Deck 8: Operating Activities

Question 1

Presented below is pension information related to Power Corp.for the year 2012: The amount of pension expense to be reported for 2012 is

A) $36,000
B) $48,000
C) $54,000
D) $40,000

Answer 1

D

Question 2

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.

Answer 2

A

Question 3

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%

Answer 3

D

Question 4

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.

Question 5

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 6

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 7

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 31,2012. 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 8

Which of the following is not a distinguishing characteristic of a derivative instrument?

A) Derivative instruments have terms that require or permit net settlement.
B) Derivative instruments have a low initial net investment.
C) Derivative instruments are highly effective throughout their term.
D) Derivative instruments have one or more underlyings and notional amounts.

Question 9

Derivatives are financial instruments that derive their value from changes in any of the following underlyings except:

A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices

Question 10

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 11

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 12

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 13

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?

Question 14

Which of the following is not one of the GAAP classifications for derivatives?

A) Speculative investment
B) Fair value hedge
C) Asset-Liability hedge
D) Cash flow hedge

Question 15

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 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

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 18

Which of the following best describes the accounting treatment for derivative instruments not held for purposes of hedging?

A) Record as an asset or liability and recognize changes in fair value in other comprehensive income.
B) Do not record as an asset or liability, record income from the transaction at maturity and recognize in earnings.
C) Record as an asset or liability, recognize changes in fair value currently in earnings.
D) Record as an asset or liability if off-balance sheet risk is material.

Question 19

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.

Question 20

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

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

Question 21

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 22

The installment method of revenue recognition can be used when cash collectibility is uncertain.The installment method

A) requires that no income is recognized until all installments are received.
B) requires that gross profit is recognized as each installment payment is received.
C) requires that entire cost of the sale be recovered prior to any income being recognized.
D) allows revenue recognition at the time of the sale.

Question 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

Under the percentage-of-completion 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

Question 31

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is

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

Question 32

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 33

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 34

Parnell Industries Parnell Industries sold a copy machine to Ranger Inc.on January 1,2012.The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Parnell to manufacture.Ranger will make four payments at the end of each year,beginning with 2012,of $1,261,883 each.The four payments of $1,261,883 when discounted at 10% have a present value of $4,000,000.An amortization table appears below:
If Parnell Industries is certain that it will collect all four payments from Ranger Inc.what amount of gross profit should Parnell recognize in 2012 from the sale?

A) $0
B) $861,883
C) $172,377
D) $800,000

Question 35

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 36

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 37

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 38

Under current U.S.GAAP unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss.Which of the following is not one of the balance sheet items?

A) Derivatives held as cash flow hedges.
B) Deferred tax assets related to net operating loss carryforwards.
C) Minimum pension obligations.
D) Investment securities classified as available for sale.

Question 39

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 40

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 41

If Parnell Industries is uncertain that it will collect all four payments from Ranger Inc.and uses the cost recovery method of accounting for revenue recognition what amount of gross profit should Parnell recognize in 2012 from the sale?

A) $0
B) $861,883
C) $172,377
D) $800,000

Question 42

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

Question 43

When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.

Question 44

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

Question 45

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

Question 46

____________________ differences arise from revenues and expenses that GAAP requires firms to include in income before taxes but that the income tax law excludes from taxable income.

Question 47

A derivative has one or more ____________________,which are a specified interest rate,commodity price,foreign exchange rate,or other variable.

Question 48

Derivative instruments acquired to hedge exposure to changes in the fair value of an asset or liability are ______________________________ hedges.

Question 49

Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.

Question 50

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 51

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 52

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

Question 53

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

Question 54

Funtime Corporation Assume that Funtime Corp.has agreed to construct a new playground for Durrey County for $2,300,000.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 Funtime Corp.estimates that the it will cost $1,600,000 to build the playground.
At the end of 2012 Funtime provided the following information about the project:
What percentage is playground complete?

A) 62.5%
B) 43.5%
C) 55.6%
D) 50.0%

Question 55

____________________ over sufficiently long time periods equals cash inflows minus cash outflows from operating,investing,and financing activities

Question 56

Parnell Industries Parnell Industries sold a copy machine to Ranger Inc.on January 1,2012.The sale price of the machine was $4,000,000 and the machine cost $3,200,000 for Parnell to manufacture.Ranger will make four payments at the end of each year,beginning with 2012,of $1,261,883 each.The four payments of $1,261,883 when discounted at 10% have a present value of $4,000,000.An amortization table appears below:
If Parnell Industries is uncertain that it will collect all four payments from Ranger Inc.and uses the installment method of accounting for revenue recognition what amount of gross profit should Parnell recognize in 2012 from the sale?

A) $0
B) $861,883
C) $172,377
D) $800,000

Question 57

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

Question 58

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

Question 59

Funtime Corporation Assume that Funtime Corp.has agreed to construct a new playground for Durrey County for $2,300,000.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 Funtime Corp.estimates that the it will cost $1,600,000 to build the playground.
At the end of 2012 Funtime provided the following information about the project:
If Funtime uses the percentage of completion to recognize revenue on the long-term contract how much gross margin should Funtime recognize in 2012?

A) $389,200
B) $278,000
C) $556,000
D) $0

Question 60

Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.

Question 61

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 which might suggest that a company is recognizing revenues too early?

Question 62

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 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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 31,2006.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 68

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

Question 69

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 70

___________________________________ is primarily a question of timing.

Question 71

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 72

Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge.Distinguish between the two types of hedges.

Question 73

Companies that engage in long-term contracts can recognize income using either the _____________________________________________ method or the ________________________________________ method.
completed contract,percentage-of-completion

Question 74

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

Question 75

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 76

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 77

When cash collectibility is uncertain,a firm using the ____________________ method recognizes revenue as it collects portions of the selling price in cash.

Question 78

When cash collectibility is uncertain the ___________________________________ method matches the costs of generating revenues dollar for dollar with cash receipts until the firm recovers all such costs.

Question 79

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 80

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.