Exam 6: Analyzing Operating Activities

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

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

The capitalization of interest cost during construction:

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.

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.

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

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

The table below shows the differences in accounting treatments for goodwill in three selected countries. Accounting for goodwill in selected countries Option to expense immediately Option to charge to equity Tax deductible United States No No No* Canada No No Yes Great Britain No Yes 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.

The capitalization of interest costs during construction increases future net income.

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

If a company that normally expenses advertising costs was to capitalize and amortize these costs over 3 years instead:

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.

Which of the following overall accounting concepts has a number of exceptions under GAAP?

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

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.

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 Preferred stock \ 10 par, 10\% , convertible into 2 shares of common stock, shares Outstanding 50Million Options 1 Million options, each to purchase one common share at \ 50 per Share Market price of stock Average for year \ 75 Beginning of year \ 70 End of year \ 78 Preferred dividends paid \ 50,000,000 Net Income for 2006 \ 350,000,000 -Basic earnings per share for 2006 was:

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

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.

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.

The intrinsic value approach ignores two types of costs: