Deck 9: Operating Activities

Question 1

To calculate a company's average tax rate an analyst would:

A) Divide income tax payable by income before taxes
B) Divide income tax expense by income before taxes
C) Multiply the statutory income tax rate by income before tax
D) Average a firm's Federal, State, Local and Foreign tax rates.

Answer 1

B

Question 2

The projected benefit obligation measures:

A) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
B) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
C) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
D) the shortest possible period for funding to maximize the tax deduction.

Answer 2

C

Question 3

Analysts concerns with postretirement benefits include all of the following except:

A) Should the underfunded postretirement benefit obligation be added to liabilities in assessing risk?
B) How reasonable are the firms' assumptions regarding health care cost increases?
C) Is the postretirement benefit fund adequately paying benefits?
D) Is the postretirement benefit fund generating returns consistent with the expected rate of return?

Answer 3

C

Question 4

Falcon Networks
Falcon Networks is a leading semiconductor company with operations in 17 different countries.Information about the company's taxes appears below:

Based on the information provided by Falcon Networks how much cash did income taxes use during 2012?

A) $154.19 million
B) $54.17 million
C) $208.36 million
D) $284.84 million

Question 5

Falcon Networks
Falcon Networks is a leading semiconductor company with operations in 17 different countries.Information about the company's taxes appears below:

Using the information provided by Falcon Networks,determine the foreign effective tax rate for 2012.

A) 33.52%
B) 35.00%
C) 42.25%
D) 45.49%

Question 6

All of the following are considered by analysts when assessing the quality of accounting except:

A) Price variation and the speed at which inventory turns over
B) Any liquidation of FIFO inventory layers
C) Any physical deterioration or obsolescence of inventory
D) The inventory cost-flow assumption chosen by management

Question 7

The major difference between accounting for pensions and the accounting for other postretirement benefits is that firms:

A) do not need to report an excess of the accumulated benefits obligations over assets in a postretirement benefits fund as a liability on the balance sheet.
B) do not need to disclose any estimates used in calculating projected benefits.
C) postretirement benefits are normally not material for most companies and do not need to be disclosed.
D) do not need to set aside funds for future postretirement benefits as they do for pension benefits.

Question 8

Which of the following statements best describes the difference between U.S.GAAP and IFRS with respect to revenue recognition?

A) IFRS has a substantial amount of industry specific guidance for revenue recognition.
B) IFRS revenue recognition is not consistent with U.S.GAAP in principle.
C) There are subtle differences in the wording of U.S.GAAP as compared with IFRS.
D) IFRS has four criteria and U.S.GAAP has five conditions for revenue recognition.

Question 9

Which of the following calculations is used to determine the amount of the liability reported on the balance sheet for underfunding?

A) Plan assets less projected benefit obligation.
B) Projected benefit obligation less plan assets.
C) Plan assets less accumulated benefit obligation.
D) Accumulated benefit obligation less plan assets.

Question 10

The accumulated benefit obligation measures:

A) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
B) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
C) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
D) the shortest possible period for funding to maximize the tax deduction.

Question 11

Falcon Networks
Falcon Networks is a leading semiconductor company with operations in 17 different countries.Information about the company's taxes appears below:

Using the information provided by Falcon Networks determine the combined effective tax rate for 2012.

A) 33.52%
B) 35.00%
C) 42.25%
D) 45.49%

Question 12

All of the following are true regarding accrual accounting except:

A) Accrual basis measures operating success by the extent to which accomplishments exceed efforts.
B) Accrual basis measures operating success by the extent to which revenues exceed expenses.
C) Accrual basis reports operating activities in terms of their success in generating value.
D) Accrual basis for the recognition of expenses is not required under IFRS.

Question 13

Presented below is pension information related to Roberts Corp.for the year 2012:

The amount of pension expense to be reported for 2012 is:

A) $46,000
B) $48,000
C) $54,000
D) $40,000

Question 14

Gorilla,Corp.implemented a defined-benefit pension plan for its employees on January 2,2012.The following data are provided for year 2012,as of December 31:

What amount should Gorilla record as additional minimum pension liability at December 31,2012?

A) $0
B) $5,000
C) $20,000
D) $45,000

Question 15

All of the following conditions signal that revenue recognition may have been recorded too early except:

A) large and volatile amounts of uncollectible accounts receivable.
B) a decrease in the number of days accounts receivable are outstanding.
C) unusually large amounts of returned goods.
D) excessive warranty expenditures.

Question 16

Falcon Networks
Falcon Networks is a leading semiconductor company with operations in 17 different countries.Information about the company's taxes appears below:

Using the information provided by Falcon Networks,determine the federal effective tax rate for 2012.

A) 33.52%
B) 35.00%
C) 42.25%
D) 45.49%

Question 17

Which of the following will most likely help identify an increasing proportion of uncollectible sales?

A) accounts receivable turnover
B) the ratio of bad debt expense to sales
C) the ratio of sales returns to sales
D) the ratio of cost of sales to sales

Question 18

A minimum liability for pension expense is reported when:

A) the projected benefit obligation exceeds the fair value of pension plan assets.
B) the pension expense reported for the period is greater than the funding amount for the same period.
C) the accumulated benefit obligation exceeds the fair value of pension plan assets.
D) vested benefits exceed the fair value of pension plan assets.

Question 19

All of the following are conditions for revenue recognition outlined by SAB 104 except:

A) There is pervasive evidence that an arrangement exists.
B) Delivery has occurred or services have been performed.
C) The seller's price to the buyer can be variable.
D) Collectability is reasonably assured.

Question 20

Which of the following accounts would not be considered a reserve account?

A) Allowance for Doubtful Accounts
B) Estimated Warranty Liability
C) Prepaid Expense
D) Accumulated Depreciation

Question 21

A LIFO liquidation during periods when prices are increasing results in a company:

A) recording a large inventory write down.
B) recording higher earnings than it would have if it had used FIFO.
C) recording lower earnings than it would have if it had used FIFO.
D) having operational problems, but no financial statement effects.

Question 22

Which of the following is not part of the balance sheet approach when computing income tax expense?

A) Identifying at each balance sheet date all differences between the book basis of assets, liabilities, and tax loss carryforwards
B) Eliminating permanent differences between book and tax basis.
C) Eliminating deferred tax assets.
D) Assessing the likelihood that the firm will realize the benefits of deferred tax assets in
The future.

Question 23

When input prices are increasing,companies that use the LIFO method of accounting for inventory will report:

A) Lower cost of goods sold amounts in comparison to the FIFO method
B) Higher sales amounts in comparison to the FIFO method
C) Higher ending inventory amounts in comparison to the FIFO method
D) Lower gross profit margins in comparison to the FIFO method

Question 24

Typical U.S.GAAP disclosures for deferred income taxes include all of the following except:

A) Components of income tax expense
B) Components of income before taxes
C) Reconciliation of income taxes at statutory rate with income tax expense
D) Components of permanent tax differences

Question 25

Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.

Question 26

All of the following examples represent complex revenue generation models except:

A) Point-of-sale transactions
B) Uncertain revenue timing
C) Bundled service deliverables
D) Bundled deliverables in leases

Question 27

Deferred tax assets result in future tax ____________________ when temporary differences reverse.

Question 28

All of the following are most likely to change the FMV of pension plan assets during a given period except:

A) Employer cash payments are made to the plan trustee.
B) Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions.
C) Actual returns on invested plan assets.
D) Retirement benefits paid.

Question 29

A typical defined benefit pension plan formula includes all of the following except:

A) the number of years of employee service
B) the fair market value of pension plan assets
C) a credit for each year of annual service
D) the final salary at retirement date

Question 30

Under the completed contract method:

A) revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.
B) revenue, cost, and gross profit are recognized during the production cycle.
C) revenue, cost, and gross profit are recognized at the time the contract is completed.
D) None of these are correct.

Question 31

Which of the following would not be suggestive of a company recognizing sales too early?

A) large and volatile amounts of uncollectible accounts receivable
B) excessive warranty expenditures
C) large growth in accounts receivable
D) unusually large amount of returned goods

Question 32

Regarding actuarial assumptions,firms must disclose in notes to the financial statements all of the following except:

A) the discount rate used to compute the pension benefit obligation.
B) the expected rate of return on pension investments.
C) estimates of the number of retirees over the future 10 years.
D) the rate of compensation increase.

Question 33

Upton Company has consistently used the percentage-of-completion method of recognizing income.In 2010,Upton started on an $18,000,000 construction contract that was completed in 2012.The following information was taken from Upton's 2010 accounting records:

What amount of revenue should Upton recognize on the contract in 2010?

A) $6,000,000
B) $5,400,000
C) $9,000,000
D) $0

Question 34

The _____________________________________________ is equal to the actuarial present value of amounts that the employer expects to pay to retired employees,based on the employees' service to date and using expected future salary amounts.

Question 35

All of the following are events that can change the projected benefit obligation (PBO)during a period except:

A) The payment of retirement benefits.
B) Amendments to the pension plan agreement
C) The interest accumulated on the liability.
D) All of these can change the PBO.

Question 36

Playtime Corporation
Assume that Playtime Corp.has agreed to construct a new playground for Surrey County for $2,450,000.Construction of the new playground will begin on March 17, 2012 and is expected to be completed in August 2013.At the signing of the contract Playtime Corp.estimates that it will cost $1,750,000 to build the playground.
At the end of 2012 Playtime provided the following information about the project:

What percentage is the playground complete?

A) 62.5%
B) 66.7%
C) 55.6%
D) 50.0%

Question 37

If the portions of the firm's foreign operations in higher-tax-rate countries grew more rapidly than foreign operations in lower-tax-rate countries,the company may seek out more tax effective ways of operating abroad through all of the following means except:

A) Assess whether transfer prices or cost allocations can be adjusted to shift income
From high-tax-rate to low-tax-rate jurisdictions.
B) Shift from domestic to foreign borrowing to increase deductions for interest against
Foreign-source income.
C) Shift from debt to equity financing of foreign operations to increase interest deductions
Against foreign-source income.
D) Shift some operations, like marketing, to the United States where the average tax rate is lower.

Question 38

Playtime Corporation
Assume that Playtime Corp.has agreed to construct a new playground for Surrey County for $2,450,000.Construction of the new playground will begin on March 17, 2012 and is expected to be completed in August 2013.At the signing of the contract Playtime Corp.estimates that it will cost $1,750,000 to build the playground.
At the end of 2012 Playtime provided the following information about the project:

If Playtime uses the percentage of completion to recognize revenue on the long-term contract,how much gross margin should Playtime recognize in 2012?

A) $389,200
B) $278,000
C) $556,000
D) $433,550

Question 39

Which of the following is not a disclosure for derivatives required under SFAS No.133?

A) Firms must describe their risk management strategy and how particular derivatives
Help accomplish their hedging objectives.
B) For fair value and cash flow hedges, firms must disclose the net gain or loss recognized
In earnings resulting from the hedges' ineffectiveness and the line item on the income statement that includes this net gain or loss.
C) For cash flow hedges, firms must describe the transactions or events that will result
In reclassifying gains and losses from other comprehensive income to net income
And the estimated amount of such reclassifications during the next 12 months.
D) The specifics of a model that simulates with a 95 percent or other confidence level the minimum, maximum, or average amount of loss that a firm would incur.

Question 40

An inventory pricing procedure in which the current costs have a direct impact on the inventory is:

A) FIFO
B) LIFO
C) Base stock
D) Weighted-average

Question 41

____________________ differences result from including revenues and expenses in income before taxes in a different period than those items affect taxable income.

Question 42

Accountants use reserve accounts for various reasons,for each of the scenarios below describe a specific account example that matches the scenario.
1.The use of a reserve account in order to match expense with revenues.
2.The use of a reserve account in order to keep expense out of the income statement.
3.The use of a reserve account in order to revalue an asset,but delay the income recognition effect.

Question 43

Although LIFO generally provides higher quality earnings measures,FIFO generally provides higher _____________________________________________ measures.

Question 44

A company that uses LIFO will experience a(n)______________________________ during a period it sells more units than it purchases.

Question 45

The difference between the economic resources received from customers and the economic resources paid to suppliers,employees and other providers of goods and services is called ____________________.

Question 46

___________________________________ is primarily a question of timing.

Question 47

A contractor would not use ________________________________________ method of income recognition when there is substantial uncertainty regarding the total costs it will incur in completing the project.

Question 48

U.S.GAAP requires firms to report the assets and liabilities of defined benefit plans _______________________________________________________.

Question 49

A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.

Question 50

A company that uses LIFO will find that its ______________________________ account will be somewhat out of date.

Question 51

Deferred tax liabilities result in future tax ____________________ when temporary differences reverse.

Question 52

Companies that engage in long-term contracts can recognize income using either the _____________________________________________ method or the ________________________________________ method.

Question 53

Please answer the following questions about defined benefit pension plans:
1.Companies with defined benefit pension plans must recognize pension expense each period.What are the five components of pension expense? Briefly describe each component.
2.How does each component of pension expense effect pension expense during the period (increase,decrease,or uncertain)?
3.What is the difference between the accumulated pension obligation and the projected pension obligation?
4.What determines whether a pension plan is underfunded or overfunded?

Question 54

The statement of cash flows allows the accountant to agree the net cash provided to the _________________________ general ledger

Question 55

The process of allocating the historical cost of certain assets to the periods of their use in a reasonably systematic manner is referred to as ____________________.

Question 56

Income tax expense consists of two components,the ____________________ portion and the ____________________ portion.

Question 57

Recording municipal bond interest received in the general ledger will generate a(n)_________________ difference

Question 58

Under the accrual method of accounting,when a firm has substantially completed its value-adding activities it should recognize ____________________.

Question 59

Differences between income before taxes and taxable income are either ____________________ or ____________________.

Question 60

One sign that a company may be recognizing sales too early is that it has unusually large amounts of ______________________________.

Question 61

Assume that Madison Corp.has agreed to construct a new basketball arena for Gator Town for $70 million dollars.Construction of the new arena begins in July,2012 and is expected to be completed in March 2009.At the signing of the contract Madison Corp.estimates that the new arena will cost $60 million dollars to build.Given the following cost and building schedule determine the cumulative degree of completion and how much revenue and gross margin Madison Corp.should recognize in years 2012,2013 and 2014.

Question 62

The following information is available from Sheldon Corp.:


Use the information above to calculate the following:
a.Average age of the depreciable assets
b.Average remaining useful life of the depreciable assets

Question 63

Cooke Industries imports and sells quality merchandise.The company had the following layers in its LIFO inventory at January 1,2012,at which time the replacement cost of the inventory was $600 per unit.

The replacement cost of the merchandise remained constant throughout 2012.Cooke sold 300 units during 2012.The company established the selling price of each unit by doubling its replacement cost at the time of sale.
Required:
1.Determine the gross margin and the gross margin percentage for 2012 assuming that Cooke purchased 310 units during the year.
2.Determine the gross margin and the gross margin percentage for 2012 assuming that Cooke purchased 200 units during the year.
3.Explain why the assumed number of units purchased makes a difference in your answers.

Question 64

Pronto,Inc.is a major producer of printing equipment.Pronto uses a LIFO cost-flow assumption for inventories.The company's tax rate is 35%.Below is selected financial data for the company.

Required:
a.The excess of FIFO over LIFO inventories was $25 million on December 31,2013,$28.5 million on December 31,2012 and $22 million on December 31,2011.Compute the cost of goods sold for Pronto,Inc.for years 2013 and 2012 assuming that it had used a FIFO assumption.
b.Compute the inventory turnover ratio for Pronto,Inc.for years 2013 and 2012 using a LIFO cost-flow assumption.
c.Compute the inventory turnover ratio for Pronto,Inc.for years 2013 and 2012 using a FIFO cost-flow assumption.
d.Compute the rate of return on assets for years 2013 and 2012 based on the reported amounts.Disaggregate ROA into profit margin and asset turnover components.
e.Compute the rate of return on assets for years 2013 and 2012 assuming that Pronto,Inc.had used the FIFO method of accounting for inventories.Disaggregate ROA into profit margin and asset turnover components.

Question 65

Firm A places its order for the equipment on June 30,Year 1.It simultaneously signs a forward foreign exchange contract for 20,000 GBP.The forward rate on June 30,Year 1,for settlement on June 30,Year 2,is $1.64 per GBP.Firm A designates the forward foreign exchange contract as a fair value hedge of the firm commitment.
Required
a.U.S.GAAP and IFRS do not require Firm A to record the purchase commitment or the
forward foreign exchange contract on the balance sheet as a liability and an asset on
June 30,Year 1.What is the logic for this accounting?
b.On December 31,Year 1,the forward foreign exchange rate for settlement on June
30,Year 2,is $1.73 per GBP.Using the financial statement effects template,show the
financial statement effects of recording the change in the value of the purchase commitment
and the change in the value of the forward contract for Year 1.Assume an 8 percent per year interest rate for discounting cash flows to their present values on December 31,Year 1.
c.Show the financial statement effects on June 30,Year 2,of recording the change in the present value of the purchase commitment and the forward foreign exchange contract for the passage of time.
d.On June 30,Year 2,the spot foreign exchange rate is $1.75 per GBP.Show the financial
statement effects of recording the change in the value of the purchase commitment and the change in the value of the forward contract due to changes in the exchange rate during the first six months of Year 2.
e.Show the financial statement effects of the June 30,Year 2,purchase of 20,000 GBP with U.S.dollars and acquisition of the equipment.
f.Show the financial statement effects on June 30,Year 2,to settle the forward foreign
exchange contract.
g.How would the effects in Parts b-f differ if Firm A had chosen to designate the forward
foreign exchange contract as a cash flow hedge instead of a fair value hedge?
h.Suggest a scenario that would justify Firm A treating the forward foreign exchange contract as a fair value hedge and a scenario that would justify the firm treating the contract as a cash flow hedge.

Question 66

Bower Construction Comp.has consistently used the percentage-of-completion method for recognizing revenue on its long-term contracts.During 2010 Bower entered into a fixed-price contract to construct an office building for $8,000,000.Information relating to the contract is as follows:

Required (Show Calculations):

Question 67

The following information is taken from Satin financial statements (amounts in thousands):

Inventory Footnote: If the first-in,first-out method of accounting for inventory had been used,inventory would have been approximately $26.9 million and $25.1 million higher than reported at 12/31/2010 and 12/31/2009,respectively.
Required:
a.Calculate what inventory would have been at 12/31/2010 and 12/31/2009 had the FIFO inventory method been used.
b.What would net income for the year ended 12/31/2010,have been if the FIFO inventory method been used?
c.Calculate what stockholders' equity would have been at 12/31/2010 and 12/31/2009 had the FIFO inventory method been used.

Question 68

Under U.S.GAAP,application of the LIFO and FIFO inventory methods result in differences in the balance sheet,income statement and cash flow statement.Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.

Question 69

What are the four disclosures required by U.S.GAAP relating to income taxes?

Question 70

The following information is related to the defined benefit pension plan of Xavier Company for 2012:

Required:

Question 71

Given the following information,compute December 31,2012 projected benefit obligation (PBO)and fair market value (FMV)of plan assets for Eagan Company.

What amount of asset or liability will be reported on the balance sheet at December 31,2012?

Question 72

Global,Inc.provides consulting services throughout the world.The company pays taxes to the nation where revenues are earned.Information about the company's taxes is presented below:

Required:
a.Using the information provided for Global,prepare the company's journal entry to record income taxes for 2012 and 2011.
b.Using the information provided for Global,determine the company's effective tax rate for 2012 and 2011.

Question 73

What are the five steps to apply the core principles of revenue recognition?

Question 74

A large manufacturer recently changed its cost-flow assumption method for inventories at the beginning of 2012.The manufacturer has been in operation for almost 40 years,and for the last decade,it has reported moderate growth in revenues.The firm changed from the LIFO method to the FIFO method and reported the following information:

Calculate the inventory turnover ratio for 2012 using the LIFO and FIFO cost-flow assumption methods.Explain why the costs assigned to inventory under LIFO at the end of 2011 and 2012 are so much less than they are under FIFO.

Question 75

Firm D holds 20,000 gallons of chemicals in inventory on October 31,Year 1,that cost $225
per gallon.Firm D contemplates selling the chemicals on March 31,Year 2,when it completes
the processing.Uncertainty about the selling price of the chemical on March 31,Year 2,leads
Firm D to acquire a forward contract on the chemical.The forward contract does not require an initial investment of funds.Firm D designates the forward commodity contract as a cash flow hedge of an anticipated transaction.The forward price on October 31,Year 1,for delivery on March 31,Year 2,is $320 per gallon.
Required
a.Using the financial statement effects template,show the financial statement effects,
if any,that Firm D would have on October 31,Year 1,when it acquires the forward
commodity price contract.
b.On December 31,Year 1,the end of the accounting period for Firm D,the forward
price of the chemical for March 31,Year 2,delivery is $310 per gallon.Show the financial
statement effects of recording the change in the value of the forward commodity
price contract.Ignore the discounting of cash flows in this part and in the remainder
of the problem.
c.Show the financial statement effects of the December 31,Year 1,decline in value of
the chemical inventory.
d.On March 31,Year 2,the price of the chemical declines to $270 per gallon.Show the
financial statement effects of revaluing the forward contract.
e.Show the financial statement effects on March 31,Year 2,to reflect the decline in
value of the inventory.
f.Show the financial statement effects on March 31,Year 2,to settle the forward contract.
g.Assume that Firm D sells the chemical on March 31,Year 2,for $270 a gallon.Show
the financial statement effects of recording the sale and recognizing the cost of
goods sold.

Question 76

A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively.In these cases the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable.List four conditions that might suggest that a company is recognizing revenues too early?

Question 77

Magnum Construction contracted to construct a factory building for $545,000.The company started during 2012 and was completed in 2013.Information relating to the contract is as follows:

Required:
Record the preceding transactions in Magnum's books under completed-contract and the percentage of completion methods.Determine amounts that will be reported on the balance sheet at the end of 2012.

Question 78

Explain the difference between a temporary and a permanent timing difference for income tax purposes"