Exam 6: Analyzing Operating Activities

Which of the following is not a reason for economic income and accounting income to differ?

The intrinsic value approach ignores two types of costs:

Tecktroniks Company reported in its annual report software refinement expenses of $12 million, $15 million, and $18 million for fiscal years 2005, 2006, and 2007, respectively. At the end of fiscal 2007, it had total assets of $140 million. Net income was $20 million for fiscal 2007, and it had a marginal tax rate of 35%. -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 long-term asset is said to be impaired when its fair value is below its book value.

Which of the following statements is 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.

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.

The capitalization of interest cost during construction:

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.

For item to be considered a special item, it should be either unusual in nature or infrequent in occurrence but not both.

If a company changes the useful life of its assets from 10 years to 12 years, this will be recorded as:

Which of the following statements concerning deferred taxes is correct?

For companies in an expansion phase, capitalizing interest may result in higher earnings over an extended period of time, compared to expensing interest.

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.

Accounting errors are considered accounting changes and treated accordingly.

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

The matching principle in accounting prescribes that costs must be recognized in the same period when the related revenues are recognized.

For item to be considered extraordinary, it should be either unusual in nature or infrequent in occurrence.

Accounting changes are usually cosmetic and do not yield cash flow consequences.

Metals Corp. has four factories with the following data: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Book Value}$ $\quad$$\quad$$\text {Expected Cash Flows}$ December 31.2006 Lead factory \ 100 \ 40 \ 40 \ 40 \ 40 Copper factory 200 50 50 50 50 Aluminum factory 300 80 80 80 80 Zinc factory 400 60 60 60 60 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)?

Which of the following statements is incorrect?