Chapter 4 – Implementing Accounting Analysis

Which of the following statements is correct?
1. “General and Administrative Expense” is an income statement line item that firms use under a classification of operating expenses by function.
2. “Raw Materials” is an income statement line item that firms use under a classification of operating expenses by function.
3. “Marketing and Selling Expense” is an income statement line item that firms use under a classification of operating expenses by nature.
4. “Cost of Services” is an income statement line item that firms use under a classification of operating expenses by nature.
Which of the following relationships between income statement line item and standard income statement account is correct?
1. Servicing and maintenance SG&A (by function)
2. Dividend income Net interest expense (income)
3. Asset impairments Cost of sales (by function)
4. Share-based payments Investment income
Which of the following relationships between balance sheet line item and standard balance sheet account is correct?
1. Amounts due from affiliates Trade receivables
2. Goodwill Non-current tangible assets
3. Work-in-progress Inventories
4. Provision for post-employment benefits Other current liabilities
Which of the following relationships between cash flow statement line item and standard cash flow statement account is correct?
1. Depreciation and amortization Non-operating losses (gains)
2. Deferred tax expense Non-current operating accruals
3. Stock bonus awards Net investments in operating working capital
4. Capital expenditures Net investments in operating working capital
5. None of the above.
When firms adopt IFRS (International Financial Reporting Standards) for the first time they apply the new standards retrospectively. This implies that they
1. Use IFRS only for transactions that occurred during the prior and current year
2. Use IFRS only for transactions that occurred during the current year
3. Use IFRS for all past transactions, i.e., apply IFRS as if had applied IFRS all along (with some exceptions)
4. None of the above
Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000, and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory (and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s beginning equity and non-current assets if she assumes that company A’s depreciation percentage should be 12%?
1. Decrease non-current assets by €1,000; decrease equity by €1,000
2. Decrease non-current assets by €2,000; decrease equity by €2,000
3. Decrease non-current assets by €1,000; decrease equity by €700
4. Decrease non-current assets by €2,000; decrease equity by €1,400
Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000, and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory (and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s current year’s tax expense if she assumes that company A’s depreciation percentage should be 12%?
1. Decrease tax expense by €60
2. Increase tax expense by €60
3. Decrease tax expense by €30
4. Increase tax expense by €30
5. No adjustment
Incorrectly treating finance leases as operating leases in the financial statements helps firms to
1. Overstate asset turnover and overstate leverage
2. Overstate profit margins and understate asset turnover
3. Understate asset turnover and overstate leverage
4. Overstate asset turnover and understate leverage
A pharmaceutical company spends €5,000, €6,000, and €4,000 on research in 2008, 2009, and 2010, respectively. Assume that research investments have an expected life of two years and occur evenly throughout the year. If an analyst decides to capitalize all research expenditures and uses the straight-line method to amortize research assets, her estimate of the book value of the pharmaceutical’s research asset at the end of 2010 equals
1. €15,000
2. €10,000
3. €4,500
4. €0
A pharmaceutical company spends €5,000, €6,000, and €4,000 on research in 2008, 2009, and 2010, respectively. Assume that research investments have an expected life of two years and occur evenly throughout the year. If an analyst decides to capitalize all research expenditures and uses the straight-line method to amortize research assets, her estimate of the pharmaceutical’s research amortization expense in 2010 equals
1. €4,000
2. €5,000
3. €5,200
4. €5,250
Consider the following statement: “An analyst’s primary concern in her analysis of discounted receivables is to make sure that all receivables that have been legally transferred to third parties have been derecognized from the seller’s balance sheet.” This statement is
1. True
2. False
A car manufacturer recognizes the sale of 40,000 cars in its income statement. The cars have a total selling price of €450,000 and a total cost of €350,000. All cars have been prepaid but not yet shipped to the customer. The car manufacturer’s statutory and effective tax rate is 0 percent. The recognition of this sale leads to the following distortions:
1. No overstatement/understatement of net profit and equity; overstatement of total assets and total liabilities by €350,000.
2. Overstatement of net profit and equity by €100,000; overstatement of total assets by €350,000; overstatement of total liabilities by €250,000.
3. Overstatement of net profit and equity by €100,000; overstatement of total assets by €100,000.
4. Overstatement of net profit and equity by €100,000; understatement of total assets by €350,000; understatement of total liabilities by €450,000
Company B reduces the discount rate it uses to estimate its post-employment benefit obligation from 8 percent (at the beginning of fiscal year 2009) to 7 percent (at the beginning of fiscal year 2010). Analysts following company B believe that this reduction is unjustified. According to these analysts company B
1. Understates its 2010 interest cost, overstates its 2010 service cost; overstates the cumulative actuarial gains at the beginning of 2010.
2. Understates its 2010 interest cost, overstates its 2010 service cost; overstates the fair value of plan assets at the beginning of 2010.
3. Overstates its 2010 interest cost, understates its 2010 service cost; understates the cumulative actuarial gains at the beginning of 2010.
4. Understates its 2010 interest cost, understates its 2010 service cost; understates the fair value of plan assets at the beginning of 2010.
Under IFRS the recognized (on-balance) post-employment liability may not be equal to the unfunded post-employment benefit obligation because
1. Firms can delay the recognition of current actuarial gains or losses.
2. Firms can delay the recognition of unexpected plan contributions.
3. Firms can delay the recognition of past service cost.
4. Both A and B are correct
5. Both A and C are correct
New (planned) international rules for the recognition of fair value gains or losses on equity securities, which will replace IAS 39, imply that gains or losses are no longer recycled. This means that
1. Fair value gains or losses that have been recognized in net profit can no longer be reversed in later periods.
2. Fair value gains or losses will no longer be recognized in comprehensive income while being unrealized and recognized in net profit upon realization.
3. None of the above

Chapter 4 – Implementing Accounting Analysis

Quiz