Multiple Choice Questions

1. Which of the following is not a reason for economic income

and accounting income to differ?
A. Transaction basis
B. The monetary assumption
C. Conservatism
D. Earnings management

2. As a general rule, revenue is normally recognized when it is:

A. measurable and earned.
B. measurable and received.
C. realizable and earned.
D. realizable.

3. Which of the following measures of accounting income is

typically reported in an income statement?
A. Net income
B. Comprehensive income
C. Continuing income
D. All of the above

4. According to FASB, initial franchise fees should be

recognized as income when:
A. the franchiser has substantially performed or satisfied all
material services and conditions.
B. the franchiser has collected the majority of fee in cash.
C. the franchisee shows the ability to pay the fee.
D. the franchiser bills the franchisee.
 Brierton Company enters a contract at the beginning of year 1
to build a new federal courthouse for a price of $16 million.
Brierton estimates that total cost of the project will be $12
million, and will take four years to complete.

5. If Brierton used percentage-of-completion method to account

for this project, what would they have reported as profit in year
2?
A. $ 0
B. $ 1.333M
C. $ 1.5M
D. $ 0.667M

6. If Brierton used cash accounting to account for this project,

what would they have reported as profit (loss) in year 2?
A. $ 0
B. $ 1.333M
C. $ (2M)
D. $ (4M)

7. Hurik Company reports the following

Based upon this information which of the following is most
correct:
A. Cost of goods sold is a permanent cost.
B. Cost of goods sold is an economic cost.
C. Cost of goods sold is a totally variable cost.
D. Cost of goods sold is a period expense.

8. Which of the following combinations of accounting practices

will lead to the highest reported earnings in an inflationary
environment?

A. Choice A
B. Choice B
C. Choice C
D. Choice D

9. Which of the following are correct?

I. If a company uses straight-line depreciation for financial
reporting purposes, it is very likely they have a deferred tax
liability with respect to its depreciable assets.
II. Straight line depreciation yields an increasing rate of return
on book value over the life of asset.
III. Straight line depreciation results in lower tax payments than
accelerated depreciation methods over the life of an asset.
IV. If a company revises its estimate of the useful life of an asset
upwards this will decrease annual depreciation expense.
A. I, II, III and IV
B. I, II and IV
C. I, II and III
D. I and IV

10. Which of the following statements concerning deferred

taxes is correct?
A. Deferred taxes will not be found in asset section of the
balance sheet.
B. Deferred taxes arise from permanent differences in GAAP
and tax accounting.
C. Deferred taxes will only decrease when a cash payment is
made.
D. Deferred taxes arising from the depreciation of a specific
asset will ultimately reduce to zero as the item is depreciated.

11. Differences in taxable income and pretax accounting income

that will not be offset by corresponding differences or "turn
around" in future periods are called:
A. timing differences.
B. circular differences.
C. permanent differences.
D. reverse differences.

The following information was extracted from Smurm

Corporation's 2006 annual report:
12. Basic earnings per share for 2006 was:
A. $3.50
B. $3.16
C. $3.08
D. $3.00

13. Using the treasury stock method, the options would result in
how many extra shares being recognized in the diluted EPS
calculation:
A. 500,000
B. 358,975
C. 333,333
D. 285,714

14. Diluted earnings per share for 2006 was:

A. $3.52
B. $3.07
C. $2.00
D. $2.03

Tecktroniks Company reported in its annual report software

refinement expenses of $12M, 15M and 18M for fiscal years
2005, 2006 and 2007, respectively. At the end of fiscal 2007, it
had total assets of 140M. Net income was 20M for fiscal 2007,
and it had a marginal tax rate of 35%.

15. If software refinement had been capitalized each year and

amortized over a three-year period beginning in the year the
cost was incurred, total assets at the end of fiscal 2007 would
have been:
A. $185M
B. $172M
C. $158M
D. $157M

16. If software refinement had been capitalized each year and

amortized over a three year period beginning in the year the cost
was incurred, net income for fiscal 2007 would have been:
A. $31.7M
B. $29.75M
C. $21.95M
D. $14.95M

17. If the software refinement had been capitalized and

amortized over a three year period beginning in the year the cost
was incurred, but was expensed for tax purposes, the deferred
tax position at the end of fiscal 2005 would have been:
A. A deferred tax credit of $2.8M
B. A deferred tax credit of $3.5M
C. A deferred tax credit of $5.2M
D. A deferred tax debit of $4M

18. If a company that normally expenses advertising costs was

to capitalize and amortize these costs over 3 years instead:
A. after the third year net income would always be higher if it is
capitalized.
B. after the third year net income would always be lower if it is
capitalized.
C. after the third year net income would be higher (if it is
capitalized) only if advertising costs were increasing.
D. after the third year net income would be lower (if it is
capitalized) only if advertising costs were increasing.

19. Compared with companies that expense costs, firms that

capitalize costs can be expected to report:
A. higher asset levels and lower equity levels.
B. higher asset levels and higher equity levels.
C. lower asset levels and higher equity levels.
D. lower asset levels and lower equity levels.

20. Two growing firms are identical except that one firm
capitalizes whereas the other firm expenses costs for long-lived
resources over time. For these two firms, which of the following
statements is generally true?
I. The expensing firm will show a more volatile pattern of
reported income than capitalizing firm.
II. The expensing firm will show a less volatile pattern of return
on assets than the capitalizing firm.
III. The expensing firm will show lower cash flows from
operations than the capitalizing firm.
A. I only
B. II only
C. I and III only
D. II and III only

21. The capitalization of interest cost during construction:

A. increases future net income.
B. decreases future depreciation expense.
C. increases net income during construction phase.
D. decreases assets during construction phase.

22. Windsor Company has net temporary differences between

tax and book accounting of $80 million, resulting in a deferred
tax liability of $28 million. An increase in the tax rate would
have the following impact on deferred taxes and net income:

A. Choice A
B. Choice B
C. Choice C
D. Choice D
23. Exoil recorded an expense and corresponding liability to
recognize potential losses relating to an oil spill in 2006 of $10
million. Its net income for the year was $200 million. It was not
able to take a deduction for tax purposes until later years when
it actually paid cash out in relation to this event. In 2006, with
respect to this, Exoil would have:
A. recognized a deferred tax liability.
B. recognized a tax loss carryforward.
C. recognized a deferred tax asset.
D. recognized a deferred equity loss.

24. Which of the following statements are correct?

I. Tax loss carrybacks result in deferred tax assets.
II. Tax loss carryforwards result in deferred tax assets.
III. The tax valuation account is used to adjust deferred tax
liabilities if it is "more likely than not" that they will not result
in increased future taxes.
A. I only
B. II only
C. III only
D. I and II

25. Which of the following will cause the reported effective

tax rate to differ from the federal statutory tax rate?
I. Foreign tax rates that are lower than federal statutory tax rate.
II. Tax-exempt income.
III. Different depreciation methods for tax and financial
reporting purposes.
IV. Foreign tax rates that are higher than federal statutory tax
rate.
A. I, II, and IV
B. I, II and III
C. I and II
D. III only

26. If a company changes the useful life of its assets from 10

years to 12 years, this will be recorded as:
A. a non-recurring gain.
B. an extraordinary item.
C. a change in accounting principle.
D. None of the above

27. If a company estimates that its expected return on pension

plan assets will increase to 9.5% from 9.0%, this would be
considered:
A. an extraordinary gain.
B. a change in accounting principle.
C. a prior period adjustment.
D. a change in accounting estimate.

28. A company changes its depreciation method from an

accelerated system to straight line. Which of the following
would normally be true?
I. The change would be discussed in the auditor's letter.
II. The cumulative effect of the change would appear net of tax
on the income statement.
III. The change would appear in cash flow from operations as a
cash inflow.
IV. The change would be mentioned in the footnotes.
A. I, II, III and IV
B. I, II and III
C. II and IV
D. I, II and IV
 29. Which of the following is true with respect to
extraordinary items?
I. Extraordinary items are recorded net of tax in income
statement.
II. Extraordinary items, by definition, are probable and unusual
in nature.
III. By definition, gains and losses from strikes are always
extraordinary.
IV. By definition, gains and losses from sale of plant, property
and equipment are never extraordinary.
A. I and IV
B. I, III and IV
C. II and IV
D. I, II and III

30. Which of the following would be considered an

extraordinary item?
I. Write-down of receivables
II. Gains on disposal of a business segment
III. Loss of inventory resulting from a fire
IV. Loss resulting from a strike
A. I and IV
B. I, III and IV
C. III only
D. I, II and III

31. Which of the following items is not included in the

calculation of net income but is included in the calculation of
comprehensive income?
A. Unrealized holding gain on available-for-sale marketable
securities.
B. Unrealized holding gain on trading marketable securities.
C. Gain from early extinguishments of bonds.
D. Gain arising from sale of available-for-sale marketable
securities.

32. Which of the following statements is true? Under GAAP,

comprehensive income:
A. may be reported in addition to net income.
B. must be reported in addition to net income.
C. may be reported instead of net income.
D. must be reported instead of net income.

33. Which of the following statements is incorrect? Employee

stock options
A. are not recorded as an expense when granted if they are at or
out-of-the money under the intrinsic value method.
B. will not affect the share price of the company when
exercised.
C. may reduce agency costs by more closely aligning interests
of stockholders and managers.
D. may increase the risk propensity of managers.

A company's net income is $100,000, and its weighted-average

shares outstanding are 20,000. During the year, the company
issues 5,000 ESOs at an exercise price of $20.

34. What will be the basic EPS if average stock price during the
year is $35 and treasury shares that can be purchased are 1000?
A. $3
B. $6
C. $5
D. $4.17

35. What will be the basic EPS if average stock price during the
year is $15 and treasury shares that can be purchased are 6000?
A. $3
B. $6
C. $5
D. $4.17

36. What will be the diluted EPS if average stock price during
the year is $15 and treasury shares that can be purchased are
6000?
A. $3
B. $5
C. $6
D. $4.17

37. What will be the diluted EPS if average stock price during
the year is $35 and treasury shares that can be purchased are
1000?
A. $3
B. $5
C. $6
D. $4.17

38. Which of the following is not an extraordinary item?

I. Loss on abandonment of property
II. Gain on disposal of a business segment
III. Effect of a strike against a key supplier
IV. Write-down of deferred research and development costs
A. I and III
B. II and IV
C. I, II and III
D. I, II, III and IV

39. Which of the following overall accounting concepts has a

number of exceptions under GAAP?
A. Historical cost
B. Transaction basis
C. Conservatism
D. Accrual accounting

40. When comparing expensing or capitalizing (with straight-

line depreciation) software, return on assets
A. will decrease over time using capitalization.
B. will increase over time using capitalization.
C. will be constant using expensing.
D. will initially be higher under expensing.

41. The intrinsic value approach ignores two types of costs:

A. Interest cost and opportunity cost
B. Opportunity cost and exercise cost
C. Interest cost and option cost
D. Carrying cost and interest cost

True / False Questions

42. Economic income and accounting income are always the

same.
FALSE

43. The matching principle in accounting prescribes that costs

must be recognized in the same period when the related
revenues are recognized.
TRUE

44. Revenue from sales where the buyer has the right of return
can only be recognized after the return period has expired.
FALSE

45. If two firms are identical except that one firm uses
percentage-of-completion accounting and the other uses
completed contract accounting for revenue recognition, the cash
flows of the firms will be identical.
TRUE

46. Generally revenue should be recorded when it is probable

and reasonably estimable.
FALSE

47. Revenues are earned inflows that arise from the company's
ongoing business activities.
TRUE

48. Gains are earned inflows that arise from the company's
ongoing business activities.
FALSE
49. Comprehensive income is computed by adjusting net
income for dirty surplus items.
TRUE

50. For item to be considered extraordinary, it should be either

unusual in nature or infrequent in occurrence.
FALSE

51. For item to be considered a special item, it should be either

unusual in nature or infrequent in occurrence but not both.
TRUE

52. Accounting changes are usually cosmetic and do not yield

cash flow consequences.
TRUE

53. A long term asset is said to be impaired when its fair value
is below its book value.
TRUE

54. Under current accounting standards, gains and losses

relating to the extinguishment of debt must be both unusual and
infrequent to be classified as an extraordinary item, and debt
refinancing does not typically meet these criteria.
TRUE

55. One difference between revenues and gains is that gains

arise from transactions that are incidental to the operations of
the business.
TRUE

56. Smythe Corporation is in the real estate development

business. If they sell a piece of land for $50,000 that they had
previously purchased for $45,000, they should record a loss of
$5,000.
FALSE

57. For companies in an expansion phase, capitalizing interest

may result in higher earnings over an extended period of time as
the amount of interest amortization will not catch up with the
amount of interest capitalized in the current period.
TRUE

58. The capitalization of interest costs during construction

increases future net income.
FALSE

59. Software costs may be capitalized once a company can

show that the product is technologically feasible.
TRUE

60. A company that capitalizes costs, rather than expensing

them will have a higher asset turnover.
FALSE
61. If revenue is recognized for financial reporting purposes but
deferred for tax purposes this results in a deferred tax liability.
TRUE

62. If an expense is recognized for financial reporting purposes

but not allowed as a bona-fide deduction for tax purposes, this
results in a deferred tax asset.
FALSE

63. Extraordinary items are defined as those that are both

unusual in nature and infrequent in occurrence. These items are
disclosed, net of tax in the income statement.
TRUE

64. Accounting errors are considered accounting changes and

treated accordingly.
FALSE

65. When a company disposes of a segment of its business, it

must restate all prior year financial statements as if it had never
owned that segment of the business.
FALSE

66. A company that capitalizes rather than expenses software

development costs, will have a less volatile net income, all other
things equal.
TRUE
67. Comprehensive income differs from net income in that it
reflects certain unrealized holding gains and losses foreign
currency translation adjustments, and minimum pension liability
adjustments.
TRUE

68. If a company, operating in an inflationary environment, uses

FIFO for tax purposes and weighted-average for financial
reporting purposes, this will result in a deferred tax asset.
TRUE

69. Deferred taxes arise due to temporary timing differences in

recognizing items for tax and financial reporting purposes.
TRUE

70. If a company depreciates an asset at a faster rate for tax

purposes than for financial reporting purposes this will give rise
to a deferred tax liability.
TRUE

71. A deferred tax liability imposes an obligation on the

business to pay taxes.
FALSE

72. Some items appear on a company's income statement but

never appear on its tax return.
TRUE
73. In order to determine permanent income for the year being
analyzed, it is necessary to consider special charges from other
years.
TRUE

74. Timing is one of the few revenue recognition issues that are
seldom a concern in financial analysis.
FALSE

75. R&D expenses for tangible assets that have alternative

future uses qualify as deferred charges.
TRUE

76. Employee stock options (ESOs) usually constitute a wealth

transfer from current shareholders to prospective shareholders
(employees) and have no effect on total liabilities and
shareholders' equity.
TRUE

77. Under long-term performance contracts—such as product

warranty contracts and software maintenance contracts—
revenues are often collected in advance and are recognized
proportionally over the entire period of the contract.
TRUE

78. ESOs often are granted to managers in growth and

innovative industries to induce more risk-taking.
TRUE
Essay Questions

79. Problem One: Revenue Recognition from Long-Term

Contract
Housing Construction Company (HCC) has agreed to build a
housing project for the city of New York. On January 1 , 2006
st

the company and the city agreed on the following terms, the
construction should take no more than 3 years, HCC would be
paid a total of $150 million for the project; the $150 million
would be paid: 3 payments of $50 million each at the end of
year 2006, 2007 and 2008. HCC expects contractions costs to be
$50 million in year 2006, $50 million in year 2007, and $10
million in year 2008.
a. If HCC uses the completed contract method, what revenues
and expenses would HCC recognize in year 2006, 2007, and
2008?
b. If HCC uses the percentage of completion method, what
revenues and expenses would HCC recognize in year 2006,
2007, and 2008?
c. Show the balance on the construction-in-process account at
the end of 2006, 2007, and 2008 (prior to the completion of the
project) using both the completed contract and the percentage of
completion methods?
Problem One: Revenue Recognition from Long-Term
Contract
a. Year 1 and Year 2: no revenues and expenses for the
observatory project.
Year 3: $150M – $110M = $40M.
b. Year Revenue Expense Income
2006 (45.45%) x $150M =$68.18M $50M (45.45%) $ 18.18M
2007 (45.45%) x $150M =$68.18M $50M (45.45%) $ 18.18M
2008 ( 9.10%) x $150M =$13.64M $10M ( 9.10%) $ 3.64M
$150M $110M $ 40M
c. Year Completed Contract Method Percentage of
Completion Method
1 $50M $68.18M
2 $50M + $50M = $100M $68.18M + 68.18M = $136.36M
3 100M + $50M = $150M $136.36M + $13.64M = $150M

80. Problem Two: Earnings per Share

The following information was obtained from Cyber
Corporation's annual report.

a. Compute weighted-average number of common shares

outstanding for the year.
b. Compute basic EPS.
c. Compute diluted EPS.
 Problem Two: Earnings per Share
a. Compute weighted-average number of common shares
outstanding for the year.

Weighted average: 8,400,000 ¸ 12 = 700,000 shares

Compute basic EPS.

Basic Earnings per Share

Compute diluted EPS.

Preferred Shares—if converted
Options: Assumed exercised

Diluted Earnings per Share

81. Problem Three: Goodwill/Cash flows

The table below shows the differences in accounting treatments
for goodwill in three selected countries.
*Goodwill is tax deductible in the United States under limited
circumstances, for the purposes of this question, assume it is
not.
Given a company that has recognized significant acquisition
goodwill, identify the country whose accounting and tax rules
for goodwill would likely result in the highest valuation of the
company. Justify and explain your answer.
Problem Three: Goodwill/Cash flows
The company should have the highest valuation in Canada as
the resulting cash flows will be higher than the cash flows if the
company was domiciled in Great Britain or the U.S. due to the
tax deductibility of the goodwill. This is a real economic gain.
Net income will be higher in Great Britain and the U.S. as no
amortization of goodwill will depress earnings on the Income
Statement. However, the underlying cash flows will not be any
higher as goodwill is not tax deductible. Therefore, the value
should not be higher for a company domiciled in Great Britain
or the U.S.
(CFA Adapted)

82. Problem Four: Taxes

Below are selected portions from Quaker Oats' tax footnote in
its X6 annual report.
Provisions for income taxes on income before cumulative effect
of accounting change were as follows:
Required:
1a. What was the effective tax rate on all income for fiscal X6?
1b. What was the effective tax rate on foreign income for fiscal
X6?
2a. How much did Quaker Oats record in deferred taxes for
fiscal X6? Was this an asset or liability?
2b. What was the major item contributing to the deferred tax for
X6? Explain fully how this arose.
Problem Four: Taxes
1a.
Provision for income taxes = $167.7
Total pretax income = $415.6
Effective tax rate = $167.7/$415.6 = 40.4%
1b.
Foreign Income = $52.8 (in footnote)
Tax expense related to foreign income = $10.2 + $10.4 (current
plus deferred) = 20.6
Effective tax rate = 20.6/52.8 = 39%
2a.
They recorded a $31.5 deferred tax liability. The taxes currently
payable are lower than the income tax expense. Note that does
not equal the change in the net liability balance given in the
table - this is due in part to the fact that some deferred taxes are
associated directly with associated assets and liabilities and due
to changes in valuation account.
2b.
The major item contributing to the deferred tax liability is
"accrued expenses including restructuring charge" of $40.6 -
this is a deferred tax liability for X6. Further examination shows
that this item is a deferred tax asset as of the end of X6, which
has decreased from its prior year level. Therefore, we can infer
that in prior years Quaker Oats recorded expenses on financial
statements but did not take tax deduction that resulted in a
deferred tax asset. This year, they paid cash out relating to these
items, which allowed them to finally take a deduction on their
tax returns. Thus for the year, they had a decrease in the
deferred tax asset which shows up as a deferred tax liability in
the reconciliation.

83. Problem Five: Deferred taxes

Many companies have significant deferred taxes. Deferred taxes
are not always long-term liabilities. For the categories below,
state whether deferred taxes can arise in this category and
provide an example.
i. Current Liabilities
ii. Long-term liabilities
iii. Stockholders' Equity
iv. Current Assets
v. Long-term assets
Problem Five: Deferred taxes
i. Current Liabilities
Could arise from recognizing all income from installment sale
for financial reporting purposes, and on cash basis for tax
purposes.
ii. Long-term liabilities
Different depreciation methods for tax and financial reporting
purposes give rise to deferred taxes. Typically assets are
depreciated faster for tax purposes giving rise to a deferred tax
liability.
iii. Stockholders' Equity
Deferred taxes are recorded to offset the valuation account for
marketable securities.
iv. Current Assets
Warrantees, accrued compensation etc. where payment in cash
is expected during next year will give rise to current deferred
tax assets.
v. Long-term assets
Post-retirement health benefits and contingent liabilities not
expected to be paid in cash within the next year will give rise to
long-term deferred tax assets.
(CFA Adapted)

84. Problem Six: Expensing versus Capitalizing

Companies can capitalize software development costs when the
product is "technologically feasible". Some companies never
capitalize their software costs – for example, Microsoft.
Viderics, a software development company capitalizes those
software costs allowed under GAAP. The following information
is taken from its financial statements.

a. If Viderics had not capitalized its software costs but expensed

them instead what would they have reported as software
expense each year, assuming unamortized balance of software
costs was $35 in year X0?
b. What is the likely effect upon net income variability of
expensing rather than capitalizing software development costs?
c. How might income be manipulated under either of these two
methods (expensing and capitalizing)?
Problem Six: Expensing versus Capitalizing
a. If Viderics had not capitalized its software costs but expensed
them instead what would they have reported as software
expense each year, assuming unamortized balance of software
costs was $35 in year X0?

b. What is the likely effect upon net income variability of

expensing rather than capitalizing software development costs?
Net income will normally have greater variability under the
expensing method. Capitalizing and amortizing has a smoothing
effect on net income (net income will only have the same
variability under the two methods if the costs incurred are the
same each period or they are increasing/decreasing at a constant
rate).
c. How might income be manipulated under either of these two
methods?
When costs are expensed, net income is immediately affected
by changes in software development expenditures. Hence if a
company is desperate to increase net income it can cut software
development costs (this of course will probably come back to
haunt them in futures periods).
When costs are capitalized and subsequently amortized, a
decrease in this year's expenditures will have a much smaller
effect than if these costs were expensed immediately. However,
management has plenty of latitude in determining when and
which costs get capitalized and over how long they are
amortized. Therefore, if a company wanted to increase its net
income this period it could 1) increase amortization period, 2)
capitalize more costs and/or 3) capitalize costs sooner.

85. Problem Seven: Changes in accounting

You are reading the 2006 annual report of Curpen Corporation
and you find the following items in its footnotes.
a. The useful life of machinery has been increased from 10 to 15
years.
b. The expected rate of return on plan assets has been increased
to 10% from 8%.
c. The company has started to capitalize small tools purchased
beginning in 2006.
For each of the above, determine the effect (higher, lower,
unchanged) of the change on the ratios listed below for the year
2006:
a. Debt-to-Equity
b. Return on Assets
c. Cash Flow from Operations
Problem Seven: Changes in accounting

86. Problem Eight: Employee Stock Options

XYZ Company issued 10,000 options to its CEO on January 1,
2006, at the prevailing market price of $5 per share. The options
were expected to vest over a 2-year period. The Black-Scholes
value of the option was valued at $2 per share. On December
31, 2007, the CEO exercised all options. Market price on that
day was $9 per share. Assume a 35% tax rate.
What will be the cumulative effect on the balance sheet as of
December 31, 2007 before the exercise of option?
What will be the cumulative effect on the balance sheet as of
December 31, 2007 after the exercise of option?
Problem Eight: Employee Stock Options
Balance Sheet Effect before exercise of option

The total pretax "cost" to the company is $2 X 10,000 =

$20,000 which will be amortized over 2006 and 2007.
At a 35% tax rate, the tax saving is $7,000.
Balance Sheet Effect after exercise of option

$5 X 10,000 = $50,000 of cash is received from the CEO. In

return, we issue 10,000 shares to the CEO. Because the options
are no longer outstanding, we reverse the $20,000 that is in
paid-in share capital—stock compensation. The sum total is
charged to normal paid-in share capital

87. Problem Nine: Impairment of Long-lived Assets

Metals Corp. has four factories with the following data:
All cash flows are at year-end and terminate after December 31,
2010. The company's cost of capital is 10% and its tax rate is
35%.
a. What is the value of each factory for balance sheet purposes
at December 31, 2006?
b. What impairment loss, if any, would be reported on Metals'
2006 income statement. How would it be reported and where
would it be reported (i.e. what component of the income
statement and other disclosures)?
Problem Nine: Impairment of Long-lived Assets

Asset impairment losses are part of income from continuing

operations, although they may be broken out as a special line
item if material. They are reported gross and their impact is
reflected in the overall income tax expense. In this problem,
Metals' impairment loss is clearly material. Footnote disclosure
would contain an explanation of the impairment loss and it
would be discussed in MD&A.

88. Problem Ten: Nonrecurring Items

For each of these nonrecurring items give an example and
indicate (match with) the appropriate accounting treatment.
Extraordinary item
Prior period adjustment
Change in accounting estimate
Change in accounting principle
Discontinued operation
Special items
Comprehensive income items
Change in reporting entity
SEC Enforcement Releases
A. Shown net as a separate line item between net income and
comprehensive income, no restatement.
B. Income statement line items adjusted as appropriate, gross or
net, prior years restated.
C. Gross amount is part of its regular income or expense line
item in income from continuing operations, prior years restated.
D. Gross amount is part of its regular income or expense line
item in income from continuing operations, no restatement.
E. Shown gross as a separate line item in income from
continuing operations, no restatement.
F. Shown net as a separate line item between income from
continuing operations and net income, prior years restated.
G. Shown cumulative net as a separate line item between
income from continuing operations and net income, no
restatement.
H. Shown net as a separate line item between income from
continuing operations and net income, no restatement.
I. Not in income statement, opening retained earnings is
changed by net amount, no restatement.
Problem Ten: Nonrecurring Items

Chapter 07
Cash Flow Analysis

Multiple Choice Questions

1. Under the accrual basis of accounting, which of the following

statements is true?
I. Reported net income provides a measure of operating
performance
II. Revenue is recognized when cash is received, and expenses
are recognized when payment is made
III. Cash inflows are recognized when they are received, and