Deck 4: Analyzing Investing Activities

Question 1

Which of the following would not be classified as a current asset?

A)Inventory
B)Accounts payable
C)Accounts receivable
D)Prepaid expenses

Answer 1

B

Question 2

Indicate which of the following items would be classified as assets on the balance sheets.

Answer 2

Classification as A sset

Question 3

Which of the following would rarely be classified as a current asset?

A)Prepaid insurance
B)Goodwill
C)Marketable securities
D)Work-in-process

Answer 3

B

Question 4

The following information can be found in ABC Co.'s financial statements.
$\begin{array}{lrr}&\underline{ 2006}&\underline{ 2005}\\\text { Finished goods } & \$ 251,690 & \$ 195,360 \\\text { Work-in-process and } & & \\\text { purchased parts } & 245,123 & 186,432 \\\text { Raw materials } & 136,568 & 106,789 \\\text { Total FIFO value } & 633,381 & 488,581 \\\begin{array}{l}\text { Less excess of current } \\\text { cost over stated LIFO }\end{array} & & \\\text { value } &\underline{ 62,951}&\underline{71,186} \\\text { Inventories } & \$570,430&\$417,395\\\text { Retained earnings }&\$3,526,000&\$3,159,000\end{array}$
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories.

-What will be the retained earnings for 2006 if ABC used FIFO valuation?

A)$3,205,271
B)$3,566,918
C)$3,893,000
D)$4,096,430

Question 5

Donuld Company sells many products. Sol is one of its popular items. Below is an analysis of the inventory purchases and sales of Sol for the month of September. Donuld Company uses the periodic inventory system. $$\begin{array} { c c r c c c } \text { Date } & \begin{array} { c } \text { Purchases } \\\text { Description }\end{array} & \text { Units } & \text { Unit Cost } & \begin{array} { c } \text { Sales } \\\text { Units }\end{array} & \begin{array} { c } \text { Selling } \\\text { Price/Unit }\end{array} \\9 / 1 & \text { Beginning inventory } & 100 & \$ 60 & & \\9 / 3 & \text { Purchase } & 60 & \$ 78 & & \\9 / 4 & \text { Sales } & & & 70 & \$ 120 \\9 / 10 & \text { Purchase } & 200 & \$ 82 & & \\9 / 16 & \text { Sales } & & & 80 & \$ 130 \\9 / 19 & \text { Sales } & & & 60 & \$ 130 \\9 / 25 & \text { Sales } & & & 50 & \$ 130 \\9 / 30 & \text { Purchase } & 40 & \$ 90 & &\end{array}$$
INSTRUCTIONS
a. Using the FIFO assumption, calculate the amount charged to cost of goods sold for September. (Show computations)

b. Using the LIFO assumption, calculate the amount assigned to the inventory on hand on September 30. (Show computations)

c. Calculate the LIFO reserve that would be reported in the company's books on September 30 if using LIFO.

Question 6

The inventory costing method used by a company (LIFO, FIFO, etc.) will affect: $\begin{array}{lll}&\text { Asset turnover } & \text { Debt-to-equity }\\&&\text { ratio }\\\text { A) } & \text { Yes } & \text { Yes } \\\text { B) } & \text { Yes } & \text { No } \\\text { C) } & \text { No } & \text { No } \\\text { D) } & \text { No } & \text { Yes }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 7

The use of LIFO rather than FIFO for inventory costing under normal economic conditions results in: I. lower net income.II. higher total assets.III. higher retained earnings.IV. unchanged retained earnings.

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

Question 8

An asset is considered to be liquid if:

A)it is readily converted into a fixed asset.
B)it is an intangible asset.
C)it is readily converted into cash.
D)it is part of retained earnings.

Question 9

Which of the following steps is required to adjust LIFO to FIFO?

A)Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve.
B)Increase deferred tax payable by LIFO reserve times Tax rate.
C)Retained earnings need to be calculated as reported retained earnings plus LIFO reserve times (1 - Tax rate).
D)All of the above

Question 10

The following information can be found in ABC Co.'s financial statements.
$\begin{array}{lrr}&\underline{ 2006}&\underline{ 2005}\\\text { Finished goods } & \$ 251,690 & \$ 195,360 \\\text { Work-in-process and } & & \\\text { purchased parts } & 245,123 & 186,432 \\\text { Raw materials } & 136,568 & 106,789 \\\text { Total FIFO value } & 633,381 & 488,581 \\\begin{array}{l}\text { Less excess of current } \\\text { cost over stated LIFO }\end{array} & & \\\text { value } &\underline{ 62,951}&\underline{71,186} \\\text { Inventories } & \$570,430&\$417,395\\\text { Retained earnings }&\$3,526,000&\$3,159,000\end{array}$
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories.

-What will be the value of inventory for 2006 if ABC used FIFO valuation?

A)$633,485
B)$570,430
C)$633,381
D)$488,581

Question 11

Analysis of a company's assets will help evaluate its: I. liquidity.II. solvency.III. operational capacity.IV. financing ability.

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

Question 12

You are analyzing two companies that operate in the same industry. They are both growing capital-intensive manufacturing companies, Guerr Corp. and Filk Corp. A diligent reading of their annual reports reveals the following:
You know that these accounting differences will affect the comparability of the two company's financial results.Consider each of the above items (depreciation method, average depreciable lives and leases) separately and determine all other things being equal, whether the following ratios will be higher, lower or the same for Guerr when compared to Filk. Explain your answers.i. Observed price-to-earning ratio in the initial years
ii. Price-to-free cash flow in the initial years
iii. Price-to-book value in the initial years

Question 13

For Control Furniture Co., To restate Year 2006 LIFO inventories to a FIFO basis, we use the following analytical entry:
$\begin{array}{ll}\text { LIFO reserve in Year 2006 } & \$ 91 \text { million } \\\text { LIFO reserve in Year 2005 } & \$ 82 \text { million }\\\text { Tax Rate is } 35 \% \text {. }\end{array}$

A.
$\begin{array} { l l l l } & \text { Inventories } & 91 & \\& \text { Deferred Tax Payable } & & 31.85 \\& \text { Retained Earnings } & & 59.15 \\\end{array}$

B.
$\begin{array} { l l l l } & \text { Inventories } & 91 & \\& \text { Deferred Tax Payable } & & 35.65 \\& \text { Retained Earnings } & & 55.35 \\\end{array}$

C.
$\begin{array} { l l l l } & \text { Inventories } & 91 & \\& \text { Deferred Tax Payable } & & 38.96 \\& \text { Retained Earnings } & & 52.04 \\\end{array}$

D.
$\begin{array} { l l l l } & \text { Inventories } & 91 & \\& \text { Deferred Tax Payable } & & 32.85 \\& \text { Retained Earnings } & & 58.15\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 14

One advantage of LIFO over FIFO under normal conditions is that:

A)it reports higher retained earnings.
B)it results in higher cash flows.
C)it results in higher current ratios.
D)it results in higher gross margins.

Question 15

The following information can be found in ABC Co.'s financial statements.
$\begin{array}{lrr}&\underline{ 2006}&\underline{ 2005}\\\text { Finished goods } & \$ 251,690 & \$ 195,360 \\\text { Work-in-process and } & & \\\text { purchased parts } & 245,123 & 186,432 \\\text { Raw materials } & 136,568 & 106,789 \\\text { Total FIFO value } & 633,381 & 488,581 \\\begin{array}{l}\text { Less excess of current } \\\text { cost over stated LIFO }\end{array} & & \\\text { value } &\underline{ 62,951}&\underline{71,186} \\\text { Inventories } & \$570,430&\$417,395\\\text { Retained earnings }&\$3,526,000&\$3,159,000\end{array}$
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories.

-What will be the retained earnings for 2005 if ABC used FIFO valuation?

A)$3,205,271
B)$3,566,918
C)$3,893,000
D)$4,096,430

Question 16

You are comparing the financial statements of two companies, Ready PLC and Marlet Inc., which operate in the same industry but different countries. Ready Inc. is a British company and prepares its financial statements using British accounting rules. Marlet is a U.S company and prepares its statements using U.S.GAAP.

The following differences in accounting methods are noted:
$\begin{array}{lll}&\text { Ready }&\text { Marlet }\\\text { Goodwill } &\text { Goodwill is immediately } &\text { Goodwill is capitalized and } \\&\text { written-off directly to } &\text { amortized over } 40 \text { years }\\&\text { stockholders' equity }\\\\\text { Inventory costing}&\text { FIFO is used for financial }&\text { LIFO allowed for tax and}\\&\text { reporting and tax purposes}&\text { financial reporting purposes}\\ \\\text {Research and }&\text {Capitalized and amortized }&\text {Expensed}\\\text { Development costs}\end{array}$
You want to restate the financial statements of Marlet in order to make them comparable with Ready PLC. Identify the adjustments you would make and the effect on the financial statements.

Question 17

Which of the following is not an effect of capitalization?

A)Capitalization usually reduces net income.
B)Capitalization usually yields a smoother net income.
C)Capitalization usually decreases the volatility of the return on investment.
D)Capitalization usually increases net income.

Question 18

Below is selected information taken from the balance sheet of LongLi Corporation as of 12/31/06.From the operating section of the statement of cash flows, you determine that the depreciation expense for the year was $2,000 and loss on sales of assets was $5,000. The investing section reveals that the company purchased equipment for $14,000 and sold equipment for $2,000.In the footnotes to the financial statements, the company states:
At the beginning of 2006, we determined that the useful life of our assets was higher than originally believed. Accordingly we have increased the useful life from 10 years to 15 years in 2006.a. What was the gross book value of the equipment that was sold?
b. What was the net book value of the equipment that was sold?
c. With respect to the change in the useful lives of the assets:
i. What is the effect on 2005's financial statements?
ii. What is the effect on 2006's financial statements?

Question 19

Which of the following is not a common characteristic of a company choosing to use LIFO rather than FIFO?

A)Higher cost of goods sold
B)Higher variability in inventory balances
C)Greater expected tax savings
D)Larger in size

Question 20

Financial Statements of ABC Corp. indicates that ending inventory levels in 2005 and 2006 were $200,000 and $350,000 respectively. Cost of goods sold for 2005 and 2006 were $1,900,000 and $2,200,000 respectively. Purchases in 2006 were:

A)$1,950,000
B)$2,150,000
C)$2,350,000
D)$1,850,000

Question 21

All other things being equal, if a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm's financial statements is generally true? I. Cost of goods sold increases.II. Gross profit margin increases.III. Taxes decrease.IV. Net income increases.

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

Question 22

Below is selected information taken from the balance sheet of Huy Corporation as of 12/31/06. $\begin{array}{lrr}&\underline{12 / 31 / 05}&\underline{12 / 31 / 06}\\\text { Land } & \$ 100,000 & \$ 100,000 \\\text { Machines } & \underline{80,000} & \underline{70,000} \\\text { Gross property, plant, \& equipment } & 180,000 & 170,000 \\\text { Accumulated depreciation } & \underline{25,000} & \underline{10,000} \\\text { Net property, plant, \& equipment } & \underline{\$ 155,000} & \underline{\$ 160,000} \\\text { Depreciation expense } & & \$ 5,000\end{array}$


-During fiscal 2006, Huy sold fully depreciated assets that originally cost $20,000 for $4,000. In 2006, they purchased assets that cost:

A)$5,000.
B)$6,000.
C)$10,000.
D)$30,000.

Question 23

Which of the following statements about inventories is true?

A)U.S. generally accepted accounting principles (GAAP) require the use of lower of cost or market valuation basis for inventories.
B)Last-In, First-Out (LIFO) inventory accounting makes management of income more difficult than First-In, First-Out (FIFO) accounting.
C)During inflation, LIFO inventory accounting tends to overstate the current ratio.
D)FIFO inventory balances generally contain old and outdated costs that have little or no relationship to current costs.

Question 24

Under current US GAAP, goodwill is: I. amortized over a period not to exceed 40 years.II. tested annually for impairment.III. exclusive of separately identifiable intangible assets.IV. recorded only upon purchase of another entity.

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

Question 25

Which of the following is not considered an intangible asset?

A)Goodwill
B)Customer lists
C)Prepaid advertising expenses
D)Memberships

Question 26

A corporation wants to increase its current ratio from its present level of 1.2 before it ends the fiscal year. The action having the desired effect is:

A)delaying the next payroll.
B)writing down impaired assets.
C)selling furniture for cash.
D)selling current marketable securities at cash for their book value.

Question 27

Depreciation is based on the principle of:

A)allocation.
B)appropriation.
C)lower of cost or market.
D)approbation.

Question 28

LIFO liquidation occurs when:

A)a firm changes from LIFO to another inventory method.
B)a firm experiences an increase in cost of raw materials.
C)the LIFO reserves decline in value.
D)the quantity of goods sold is greater than the quantity produced.

Question 29

The following information can be found in Manufacturer Company's financial statements. $\begin{array}{llll}&\underline{2006}&\underline{2005}\\\text { COGS } & \$ 2,500,000 & \$ 2,000,000 \\\text { Inventory } & \$ 180,000 & \$ 140,000 \\\text { Net income } & \$ 125,000 & \$ 100,000 \\\text { Retained earnings } & \$ 500,000 & \$ 400,000 \\\text { LIFO reserve } & \$ 40,000 & \$ 30,000\\\text { Tax rate }&40\%&40\%\end{array}$


-If Manufacturer used FIFO, its net income for fiscal 2006 would be:

A)$165,000.
B)$149,000.
C)$135,000.
D)$131,000.

Question 30

A firm has a current ratio greater than 1.0. If the firm's ending inventory is understated by $3,000 and beginning inventory is overstated by $5,000, the firm's net income and current ratio will be: $\begin{array} { l l l } & { \quad\quad\underline{\text { Net income} } } &\quad\quad \underline{\text { Current ratio} } \\\end{array}$
A. $\begin{array} { l l l } & \text { understated by } \$ 2,000 & \text { too low } \\\end{array}$
B. $\begin{array} { l l l } & \text { overstated by } \$ 2,000 &\quad \text { too low } \\\end{array}$
C. $\begin{array} { l l l } & \text { understated by } \$ 8,000 & \text { too low } \\\end{array}$
D. $\begin{array} { l l l } & \text { understated by } \$ 8,000 & \text { too high }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 31

Target Inc. has 30 million shares outstanding and trades at $50 per share. Target has net identifiable assets with a book value of $1,000 million and a fair value of $1,200 million. Acquirer Corporation purchases all of Target Inc. stock for $60 per share. How much will Acquirer records as goodwill upon acquiring Target?

A)$300 million
B)$500 million
C)$600 million
D)$800 million

Question 32

The following information can be found in Manufacturer Company's financial statements. $\begin{array}{llll}&\underline{2006}&\underline{2005}\\\text { COGS } & \$ 2,500,000 & \$ 2,000,000 \\\text { Inventory } & \$ 180,000 & \$ 140,000 \\\text { Net income } & \$ 125,000 & \$ 100,000 \\\text { Retained earnings } & \$ 500,000 & \$ 400,000 \\\text { LIFO reserve } & \$ 40,000 & \$ 30,000\\\text { Tax rate }&40\%&40\%\end{array}$


-If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:

A)$540,000.
B)$440,000.
C)$524,000.
D)$506,000.

Question 33

Which of the following is not an analysis issue arising with impairment?

A)Evaluating the appropriateness of the amount of the impairment
B)Evaluating the appropriateness of the timing of the impairment
C)Analyzing the effect of the impairment on asset
D)Analyzing the effect of the impairment on income

Question 34

Look Good Corporation has current assets of $1.1 million and current liabilities of $1 million. It is close to year-end, and it would like to increase its current ratio. Which of the following will achieve this?

A)Encourage customers to pay their bills more quickly.
B)Increase short-term borrowings by $0.1 million.
C)Sell building for $0.2 million in cash.
D)Liquidate some of its trading marketable securities.

Question 35

Which of the following is incorrect with respect to recognized goodwill on the balance sheet?

A)It should not be amortized.
B)It arises when another company is purchased or when internally generated.
C)It should be written-down if the future benefits no longer exist.
D)It may be negative.

Question 36

A firm has a current ratio greater than 1.0. During the course of the year the firm sells $60 million of accounts receivable with limited recourse. If it had not sold the receivables it would have taken out a short-term loan. The effect of selling the receivables is:
$\begin{array}{lc}\underline{\text { Accounts receivable turnover} } \quad \underline{\text { Current ratio} }\end{array}$
A. $\begin{array}{lc}\quad\quad\quad\quad\text { higher } &\quad\quad\quad\quad\quad\quad \text { lower } \\\end{array}$
B. $\begin{array}{lc}\quad\quad\quad\quad\text { higher } & \quad\quad\quad\quad\quad\quad\text { higher } \\\end{array}$
C. $\begin{array}{lc}\quad\quad\quad\quad\text { lower } &\quad\quad\quad\quad\quad\quad \text { lower } \\\end{array}$
D. $\begin{array}{lc}\quad\quad\quad\quad\text { lower } &\quad\quad\quad\quad\quad\quad \text { higher }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 37

Below is selected information taken from the balance sheet of Huy Corporation as of 12/31/06. $\begin{array}{lrr}&\underline{12 / 31 / 05}&\underline{12 / 31 / 06}\\\text { Land } & \$ 100,000 & \$ 100,000 \\\text { Machines } & \underline{80,000} & \underline{70,000} \\\text { Gross property, plant, \& equipment } & 180,000 & 170,000 \\\text { Accumulated depreciation } & \underline{25,000} & \underline{10,000} \\\text { Net property, plant, \& equipment } & \underline{\$ 155,000} & \underline{\$ 160,000} \\\text { Depreciation expense } & & \$ 5,000\end{array}$


-The average total life span of Huy's depreciable assets as of 2006 is:

A)2 years.
B)7 years.
C)14 years.
D)34 years.

Question 38

A write-down in asset value is:

A)a very rare occurrence.
B)not allowed under GAAP.
C)results in a direct debit to stockholders' equity.
D)required if an asset is deemed to have permanent impairment of value.

Question 39

Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year, the effect on: $\quad$$\quad$$\quad$$\text {This year's ROA}$ $\quad$$\text {Next year's ROA}$
A. $\quad\quad\quad\text { Increased }\quad\quad \quad \text { No change }$
B. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { No change }$
C. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { Decreased }$
D. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { Increased }$

A)Option A
B)Option B
C)Option C
D)Option D

Question 40

Below is selected information taken from the balance sheet of Huy Corporation as of 12/31/06. $\begin{array}{lrr}&\underline{12 / 31 / 05}&\underline{12 / 31 / 06}\\\text { Land } & \$ 100,000 & \$ 100,000 \\\text { Machines } & \underline{80,000} & \underline{70,000} \\\text { Gross property, plant, \& equipment } & 180,000 & 170,000 \\\text { Accumulated depreciation } & \underline{25,000} & \underline{10,000} \\\text { Net property, plant, \& equipment } & \underline{\$ 155,000} & \underline{\$ 160,000} \\\text { Depreciation expense } & & \$ 5,000\end{array}$


-The average age of Huy's depreciable assets as of 2006 is:

A)2 years.
B)7 years.
C)14 years.
D)34 years.

Question 41

All property, plant, and equipment must be depreciated over a period not to exceed forty years.

Question 42

Which of the following is a benefit of securitization through the use of a properly structured SPE to a company? I. Remove receivables from the balance sheet
II) Remove debt from the balance sheet
III) Lower financing costs
IV) Recognize gains on the sale of assets to the SPE

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

Question 43

Forming a special purpose entity (SPE) is a common way companies securitize receivables.

Question 44

If a company factors its accounts receivables, this will have the effect of making its cash cycle appear shorter.

Question 45

Solvency refers to the ability of a company to meet its short-term obligations.

Question 46

Under GAAP, the choice of inventory costing method (LIFO, FIFO, etc.) must be determined by the physical flow of the goods.

Question 47

In a period of rising prices, using FIFO would produce a lower cost of goods sold than using LIFO.

Question 48

One advantage of FIFO over LIFO is that it minimizes the distortion caused by inflation on net income.

Question 49

Capitalization of interest costs results in higher reported net income in the period of capitalization and lower net income in future periods.

Question 50

The LIFO conformity rule states that if a company uses LIFO for tax purposes, it must also use it for financial reporting purposes.

Question 51

With respect to LIFO, which of the following is incorrect?

A)If a company uses LIFO for tax purposes, it must use it for GAAP purposes.
B)If the LIFO reserve increases in a given year, cost of goods sold under the LIFO inventory costing is higher than it would have been if FIFO had been used for that year.
C)LIFO results in better matching on the income statement than FIFO.
D)LIFO results in inventory levels on the balance sheet that are closer to current cost than FIFO.

Question 52

LIFO provides a better match of current expenses to revenues on the income statement, while FIFO provides a better ending inventory figure by more closely reflecting current costs.

Question 53

An increasing accounts receivables balance is always a good sign as it means the company has more current assets and is more liquid.

Question 54

If management underestimates the allowance for non-collectible accounts, this will cause net income for the period to be overstated.

Question 55

Prepaid expenses are usually classified as current assets.

Question 56

Goodwill is:

A)the excess of the purchase price of net assets over the book value of net assets.
B)the excess of the appraised value of net assets over the book value of net assets.
C)the excess of the purchase price of net assets over the fair value of net assets.
D)the excess of the appraised value of net assets over the fair value of net assets.

Question 57

Changes in inventory levels have been shown to be useful in predicting future sales and earnings.

Question 58

Accounts receivable are usually not classified as a current asset.

Question 59

Gains and losses from the sale of property, plant, and equipment should be included in cost of goods sold as in reality they reflect the cost of producing goods for sale.

Question 60

The cash operating cycle is the amount of days between making a sale and collecting money from customers.

Question 61

Depreciation is a method for matching costs of long-lived assets to revenues generated from their use.

Question 62

Donuld Company sells many products. Sol is one of its popular items. Below is an analysis of the inventory purchases and sales of Sol for the month of September. Donuld Company uses the periodic inventory system.INSTRUCTIONS
a. Using the FIFO assumption, calculate the amount charged to cost of goods sold for September. (Show computations)
b. Using the LIFO assumption, calculate the amount assigned to the inventory on hand on September 30. (Show computations)
c. Calculate the LIFO reserve that would be reported in the company's books on September 30 if using LIFO.

Question 63

Depreciation is a valuation exercise.

Question 64

The cost of software developed for internal use should be capitalized only after it has reached technological feasibility.

Question 65

When the discounted amount of expected cash flows from an asset is greater than the asset's book value, the asset is deemed to be impaired.

Question 66

Software development costs are treated the same way as research and development costs under GAAP (Generally Accepted Accounting Principles).

Question 67

If the write-off is occurring because of an industrywide downturn or market crash, it is useful to compare the percentages of the write-off with those taken by other companies in the industry.