Question 1

The successful efforts method places only exploration and production costs of successful wells on the balance sheet under property, plant, and equipment.

Accepted Answer

The successful efforts method only capitalizes exploration and production costs for successful wells on the balance sheet under property, plant, and equipment. Unsuccessful exploration costs and abandonment costs are expensed immediately.

Question 2

A review of the assets of a bank may indicate that the bank has a substantial investment in long-term bonds.Such an investment could reflect substantial risk if interest rates increase.

Accepted Answer

If interest rates increase, the value of long-term bonds decreases, which could result in the bank suffering losses or decrease in profits. Therefore, a substantial investment in long-term bonds can reflect substantial risk in a rising interest rate environment.

Question 3

For a regulated utility, the first item listed under liabilities and equity is capitalization.

Accepted Answer

Capitalization represents the amount of money invested by shareholders in the company, which is listed in the liabilities and equity section of a financial statement. As a regulated utility is owned by shareholders, it is required to list capitalization as the first item in this section.

Question 4

For a regulated electric utility, the account allowance for equity funds used during construction represents the cost of borrowed funds that are used for construction.

Accepted Answer

The allowance for funds used during construction (AFUDC) represents the cost of equity and debt funds used to finance a utility's construction projects, not just the cost of borrowed funds.

Question 5

A basic issue, still unresolved, relates to whether oil and gas exploration cost should be expensed or capitalized.

Accepted Answer

The issue of whether to expense or capitalize oil and gas exploration costs is still unresolved and debated among accounting professionals.

Question 6

Large oil and gas companies tend to select a variation of the full-cost method to account for exploration and production costs.

Accepted Answer

Large oil and gas companies typically use the successful efforts method to account for exploration and production costs, as it allows them to capitalize only the costs associated with successful exploration activities, while expenses related to unsuccessful exploration efforts are immediately charged to expense.

Question 7

In the ratio funded debt to operating property for a utility, construction in progress is a component of operating property.

Accepted Answer

Construction in progress is a component of operating property, therefore it would be included in the ratio funded debt to operating property for a utility.

Question 8

Inventory turnover is a valuable tool for analyzing a railroad.

Accepted Answer

Inventory turnover is not a relevant measure for analyzing a railroad as they primarily deal with transportation of goods, rather than holding inventory or stock. Other metrics like revenue per car, average speed, car utilization, and operating ratio are more relevant for analyzing railroad performance.

Question 9

Real estate companies contend that conventional accounting, recognizing depreciation but not the underlying value of the property, misleads investors.

Accepted Answer

Real estate companies argue that conventional accounting, which only recognizes depreciation but not the true value of the property, can mislead investors.

Question 10

A good statistic for analysis of asset utilization for a bus line is the passenger load factor.

Accepted Answer

The passenger load factor is a measure of how efficiently a bus line is using its assets (buses) to transport passengers. It is calculated by dividing the number of passengers carried by the total seating capacity of the bus. This statistic can be analyzed to determine if the bus line is operating efficiently, if there is excess capacity, or if there is overcrowding.

Question 11

The value of fixed rate mortgages could decline substantially if interest rates decrease.

Accepted Answer

Fixed rate mortgages have their interest rates set for the life of the loan, so if interest rates decrease, the value of having a fixed rate (which remains the same) does not decline. In fact, borrowers with fixed rate mortgages benefit from having locked in their rate if the market rates increase.

Question 12

Operating revenue to operating property for a railroad is a turnover type ratio.

Accepted Answer

Operating revenue to operating property ratio measures how efficiently a railroad is using its assets to generate revenue. It is a turnover type ratio.

Question 13

In the case of air carriers, the cost of goods sold section of the income statement looks similar to that of a steel manufacturer.

Accepted Answer

The cost of goods sold section for air carriers differs significantly from that of a steel manufacturer because the cost of goods sold for airlines includes expenses such as fuel, salaries and wages, maintenance and repairs, landing fees, and other operating costs related to providing air transportation services. In contrast, the cost of goods sold for a steel manufacturer would typically include the cost of raw materials, direct labor, and manufacturing overhead incurred in producing steel products.

Question 14

The financial statement format for regulated firms will never differ from those of manufacturers and retailers; the format is prescribed by the FASB.

Accepted Answer

The financial statement format may differ for regulated firms as they may be required to adhere to specific regulations or guidelines set by regulatory bodies. The FASB sets accounting standards, but the format of financial statements may still vary based on the specific industry and its regulations.

Question 15

A review of the disclosure of allowance for loan losses for a bank may indicate significant losses charged.

Accepted Answer

If a bank has disclosed significant losses charged in their allowance for loan losses, it means they have experienced defaults or delinquencies in their loan portfolio that require a reserve to cover potential losses. This could indicate potential financial challenges for the bank.

Question 16

Monitoring cash flow can be particularly important when following an oil or gas company.

Accepted Answer

Oil and gas companies typically have significant capital expenditures and cash flow can be affected by fluctuations in commodity prices and production levels. Monitoring cash flow can help investors and stakeholders assess the financial health of the company and its ability to fund operations and growth initiatives.

Question 17

The passenger load factor measures the percent that a carrier is filled, based on capacity.

Accepted Answer

The statement is true. The passenger load factor is calculated by dividing the number of passengers by the total capacity of the aircraft and multiplying by 100 to get a percentage. It measures how much of the carrier's capacity is being utilized by passengers on a given flight.

Question 18

Most regulated utilities have very high receivables.

Accepted Answer

Regulated utilities typically have stable cash flows and timely payments from customers, leading to lower levels of receivables compared to many other industries.

Question 19

Electric utilities that have substantial construction work in progress are usually viewed as being less risky investments than electric utilities that do not have substantial construction work in progress.

Accepted Answer

Electric utilities with substantial construction work in progress are often viewed as riskier investments because they face construction risks, regulatory approval uncertainties, and potential cost overruns, which can impact their financial stability and future earnings.

Question 20

A profitable utility will maintain a high operating ratio.

Accepted Answer

A high operating ratio indicates higher operating expenses relative to revenue, which is generally not desirable for profitability. A lower operating ratio is preferred as it suggests more efficient operations and potentially higher profits.

Quiz 12: Special Industries: Banks, Utilities, Oil and Gas, Transportation, Insurance, Real Estate Companies