Increase in its current ratio from 0.71 to 0.75.
19. Which of the following choices best describes reasonable conclusions an analyst might
make about the company ’ s profi tability?
A. Comparing 2004 with 2000, the company ’ s profi tability improved, as indicated by
an increase in its debt - to - assets ratio from 0.14 to 0.27.
B. Comparing 2004 with 2000, the company ’ s profi tability deteriorated, as indicated by
a decrease in its net profi t margin from 11.0 percent to 5.7 percent.
C. Comparing 2004 with 2000, the company ’ s profi tability improved, as indicated by
the growth in its shareholders ’ equity to GBP 6,165 million.
20. In general, a creditor would consider a decrease in which of the following ratios to be
positive news?
A. Interest coverage (times interest earned)
B. Debt to total assets
C. Return on assets
21. Assuming no changes in other variables, which of the following would decrease ROA?
A. A decrease in the effective tax rate
B. A decrease in interest expense
C. An increase in average assets
22. What does the P/E ratio measure?
A. The “ multiple ” that the stock market places on a company ’ s EPS.
B. The relationship between dividends and market prices.
C. The earnings for one common share of stock.
Chapter 8
1. According to the IFRS Framework, which of the following is a qualitative characteristic
related to the usefulness of information in fi nancial statements?
A. Neutrality
B. Timeliness
C. Accrual basis
2. Under the IFRS Framework, changes in the elements of fi nancial statements are most
likely portrayed in the
A. balance sheet.
B. income statement.
C. cash fl ow statement.
3. Under IASB standards, which of the following categories of marketable securities is most
likely to incur an asymmetrical treatment of income and changes in value?
A. Held for trading
B. Held to maturity
C. Available for sale
4. According to IASB standards, which of the following inventory methods is most
preferred ?
A. Specifi c identifi cation
B. Weighted average cost
C. First in, fi rst out (FIFO)
5. According to IASB standards, which of the following inventory methods is not
acceptable?
A. Weighted average cost
B. First in, fi rst out (FIFO)
C. Last in, fi rst out (LIFO)
6. Under IASB standards, inventory write - downs are
A. not allowed.
B. allowed but not reversible.
C. allowed and subject to reversal.
7. According to IASB standards, property, plant, and equipment revaluations are
A. not allowed.
B. allowed for decreases only.
C. allowed for both increases and decreases.
8. Under IASB standards, a joint venture interest is accounted for by using
A. consolidation.
B. the equity method or consolidation.
C. the equity method or proportionate consolidation.
9. Under IASB standards, goodwill
A. may be written off when acquired.
B. is subject to an annual impairment test.
C. is amortized over its expected useful life.
10. Under IASB standards, negative goodwill
A. must be recorded as a gain.
B. is prorated to the noncurrent assets.
C. is accounted for as an extraordinary item.
11. Under IASB standards, an identifi able intangible asset with an indefi nite life
A. may be written off when acquired.
B. is amortized over a 20 - year period.
C. is accounted for in the same manner as goodwill.
12. Under IASB standards, identifi able intangible assets are
A. only revalued downward, with the decrease reported to profi t and loss.
B. revalued upward and reported to equity when reversing a previous revaluation
decrease.
C. revalued upward and reported to profi t and loss when reversing a previous revaluation
decrease.
13. Under IASB standards, when the outcome of a construction contract cannot be estimated
reliably, revenue and costs should be
A. recognized by using the completed contract method.
B. recognized by using the percentage of completion contract method.
C. recognized to the extent that it is probable to recover contract costs.
14. Under IASB standards, fi xed asset depreciation methods must be
A. rational and systematic.
B. rational and reviewed at least annually.
C. systematic and refl ect the pattern of expected consumption.
15. Under IASB standards, cash infl ows for the receipt of interest and dividends are
A. operating cash fl ows.
B. either operating or investing cash fl ows.
C. either investing or fi nancing cash fl ows.
16. Under IASB standards, cash outfl ows for the payment of interest are
A. operating cash fl ows.
B. either investing or fi nancing cash fl ows.
C. either operating or fi nancing cash fl ows.
17. Under IASB standards, cash outfl ows for the payment of dividends are
A. fi nancing cash fl ows.
B. either operating or investing cash fl ows.
C. either operating or fi nancing cash fl ows.
18. When comparing a U.S. company that uses LIFO accounting with an IFRS company
that uses FIFO accounting, an analyst will
A. make no adjustment if the adjustment data are unavailable.
B. adjust either company to achieve comparability with the other.
C. adjust the U.S. company to achieve comparability with the IFRS company.
19. When comparing a U.S. company with an IFRS company that has written up the value of
its intangible assets, an analyst will eliminate the effect of the write - ups in calculating the
A. gross margin.
B. earnings per share.
C. fi nancial leverage multiplier.
Chapter 9
1. Projecting profi t margins into the future on the basis of past results would be most reliable
when the company
A. is a large, diversifi ed company operating in mature industries.
B. is in the commodities business.
C. operates in a single business segment.
2. Galambos Corporation had an average receivable collection period of 19 days in 2003.
Galambos has stated that it wants to decrease its collection period in 2004 to match
the industry average of 15 days. Credit sales in 2003 were $300 million, and analysts
expect credit sales to increase to $400 million in 2004. To achieve the company ’ s goal of
decreasing the collection period, the change in the average accounts receivable balance
from 2003 to 2004 that must occur is closest to
A. – $420,000.
B. $420,000.
C. $836,000.
3. Credit analysts are likely to consider which of the following in making a rating recommendation?
A. Business risk, but not fi nancial risk
B. Financial risk, but not business risk
C. Both business risk and fi nancial risk
4. When screening for potential equity investments based on return on equity, to control
risk an analyst would be most likely to include a criterion that requires
A. positive net income.
B. negative net income.
C. negative shareholders ’ equity.
5. One concern when screening for low price - to - earnings stocks is that companies with low
price - to - earnings ratios may be fi nancially weak. What criteria might an analyst include
to avoid inadvertently selecting weak companies?
A. current - year sales growth lower than prior - year sales growth
B. net income less than zero
C. debt - to - total assets ratio below a certain cutoff point
6. When a database eliminates companies that cease to exist because of a merger or bankruptcy,
this can result in
A. look - ahead bias.
B. backtesting bias.
C. survivorship bias.
7. In a comprehensive fi nancial analysis, fi nancial statements should be
A. used as reported without adjustment.
B. adjusted after completing ratio analysis.
C. adjusted for differences in accounting standards, such as IFRS and U.S. GAAP.
8. When comparing fi nancial statements prepared under IFRS with those prepared under
U.S. GAAP, analysts may need to make adjustments related to
A. realized losses.
B. unrealized gains and losses for trading securities.
C. unrealized gains and losses for available - for - sale securities.
9. When comparing a U.S. company using the LIFO method of inventory to companies
preparing their fi nancial statements under IFRS, analysts should be aware that according
to IFRS, the LIFO method of inventory
A. is never acceptable.
B. is always acceptable.
C. is acceptable when applied to fi nished goods inventory only.
10. An analyst is evaluating the balance sheet of a U.S. company that uses LIFO accounting
for inventory. The analyst collects the following data:
31 Dec 05 31 Dec 06
Inventory reported on
balance sheet
$500,000 $600,000
LIFO reserve $50,000 $70,000
Average tax rate 30% 30%
After adjustment to convert to FIFO, inventory on 31 December 2006 would be closest to
A. $600,000.
B. $620,000.
C. $670,000.
11. An analyst gathered the following data for a company ($ millions):
31 Dec 2000 31 Dec 2001
Gross investment in fi xed assets $2.8 $2.8
Accumulated depreciation $1.2 $1.6
The average age and average depreciable life, respectively, of the company ’ s fi xed assets at
the end of 2001 are closest to
Average Age Average Depreciable Life
A. 1.75 years 7 years
B . 1.75 years 14 years
C. 4.00 years 7 years
12. To compute tangible book value, an analyst would
A. add goodwill to stockholders ’ equity.
B. add all intangible assets to stockholders ’ equity.
C. subtract all intangible assets from stockholders ’ equity.
13. Which of the following is an off - balance - sheet fi nancing technique? The use of
A. the LIFO inventory method.
B. capital leases.
C. operating leases.
14. To better evaluate the solvency of a company, an analyst would most likely add to total
liabilities
A. the present value of future capital lease payments.
B. the total amount of future operating lease payments.
C. the present value of future operating lease payments.
Chapter 10
1. Inventory cost is least likely to include
A. production - related storage costs.
B. costs incurred due to normal waste of materials.
C. transportation costs of shipping inventory to customers.
2. Ajax Factories produces pencils at a factory designed to produce 10 million pencils per
year. In 2007 the fi xed production overhead related to the factory was $1 million and
the factory produced 9 million pencils. The inventory cost for each pencil related to the
fi xed production overhead is closest to
A. $0.00
B. $0.10
C. $0.11
3. Mustard Seed PLC adheres to IFRS. It recently purchased inventory for € 100 million
and spent € 5 million for storage prior to selling the goods. The amount it charged to
inventory expense (in € millions) was closest to
A. € 95.
B. € 100.
C. € 105.
4. Carrying inventory at a value above its historical cost would most likely be permitted if
A. the inventory was held by a produce dealer.
B. fi nancial statements were prepared using U.S. GAAP.
C. the change resulted from a reversal of a previous write - down.
5. Eric ’ s Used Bookstore prepares its fi nancial statements in accordance with U.S. GAAP.
Inventory was purchased for $1 million and later marked down to $550,000. However,
one of the books was later discovered to be a rare collectible item and the inventory is
now worth an estimated $3 million. The inventory is most likely reported on the balance
sheet at
A. $550,000.
B. $1,000,000.
C. $3,000,000.
6. Fernando ’ s Pasta purchased inventory and later wrote it down, though the current realizable
value is higher than the value when written down. Fernando ’ s inventory balance will
most likely be
A. higher if it complies with IFRS.
B. higher if it complies with U.S. GAAP.
C. the same under U.S. GAAP and IFRS.
7. Cinnamon Corp. started business in 2007 and uses the weighted average cost inventory
method. During 2007 it purchased 45,000 units of inventory at € 10 each and sold
40,000 units for € 20 each. In 2008 it purchased another 50,000 units at € 11 each
and sold 45,000 units for € 22 each. Its 2008 cost of goods sold (in € thousands) was
closest to
A. € 490.
B. € 491.
C. € 495.
8. Zimt AG started business in 2007 and uses the FIFO inventory method. During 2007 it
purchased 45,000 units of inventory at € 10 each and sold 40,000 units for € 20 each. In
2008 it purchased another 50,000 units at € 11 each and sold 45,000 units for € 22 each.
Its 2008 ending inventory balance (in € thousands) was closest to
A. € 105.
B. € 109.
C. € 110.
9. Zimt AG uses the FIFO inventory accounting method, and Nutmeg Inc. uses the LIFO
method. Compared to the cost of replacing the inventory, during periods of rising prices
the cost of goods sold reported by
A. Zimt is too low.
B. Nutmeg is too low.
C. Nutmeg is too high.
10. Zimt AG uses the FIFO inventory accounting method, and Nutmeg Inc. uses the LIFO
method. Compared to the cost of replacing the inventory, during periods of rising prices
the ending inventory balance reported by
A. Zimt is too high.
B. Nutmeg is too low.
C. Nutmeg is too high.
11. Like many technology companies, TechnoTools operates in an environment of declining
prices. Its reported profi ts will tend to be highest if it accounts for inventory using the
A. FIFO method.
B. LIFO method.
C. weighted average cost method.
12. Compared to using the weighted average cost method to account for inventory, during
a period in which prices are generally rising the current ratio of a company using the
FIFO method would most likely be
A. lower.
B. higher.
C. dependent upon the interaction with accounts payable.
13. Zimt AG wrote down the value of inventory in 2007 and reversed the write - down
in 2008. Compared to ratios calculated if the write - down had never occurred, Zimt ’ s
reported 2007
A. current ratio was too high.
B. gross margin was too high.
C. inventory turnover was too high.
14. Zimt AG wrote down the value of inventory in 2007 and reversed the write - down in
2008. Compared to results reported if the write - down had never occurred, Zimt ’ s
reported 2008
A. profi t was overstated.
B. cash fl ow from operations was overstated.
C. year - end inventory balance was overstated.
15. Compared to a company that uses the FIFO inventory accounting method, during periods
of rising prices a company that uses the LIFO method will most likely appear more
A. liquid.
B. effi cient.
C. profi table.
16. Nutmeg, Inc. uses the LIFO method to account for inventory. During years in
which inventory unit costs are generally rising and in which the company purchases
more inventory than it sells to customers its reported gross profi t margin will most
likely be
A. lower than it would have been if the company used the FIFO method.
B. higher than it would have been if the company used the FIFO method.
C. about the same as it would have been if the company used the FIFO method.
17. Sauerbraten Corp. reported 2007 sales ($ in millions) of $2,157 and cost of goods
sold of $1,827. The company uses the LIFO method for inventory valuation and discloses
that if the FIFO inventory valuation method had been used, inventories would
have been $63.3 million and $56.8 million higher in 2007 and 2006, respectively. If
Sauerbraten used the FIFO method exclusively, it would have reported 2007 gross
profi t closest to
A. $324.
B. $330.
C. $337.
18. Sauerbraten Corp. reported 2007 sales ($ in millions) of $2,157 and cost of goods sold
of $1,827. Inventories at year - end 2007 and 2006, respectively, were $553 and $562.
The company uses the LIFO method for inventory valuation and discloses that if the
FIFO inventory valuation method had been used, inventories would have been $63.3
million and $56.8 million higher in 2007 and 2006, respectively. Compared to the
inventory turnover ratio reported, if Sauerbraten had exclusively used the FIFO method
its inventory turnover ratio would have been closest to
A. 2.96.
B. 3.28.
C. 3.49.
19. Compared to using the FIFO method to account for inventory, during periods of rising
prices a company that uses the LIFO method is most likely to report higher
A. net income.
B. cost of sales.
C. income taxes.
20. In order to compare the results of a company that uses the LIFO method to one using
FIFO, the required adjustments to the fi nancial statements of the LIFO user include
adding the
A. LIFO reserve to inventory.
B. change in the LIFO reserve to inventory.
C. change in the LIFO reserve to cost of goods sold.
21. Carey Company adheres to U.S. GAAP, while Jonathan Company adheres to IFRS. It is
least likely that
A. Carey has reversed an inventory write - down.
B. Jonathan has reversed an inventory write - down.
C. Jonathan and Carey both use the FIFO inventory accounting method.
Chapter 11
1. The Schneider Candy Company has decided to capitalize the interest costs it incurs during
and related to construction of its new storage and shipping facility. This practice is
A. permitted only if the company complies with U.S. GAAP.
B. permitted only if the company complies with IFRS.
C. permissible under either U.S. GAAP or IFRS.
2. The Juniper Juice Company reports that it has capitalized the interest costs it incurred
during and related to construction of its new bottling plant. A creditor assessing Juniper
Juice ’ s solvency ratios would most likely
A. add capitalized interest to reported interest expense.
B. subtract capitalized interest from reported interest expense.
C. add any depreciation from previously capitalized interest to interest expense.
3. Anna Lyssette is evaluating the performance of two biotechnology companies: Biotech
Holdings and Advanced Biotech. Both companies released their fi rst new drugs early in
the year, but Lyssette is worried about a possible lack of comparability due to differing
strategies. Biotech Holdings acquired the research and development for its drug from
another company while Advanced Biotech developed its drug internally. In the current
accounting period, all else equal, Biotech Holdings would most likely report
A. lower total assets.
B. higher net income.
C. similar cash fl ow from operations.
4. Amerisoft complies with U.S. GAAP, while EuroWare complies with IFRS. When comparing
the two companies, it would most likely be necessary to adjust the fi nancial statements
of
A. Amerisoft to remove charges related to acquired in - process R & D.
B. EuroWare to remove charges related to acquired in - process R & D.
C. Both companies to remove charges related to acquired in - process R & D.
5. When comparing a company that complies with IFRS to a company that complies with
U.S. GAAP, it is most important to remember that under IFRS
A. research - phase R & D expenditures are capitalized.
B. acquired in - process R & D is expensed immediately.
C. development - phase R & D expenditures may be capitalized.
The following information relates to Problems 6 through 9:
The Asset Intensive Company (AIC) has purchased equipment for $1 million. The
equipment is expected to have a three - year useful life and a salvage value of $100,000. AIC
reports under U.S. GAAP.
6. Over the full life of the machine, all else equal, the volatility of AIC ’ s net income will be
A. the same regardless of whether AIC expenses or capitalizes the cost of the machine.
B. highest if the company expenses the entire cost of the machine in the year of its
purchase.
C. highest if the company capitalizes the cost of the machine and depreciates it over its
useful life.
7. Assuming AIC capitalizes the cost of the equipment, depreciation expense over the life
of the machine will be
A. the same regardless of the chosen depreciation method.
B. lowest if the company uses the double - declining balance method.
C. highest if the company uses the double - declining balance method.
8. In year 3, the return on equity will most likely be
A. highest if the company expenses the cost of the equipment.
B. highest if the company capitalizes the cost of the equipment.
C. the same regardless of whether the cost of the equipment is expensed or capitalized.
9. Regardless of the depreciation method used for reporting purposes, the company will use
MACRS for tax purposes. In year 1, the reported income tax expense will be
A. the same regardless of depreciation method.
B. highest if the company uses the straight - line method.
C. highest if the company uses the double - declining balance method.
10. Bobcat Company ’ s balance sheet shows PP & E valued at a historical cost of $22,983 million
and accumulated depreciation of $7,879 million. Depreciation expense in the most
recent year was $2,459 million. What is the average remaining useful life of Bobcat ’ s
assets?
A. 3.2 years.
B. 6.1 years.
C. 9.3 years.
11. Francis Acana is comparing the property and equipment disclosures for three airline
companies, as summarized in the following table:
Airline A Airline B Airline C
Historical cost, aircraft $17,239 £ 23,584 € 45,266
Accumulated depreciation,
aircraft
6,584 13,654 21,745
Net cost, aircraft 10,655 9,930 23,521
Annual depreciation expense 575 786 1,509
Acana fi nds that the average fl eet age is
A. lowest for Airline A.
B. lowest for Airline B.
C. lowest for Airline C.
12. Relative to assets with fi nite lives, an intangible asset determined to have an indefi nite
life will result in lower reported
A. assets.
B. net income.
C. amortization expense.
13. With regard to intangible assets, a company ’ s reported profi t margin the year the asset is
acquired will be highest if it estimates a
A. six - year useful life and no salvage value.
B. six - year useful life and a positive salvage value.
C. fi ve - year useful life and a positive salvage value.
14. With regard to intangible assets, the company ’ s cash fl ow from operating activities the
year the asset is acquired will most likely be highest if it estimates a
A. fi ve - year useful life and no salvage value.
B. six - year useful life and a positive salvage value.
C. fi ve - year useful life and a positive salvage value.
15. When a company is able to estimate the future costs it will incur when an asset is retired,
it is least likely to
A. increase the carrying value of the asset.
B. decrease the carrying value of the liability through an accretion charge.
C. decrease the carrying value of the asset over time through an accretion charge.
16. Compared to an asset that will not require a retirement obligation, an asset that will
require a retirement obligation is most likely to result in a
A. one - time charge at the time of retirement.
B. rising debt/equity ratio as the retirement date approaches.
C. declining debt/equity ratio as the retirement date approaches.
17. A credit analyst reviewing a company with asset retirement obligations (ARO) would
least likely adjust
A. interest expense by the amount of accretion.
B. shareholders ’ equity by the amount of the ARO.
C. the reported ARO by the amount of any related trust funds or escrow.
18. Fisherman Enterprises purchased $1 million of equipment with an estimated 10 - year
useful life and a $100,000 expected salvage value. The company uses the straight - line
method of depreciation. At the end of fi ve years it sells the equipment for $500,000.
Fisherman ’ s income statement will include a $50,000
A. loss recorded as a separate line item.
B. gain recorded as a separate line item.
C. offset to depreciation and amortization.
19. A company that has decided to sell an asset is least likely to record a
A. gain at the time the asset is sold.
B. loss at the time the decision is made.
C. gain at the time the decision is made.
20. An asset is considered impaired when
A. its fair value exceeds its carrying value.
B. its carrying value exceeds its fair value.
C. it ceases to provide an economic benefi t.
21. An asset impairment is most likely to impact reported
A. depreciation expense in future periods.
B. depreciation expense in the year impaired.
C. cash fl ow from operating activities in the year impaired.
22. When comparing the reported results of a company that complies with U.S. GAAP to
a company that complies with IFRS, return on assets is least likely to require an adjustment
for
A. goodwill amortization.
B. upwardly revalued assets.
C. acquired in - process R & D charges.
23. In the year of the revaluation, an asset revaluation that increases the carrying value of an
asset is most likely to
A. increase return on equity.
B. decrease reported leverage.
C. decrease shareholders ’ equity.
Chapter 12
1. Using the straight - line method of depreciation for reporting purposes and accelerated
depreciation for tax purposes would most likely result in a
A. valuation allowance.
B. deferred tax liability.
C. temporary difference.
2. In early 2009 Sanborn Company must pay the tax authority € 37,000 on the income it
earned in 2008. This amount was recorded on the company ’ s 31 December 2008 fi nancial
statements as
A. taxes payable.
B. income tax expense.
C. a deferred tax liability.
3. Income tax expense reported on a company ’ s income statement equals taxes payable, plus
the net increase in
A. deferred tax assets and deferred tax liabilities.
B. deferred tax assets, less the net increase in deferred tax liabilities.
C. deferred tax liabilities, less the net increase in deferred tax assets.
4. Analysts should treat deferred tax liabilities that are expected to reverse as
A. equity.
B. liabilities.
C. neither liabilities nor equity.
5. Deferred tax liabilities should be treated as equity when
A. they are not expected to reverse.
B. the timing of tax payments is uncertain.
C. the amount of tax payments is uncertain.
6. When both the timing and amount of tax payments is uncertain, analysts should treat
deferred tax liabilities as
A. equity.
B. liabilities.
C. neither liabilities nor equity.
7. When accounting standards require recognition of an expense that is not permitted
under tax laws, the result is a
A. deferred tax liability.
B. temporary difference.
C. permanent difference.
8. When certain expenditures result in tax credits that directly reduce taxes, the company
will most likely record
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
9. When accounting standards require an asset to be expensed immediately but tax rules
require the item to be capitalized and amortized, the company will most likely record
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
10. A company incurs a capital expenditure that may be amortized over fi ve years for
accounting purposes, but over four years for tax purposes. The company will most likely
record
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
11. A company receives advance payments from customers that are immediately taxable but
will not be recognized for accounting purposes until the company fulfi lls its obligation.
The company will most likely record
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
Use the following disclosure related to income taxes to answer Problems 12 – 14.
NOTE I
Income Taxes
The components of earnings before income taxes are as follows ($ thousands):
2007 2006 2005
Earnings before income taxes:
United States $88,157 $75,658 $59,973
Foreign 116,704 113,509 94,760
Total $204,861 $189,167 $154,733
The components of the provision for income taxes are as follows ($ thousands):
2007 2006 2005
Income taxes
Current:
Federal $30,632 $22,031 $18,959
Foreign 28,140 27,961 22,263
$58,772 $49,992 $41,222
Deferred:
Federal ($4,752) $5,138 $2,336
Foreign 124 1,730 621
(4,628) 6,868 2,957
Total $54,144 $56,860 $44,179
12. In 2007, the company ’ s U.S. GAAP income statement recorded a provision for income
taxes closest to
A. $30,632.
B. $54,144.
C. $58,772.
13. The company ’ s effective tax rate was highest in
A. 2005.
B. 2006.
C. 2007.
14. Compared to the company ’ s effective tax rate on U.S. income, its effective tax rate on
foreign income was
A. lower in each year presented.
B. higher in each year presented.
C. higher in some periods and lower in others.
15. Zimt AG presents its fi nancial statements in accordance with International Financial
Reporting Standards. In 2007, Zimt discloses a valuation allowance of € 1,101 against
total deferred tax assets of € 19,201. In 2006, Zimt disclosed a valuation allowance of
€ 1,325 against total deferred tax assets of € 17,325. The change in the valuation allowance
most likely indicates that Zimt ’ s
A. deferred tax liabilities were reduced in 2007.
B. expectations of future earning power has increased.
C. expectations of future earning power has decreased.
16. Cinnamon, Inc. recorded a total deferred tax asset in 2007 of $12,301, offset by a
$12,301 valuation allowance. Cinnamon most likely
A. fully utilized the deferred tax asset in 2007.
B. has an equal amount of deferred tax assets and deferred tax liabilities.
C. expects not to earn any taxable income before the deferred tax asset expires.
Use the following income tax disclosure to answer Problems 17 – 19.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities
are as follows ($ thousands):
2007 2006
Deferred tax assets:
Accrued expenses $8,613 $7,927
Tax credit and net operating loss carryforwards 2,288 2,554
LIFO and inventory reserves 5,286 4,327
Other 2,664 2,109
Deferred tax assets 18,851 16,917
Valuation allowance (1,245) (1,360)
Net deferred tax assets $17,606 $15,557
2007 2006
Deferred tax liabilities:
Depreciation and amortization (27,338) (29,313)
Compensation and retirement plans (3,831) (8,963)
Other (1,470) (764)
Deferred tax liabilities (32,639) (39,040)
Net deferred tax liability ($15,033) ($23,483)
17. A reduction in the statutory tax rate would most likely benefi t the company ’ s
A. income statement and balance sheet.
B. income statement but not the balance sheet.
C. balance sheet but not the income statement.
18. If the valuation allowance had been the same in 2007 as it was in 2006, the company
would have reported $115 higher
A. net income.
B. deferred tax asset.
C. income tax expense.
19. Compared to the provision for income taxes in 2007, the company ’ s cash tax payments
were
A. lower.
B. higher.
C. the same.
Use the following income tax disclosure to answer Problems 20 – 22.
A company ’ s provision for income taxes resulted in effective tax rates attributable to loss
from continuing operations before cumulative effect of change in accounting principles that
varied from the statutory federal income tax rate of 34 percent, as summarized in the table
below.
Year ended 30 June 2007 2006 2005
Expected federal income tax expense (benefi t) from
continuing operations at 34 percent
($112,000) $768,000 $685,000
Expenses not deductible for income tax purposes 357,000 32,000 51,000
State income taxes, net of federal benefi t 132,000 22,000 100,000
Change in valuation allowance for deferred tax assets (150,000) (766,000) (754,000)
Income tax expense $227,000 $56,000 $82,000
20. In 2007, the company ’ s net income (loss) was closest to
A. ($217,000).
B. ($329,000).
C. ($556,000).
21. The $357,000 adjustment in 2007 most likely resulted in
A. an increase in deferred tax assets.
B. an increase in deferred tax liabilities.
C. no change to deferred tax assets and liabilities.
22. Over the three years presented, changes in the valuation allowance for deferred tax assets
were most likely indicative of
A. decreased prospect for future profi tability.
B. increased prospects for future profi tability.
C. assets being carried at a higher value than their tax base
Chapter 13
1. A company issues $1 million of bonds at face value. When the bonds are issued, the
company will record a
A. cash infl ow from investing activities.
B. cash infl ow from fi nancing activities.
C. cash infl ow from operating activities.
2. Alpha Aircraft receives $1 million for bonds issued at face value, and Beta Bizjets receives
$1 million for bonds issued at a discount. As a result of the bond issue, compared to
Alpha Aircraft, Beta Bizjets will most likely record higher
A. periodic interest expense on the income statement.
B. liabilities on the balance sheet at the time of issue.
C. periodic interest payments on the cash fl ow statement.
3. Oil Exploration LLC paid $45,000 related to printing, legal fees, commissions, and
other costs associated with its recent bond issue. Under U.S. GAAP it is most likely to
record these costs on its fi nancial statements as
A. an asset.
B. a liability.
C. a cash outfl ow from investing activities.
4. On 1 January 2008, Elegant Fragrances Company issues $1 million worth of fi ve - year
bonds with annual interest payments of $55,000 paid each 31 December. The market
interest rate is 6.0 percent. Using the effective interest rate method of amortizing,
Elegant Fragrances is most likely to record
A. interest expense of $55,000 on its 2008 income statement.
B. a liability of $982,674 on the 31 December 2008 balance sheet.
C. a $58,736 cash outfl ow from operating activity on the 2008 statement of cash
fl ows.
5. Consolidated Enterprises issues $10 million worth of fi ve - year bonds with a stated
rate of 6.5 percent at a time when the market interest rate is 6.0 percent. Using the
effective interest rate method of amortizing, the carrying value after one year will be
closest to
A. $10.17 million.
B. $10.21 million.
C. $10.28 million.
6. Innovative Inventions, Inc. needs to raise $10 million and typically would issue coupon -
bearing bonds at par value. If the company chooses to issue zero - coupon bonds instead,
its debt - to - equity ratio will
A. rise as the maturity date approaches.
B. decline as the maturity date approaches.
C. remain constant throughout the life of the bond.
7. Fairmont Golf issued fi xed rate debt when interest rates were 6 percent. Rates have since
risen to 7 percent. Using the values reported on the fi nancial statements would most
likely cause an analyst to
A. overestimate Fairmont ’ s economic liabilities.
B. underestimate Fairmont ’ s economic liabilities.
C. underestimate Fairmont ’ s interest coverage ratio.
8. Debt covenants are least likely to place restrictions on the issuer ’ s ability to
A. pay dividends.
B. issue additional debt.
C. issue additional equity.
9. Sheila Cummins is analyzing the fi nancial statements of a company that has issued
convertible bonds that are currently reported as debt. Cummins is considering potential
adjustments to the debt - to - equity ratio as part of her analysis. The least appropriate
action would be to
A. make no adjustment.
B. adjust debt but not equity.
C. adjust equity but not debt.
10. Why - Fi Incorporated reports total equity of $10 million. It has also issued convertible
bonds with a book value of $10 million that are convertible into equity with a current
market value of $15 million. Under U.S. GAAP, if the bonds are converted, Why - Fi will
report total equity closest to
A. $10 million.
B. $20 million.
C. $25 million.
11. When analyzing the fi nancial statements of Energy Resources, Inc., Frederico
Montalban, CFA, is treating its convertible bonds issue as equity rather than debt.
Montalban ’ s analysis is most likely appropriate
A. if the conversion price is near the current market price of the stock.
B. if the conversion price is signifi cantly above the current market price of the stock.
C. if the conversion price is signifi cantly below the current market price of the stock.
12. Capitol Services Corp. has $300 million in shareholders ’ equity and $400 million in
long - term debt, of which $200 million are convertible bonds. What would Capitol ’ s
long - term debt - to - equity ratio be if the bonds were converted?
A. 0.40
B. 0.80
C. 0.67
13. Assets that are being used under a synthetic lease are reported as though the lessee owns
them
A. for tax purposes and on the fi nancial statements.
B. on the fi nancial statements but not for tax purposes.
C. for tax purposes but not on the fi nancial statements.
14. Compared to using a fi nance lease, a lessee that makes use of an operating lease will
report higher
A. debt.
B. rent expense.
C. cash fl ow from operating activity.
15. The notes to the fi nancial statements of Bargain Apparel Corp. disclose that the company
has fi nance lease commitments with minimum future payments of $20 million,
of which $6 million represents interest payments. It also has operating leases with minimum
future payments of $25 million. If Robert Xu, CFA, wishes to adjust the fi nancial
statements to treat all leases as debt, he should increase reported total liabilities by an
amount closest to
A. $17.5 million.
B. $25.0 million.
C. $45.0 million.
16. Compared to an identical company that uses an operating lease, a company that uses a
fi nance lease will most likely produce a reported return on equity (ROE) that
A. starts lower but rises during the life of the lease.
B. starts higher but decline during the life of the lease.
C. starts lower and remains so during the life of the lease.
17. For a lessor, the leased asset appears on the balance sheet and continues to be depreciated
when the lease is classifi ed as
A. a sales - type lease.
B. an operating lease.
C. a direct fi nancing lease.
18. A lessor ’ s reported revenues at lease inception will be highest if the lease is classifi ed as
A. a sales - type lease.
B. an operating lease.
C. a direct fi nancing lease.
19. The lessor will record interest income if the lease is classifi ed as
A. sales - type only.
B. direct fi nancing only.
C. either sales - type or direct fi nancing.
20. Cavalier Copper Mines has $840 million in total liabilities and $520 million in shareholders
’ equity. It has disclosed $100 million in purchase commitments over the next fi ve years. An analyst wishing to treat the purchase commitments as debt would calculate
a debt to total capital ratio closest to
A. 0.58.
B. 0.59.
C. 0.64.
21. Charles McKimmon, CFA, is analyzing the fi nancial statements of Computers On
Credit, Inc. (COC). COC has sold $60 million of accounts receivable for proceeds of
$50 million, and McKimmon wishes to treat the transaction as collateralized borrowing.
McKimmon ’ s fi nancial statement adjustments will most likely include adding
A. $50 million to accounts receivable.
B. $50 million to cash fl ows from fi nancing activity.
C. $50 million to cash fl ows from operating activity.
Chapter 14
1. At year - end 2008, $28,531 represents the defi ned benefi t pension plan ’ s
A. vested benefi t obligation.
B. projected benefi t obligation.
C. accumulated benefi t obligation.
2. The economic pension expense for Magenta ’ s DB plan is closest to
A. $135 million
B. $1,251 million
C. $2,509 million
3. The difference between Magenta ’ s estimated economic pension expense for the period
and the reported pension expense is closest to
A. $92 million
B. $1,208 million
C. $1,302 million
4. To adjust Magenta ’ s reported net income to refl ect the company ’ s underlying economic
pension expense, an analyst would decrease net income by an amount closest to
A. $43 million.
B. $55 million.
C. $135 million.
5. In order to refl ect the underlying economic liability of Magenta ’ s defi ned - benefi t pension
plan, an analyst would adjust Magenta ’ s 2008 balance sheet to include a $24,105
A. increase in assets and equity.
B. increase in assets and liabilities.
C. increase in liabilities and reduction to equity.
6. An adjustment to the Magenta ’ s statement of cash fl ows to reclassify the company ’ s excess
contribution for 2008 would most likely entail reclassifying $558 million as an outfl ow
related to
A. investing activities rather than operating activities
B. fi nancing activities rather than operating activities
C. operating activities rather than fi nancing activities
7. With regard to its defi ned - benefi t pension plan, Passaic ’ s year - end 2008 balance sheet
most likely presents a
A. $621 million asset.
B. $621 million liability.
C. $1,699 million liability.
8. The pension expense reported on the Passaic Industries income statement for the year
ending 31 December 2008 is closest to
A. $908 million.
B. $1,050 million.
C. $2,331 million.
9. The Passaic Industries statement of cash fl ows for the year ended 31 December 2008
shows the reconciliation of net income to cash fl ows from operating activities for the
period. The associated adjustment to net income related to the DB plan is closest to
A. $526 million.
B. $2,331 million.
C. $4,239 million.
10. The estimated increase in the pension obligation due to benefi ts earned by current
employees in 2008 is closest to
A. $908 million.
B. $1,050 million.
C. $2,331 million.
11. Because of the changes in pension plan assets and benefi t obligations reported in the Funded
Status of Plan reported at 31 December 2007 and 31 December 2008, the 2008 Passaic
Industries balance sheet compared to the 2007 balance sheet will show a $2,320 increase in
A. assets.
B. liabilities.
C. shareholders ’ equity.
12. Compared to 2008 net income as reported, if Passaic Industries had used the same
expected volatility assumption for its 2008 option grants that it had used in 2007, its
2008 net income would have been
A. lower.
B. higher.
C. the same.
13. Compared to the 2008 reported fi nancial statements, if Stereo Warehouse had used the
same expected long - term rate of return on plan assets assumption in 2008 as it used in
2006, its year - end 2008 pension obligation would most likely have been
A. lower.
B. higher.
C. the same.
14. Compared to the reported 2008 fi nancial statements, if Stereo Warehouse had used the
same discount rate as it used in 2006, it would have most likely reported lower
A. net income.
B. total liabilities.
C. cash fl ow from operating activities.
15. Compared to the assumptions Stereo Warehouse used to compute its pension expense in
2007, earnings in 2008 were most favorably impacted by the change in the
A. discount rate.
B. expected salary increases.
C. expected long - term rate of return on plan assets.
16. The pension assumptions being used by Stereo Warehouse may be internally inconsistent
with respect to
A. asset returns only.
B. infl ation expectations only.
C. both infl ation expectations and asset returns.
17. Compared to the reported 2008 fi nancial statements, if Stereo Warehouse had used the
2006 expected volatility assumption to value its employee stock options it would have
most likely reported higher
A. net income.
B. compensation expense.
C. deferred compensation liability.
18. Compared to the assumptions Stereo Warehouse used to value stock options in 2007,
earnings in 2008 were most favorably impacted by the change in the
A. expected life.
B. risk - free rate.
C. dividend yield.
19. At year - end 2008, € 10,018 million represents the total present value of benefi ts Aero
Euro ’ s employees
A. have earned to date.
B. would receive if they left the company.
C. are expected to earn during their career.
20. The adjustments Kordt needs to make in order to refl ect the underlying economic pension
expense for 2008 include subtracting
A. € 423 million from the change in benefi t obligation.
B. € 423 million from the change in the value of plan assets.
C. € 323 million from the change in the value of plan assets.
21. The 2008 pension expense recognized on Aero Euro ’ s income statement is closest to
A. € 143 million.
B. € 423 million.
C. € 1,155 million.
22. Adjusting Aero Euro ’ s 2008 balance sheet to refl ect the underlying economic position of
the company ’ s defi ned benefi t plan would result in a € 667 increase in
A. assets.
B. liabilities.
C. shareholders ’ equity.
23. Compared to the reported 2008 fi nancial statements, if Aero Euro used the 2006 salary
infl ation rate in 2008 it would have most likely reported higher
A. net income.
B. benefi t obligation.
C. amortization of prior service cost.
24. Compared to the reported 2008 fi nancial statements, if Aero Euro used the 2006
expected long - term rate of return on plan assets in 2008 it would have most likely
reported higher
A. net assets.
B. net income.
C. pension expense.
Chapter 15
1. In 2008, Cinnamon ’ s earnings before taxes includes a contribution (in $ millions) from
its investment in Cambridge Processing closest to
A. $2.5 million.
B. $3.8 million.
C. $5.0 million.
2. In 2009, Cinnamon is least likely to account for its investment in Cambridge under
which of the following methods?
A. Equity
B. Purchase method
C. Proportionate consolidation
3. On 31 December 2009, Cinnamon ’ s shareholders ’ equity amount on the balance sheet
would most likely be
A. highest if Cinnamon is deemed to have control of Cambridge.
B. independent of the accounting method used for the investment in Cambridge.
C. highest if Cinnamon is deemed to have signifi cant infl uence over Cambridge.
4. In 2009, Cinnamon ’ s net profi t margin would be highest if
A. it is deemed to have control of Cambridge.
B. it had not increased its stake in Cambridge.
C. it is deemed to have signifi cant infl uence over Cambridge.
5. On 31 December 2009, Cinnamon ’ s reported debt - to - equity ratio will most likely be
highest if it is deemed to have
A. control of Cambridge.
B. joint control of Cambridge.
C. signifi cant infl uence over Cambridge.
6. Compared to Cinnamon ’ s operating margin in 2008, if it is deemed to have control of
Cambridge, its operating margin in 2009 will most likely be
A. lower.
B. higher.
C. the same.
7. In 2008, Zimt ’ s earnings before taxes includes a contribution (in € millions) from its
investment in Oxbow Limited closest to
A. ( € 0.6) million.
B. € 1.0 million.
C. € 1.9 million.
8. On 31 December 2009, Zimt ’ s total assets balance would most likely be
A. highest if Zimt is deemed to have control of Oxbow.
B. highest if Zimt is deemed to have signifi cant infl uence over Oxbow.
C. unaffected by the accounting method used for the investment in Oxbow.
100 Learning Outcomes, Summary Overview, and Problems
9. Based on Gelblum ’ s estimates, if Zimt is deemed to have signifi cant infl uence over
Oxbow, its 2009 operating income would be closest to
A. € 153.
B. € 221.
C. € 288.
10. Based on Gelblum ’ s estimates, if Zimt is deemed to have joint control of Oxbow, and
Zimt uses the proportionate consolidation method, its 31 December 2009 total liabilities
will most likely be closest to
A. € 686.
B. € 975.
C. € 1,263.
11. Based on Gelblum ’ s estimates, if Zimt is deemed to have control over Oxbow, its 2009
consolidated sales will be closest to
A. € 1,700.
B. € 2,375.
C. € 3,050.
12. Based on Gelblum ’ s estimates, Zimt ’ s net income in 2009 will most likely be
A. highest if Zimt is deemed to have control of Oxbow.
B. highest if Zimt is deemed to have signifi cant infl uence over Oxbow.
C. independent of the accounting method used for the investment in Oxbow.
13. The balance sheet carrying value of Confabulated ’ s investment portfolio (in € thousands)
at 31 December 2008 is closest to
A. 112,000.
B. 115,000.
C. 118,000.
14. The balance sheet carrying value of Confabulated ’ s investment portfolio (in € thousands)
at 31 December 2008 would have been higher if which of the securities had been
reclassifi ed as a held - for - trading security?
A. Bugle .
B. Cathay.
C. Dumas .
15. Compared to Confabulated ’ s reported interest income in 2009, if Dumas had been classifi
ed as available - for - sale, the interest income would have been
A. lower.
B. the same.
C. higher.
16. Compared to Confabulated ’ s reported earnings before taxes in 2009, if Bugle had been
classifi ed as a held - for - trading security, the earnings before taxes would have been
A. the same.
B. € 1,000 lower.
C. € 3,000 higher.
17. Confabulated ’ s reported interest income would be higher if the cost were the same but
the par value of
A. Bugle was € 28,000.
B. Cathay was € 37,000.
C. Dumas was € 55,000.
18. Confabulated ’ s special purpose entity is most likely to be
A. held off balance sheet.
B. consolidated on Confabulated ’ s fi nancial statements.
C. consolidated on Confabulated ’ s fi nancial statements only if it is a QSPE.
19. Compared to accounting principles currently in use, the pooling method BetterCare
used for its Statewide Medical acquisition has most likely caused its reported
A. revenue to be higher.
B. total equity to be lower.
C. total assets to be higher.
20. Based on Ohalin ’ s estimates, the amount of joint venture revenue included on
BetterCare ’ s consolidated 2009 fi nancial statements should be closest to
A. $0.
B. $715.
C. $1,430.
21. Based on Ohalin ’ s estimates, the amount of joint venture operating income included on
the consolidated fi nancial statements of each venturer will most likely be
A. higher for BetterCare.
B. higher for Supreme Healthcare.
C. the same for both BetterCare and Supreme Healthcare.
22. Based on Ohalin ’ s estimates, the amount of the joint venture ’ s 31 December 2009 total
assets that will be included on Supreme Healthcare ’ s consolidated fi nancial statements
will be closest to
A. $0.
B. $750.
C. $1,500.
23. Based on Ohalin ’ s estimates, the amount of joint venture shareholders ’ equity at 31
December 2009 included on the consolidated fi nancial statements of each venturer will
most likely be
A. higher for BetterCare.
B. higher for Supreme Healthcare.
C. the same for both BetterCare and Supreme Healthcare.
24. If BetterCare uses its special purpose entity, its consolidated fi nancial results will most
likely show a higher
A. revenue fi gure for 2009.
B. cash balance at 31 December 2009.
C. accounts receivable balance at 31 December 2009.
Chapter 16
1. If Ukraine ’ s economy becomes highly infl ationary, Eurexim will most likely translate
inventory by
A. restating for infl ation and using the temporal method.
B. restating for infl ation and using the current rate method.
C. using the temporal method with no restatement for infl ation.
2. Given Ruiza ’ s belief about the direction of exchange rates, Eurexim ’ s gross profi t margin
would be highest if it accounts for the Ukraine subsidiary ’ s inventory using
A. FIFO and the temporal method.
B. weighted average cost and the temporal method.
C. weighted average cost and the current rate method.
3. If the euro is chosen as the Ukraine subsidiary ’ s functional currency, Eurexim will
translate its fi xed assets using the
A. average rate for the reporting period.
B. rate in effect when the assets were purchased.
C. rate in effect at the end of the reporting period.
4. If the euro is chosen as the Ukraine subsidiary ’ s functional currency, Eurexim will
translate its accounts receivable using the
A. rate in effect at the transaction date.
B. average rate for the reporting period.
C. rate in effect at the end of the reporting period.
5. If the hryvnia is chosen as the Ukraine subsidiary ’ s functional currency, Eurexim will
translate its inventory using the
A. average rate for the reporting period.
B. rate in effect at the end of the reporting period.
C. rate in effect at the time the inventory was purchased.
6. Based on the information available and Ruiza ’ s expectations regarding exchange rates, if
the hryvnia is chosen as the Ukraine subsidiary ’ s functional currency Eurexim will most
likely report
A. an addition to the cumulative translation adjustment.
B. a subtraction from the cumulative translation adjustment.
C. a translation gain or loss as a component of net income.
7. After translating Consol - Can ’ s inventory and long - term debt into the parent currency
(US$), the amounts reported on Consolidated Motor ’ s fi nancial statements at 31
December 2007 would be closest to (in millions)
A. $71 for inventory and $161 for long - term debt.
B. $71 for inventory and $166 for long - term debt.
C. $73 for inventory and $166 for long - term debt.
8. After translating Consol - Can ’ s 31 December 2007 balance sheet into the parent currency,
the translated value of retained earnings will be closest to
A. $41 million.
B. $44 million.
C. $46 million.
9. In response to the Board ’ s fi rst question, Templeton should reply that such a change
would be most justifi ed if
A. the infl ation rate in the United States became hyperinfl ationary.
B. management wanted to fl ow more of the gains through net income.
C. Consol - Can were making autonomous decisions about operations, investing, and
fi nancing.
10. In response to the Board ’ s second question, Templeton should note that if the change
is made, the consolidated fi nancial statements for Consolidated Motors would begin to
recognize
A. realized gains and losses on monetary assets and liabilities.
B. realized gains and losses on non - monetary assets and liabilities.
C. unrealized gains and losses on non - monetary assets and liabilities.
11. In response to the Board ’ s third question, Templeton should note that the change will
most likely affect
A. the cash ratio.
B. fi xed asset turnover.
C. receivables turnover.
12. In response to the Board ’ s fourth question, the balance sheet exposure (in millions)
would be closest to
A. _ 19.
B. 148.
C. 400.
13. Based on the translation method being used for Julius, the subsidiary is most likely
A. a sales outlet for Romulus ’ s products.
B. a self - contained, independent operating entity.
C. using the U.S. dollar as its functional currency.
14. To account for its foreign operations, Romulus has most likely designated the euro as the
functional currency for
A. Julius only.
B. Augustus only.
C. both Julius and Augustus.
15. When Romulus consolidates the results of Julius, any unrealized exchange rate holding
gains on monetary assets should be
A. reported as part of operating income.
B. reported as a nonoperating item on the income statement.
C. reported directly to equity as part of the cumulative translation adjustment.
16. When Marks translates his forecasted balance sheet for Julius into U.S. dollars, total
assets on 31 December 2008 (dollars in millions) will be closest to
A. $1,429.
B. $2,392.
C. $3,703.
17. When Marks converts his forecasted income statement data into U.S. dollars, the 2008
gross profi t margin for Julius will be closest to
A. 39.1 percent.
B. 40.9 percent.
C. 44.6 percent.
18. Relative to the gross margins the subsidiaries ’ report in local currency, Romulus ’ s consolidated
gross margin most likely
A. will not be distorted by currency translations.
B. would be distorted if Augustus were using the same translation method as Julius.
C. will be distorted due to the translation and inventory accounting methods Augustus