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Analysis of a company’s assets will help evaluate its: I. liquidity. II. solvency. III. ANSWER

Question 1 Marks: 2 Analysis of a company’s assets will help evaluate its: I. liquidity. II. solvency. III. operational capacity. IV financing ability. Choose one answer.

  1. I, II, III and IV
  2. I, II and IV
  3. II, III and IV
  4. I, II and III


Question 2 Marks: 2 For Control Furniture Co., LIFO Reserve in Year 2006 $91 million LIFO Reserve in Year 2005 $82 million Tax Rate is 35%. To restate Year 2006 LIFO inventories to a FIFO basis, we use the following analytical entry: A) Inventories 91 Deferred Tax Payable 31.85 Retained Earnings 59.15 B) Inventories 91 Deferred Tax Payable 35.65 Retained Earnings 55.35 C) Inventories 91 Deferred Tax Payable 38.96 Retained Earnings 52.04 D) Inventories 91 Deferred Tax Payable 32.85 Retained Earnings 58.15 Choose one answer.

  • Option A


  1.  b. Option B
  2. c. Option C
  3. d. Option D


Question 3 Marks: 2 The use of LIFO rather than FIFO for inventory costing under normal economic conditions results in: I. lower net income. II. higher total assets. III. higher retained earnings. IV. unchanged retained earnings. Choose one answer. a. II and III b. I, II and IV c. I only d. I and IV


Question 4 Marks: 2 The following information can be found in ABC Co.’s financial statements. 2006 2005 Finished Goods $251,690 $195,360 Work in Process and purchased parts 245,123 17,377 Raw Materials 136,568 106,789 633,381 488,581 Less excess of current cost over stated LIFO value 62,951 71,186 $570,430 $417,395 Retained earnings $3,526,000 $3,159,000 Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories. What will be the value of inventory for 2006 if ABC used FIFO valuation? Choose one answer. a. 633,485 b. 570,430 c. 633,381 d. 488,581


Question 5 Marks: 2 What will be the retained earnings for 2006 if ABC used FIFO valuation? Choose one answer. a. 3,205,271 b. 3,566,918 c. 3,893,000 d. 4,096,430


Question 6 Marks: 2 What will be the retained earnings for 2005 if ABC used FIFO valuation? Choose one answer. a. 3,205,271 b. 3,566,918 c. 3,893,000 d. 4,096,430


Question 7 Marks: 2 Which of the following is not a common characteristic of a company choosing to use LIFO rather than FIFO? Choose one answer. a. Larger inventory balances b. Higher variability in inventory balances c. Greater expected tax savings d. Larger in size


Question 8 Marks: 2 Financial Statements of ABC Corp. indicates that ending inventory levels in 2005 and 2006 were $200,000 and $350,000 respectively. Cost of Goods sold for 2005 and 2006 were $1,900,000 and $2,200,000 respectively. Purchases in 2006 were: Choose one answer. a. $1,950,000 b. $2,150,000 c. $2,350,000 d. $1,850,000


Question 9 Marks: 2 The inventory costing method used by a company (LIFO, FIFO, etc.) will affect: Asset Turnover Debt/Equity Ratio A) Yes Yes B) Yes No C) No No D) No Yes Choose one answer. a. Option A b. Option B c. Option C d. Option D


Question 10 Marks: 2 Which of the following statements about inventories is true? Choose one answer. a. U.S. generally accepted accounting principles (GAAP) require the use of lower-of-cost or market-valuation basis for inventories. b. Last-in, last-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.


Question 11 Marks: 2 With respect to LIFO, which of the following is incorrect? Choose one answer. a. If a company uses LIFO for tax purposes it must use it for GAAP purposes. b. If the LIFO reserve increases in a given year, the LIFO COGS is higher than it would have been if FIFO had been used for that year. c. LIFO results in better matching on the income statement than FIFO. d. LIFO results in inventory levels on the balance sheet that are closer to current cost than FIFO.

Question 12 Marks: 2 LIFO liquidation occurs when: Choose one answer. 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.


Question 13 Marks: 2 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 (before taxes) and current ratio will be: Net Income Current Ratio A) understated by $2,000 too low B) overstated by $2,000 too low C) understated by $8,000 too low D) understated by $8,000 too high Choose one answer. a. Option A b. Option B c. Option C d. Option D


Question 14 Marks: 2 Which of the following steps are required to adjust LIFO to FIFO? Choose one answera. Inventory needs to be calculated as reported LIFO inventory plus LIFO reserve. b. Increase deferred tax payable by LIFO reserve times Tax rate. c. Retained earnings need to be calculated as reported retained earnings plus LIFO reserve times (1 – Tax rate). d. All of the above.


Question 15 Marks: 2 Target Inc. has 30M shares outstanding and trades at $50 per share. Target has net identifiable assets with a book value of $1,000M and a fair value of $1,200M. Acquirer Corporation purchases all of Target Inc. stock for $60 per share. How much will Acquirer record as goodwill upon acquiring Target? Choose one answer. a. 300M b. 500M c. 600M d. 800M


Question 16 Marks: 2 Which of the following is not an effect of capitalization? Choose one answer. a. Capitalization usually reduces net income. b. Capitalization usually yields a smoother net income. c. Capitalization usually decreases the volatility of the return on investment. d. Capitalization usually increases net income.


Question 17 Marks: 2 Look Good Corporation has current assets of $1.1M and current liabilities of $1M. It is close to year-end and it would like to increase its current ratio. Which of the following will achieve this? Choose one answer. a. Encourage customers to pay their bills more quickly. b. Increase short-term borrowings by $0.1M. c. Sold building for $0.2M in cash. d. Liquidate some of its trading marketable securities.


Question 18 Marks: 2 Securitization through the use of a properly structured SPE may result in the following benefits to the company: I. Remove receivables from the balance sheet. II. Remove debt from the balance sheet. III. Lower financing costs. IV. Recognize gains on the sale of assets to the SPE. Choose one answer. a. I, II, III and IV b. I, II and III c. I and IV d. II and III


Question 19 Marks: 2 Trading Marketable Securities: Choose one answer. a. are considered non-current assets. b. are recorded at amortized cost. c. are marked to the lower of cost or market each accounting period. d. are marked to market each accounting period.


Question 20 Marks: 2 The classification of marketable equity securities as trading or available-for-sale is determined by: Choose one answer. a. management’s intent regarding the disposition of the securities. b. when the securities mature. c. whether the current assets are greater or less than the current liabilities. d. whether management wants to mark them to market or not.


Question 21 Marks: 2 The equity method of accounting for investments requires: Choose one answer. a. Investment should be marked to market each accounting period. b. Pro-rata share of investee’s earnings should be recorded as investment income. c. Company should not have significant influence over investee. d. Goodwill related to purchase of investee stock to be recorded separately on balance sheet.


Question 22 Marks: 2 Agwen Corporation owns 25% of the shares of Bronwo Corporation, which traded on the New York Stock Exchange. Which method is Agwen most likely to use to account for this investment? Choose one answer. a. Cost method b. Market method c. Equity method d. Consolidation method


Question 23 Marks: 2 Which of the following is incorrect? An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method: Choose one answer. a. Cash flow received from investee may be substantially different from investment income recorded. b. As investee’s liabilities are not recorded on the company’s balance sheet, there may be significant off-balance-sheet financing.c. They must mark investment in investee to market even though there may be no ready market in which they can sell their investment. d. Company must record pro rata share of investee’s earnings, which may not be well correlated with changes in market value of investee.


Question 24 Marks: 2 When accounting for an investment under the equity method, what situations may reduce the carrying value of the investment? I. Investee experiences significant losses. II. Investee distributes dividends in excess of earnings. III. Investee sells additional shares for less than book value. IV. Investee engages in a stock split. Choose one answer. a. I and II b. II and IV c. I, II and III d. I, III and IV


Question 25 Marks: 2 Which of the following is allowed to be reported on fair value basis under SFAS 159? Choose one answer. a. Investment in subsidiaries that need to be consolidated b. Lease assets and obligations c. Derivatives d. Postretirement benefit assets and obligations.

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