Question 1

Gains and losses on a long-lived asset disposal are determined by comparing the asset's cost to its selling price.

Accepted Answer

Gains and losses on a long-lived asset disposal are determined by comparing the asset's book value to its selling price.

Question 2

Research and development costs are capitalized under GAAP once a product or process has been developed.

Accepted Answer

Research and Development costs are expensed as incurred under GAAP.

Question 3

The Wilson Company has provided the following information:
Net sales,$100,000;
 Net operating income,$40,000;
Net income,$20,000;
Average total assets,$120,000;
Average net fixed assets; $80,000.
What is Wilson's fixed asset turnover ratio?
A)0.83
B)1.25
C)0.25
D)0.50.

Accepted Answer

Fixed asset turnover ratio (1.25) = Net sales ($100,000) / Average net fixed assets ($80,000)

Question 4

Which of the following accounts would not be considered an intangible asset?
A)Goodwill
B)Patents
C)Research and development costs
D)Trademarks

Accepted Answer

Tangible assets have physical substance, whereas intangible assets lack physical substance. Research and development costs are expensed as incurred.

Question 5

Which statement is false?
A)Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover.
B)Using an accelerated depreciation method instead of the straight-line depreciation method will lead to reporting a higher fixed asset turnover during the earlier years of an asset's life.
C)Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover.
D)Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.

Accepted Answer

Selling long-lived assets results in a decrease in the fixed asset turnover ratio denominator and therefore an increase in the fixed asset turnover ratio.

Question 6

The first step in recording the disposal of a long-lived asset is to update its book value by recognizing depreciation expense for the period of time since the last depreciation adjustment was made.

Accepted Answer

Depreciation expense has to be recorded up to the date of sale.

Question 7

Which of the following would not be classified as property,plant and equipment on a balance sheet?
A)Land being held for resale.
B)Equipment used in the manufacturing process.
C)A building used as corporate headquarters.
D)A natural resource being mined.

Accepted Answer

Land being held for resale would be reported on a balance sheet as either an investment or a current asset.

Question 8

The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight-line depreciation method.

Accepted Answer

The method is most similar to the units-of-production method of depreciation.

Question 9

Which of the following includes only intangible assets?
A)Natural resources, patents, and trademarks.
B)Research and development costs, franchises, and trademarks.
C)Copyrights, licenses, and land.
D)Leaseholds, patents and copyrights.

Accepted Answer

Intangible assets have physical form; each of these assets lacks physical substance.

Question 10

The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion.

Accepted Answer

The allocation of a natural resource cost to future periods is referred to as depletion.

Question 11

Which of the following accounts would not be considered a tangible asset?
A)Buildings
B)Land
C)Equipment
D)Patents

Accepted Answer

Tangible assets have physical substance, whereas intangible assets lack physical substance.

Question 12

Natural resource depletion expense is recognized on the income statement for all resources removed during the period whether they are sold or not.

Accepted Answer

If the resources aren't sold, they are reported as inventory on the balance sheet.

Question 13

Which of the following includes only tangible assets?
A)Land, buildings and natural resources.
B)Land, buildings and leaseholds.
C)Natural resources, buildings, and franchises.
D)Licenses, trademarks, and land.

Accepted Answer

Tangible assets have physical substance; each of these assets has physical substance.

Question 14

Which of the following statements regarding the fixed asset turnover ratio is incorrect?
A)The numerator is net operating income.
B)The denominator is average net fixed assets.
C)It is used to assess a company's effectiveness in generating sales from its fixed assets.
D)It increases when a company sells a factory building for its book value.

Accepted Answer

The numerator is net sales or operating revenues and the denominator is average net fixed assets.

Question 15

Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets.

Accepted Answer

Selling a depreciable asset for a gain increases net income and therefore stockholders' equity; assets increase because the selling price exceeds book value.

Question 16

Goodwill is recorded only when an existing company is bought by another company and the purchase price exceeds the fair value of the purchased company's net assets.

Accepted Answer

Goodwill is recognized when the amount paid for an existing company exceeds the company's assets at fair value.

Question 17

Which of the following transactions would not increase the fixed asset turnover ratio?
A)A profitable sale of inventory on account.
B)A profitable sale of inventory for cash.
C)Selling equipment used in the manufacturing process for a loss.
D)A decrease in cash-based operating expenses.

Accepted Answer

Fixed asset turnover is calculated by dividing net sales by average net fixed assets. A decrease in operating expenses does not affect net sales or average net fixed assets.

Question 18

If a long-lived asset has been impaired,the journal entry will require a debit to a loss account and a credit to the long-lived asset account.

Accepted Answer

An asset impairment results in a loss and reduces the book value of the impaired asset.

Question 19

When determining cash flow from operations using the direct method,depreciation and amortization expense are deducted from net income.

Accepted Answer

Depreciation and amortization expense are added to net income.

Question 20

If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million,no impairment has occurred and no loss would be recognized.

Accepted Answer

The first step in the determination of asset impairment is to compare the asset's book value to its future estimated cash flows. If cash flows exceed book value, there isn't impairment.

Quiz 8: Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Gains and losses on a long-lived asset disposal are determined by comparing the asset's cost to its selling price.

Research and development costs are capitalized under GAAP once a product or process has been developed.

The Wilson Company has provided the following information: Net sales,$100,000; Net operating income,$40,000; Net income,$20,000; Average total assets,$120,000; Average net fixed assets; $80,000. What is Wilson's fixed asset turnover ratio?

Which of the following accounts would not be considered an intangible asset?

Which statement is false?

The first step in recording the disposal of a long-lived asset is to update its book value by recognizing depreciation expense for the period of time since the last depreciation adjustment was made.

Which of the following would not be classified as property,plant and equipment on a balance sheet?

The method of depletion used to allocate the cost of natural resources to future periods is most similar to the straight-line depreciation method.

Which of the following includes only intangible assets?

The systematic and rational allocation of the acquisition cost of natural resources to those periods in which the resources contribute to revenue is called depletion.

Which of the following accounts would not be considered a tangible asset?

Natural resource depletion expense is recognized on the income statement for all resources removed during the period whether they are sold or not.

Which of the following includes only tangible assets?

Which of the following statements regarding the fixed asset turnover ratio is incorrect?

Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets.

Goodwill is recorded only when an existing company is bought by another company and the purchase price exceeds the fair value of the purchased company's net assets.

Which of the following transactions would not increase the fixed asset turnover ratio?

If a long-lived asset has been impaired,the journal entry will require a debit to a loss account and a credit to the long-lived asset account.

When determining cash flow from operations using the direct method,depreciation and amortization expense are deducted from net income.

If a company has an asset with a book value of $5.0 million and estimates the future cash flows to be received over the asset's remaining life to be $5.5 million,no impairment has occurred and no loss would be recognized.