802 + $10,366 = $4,685,168 new balance sheet liability

(0.045)(4,685,168) = $210,833

(Module 21.2, LOS 21.b)

Question #165 of 200 Question ID: 1590011

Under accrual accounting, revenues are recognized in the same period in which the
associated:

A) cash is collected.
B) invoices are billed.
C) expenses are incurred.

Explanation

Accrual accounting is based on the matching principle, under which revenues are
recognized in the same period that the expenses are incurred to generate those revenues.

(Module 15.3, LOS 15.d)

Question #166 of 200 Question ID: 1590274

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Vasco Ltd. purchased a unit of heavy equipment one year ago for £500,000 and capitalized it
as a long-lived asset. Because demand for equipment of this type has grown significantly,
Vasco believes the fair value of its equipment has increased to £600,000. If Vasco revalues its
equipment to £600,000, what will be the most likely effect on Vasco's financial results,
compared to not revaluing the equipment?

A) Net income will be lower in the periods following the revaluation.

B) The debt-to-equity ratio will be unaffected by the revaluation.
C) Net income will be higher in the period of the revaluation.

Explanation

Revaluing the asset to £600,000 will increase future depreciation expense, and therefore
reduce net income in subsequent periods. Because Vasco has not previously recognized a
loss on this asset, the revaluation is not recognized as income but is recorded as an
adjustment to equity. An increase in equity (with unchanged debt) will decrease the debt-
to-equity ratio.

Question #167 of 200 Question ID: 1590353

A bond is issued with the following data:

$10 million face value.

9% coupon rate.
8% market rate.
3-year bond with semiannual payments.

Assuming market rates do not change, what will the bond's market value be one year from
now and what is the total interest expense over the life of the bond?

Value in 1-Year Total Interest Expense

A) 10,181,495 2,962,107

B) 10,181,495 2,437,893

C) 11,099,495 2,437,893

Explanation

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To determine the bond's market value one year from now: FV = 10,000,000; N = 4; I = 4;
PMT = 450,000; CPT → PV = $10,181,495.

To determine the total interest expense:

1. FV = 10,000,000; N = 6; I = 4; PMT = 450,000; CPT → PV = $10,262,107. This is the

price the purchaser of the bond will pay to the issuer of the bond. From the issuer's
point of view this is the amount the issuer will receive from the bondholder.
2. Total interest expense over the life of the bond is equal to the difference between
the amount paid by the issuer and the amount received from the bondholder.

[(6)(450,000) + 10,000,000] – 10,262,107 = 2,437,893

(Module 21.2, LOS 21.b)

Question #168 of 200 Question ID: 1590153

Given the following data and assuming a periodic inventory system, what is the ending
inventory using the average cost method?

Purchases Sales

40 units at $60/unit 25 units at $65/unit

50 units at $55/unit 30 units at $60/unit

60 units at $45/unit 40 units at $50/unit

A) $2,878.
B) $2,933.
C) $3,141.

Explanation

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Average cost per unit purchased:

40 units at $60/per unit = $2,400

50 units at $55/per unit = $2,750

60 units at $45/per unit = $2,700

Total = 150 units = $7,850

Average cost per unit = $7,850 /150 units = $52.33/unit

Purchased 40 + 50 + 60 = 150 units. Sold 25 + 30 + 40 = 95

Ending inventory = 150 – 95 = 55 units × $52.33/unit = $2,878

(Module 18.1, LOS 18.c)

Question #169 of 200 Question ID: 1590104

Under U.S. GAAP, interest paid would be classified as:

A) having no cash flow impact.

B) financing cash flow.
C) operating cash flow.

Explanation

Interest paid is classified as operating cash flow under U.S. GAAP.

(Module 17.1, LOS 17.a)

Question #170 of 200 Question ID: 1590343

A $1,000 bond is issued with an 8% semiannual coupon rate and 5 years to maturity when
market interest rates are 10%. What is the initial liability?

A) 1023.
B) 855.
C) 923.

Explanation

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FV = 1000; PMT = 80/2; N = 5 × 2; I/Y = 10/2; solve for PV = 923.

(Module 21.1, LOS 21.a)

Question #171 of 200 Question ID: 1590397

A firm has a debt-to-equity ratio of 0.50 and debt equal to $35 million. The firm acquires new
equipment with a 3-year operating lease that has a present value of lease payments of $12
million. The most appropriate analyst treatment of this operating lease will:

A) increase the debt-to-equity ratio to 0.67.

B) leave the debt-to-equity ratio unchanged at 0.5.
C) increase the debt-to-equity ratio to 0.57.

Explanation

Shareholders' equity = $35 million / 0.5 = $70 million. The most appropriate analyst
adjustment for an operating lease is to add the present value of lease payments to the
firm's assets and long-term debt (leaving equity unchanged). This will result in a debt-to-
equity ratio of ($35 million + $12 million) / $70 million = 0.6714.

(Module 22.2, LOS 22.e)

Question #172 of 200 Question ID: 1590100

When a U.S. company pays dividends to its stockholders, which type of cash flow does this
represent?

A) Financing.
B) Investing.
C) Operating.

Explanation

Dividends paid to stockholders are considered cash outlays from financing according to
U.S. GAAP.

(Module 17.1, LOS 17.a)

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Question #173 of 200 Question ID: 1590014

Gus Davy, CFA, is reviewing an industry that has been experiencing rising prices as well as
unit volume growth. Davy's investment criteria include selecting companies generating the
highest profit margins. If Davy does not adjust companies' financial statements for their
inventory cost assumptions, he is most likely to select companies that use:

A) weighted average cost.

B) LIFO.
C) FIFO.

Explanation

The FIFO method recognizes the oldest costs in the cost of goods sold. With rising prices,
COGS will be lower and net income will be higher using FIFO as compared to the LIFO or
average cost methods. Higher net income relative to sales (which are not affected by the
inventory cost method) means higher profit margins.

(Module 15.3, LOS 15.d)

Question #174 of 200 Question ID: 1590332

Which of the following situations will most likely require a company to record a valuation
allowance on its balance sheet?

A firm has differences between taxable and pretax income that are never expected
A)
to reverse.
A firm is unlikely to have future taxable income that would enable it to take
B)
advantage of deferred tax assets.
To report depreciation, a firm uses the double-declining balance method for tax
C)
purposes and the straight-line method for financial reporting purposes.

Explanation

A valuation allowance is a contra account (offset) against deferred tax assets that reflects
the likelihood that the deferred tax assets will never be realized. If a firm is unlikely to
have future taxable income, it would be unlikely to ever use its deferred tax assets, and
therefore must record a valuation allowance.

(Module 20.3, LOS 20.f)

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Question #175 of 200 Question ID: 1590037

According to the Financial Accounting Standards Board, what is the appropriate balance
sheet treatment for available-for-sale securities and where are the unrealized gains and
losses reported?

Balance sheet Unrealized gains and losses

A) Amortized cost Other comprehensive income

B) Fair value Net income

C) Fair value Other comprehensive income

Explanation

Available-for-sale securities are reported on the balance sheet at fair value. The unrealized
gains and losses bypass the income statement and are reported as a component of
stockholders' equity as a part of other comprehensive income.

(Module 15.4, LOS 15.i)

Question #176 of 200 Question ID: 1590279

A firm acquires investment property for €3 million and chooses the fair value model for
financial reporting. In Year 1 the market value of the investment property decreases by
€150,000. In Year 2 the market value of the investment property increases by €200,000. On
its financial statements for Year 2, the firm will recognize a:

A) €200,000 gain on its income statement.

B) €150,000 increase in shareholders’ equity.
€150,000 gain on its income statement and a €50,000 revaluation surplus in
C)
shareholders’ equity.

Explanation

Under the fair value model, all gains and losses from changes in the value of investment
property are recognized on the income statement. The firm will recognize a loss of
€150,000 in Year 1 and a gain of €200,000 in Year 2.

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Question #177 of 200 Question ID: 1590154

Given the following information and assuming beginning inventory was zero and a periodic
inventory system was used, what is the gross profit at the end of the period using the FIFO,
LIFO, and average cost methods?

Purchases Sales

20 units at $50 15 units at $60

35 units at $40 35 units at $45

85 units at $30 85 units at $35

FIFO LIFO Cost Average

A) $650 $750 $677

B) $650 $750 $990

C) $677 $650 $677

Explanation

Sales = (15 * 60) + (35 * 45) + (85 * 35) = 5,450

COGSFIFO = (20 * 50) + (35 * 40) + (80 * 30) = 4,800

GMFIFO: $5,450 – 4,800 = $650

COGSLIFO = (15 * 50) + (35 * 40) + (85 * 30) = 4,700

GMLIFO: $5,450 – $4,700 = $750

COGSAverage = (20 * 50) + (35 * 40) + (85 * 30) = 4,950

4,950*135 / 140 = 4,773.21

GMCost Average: $5,450 – $4,773.21 = $676.79

(Module 18.1, LOS 18.c)

Question #178 of 200 Question ID: 1590275

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Clampet Ltd. reports under IFRS and reports certain assets on its balance sheet using the
revaluation model. Machinery purchased in 20X1 for £22,000 is revalued to £20,000 at the
end of 20X2. At the end of 20X3, the fair value of the asset is £23,000. The most likely effect
of the change in value to £23,000 is to:

A) increase EBIT by £3,000.

B) increase EBIT by £2,000.
C) leave EBIT unchanged.

Explanation

Clampet may only recognize a gain on revaluation to the extent that it reverses the
previously recognized £2,000 loss. The increase in asset value in excess of the previously
recognized loss will be recognized in equity as revaluation surplus.

Question #179 of 200 Question ID: 1590366

A company issues $10 million in 8% annual-pay, 5-year bonds, when the market rate is
8.25%. Under the effective interest method and ignoring any issuance costs, the balance
sheet liability one year from the date of issue is closest to:

A) $9,918,000
B) $9,975,000
C) $10,082,000

Explanation

A PMT = 800,000; FV = 10,000,000; N = 5; I/Y = 8.25; CPT → PV = $9,900,837

interest expense = 9,900,836.51 × 0.0825 = $816,819.01

amortization = 816,819.01 – 800,000 = $16,819.01

year-end debt = $9,900,836.51 + $16,819.01 = $9,917,655.52

(Module 21.2, LOS 21.b)

Question #180 of 200 Question ID: 1590117

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For the year ended December 31, 2007, Challenger Company reported the following financial
information:

Revenue $100,000

Cost of goods sold (40,000)

Cash operating expenses (20,000)

Depreciation expense (5,000)

Tax expense (3,000)

Net income $32,000

Increase in accounts receivable $7,500

Decrease in inventory $2,500

Increase in short-term notes payable $3,000

Decrease in accounts payable $1,000

Calculate cash flow from operating activities using the direct method and the indirect
method.

Direct method Indirect method

A) $31,000 $34,000

B) $34,000 $34,000

C) $31,000 $31,000

Explanation

CFO is the same under both methods, the only difference is presentation. Direct method:
$92,500 cash collections ($100,000 revenue – $7,500 increase in receivables) – $38,500
cash paid to suppliers (– $40,000 COGS + $2,500 decrease in inventory – $1,000 decrease
in payables) – $20,000 cash operating expenses – $3,000 tax expense = $31,000. Indirect
method: $32,000 net income + $5,000 depreciation expense – $7,500 increase in
receivables + $2,500 decrease in inventory – $1,000 decrease in payables = $31,000. The
increase in short-term notes payable is a financing activity.

(Module 17.1, LOS 17.c)

Question #181 of 200 Question ID: 1590086

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An examination of the cash receipts and payments of Xavier Corporation reveals the
following:

Cash paid to suppliers for purchase of merchandise $5,000

Cash received from customers 14,000

Cash paid for purchase of equipment 22,000

Dividends paid 2,000

Cash received from issuance of preferred stock 10,000

Interest received on short-term investments 1,000

Wages paid 4,000

Repayment of loan to the bank 5,000

Cash from sale of land 12,000

Under U.S. GAAP, Xavier's reported cash flow from operations will be:

A) -$5,000.
B) $5,000.
C) $6,000.

Explanation

Cash flow relating to operating activities includes cash paid to suppliers, cash received
from customers, interest received, and wages paid. –5,000 + 14,000 + 1,000 + –4,000 =
6,000.

(Module 17.1, LOS 17.a)

Question #182 of 200 Question ID: 1590227

Other things equal, compared to using the first-in-first-out (FIFO) inventory cost method,
using the last-in-first-out (LIFO) method in a rising price environment will result in a higher:

A) gross profit margin.

B) inventory turnover ratio.
C) quick ratio.

Explanation

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The inventory turnover ratio is cost of sales / average inventory. Compared to FIFO, LIFO
results in higher cost of sales and lower average inventory when prices are increasing, and
therefore results in a higher inventory turnover ratio. Because cost of sales is higher with
LIFO, gross profit margin is lower. The quick ratio is unaffected by the inventory cost
assumption.

(Module 18.5, LOS 18.k)

Question #183 of 200 Question ID: 1590230

Selected financial data from Krandall, Inc.'s balance sheet for the year ended December 31
was as follows (in $):

Cash $1,100,000 Accounts Payable $400,000

Accounts Receivable 300,000 Deferred Tax Liability 700,000

Inventory 2,400,000 Long-term Debt 8,200,000

Property, Plant & Eq. 8,000,000 Common Stock 1,000,000

Total Assets 11,800,000 Retained Earnings 1,500,000

Total Liabilities & Equity 11,800,000

LIFO Reserve at Jan. 1 600,000

LIFO Reserve at Dec. 31 900,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%.
If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its
assets-to-equity ratio would be closest to:

A) 4.06.
B) 3.73.

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C) 4.18.

Explanation

With FIFO instead of LIFO:

Inventory would be higher by $900,000, the amount of the ending LIFO reserve.
Cumulative pretax income would also be higher by $900,000, so taxes paid would be
higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.
Cumulative retained earnings would be higher by (1 − 0.40)($900,000) = $540,000.

So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and

equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity
ratio would be $12,340,000 / $3,040,000 = 4.06.

(Module 18.5, LOS 18.k)

Question #184 of 200 Question ID: 1590020

A company reports the following unusual events:

Loss on discontinued operations.

Restructuring and severance costs applicable to asset sales.
Plant shutdown costs.

Which of these items would most likely be considered nonrecurring and included in
operating income?

Restructuring and severance costs applicable to asset sales and plant shutdown
A)
costs.
Loss on discontinued operations and restructuring and severance costs applicable
B)
to asset sales.
C) Loss on discontinued operations and plant shutdown costs.

Explanation

Restructuring and plant shutdown costs are considered part of a company's normal
operations. Gains and losses related to discontinued operations are reported separately in
the income statement because these activities are no longer included as part of the
company's continuing operations.

(Module 15.3, LOS 15.e)

Question #185 of 200 Question ID: 1590295

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Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for
tax purposes. Cash collections from customers are $476,000, and accrued revenue is only
$376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000
on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred
tax:

A) asset of $48,960.
B) liability of $17,000.
C) asset of $17,000.

Explanation

Since taxable income ($238,000) exceeds pretax income ($188,000), Kruger will have a
deferred tax asset of $17,000 [($238,000 − $188,000)(0.34)].

(Module 20.1, LOS 20.b)

Question #186 of 200 Question ID: 1590340

A company issues $50 million face value of bonds with a 4.0% coupon rate, when the market
interest rate on the bonds is 4.5%. Proceeds raised from these bonds will be:

A) less than $50 million.

B) equal to $50 million.
C) greater than $50 million.

Explanation

When the coupon rate on a bond is lower than the market rate (yield to maturity), the
bond will sell for a discount. If bonds are issued at a discount, the proceeds raised will be
less than their face value.

(Module 21.1, LOS 21.a)

Question #187 of 200 Question ID: 1590291

In the period when a deferred tax liability reverses, tax expense on the income statement is:

A) greater than taxes payable on the tax return.

B) equal to taxes payable on the tax return.
C) less than taxes payable on the tax return.
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Explanation

When a DTL reverses, income statement tax expense is less than taxes payable on the tax
return.

(Module 20.1, LOS 20.b)

Question #188 of 200 Question ID: 1590200

Given the following inventory information about the Buckner Company:

Year-end LIFO inventory of $6,500.

Year-end LIFO reserve of $2,500.
The previous year's LIFO reserve was $2,000.
The current year's LIFO cost of goods sold (COGS) is $15,000.
After-tax income is $1,600.

How much higher would the firm's retained earnings be on a FIFO basis if the firm's tax rate
is 40%?

A) $1,500.
B) $1,800.
C) $2,100.

Explanation

Adjustment to retained earnings = LIFO reserve (1 − t) = $2,500(1 − 0.4) = $1,500.

(Module 18.3, LOS 18.f)

Question #189 of 200 Question ID: 1590282

Stone Development Company owns four office buildings and a tract of raw land. Stone
occupies one of the buildings, collects rental income from the other three buildings, and is
holding the land for capital appreciation. Under IFRS, which of these assets should Stone
classify as investment property on its balance sheet?

A) Only the land held for capital appreciation.

B) The land and the buildings that generate rental income.

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C) All of these assets.

Explanation

Investment property is defined under IFRS as property held for the purpose of earning
rental income, capital appreciation, or both. Owner-occupied property is not classified as
investment property.

Question #190 of 200 Question ID: 1590329

For the year ended 31 December 2004, Pick Co's pretax financial statement income was
$400,000 and its taxable income was $300,000. The difference is due to the following:

Interest on tax-exempt municipal bonds $140,000

Premium expense on key person life insurance $(40,000)

Total $100,000

Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount
should Pick report as current provision for tax payable?

A) $120,000.
B) $90,000.
C) $102,000.

Explanation

According to SFAS 109, Current provision = statutory rate × taxable income

30% = Taxes Payable / $300,000

= 0.30 × $300,000

= $90,000

(Module 20.3, LOS 20.d)

Question #191 of 200 Question ID: 1590056

The average number of days that it takes to turn raw materials into cash proceeds is a firm's:

A) inventory turnover cycle.

B) receivables cycle.
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C) operating cycle.

Explanation

Operating cycle refers to the time it takes to turn raw materials into cash from sales.

(Module 16.3, LOS 16.d)

Question #192 of 200 Question ID: 1590333

Which of the following statements best justifies analyst scrutiny of valuation allowances?

Increases in valuation allowances may be a signal that management expects

A)
earnings to improve in the future.
B) Changes in valuation allowances can be used to manage reported net income.
If differences in taxable and pretax incomes are never expected to reverse, a
C)
company’s equity may be understated.

Explanation

A valuation allowance is a contra account (offset) against deferred tax assets that reflects
the likelihood that the deferred tax assets will never be realized. Changes in the valuation
allowance have a direct impact on reported income. Because management has discretion
with regard to the amount and timing of a valuation allowance, changes in the valuation
allowance give management significant opportunity to manage earnings.

(Module 20.3, LOS 20.f)

Question #193 of 200 Question ID: 1590098

Which of the following items is least appropriately described as a liability arising from an
operating activity for a non-financial company?

A) Trade payables.
B) Cash advances from customers.
C) The current portion of long-term debt.

Explanation

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The current portion of long-term debt arises from a financing activity. The other items
listed arise from operating activities.

(Module 17.1, LOS 17.a)

Question #194 of 200 Question ID: 1589972

The fundamental qualitative characteristics of financial reporting set out in the IFRS Financial
Reporting Standards Framework least likely include:

A) faithful representation.
B) accrual basis.
C) relevance.

Explanation

The two fundamental qualitative characteristics are relevance and faithful representation.

(Module 14.2, LOS 14.c)

Question #195 of 200 Question ID: 1589975

According to the IASB Conceptual Framework for Financial Reporting, what are the two
fundamental qualitative characteristics of financial statements?

A) Relevance and faithful representation.

B) Timeliness and comparability.
C) Verifiability and understandability.

Explanation

The IASB Conceptual Framework for Financial Reporting describes the two fundamental
qualitative characteristics of financial statements as relevance and faithful representation.
The Conceptual Framework lists timeliness, comparability, verifiability, and
understandability as characteristics that enhance relevance and faithful representation.

(Module 14.2, LOS 14.c)

Question #196 of 200 Question ID: 1590218

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Which of the following statements about inventory presentation and disclosures is most
accurate?

An analyst must determine which inventory cost method was used by examining the
A)
firm’s current and historical inventory values.
Changing from FIFO to LIFO is a change in accounting principle that must be applied
B)
retrospectively.
IFRS permits reversals of inventory writedowns but the firm must disclose the
C)
circumstances of the reversal in its financial statements.

Explanation

IFRS requires a firm that reverses an inventory writedown to discuss the circumstances
that led to the reversal. Both IFRS and U.S. GAAP require firms to disclose the inventory
cost flow method they use. While a change to LIFO from another inventory cost method is
a change in accounting principle, under U.S. GAAP this change is not applied
retrospectively. The carrying value of inventory is considered to be the first LIFO layer.

(Module 18.4, LOS 18.i)

Question #197 of 200 Question ID: 1590082

Purchases and sales of equity securities for trading purposes are most likely classified as
cash flows from:

A) investing.
B) operations.
C) financing.

Explanation

Purchases and sales of securities for trading purposes are operating cash flows. Purchases
and sales of securities for investment purposes are investing cash flows.

(Module 17.1, LOS 17.a)

Question #198 of 200 Question ID: 1590212

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A company purchased inventory on January 1, 20X2, for $600,000. On December 31, 20X2,
the inventory had a net realizable value (NRV) of $550,000 and a replacement cost of
$525,000, which is also the NRV less the normal profit margin. What would be the carrying
value of the inventory on the company's December 31, 20X2, balance sheet using:

lower of cost or NRV?: lower of cost or market?

A) $525,000; $525,000

B) $525,000; $550,000

C) $550,000; $525,000

Explanation

Lower of cost or NRV is $550,000. Using lower of cost or market, the replacement cost of
$525,000 would be used because it is below NRV and equal to the NRV less the normal
profit margin.

(Module 18.4, LOS 18.g)

Question #199 of 200 Question ID: 1590272

On January 1, 20X4, Cayman Corporation bought manufacturing equipment for $30 million.
On December 31, 20X6, Cayman determined the equipment was impaired and recognized a
$5 million impairment loss in its income statement. As of December 31, 20X7, the fair value
of the equipment exceeded the book value by $7 million. Cayman may recognize a gain in its
20X7 income statement if it reports under:

A) either IFRS or U.S. GAAP.

B) IFRS, but not U.S. GAAP.
C) neither IFRS nor U.S. GAAP.

Explanation

U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the
recovery is reported in the income statement to the extent that the previous downward
adjustment (loss) was reported in net income. Any further increase in value is reported as
revaluation surplus in shareholders' equity.

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Question #200 of 200 Question ID: 1590064

According to International Financial Reporting Standards, how do cash dividends received

from trading securities and financial securities measured at fair value through OCI affect net
income?

Trading securities Fair value through OCI

A) Increase Increase

B) Increase No effect

C) No effect Increase

Explanation

Dividends received from trading securities and available-for-sale securities are recognized
in the income statement. The difference in trading and available-for-sale classifications
relates to the treatment of any unrealized gains and losses.

(Module 16.3, LOS 16.e)

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