Exam 6: Analyzing Operating Activities

Which of the following statements is incorrect? Employee stock options

Under current accounting standards, gains and losses relating to the extinguishment of debt must be both unusual and infrequent to be classified as an extraordinary item, and debt refinancing does not typically meet these criteria.

ESOs often are granted to managers in growth and innovative industries to induce more risk-taking.

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

R&D expenses for tangible assets that have alternative future uses qualify as deferred charges.

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

Which of the following statements are 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.

When comparing expensing or capitalizing (with straight-line depreciation) software, return on assets

One difference between revenues and gains is that gains arise from transactions that are incidental to the operations of the business.

Which of the following items is not included in the calculation of net income but is included in the calculation of comprehensive income?

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 \ 2 Year 2 \ 4 \ 2 Year 3 \ 2 \ 6 Year 4 \ 2 \ 6 -If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?

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

Which of the following combinations of accounting practices will lead to the highest reported earnings in an inflationary environment? Depreciation Method Inventory Method A) Straight-line LIFO B) Double-declining balance LIFO C) Straight-line FIFO D) Double-declining balance FIFO

XYZ Company issued 10,000 options to its CEO on January 1, 2006, at the prevailing market price of $5 per share. The options were expected to vest over a 2-year period. The Black-Scholes value of the option was valued at $2 per share. On December 31, 2007, the CEO exercised all options. Market price on that day was $9 per share. Assume a 35% tax rate. What will be the cumulative effect on the balance sheet as of December 31, 2007 before the exercise of option? What will be the cumulative effect on the balance sheet as of December 31, 2007 after the exercise of option?

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

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 letter. 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.

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, net income for fiscal 2007 would have been:

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

Exoil recorded an expense and corresponding liability to recognize potential losses relating to an oil spill in 2006 of $10 million. Its net income for the year was $200 million. It was not able to take a deduction for tax purposes until later years when it actually paid cash out in relation to this event. In 2006, with respect to this, Exoil would have:

Which of the following would be considered an extraordinary item? I. Write-down of receivables II. Gains on disposal of a business segment III. Loss of inventory resulting from a fire IV. Loss resulting from a strike