Exam 6: Analyzing Operating Activities

Generally revenue should be recorded when it is probable and reasonably estimable.

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, or 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

The following information was extracted from Smurm Corporation's 2006 annual report: Common stock Shares outstanding 12/31/05 90 million New shares issued 4/1/06 10 million Shares outstanding 12/31/06 100 million $\text { Preferred stock }$ $\$ 10$ par, $10 \%$ , convertible into 2 shares of common stock, shares outstanding $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$50 \text { million }$ 1 million options, each to purchase one common share at $\$ 50$ per share Average for year \7 5 Beginning of year \7 0 End of year \7 8 Preferred dividends paid \5 0,000,000 Net income for 2006 \3 50,000,000 -Using the treasury stock method, calculate the number of extra shares being recognized in the diluted EPS calculation resulting from options.

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: Deferred Taxes Net Income A) Increase No effect B) Increase Decrease C) No effect No effect D) Decrease No effect

All other things equal, a company that capitalizes rather than expenses software development costs, will have a less volatile net income.

The table below shows the differences in accounting treatments for goodwill in three selected countries. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Accounting for goodwill in selected countries }$ Option to expense Option to charge to United States No No No* Great Britain No No Yes No Yes No No *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.

Deferred taxes arise due to temporary timing differences in recognizing items for tax and financial reporting purposes.

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 report. 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.

Some items appear on a company's income statement but never appear on its tax return.

The following information was extracted from Smurm Corporation's 2006 annual report: Common stock Shares outstanding 12/31/05 90 million New shares issued 4/1/06 10 million Shares outstanding 12/31/06 100 million $\text { Preferred stock }$ $\$ 10$ par, $10 \%$ , convertible into 2 shares of common stock, shares outstanding $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$50 \text { million }$ 1 million options, each to purchase one common share at $\$ 50$ per share Average for year \7 5 Beginning of year \7 0 End of year \7 8 Preferred dividends paid \5 0,000,000 Net income for 2006 \3 50,000,000 -Basic earnings per share for 2006 was:

The following information was obtained from Cyber Corporation's annual report. $\text { Common stock: shares outstanding }$ Balance on January 1 500,000 April 1 - issued in conversion of preferred stock 200,000 July 1 - sold for cash Balance on December 31 $\text { Preferred stock: shares outstanding }$ \ 10 par 8\% , each convertible into two common shares Shares outstanding, January 1 175,000 Converted on April 1 (into 200,000 common) Shares outstanding at year-end Options 100,000 options each to purchase one common share at $\$ 80$ per share. None have been exercised. $\text { Additional information: }$ Market prices of common stock for Year Average for Year \ 84 End of Year \ 86 Preferred dividends paid in year \ 80,000 Net income \ 1,200,000 a. Compute weighted-average number of common shares outstanding for the year. b. Compute basic EPS. c. Compute diluted EPS.

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. Costs incurred Payments from federal government Year 1 \ 4 million \ 2 million Year 2 \ 4 million \ 2 million Year 3 \ 2 million \ 6 million Year 4 \ 2 million \ 6 million -If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?

A company that capitalizes costs, rather than expensing them will have a higher asset turnover.

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

Income from continuing operations is a measure that excludes certain nonrecurring items, such as extraordinary items, and the effects of discontinued operations, from net income.

Software costs may be capitalized once a company can show that the product is technologically feasible.

According to FASB, initial franchise fees should be recognized as income when:

The following information was extracted from Smurm Corporation's 2006 annual report: Common stock Shares outstanding 12/31/05 90 million New shares issued 4/1/06 10 million Shares outstanding 12/31/06 100 million $\text { Preferred stock }$ $\$ 10$ par, $10 \%$ , convertible into 2 shares of common stock, shares outstanding $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$50 \text { million }$ 1 million options, each to purchase one common share at $\$ 50$ per share Average for year \7 5 Beginning of year \7 0 End of year \7 8 Preferred dividends paid \5 0,000,000 Net income for 2006 \3 50,000,000 -Diluted earnings per share for 2006 was:

Based on GAAP, which of the following is true of comprehensive income?

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 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: