Exam 6: Analyzing Operating Activities

For companies in an expansion phase, capitalizing interest may result in higher earnings over an extended period of time as the amount of interest amortization will not catch up with the amount of interest capitalized in the current period.

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

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

Which of the following statements is true? Under GAAP, comprehensive income:

Accounting errors are considered accounting changes and treated accordingly.

Differences in taxable income and pretax accounting income that will not be offset by corresponding differences or "turn around" in future periods are called:

Economic income and accounting income are always the same.

Extraordinary items are defined as those that are both unusual in nature and infrequent in occurrence. These items are disclosed, net of tax in the income statement.

What will be the diluted EPS if average stock price during the year is $15 and treasury shares that can be purchased are 6000?

Two growing firms are identical except that one firm capitalizes whereas the other firm expenses costs for long-lived resources over time. For these two firms, which of the following statements is generally true? I. The expensing firm will show a more volatile pattern of reported income than capitalizing firm. II. The expensing firm will show a less volatile pattern of return on assets than the capitalizing firm. III. The expensing firm will show lower cash flows from operations than the capitalizing firm.

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, 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 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 -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:

Gains are earned inflows that arise from the company's ongoing business activities.

What will be the basic EPS if average stock price during the year is $15 and treasury shares that can be purchased are 6000?

What will be the basic EPS if average stock price during the year is $35 and treasury shares that can be purchased are 1000?

If a company estimates that its expected return on pension plan assets will increase to 9.5% from 9.0%, this would be considered:

In order to determine permanent income for the year being analyzed, it is necessary to consider special charges from other years.

If a company depreciates an asset at a faster rate for tax purposes than for financial reporting purposes this will give rise to a deferred tax liability.

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

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