Question 1

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

Accepted Answer

During a LIFO liquidation in a period of rising prices, older, lower-cost inventory is sold, resulting in a lower cost of goods sold. This leads to higher gross profit margins and higher net income. Taxes would increase, not decrease, due to the higher net income.

Question 2

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.

Accepted Answer

The net increase in property, plant, and equipment is $5,000 ($160,000 - $155,000). Since they sold fully depreciated assets for $4,000, the original cost was $20,000, and the depreciation expense was $5,000, the purchase of new assets must have been $10,000 to account for the net increase.

Question 3

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D)FIFO inventory balances generally contain old and outdated costs that have little or no relationship to current costs.

Accepted Answer

This statement is true as per U.S. generally accepted accounting principles (GAAP), inventories are required to be valued at lower of cost or market (LCM) basis. LCM basis means that the inventory should be valued at either the original cost incurred to acquire the inventory or the current market price, whichever is lower.

Question 4

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

Accepted Answer

The answer of Under current US GAAP, goodwill is:

I. amortized...

Question 5

Which of the following is not considered an intangible asset?
A)Goodwill
B)Customer lists
C)Prepaid advertising expenses
D)Memberships

Accepted Answer

Goodwill, customer lists, and memberships are all examples of intangible assets, as they do not have a physical form or substance. Prepaid advertising expenses, on the other hand, are a type of prepaid expense and do not meet the criteria of being an intangible asset.

Question 6

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.

Accepted Answer

Selling furniture for cash increases current assets without increasing current liabilities, thus improving the current ratio.

Question 7

Depreciation is based on the principle of:
A)allocation.
B)appropriation.
C)lower of cost or market.
D)approbation.

Accepted Answer

Depreciation is the process of allocating the cost of a tangible asset over its useful life. Therefore, depreciation is based on the principle of allocation. The cost of the asset is spread over its useful life, and the expense is recognized in each accounting period that the asset is used.

Question 8

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.

Accepted Answer

LIFO liquidation occurs when the quantity of goods sold is greater than the quantity produced. This can lead to a decline in the LIFO reserve and can result in higher taxable income and lower net income for the firm.

Question 9

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.

Accepted Answer

The answer of The following information can be found in...

Question 10

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

Accepted Answer

If ending inventory is understated and beginning inventory is overstated, it would result in an understatement of cost of goods sold (COGS) and an overstatement of gross profit. 
This would lead to an overstated net income. 
The current ratio formula is current assets divided by current liabilities. Since the current ratio was already greater than 1.0, the understatement and overstatement would not affect the ratio. 
Therefore, the correct answer is Option C.

Question 11

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

Accepted Answer

Acquirer Corporation will pay a total of $1,800 million to acquire all of Target Inc. stock (30 million shares x $60 per share). The fair value of Target's net identifiable assets is $1,200 million, so the excess purchase price over the fair value of net identifiable assets represents goodwill.

Calculation: 
Purchase Price - Fair Value of Net Identifiable Assets = Goodwill
$1,800 million - $1,200 million = $600 million

Therefore, the answer is C)$600 million.

Question 12

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.

Accepted Answer

The retained earnings can be calculated by subtracting the total dividends paid from the net income earned over the years. Since the question does not provide information about dividends, we cannot use that method. Instead, we can use the fact that under FIFO, the cost of goods sold will be higher, leading to lower net income compared to other methods. Therefore, the retained earnings for FIFO will be lower than the other methods. Looking at the answer choices, only option C is lower than the other choices and therefore the best choice.

Question 13

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

Accepted Answer

Analyzing the effect of the impairment on an asset is not considered an analysis issue arising with impairment because the primary concerns are evaluating the appropriateness of the amount and timing of the impairment, as well as its impact on income. The effect on the asset itself is a direct consequence of recognizing the impairment, rather than an analysis issue.

Question 14

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.

Accepted Answer

The answer of Look Good Corporation has current assets of...

Question 15

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.

Accepted Answer

Goodwill is recognized on the balance sheet when a company acquires another company for a price higher than the fair value of its net identifiable assets. It is not recognized for internally generated goodwill.

Question 16

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

Accepted Answer

Selling accounts receivable increases accounts receivable turnover because it reduces the average accounts receivable balance. It lowers the current ratio because it reduces current assets without affecting current liabilities.

Question 17

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.

Accepted Answer

The average total life span can be calculated by dividing the gross property, plant, and equipment by the depreciation expense. In this case, $170,000 / 5,000 = 34$ years. However, considering the accumulated depreciation adjustment, the correct calculation should be $ (170,000 - 10,000) / 5,000 = 32$ years, but the closest choice is 34 years.

Question 18

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.

Accepted Answer

A write-down in asset value is required if an asset is deemed to have permanent impairment of value. This is a common occurrence in accounting and is allowed under GAAP. It results in a direct debit to the asset account and a credit to an allowance account or an expense account, which ultimately reduces the asset's value on the balance sheet.

Question 19

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

Accepted Answer

Writing down assets decreases the asset base, reducing this year's ROA due to the loss. Next year, with a lower asset base, if earnings remain constant or improve, the ROA would increase, as it's calculated based on a lower asset base.

Question 20

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.

Accepted Answer

The answer of Below is selected information taken from the...

Quiz 4: Analyzing Investing Activities

Which of the following statements about inventories is true?

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.

Which of the following is not considered an intangible asset?

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:

Depreciation is based on the principle of:

LIFO liquidation occurs when:

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

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?

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

A write-down in asset value is: