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Fernando’s Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando’s inventory balance will most likely be:
Ahigher if it complies with IFRS.
Bhigher if it complies with US GAAP.
Cthe same under US GAAP and IFRS.
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assume the companies use a periodic inventory system.Cinnamon Corp. started business in 2007 and uses the weighted average cost method. During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2008 cost of sales (€ thousands) was closest to:
A€ 490.00
B€ 491.00
C€ 495.00
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assume the companies use a periodic inventory system.Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by:
AZimt is too low.
BNutmeg is too low.
CNutmeg is too high.
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assume the companies use a periodic inventory system.Carey Company adheres to US GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that:
ACarey has reversed an inventory write-down.
BJonathan has reversed an inventory write-down.
CJonathan and Carey both use the FIFO inventory accounting method.
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Which of the following most likely signals that a manufacturing company expects demand for its product to increase?
AFinished goods inventory growth rate higher than the sales growth rate
BHigher unit volumes of work in progress and raw material inventories
CSubstantially higher finished goods, with lower raw materials and work-in-process
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Miguel Rodriguez of MARIO S.A., an Uruguayan corporation, is computing the depreciation expense of a piece of manufacturing equipment for the fiscal year ended 31 December 2009. The equipment was acquired on 1 January 2009. Rodriguez gathers the following information (currency in Uruguayan pesos, UYP):
If MARIO uses the units-of-production method, the amount of depreciation expense (in UYP) on MARIO’s income statement related to the manufacturing equipment is closest to:
A118,750.00
B168,750.00
C202,500.00
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Brian Jordan is interviewing for a junior equity analyst position at Orion Investment Advisors. As part of the interview process, Mary Benn, Orion’s Director of Research, provides Jordan with information about two hypothetical companies, Alpha and Beta, and asks him to comment on the information on their financial statements and ratios. Both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and are identical in all respects except for their accounting choices. Jordan is told that at the beginning of the current fiscal year, both companies purchased a major new computer system and began building new manufacturing plants for their own use. Alpha capitalised and Beta expensed the cost of the computer system; Alpha capitalised and Beta expensed the interest costs associated with the construction of the manufacturing plants. In mid-year, both companies leased new office headquarters. Alpha classified the lease as an operating lease, and Beta classified it as a finance lease. Benn asks Jordan, “What was the impact of these decisions on each company’s current fiscal year financial statements and ratios?” Jordan responds, “Alpha’s decision to capitalise the cost of its new computer system instead of expensing it results in lower net income, lower total assets, and higher cash flow from operating activities in the current fiscal year. Alpha’s decision to capitalise its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio. Alpha’s decision to classify its lease as an operating lease instead of a finance lease results in higher net income, higher cash flow from operating activities, and stronger solvency and activity ratios compared to Beta.” Jordan is told that Alpha uses the straight-line depreciation method and Beta uses an accelerated depreciation method; both companies estimate the same useful lives for long-lived assets. Many companies in their industry use the units-of-production method. Benn asks Jordan, “What are the financial statement implications of each depreciation method, and how do you determine a company’s need to reinvest in its productive capacity?” Jordan replies, “All other things being equal, the straight-line depreciation method results in the least variability of net profit margin over time, while an accelerated depreciation method results in a declining trend in net profit margin over time. The units-of-production can result in a net profit margin trend that is quite variable. I use a three-step approach to estimate a company’s need to reinvest in its productive capacity. First, I estimate the average age of the assets by dividing net property, plant, and equipment by annual depreciation expense. Second, I estimate the average remaining useful life of the assets by dividing accumulated depreciation by depreciation expense. Third, I add the estimates of the average remaining useful life and the average age of the assets in order to determine the total useful life.” Jordan is told that at the end of the current fiscal year, Alpha revalued a manufacturing plant; this increased its reported carrying amount by 15 percent. There was no previous downward revaluation of the plant. Beta recorded an impairment loss on a manufacturing plant; this reduced its carrying by 10 percent. Benn asks Jordan “What was the impact of these decisions on each company’s current fiscal year financial ratios?” Jordan responds, “Beta’s impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities. Alpha’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.” At the end of the interview, Benn thanks Jordan for his time and states that a hiring decision will be made shortly. Jordan’s response about the financial statement impact of Alpha’s decision to capitalise the cost of its new computer system is most likely correct with respect to:
Alower net income.
Blower total assets.
Chigher cash flow from operating activities.
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On 1 January 2010, Elegant Fragrances Company issues £1,000,000 face value, five-year bonds with annual interest payments of £55,000 to be paid each 31 December. The market interest rate is 6.0 percent. Using the effective interest rate method of amortisation, Elegant Fragrances is most likely to record:
Aan interest expense of £55,000 on its 2010 income statement.
Ba liability of £982,674 on the 31 December 2010 balance sheet.
Ca £58,736 cash outflow from operating activity on the 2010 statement of cash flows.
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If a company uses a non-GAAP financial measure in an SEC filing, then the company must:
Agive more prominence to the non-GAAP measure if it is used in earnings releases.
Bprovide a reconciliation of the non-GAAP measure and equivalent GAAP measure.
Cexclude charges requiring cash settlement from any non-GAAP liquidity measures.
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One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies?
ANet income less than zero
BDebt-to-total assets ratio below a certain cutoff point
CCurrent-year sales growth lower than prior-year sales growth
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An analyst gathered the following data for a company ($ millions):
The average age and average depreciable life of the company’s fixed assets at the end of 2001 are closest to:
AAverage Age 1.75 yearsAverage Depreciable Life 7 years
BAverage Age 1.75 yearsAverage Depreciable Life 14 years
CAverage Age 4.00 yearsAverage Depreciable Life 7 years
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East Company purchased a new truck at the beginning of this year for $30,000.The truck has a useful life of eight years or 150,000 miles, and an estimated salvage value of $3,000. If the truck is driven 16,500 miles this year, how much depreciation will East report under the double-declining balance (DDB) method and the units-of-production (UOP) method?
ADDB UOP$7,500 $2,970
BDDB UOP$7,500 $3,300
CDDB UOP$6,750 $2,970
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At the beginning of this year, Fairweather Corp. incurred $200,000 of researc costs and $100,000 of development costs to create a new patent. The patent is expected to have a useful life of 40 years with no salvage value. Calculate the carrying value of the patent at the end of this year, assuming Fairweather follows U.S. GAAP.
A$0.00
B$97,500.00
C$292,500.00
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The author of a new textbook received a $100,000 advance from the publisher this year. $40,000 of income taxes were paid on the advance when received. The textbook will not be finished until next year. Determinne the tax basis of the advance at the end of this year.
A$0.00
B$40,000.00
C$100,000.00
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A firm acquires an asset for $120,000 with a 4-year useful life and no salvage value. The asset will generate $50,000 of cash flow for all four years. The tax rate is 40% each year. The firm will depreciate the asset over three years on a straight-line (SL) basis for tax purposes and over four years on a SL basis for financial reporting purposes. Taxes payable in year 4 are:
A$4,000.00
B$6,000.00
C$20,000.00
