Question 1

Recording municipal bond interest received in the general ledger will generate a _________________ difference

Accepted Answer

Permanent

Question 2

Which of the following is not a distinguishing characteristic of a derivative instrument?

Accepted Answer

A)  Derivative instruments have terms that require or permit net settlement. 
B)  Derivative instruments have a low initial net investment. 
C)  Derivative instruments are highly effective throughout their term. 
D)  Derivative instruments have one or more underlyings and notional amounts. 
A)  Derivative instruments have terms that require or permit net settlement. 
B)  Derivative instruments have a low initial net investment. 
C)  Derivative instruments are highly effective throughout their term. 
D)  Derivative instruments have one or more underlyings and notional amounts. C

Question 3

Firm D holds 20,000 gallons of chemicals in inventory on October 31,Year 1,that cost $225
per gallon.Firm D contemplates selling the chemicals on March 31,Year 2,when it completes
the processing.Uncertainty about the selling price of the chemical on March 31,Year 2,leads
Firm D to acquire a forward contract on the chemical.The forward contract does not require an initial investment of funds.Firm D designates the forward commodity contract as a cash flow hedge of an anticipated transaction.The forward price on October 31,Year 1,for delivery on March 31,Year 2,is $320 per gallon.
Required: a.Using the financial statement effects template,show the financial statement effects,
if any,that Firm D would have on October 31,Year 1,when it acquires the forward
commodity price contract.
b.On December 31,Year 1,the end of the accounting period for Firm D,the forward
price of the chemical for March 31,Year 2,delivery is $310 per gallon.Show the financial
statement effects of recording the change in the value of the forward commodity
price contract.Ignore the discounting of cash flows in this part and in the remainder
of the problem.
c.Show the financial statement effects of the December 31,Year 1,decline in value of
the chemical inventory.
d.On March 31,Year 2,the price of the chemical declines to $270 per gallon.Show the
financial statement effects of revaluing the forward contract.
e.Show the financial statement effects on March 31,Year 2,to reflect the decline in
value of the inventory.
f.Show the financial statement effects on March 31,Year 2,to settle the forward contract.
g.Assume that Firm D sells the chemical on March 31,Year 2,for $270 a gallon.Show
the financial statement effects of recording the sale and recognizing the cost of
goods sold.

Accepted Answer

a. Firm D does not make an entry on October 1,2010,because the forward commodity price contract is a mutually unexecuted contract and requires no initial investment.b. The value of the forward contract increases $200,000 [= 20,000 x ($320 - $310)].The forward contract is an asset because the firm has the right to sell the chemical at $320 a gallon,whereas the forward rate for settlement on March 31,2011,suggests that other firms will sell the chemical for only $310 per gallon on that date.The increase in the asset is recognized as an increase in other comprehensive income.c. Inventory is written down by the same amount,resulting in a decrease in other comprehensive income.If Firm D had not chosen to designate the forward commodity contract as a hedge of the cash flows from the inventory,it would not have written down the inventory.The market value of the inventory ($6,200,000)still exceeds Firm D's acquisition cost ($4,500,000).By designating the forward contract as a hedge,it must recognize the decrease in value in its accounts.d. By March 31,2011,inventory has decreased further in value [$800,000 = 20,000 x ($310 - $270)],but the forward contract increases by the same amount.The OCI effects cancel each other out.e. See Part d.
above.f. On March 31,2011,the firm settles the forward contract net for $1,000,000 [= 20,000 x ($320 - $270)].g. At sale,the firm recognizes 20,000 x $270 = $5,400,000 in sales revenue and 20,000 x ($225 - $10 - $40)= $3,500,000 in cost of goods sold.The net balance in Other Comprehensive Income related to the inventory and the forward contract is zero.Thus,there is no balance to transfer to earnings at this point.Note that the gross margin on the sale is $1,900,000 (= $5,400,000 - $3,500,000).This is the same gross margin that Firm D would have reported if it had not obtained the forward contract and the market price for the chemical on March 31,2011,had been Firm D's anticipated amount of $320 per gallon ($1,900,000 = $6,400,000 - $4,500,000).The forward contract shifted the risk of changes in the selling price to the counterparty.h. Each of the entries in Parts b.-e.involving other comprehensive income would have been made to income statement accounts instead.i. A justification for treating the forward commodity price contract as a fair value hedge is that the firm wanted to protect the gross margin on the sale of $1,900,000 against commodity price changes.A justification for treating the contract as a cash flow hedge is that the firm wanted to ensure that it received a net cash inflow of $6,400,000 on the sale of the chemical.
accounting for Forward Commodity Price Contract as a Cash Flow Hedge
December 31,2010 Revaluation
   
Forward Contract 200,000
OCI-Forward Commodity Contract 200,000
   
OCI-Forward Commodity Contract 200,000
Inventory 200,000
March 31,2011 Revaluation
   
Forward Contract 800,000
OCI-Forward Commodity Contract 800,000
   
OCI-Forward Commodity Contract 800,000
Inventory 800,000
Closing of Forward Contract and Sale of Inventory
   
Cash 1,000,000
Forward Contract 1,000,000
   
Cash 5,400,000
Sales Revenue 5,400,000
Cost of Goods Sold 3,500,000
Inventory 3,500,000

Question 4

Although LIFO generally provides higher quality earnings measures,FIFO generally provides higher _____________________________________________ measures.

Accepted Answer

quality fi

Question 5

To calculate a company's average tax rate an analyst would

Accepted Answer

A)  Divide income tax payable by income before taxes 
B)  Divide income tax expense by income before taxes 
C)  Multiply the statutory income tax rate by income before tax 
D)  Average a firm's Federal, State, Local and Foreign tax rates. 
A)  Divide income tax payable by income before taxes 
B)  Divide income tax expense by income before taxes 
C)  Multiply the statutory income tax rate by income before tax 
D)  Average a firm's Federal, State, Local and Foreign tax rates.

Question 6

Under U.S.GAAP,application of the LIFO and FIFO inventory methods result in differences in the balance sheet,income statement and cash flow statement.Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.

Accepted Answer

The answer of Under U.S.GAAP,application of the LIFO and FIFO...

Question 7

When input prices are increasing,companies that use the LIFO method of accounting for inventory will report

Accepted Answer

A)  Lower cost of goods sold amounts in comparison to the FIFO method 
B)  Higher sales amounts in comparison to the FIFO method 
C)  Higher ending inventory amounts in comparison to the FIFO method 
D)  Lower gross profit margins in comparison to the FIFO method 
A)  Lower cost of goods sold amounts in comparison to the FIFO method 
B)  Higher sales amounts in comparison to the FIFO method 
C)  Higher ending inventory amounts in comparison to the FIFO method 
D)  Lower gross profit margins in comparison to the FIFO method

Question 8

Falcon Networks
Falcon Networks is a leading semiconductor company with operations in 17 different countries. Information about the company's taxes appears below:
  
-Using the information provided by Falcon Networks determine the foreign effective tax rate for 2012.

Accepted Answer

A)  33.52% 
B)  35.00% 
C)  42.25% 
D)  45.49% 
A)  33.52% 
B)  35.00% 
C)  42.25% 
D)  45.49%

Question 9

Pronto,Inc.is a major producer of printing equipment.Pronto uses a LIFO cost-flow assumption for inventories.The company's tax rate is 35%.Below is selected financial data for the company.
   
Required:a.The excess of FIFO over LIFO inventories was $25 million on December 31,2013,$28.5 million on December 31,2012 and $22 million on December 31,2011.Compute the cost of goods sold for Pronto,Inc.for years 2013 and 2012 assuming that it had used a FIFO assumption.
b.Compute the inventory turnover ratio for Pronto,Inc.for years 2013 and 2012 using a LIFO cost-flow assumption.
c.Compute the inventory turnover ratio for Pronto,Inc.for years 2013 and 2012 using a FIFO cost-flow assumption.
d.Compute the rate of return on assets for years 2013 and 2012 based on the reported amounts.Disaggregate ROA into profit margin and asset turnover components.
e.Compute the rate of return on assets for years 2013 and 2012 assuming that Pronto,Inc.had used the FIFO method of accounting for inventories.Disaggregate ROA into profit margin and asset turnover components.

Accepted Answer

Required:
a.The excess of FIFO over LIFO

Question 10

All of the following are most likely to change the FMV of pension plan assets during a given period except:

Accepted Answer

A)  Employer cash payments are made to the plan trustee. 
B)  Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions. 
C)  Actual returns on invested plan assets. 
D)  Retirement benefits paid. 
A)  Employer cash payments are made to the plan trustee. 
B)  Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions. 
C)  Actual returns on invested plan assets. 
D)  Retirement benefits paid.

Question 11

When cash collectibility is uncertain the ___________________________________ method matches the costs of generating revenues dollar for dollar with cash receipts until the firm recovers all such costs.

Accepted Answer

The answer of When cash collectibility is uncertain the ___________________________________...

Question 12

Firm A places its order for the equipment on June 30,Year1.It simultaneously signs a forward foreign exchange contract for 20,000 GBP.The forward rate on June 30,Year 1,for settlement on June 30,Year 2,is $1.64 per GBP.Firm A designates the forward foreign exchange contract as a fair value hedge of the firm commitment.
Required: a.U.S.GAAP and IFRS do not require Firm A to record the purchase commitment or the
forward foreign exchange contract on the balance sheet as a liability and an asset on
June 30,Year1.What is the logic for this accounting?
b.On December 31,Year 1,the forward foreign exchange rate for settlement on June
30,Year 2,is $1.73 per GBP.Using the financial statement effects template,show the
financial statement effects of recording the change in the value of the purchase commitment
and the change in the value of the forward contract for Year1.Assume an 8 percent per year interest rate for discounting cash flows to their present values on December 31,Year 1.
c.Show the financial statement effects on June 30,Year 2,of recording the change in the present value of the purchase commitment and the forward foreign exchange contract for the passage of time.
d.On June 30,Year 2,the spot foreign exchange rate is $1.75 per GBP.Show the financial
statement effects of recording the change in the value of the purchase commitment and the change in the value of the forward contract due to changes in the exchange rate during the first six months of Year 2.
e.Show the financial statement effects of the June 30,Year 2,purchase of 20,000 GBP with U.S.dollars and acquisition of the equipment.
f.Show the financial statement effects on June 30,Year 2,to settle the forward foreign
exchange contract.
g.How would the effects in Parts b-f differ if Firm A had chosen to designate the forward
foreign exchange contract as a cash flow hedge instead of a fair value hedge?
h.Suggest a scenario that would justify Firm A treating the forward foreign exchange contract as a fair value hedge and a scenario that would justify the firm treating the
contract as a cash flow hedge.

Accepted Answer

a.The purchase commitment and the forwar

Question 13

Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.

Accepted Answer

The answer of Deferred tax liabilities result in future tax...

Question 14

Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.

Accepted Answer

The answer of Dividing a company's income tax expense by...

Question 15

Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.

Accepted Answer

The answer of Derivative instruments acquired to hedge exposure to...

Question 16

All of the following are considered by analysts when assessing the quality of accounting except:

Accepted Answer

A)  Price variation and the speed at which inventory turns over 
B)  Any liquidation of FIFO inventory layers 
C)  Any physical deterioration or obsolescence of inventory 
D)  The inventory cost-flow assumption chosen by management 
A)  Price variation and the speed at which inventory turns over 
B)  Any liquidation of FIFO inventory layers 
C)  Any physical deterioration or obsolescence of inventory 
D)  The inventory cost-flow assumption chosen by management

Question 17

Companies that engage in long-term contracts can recognize income using either the _____________________________________________ method or the ________________________________________ method.

Accepted Answer

percentage

Question 18

The accumulated benefit obligation measures

Accepted Answer

A)  the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. 
B)  an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. 
C)  the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. 
D)  the shortest possible period for funding to maximize the tax deduction. 
A)  the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. 
B)  an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. 
C)  the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. 
D)  the shortest possible period for funding to maximize the tax deduction.

Question 19

U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.

Accepted Answer

in the not

Question 20

The process of allocating the historical cost of certain assets to the periods of their use in a reasonably systematic manner is referred to as ____________________.

Accepted Answer

The answer of The process of allocating the historical cost...

Recording municipal bond interest received in the general ledger will generate a _________________ difference

Which of the following is not a distinguishing characteristic of a derivative instrument?

Although LIFO generally provides higher quality earnings measures,FIFO generally provides higher _____________________________________________ measures.

To calculate a company's average tax rate an analyst would

Under U.S.GAAP,application of the LIFO and FIFO inventory methods result in differences in the balance sheet,income statement and cash flow statement.Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.

When input prices are increasing,companies that use the LIFO method of accounting for inventory will report

Falcon Networks Falcon Networks is a leading semiconductor company with operations in 17 different countries. Information about the company's taxes appears below: -Using the information provided by Falcon Networks determine the foreign effective tax rate for 2012.

All of the following are most likely to change the FMV of pension plan assets during a given period except:

When cash collectibility is uncertain the ___________________________________ method matches the costs of generating revenues dollar for dollar with cash receipts until the firm recovers all such costs.

Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.

Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.

Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.

All of the following are considered by analysts when assessing the quality of accounting except:

Companies that engage in long-term contracts can recognize income using either the _____ method or the method.

The accumulated benefit obligation measures

U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.

The process of allocating the historical cost of certain assets to the periods of their use in a reasonably systematic manner is referred to as ____________________.

Overview of Financial Reporting, financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Accounting Quality

Financing Activities

Investing Activities

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

Exam 9: Operating Activities

Recording municipal bond interest received in the general ledger will generate a _________________ difference

Which of the following is not a distinguishing characteristic of a derivative instrument?

Although LIFO generally provides higher quality earnings measures,FIFO generally provides higher _____________________________________________ measures.

To calculate a company's average tax rate an analyst would

Under U.S.GAAP,application of the LIFO and FIFO inventory methods result in differences in the balance sheet,income statement and cash flow statement.Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.

When input prices are increasing,companies that use the LIFO method of accounting for inventory will report

Falcon Networks Falcon Networks is a leading semiconductor company with operations in 17 different countries. Information about the company's taxes appears below: -Using the information provided by Falcon Networks determine the foreign effective tax rate for 2012.

All of the following are most likely to change the FMV of pension plan assets during a given period except:

When cash collectibility is uncertain the ___________________________________ method matches the costs of generating revenues dollar for dollar with cash receipts until the firm recovers all such costs.

Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.

Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.

Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.

All of the following are considered by analysts when assessing the quality of accounting except:

Companies that engage in long-term contracts can recognize income using either the _____________________________________________ method or the ________________________________________ method.

The accumulated benefit obligation measures

U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.

The process of allocating the historical cost of certain assets to the periods of their use in a reasonably systematic manner is referred to as ____________________.

Overview of Financial Reporting, financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Accounting Quality

Financing Activities

Investing Activities

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

Filters

Companies that engage in long-term contracts can recognize income using either the _____ method or the method.