Question 1

Compared with companies that expense costs, firms that capitalize costs can be expected to report:

Accepted Answer

A) higher asset levels and lower equity levels. 
B) higher asset levels and higher equity levels. 
C) lower asset levels and higher equity levels. 
D) lower asset levels and lower equity levels.

Question 2

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. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text {  government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?

Accepted Answer

A) $0 
B) $1.33 million 
C) $1.50 million 
D) $0.67 million

Question 3

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

Accepted Answer

A) Historical cost 
B) Transaction basis 
C) Conservatism 
D) Accrual accounting

Question 4

Only costs of materials, equipment, and facilities having alternative future uses (in R&D projects or otherwise) are capitalized as tangible assets.

Accepted Answer

A) True 
 B)False

Question 5

Economic income and accounting income are always the same.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

If revenue is recognized for financial reporting purposes but deferred for tax purposes this results in a deferred tax liability.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

If an expense is recognized for financial reporting purposes but not allowed as a bona-fide deduction for tax purposes, this results in a deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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, net income for fiscal 2007 would have been:

Accepted Answer

A) $31.7 million. 
B) $29.75 million. 
C) $21.95 million. 
D) $14.95 million.

Question 15

All other things being equal, when comparing expensing or capitalizing the R&D expenditures (with straight-line depreciation), return on assets:

Accepted Answer

A) will decrease over time using capitalization. 
B) will increase over time using capitalization. 
C) will be constant using expensing. 
D) will initially be higher under expensing.

Question 16

Assume a company that normally expenses advertising costs was to capitalize and amortize these costs over 3 years instead. After the third year net income would:

Accepted Answer

A) be higher, irrespective of the change in advertising costs. 
B) be lower, irrespective of the change in advertising costs. 
C) be higher only if advertising costs were increasing. 
D) be lower only if advertising costs were increasing.

Question 17

Comprehensive income is computed by adjusting net income, on an after-tax basis, for certain unrealized gains and losses.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) measurable and earned. 
B) measurable and received. 
C) realizable and earned. 
D) realizable and measurable.

Question 19

Which of the following is 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 an 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.

Accepted Answer

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

Question 20

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

Accepted Answer

A) timing differences. 
B) circular differences. 
C) permanent differences. 
D) reverse differences.

Exam 6: Analyzing Operating Activities

Compared with companies that expense costs, firms that capitalize costs can be expected to report:

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

Only costs of materials, equipment, and facilities having alternative future uses (in R&D projects or otherwise) are capitalized as tangible assets.

Economic income and accounting income are always the same.

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 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

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

If revenue is recognized for financial reporting purposes but deferred for tax purposes this results in a deferred tax liability.

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

If an expense is recognized for financial reporting purposes but not allowed as a bona-fide deduction for tax purposes, this results in a deferred tax asset.

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.

All other things being equal, when comparing expensing or capitalizing the R&D expenditures (with straight-line depreciation) , return on assets:

Assume a company that normally expenses advertising costs was to capitalize and amortize these costs over 3 years instead. After the third year net income would:

Comprehensive income is computed by adjusting net income, on an after-tax basis, for certain unrealized gains and losses.

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

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