Question 1

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

Accepted Answer

A)  Transaction basis
B)  The monetary assumption
C)  Conservatism
D)  Earnings management B

Question 2

The intrinsic value approach ignores two types of costs:

Accepted Answer

A)  interest cost and opportunity cost.
B)  opportunity cost and exercise cost.
C)  interest cost and option cost.
D)  carrying cost and interest cost. C

Question 3

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 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:

Accepted Answer

A)  $185 million.
B)  $172 million.
C)  $158 million.
D)  $157 million. D

Question 4

A long-term asset is said to be impaired when its fair value is below its book value.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is 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.

Accepted Answer

A)  I only
B)  II only
C)  III only
D)  I and II

Question 6

Under long-term performance contracts-such as product warranty contracts and software maintenance contracts-revenues are often collected in advance and are recognized proportionally over the entire period of the contract.

Accepted Answer

A) True 
 B)False

Question 7

The capitalization of interest cost during construction:

Accepted Answer

A)  increases future net income.
B)  decreases future depreciation expense.
C)  increases net income during construction phase.
D)  decreases assets during construction phase.

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  a nonrecurring gain.
B)  an extraordinary item.
C)  a change in accounting principle.
D)  None of the above

Question 11

Which of the following statements concerning deferred taxes is correct?

Accepted Answer

A)  Deferred taxes will not be found in the asset section of a balance sheet.
B)  Deferred taxes arise from permanent differences in GAAP and tax accounting.
C)  Deferred taxes will only decrease when a cash payment is made.
D)  Deferred taxes arising from the depreciation of a specific asset will ultimately reduce to zero as the item is depreciated.

Question 12

For companies in an expansion phase, capitalizing interest may result in higher earnings over an extended period of time, compared to expensing interest.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

Accounting errors are considered accounting changes and treated accordingly.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  I and III
B)  II and IV
C)  I, II, and III
D)  I, II, III, and IV

Question 16

The matching principle in accounting prescribes that costs must be recognized in the same period when the related revenues are recognized.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Accounting changes are usually cosmetic and do not yield cash flow consequences.

Accepted Answer

A) True 
 B)False

Question 19

Metals Corp. has four factories with the following data:
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $$\text {Book Value}$  $\quad $$\quad $$\text {Expected Cash Flows}$
$\begin{array}{lrrrrr}
&\text { December 31.2006 }
& \underline{2007} & \underline{2008} & \underline{2009} & \underline{2010}\ 
\text { Lead factory } & \$ 100 & \$ 40 & \$ 40 & \$ 40 & \$ 40 \
\text { Copper factory } & 200 & 50 & 50 & 50 & 50 \
\text { Aluminum factory } & 300 & 80 & 80 & 80 & 80 \
\text { Zinc factory } & 400 & 60 & 60 & 60 & 60
\end{array}$

All cash flows are at year-end and terminate after December 31, 2010. The company's cost of capital is 10% and its tax rate is 35%.

a. What is the value of each factory for balance sheet purposes at December 31, 2006?
b. What impairment loss, if any, would be reported on Metals' 2006 income statement? How would it be reported and where would it be reported (i.e. what component of the income statement and other disclosures)?

Accepted Answer

The answer of Metals Corp. has four factories with the...

Question 20

Which of the following statements is incorrect?

Accepted Answer

A)  Employee stock options are not recorded as an expense when granted if they are out-of-the money under the intrinsic value method.
B)  Employee stock options will not affect the share price of a company when exercised.
C)  Employee stock options may reduce agency costs by more closely aligning interests of stockholders and managers.
D)  Employee stock options may increase the risk propensity of managers.

Exam 6: Analyzing Operating Activities

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

The intrinsic value approach ignores two types of costs:

A long-term asset is said to be impaired when its fair value is below its book value.

Under long-term performance contracts-such as product warranty contracts and software maintenance contracts-revenues are often collected in advance and are recognized proportionally over the entire period of the contract.

The capitalization of interest cost during construction:

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.

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

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

Which of the following statements concerning deferred taxes is correct?

For companies in an expansion phase, capitalizing interest may result in higher earnings over an extended period of time, compared to expensing interest.

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.

Accounting errors are considered accounting changes and treated accordingly.

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

The matching principle in accounting prescribes that costs must be recognized in the same period when the related revenues are recognized.

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

Accounting changes are usually cosmetic and do not yield cash flow consequences.

Which of the following statements is incorrect?