PRACTICE SET: FSA ASSETS

COMPREHENSIVE B. Firms that capitalize costs will show more variability in reported income.
1
. The inventory costing method whereby the oldest cost incurred seldom has an effect on the dollar C. Firms that capitalize costs will have lower assets and equity.
amount in ending inventory is: D. Cash flow from operations is not affected by the capitalization or expensing choice.
A. LIFO C. Average cost
9
B. FIFO D. Specific identification . Which of the following statements is FALSE? All other things being equal, firms that capitalize
costs:
2
. Which of the following is included in a manufacturing company’s inventories? A. show smoother reported income than expensing firms.
A. Raw materials C. Finished goods B. have higher operating cash flow and lower investment cash flow than expensing firms.
B. Work in process D. All of the above C. have lower leverage ratios than expensing firms.
D. have lower profitability ratios in the early years than expensing firms.
3
. Which of the following is not a cost flow assumption that can be made when computing ending
10
inventory? . CBOK Firm expenses costs while JKE Firm capitalizes them. All other things being equal,
A. Lower-of-cost-or-market method C. Specific identification method which of the following choices best describes the relationship between the debt ratios of Firm
B. Average cost method D. LIFO method A and Firm B?
A. They will be equal.
4
. The difference between sales and cost of goods sold (COGS) is known as: B. Firm A's will be lower.
A. Unrealized holding gain C. Operating profit C. Firm A's will be higher.
B. Realized holding gain D. Gross profit D. Cannot be determined without more information.
5 11
. The difference between the replacement cost of a firm's ending inventory and its historical . For purposes of analysis, capitalized interest should be:
(acquisition) cost is: A. added to fixed assets.
A. The operating profit C. The realized holding gain B. added back to the cash flows for investment.
B. The gross profit D. The unrealized holding gain C. added to interest expense and results in higher net income.
D. subtracted from interest expense and results in higher net income.
6
. The difference between cost of goods sold based on replacement cost and the cost of goods sold
12
based on its historical (acquisition) cost is: . If a firm capitalizes construction interest costs, it will have:
A. The operating profit C. The realized holding gain A. a lower debt ratio.
B. The gross profit D. The unrealized holding gain B. higher future depreciation expense.
C. lower reported income after the first year.
7
. Which of the following statements about inventories is false? D. all of the above.
A. A LIFO inventory layer occurs in any year when purchases exceeds sales thereby increasing
13
inventory. . Which of the following statements about the treatment of intangible assets is FALSE?
B. Reductions in inventory appear as an addition to net income in the operating activities section A. Advertising costs are expensed when incurred.
of the statement of cash flows when calculating cash flow from operations. B. All software development costs may be capitalized.
C. During periods of rising prices, the unrealized holding gain recognized on the income C. Internally developed patent and copyright costs are expensed when incurred.
statement under FIFO is greater than the amount recognized under LIFO. D. In the U.S., research and development costs are expensed when incurred.
D. None of the above are false statements.
14
. Which of the following statements is TRUE?
8
. Which of the following statements is TRUE? A. Research and development is capitalized according to U.S. GAAP.
A. The choice between capitalization and expensing makes no operational difference.
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19
B. The costs associated with the creation of a brand name within a company are capitalized. . Which of the following statements about inventories is true?
C. In the case of a patent, the costs of developing the patent are expensed but any legal costs A. U.S. generally accepted accounting principles require the use of the lower-of-cost-or-
are capitalized. market-valuation basis for inventories.
D. The difference between the purchase price and the fair value of identifiable net assets B. Last-in, first-out (LIFO) inventory accounting is less likely to facilitate management of
acquired in an acquisition is expensed in the period the acquisition is made, assuming the income than first-m, first-out (FIFO) accounting.
purchase method is used. 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
15
. With the exception of legal costs, generally accepted accounting principles (GAAP) require that relationship to current costs.
costs incurred in:
20
A. B. C. D. . Which method of inventory pricing best approximates the actual flow of costs and units for
developing patents are expensed expensed capitalized capitalized most manufacturing concerns?
purchased patents are expensed capitalized expensed capitalized A. FIFO C. Average cost
B. LIFO D. Specific Identification
16
. With the exception of legal costs, generally accepted accounting principles (GAAP) require that 21
costs incurred in establishing software be: . Which of the following would not be considered by management as a basis for selecting LIFO
A. expensed, and interest expenses relative to the construction of a building must be expensed. as an inventory costing method?
B. expensed, and interest expenses relative to the construction of a building must be capitalized. A. Cash flow consequences from the usage of LIFO.
C. capitalized, and interest expenses relative to the construction of a building must be expensed. B. The matching of revenues with costs.
D. capitalized, and interest expenses relative to the construction of a building must be capitalized. C. Actual physical flow of inventory.
D. Tax consequences from the usage of LIFO.
22
17
. Hapreet Corporation purchased inventory on January 1, 20X1 for $600,000. On December 31, . Which of the following must be used for financial reporting if it is used for income tax
20X1, the inventory had a current market value of $550,000. During 20X2, Slingshot sold the reporting?
inventory for $620,000. Based on the above, which of the following statements is true? A. LIFO C. Average-cost
A. The December 31, 20X1 balance sheet reported the inventory at $600,000. B. FIFO D. Installment sales method
B. The December 31, 20X1 balance sheet reported the inventory at $620,000. 23
C. When the inventory was sold in 20X2, Slingshot reported a $20,000 gain on its income . Which of the following statements about inventory accounting choices is false?
statement. A. If a company changes from using FIFO to using LIFO to account for inventories, the
D. For the year ending December 31, 20X1, Slingshot recognized a $50,000 loss on its income change is only made prospectively.
statement. B. FIFO-based inventory valuations generally produce the most meaningful solvency ratios
for analytical purposes.
18
. Which of the following statements regarding the lower-of-cost-or-market inventory valuation C. If a company changes from using LIFO to FIFO to account for inventories, all reported
method is true? prior financial data must be restated retroactively to reflect FIFO accounting.
A. Inventory losses are recognized immediately, but inventory gains are recognized only when an D. The more meaningful debt-to-equity ratios for analytical purposes are measured by
item in inventory is sold. dividing a company's debt by shareholders' equity that includes the impact of LIFO
B. Inventory losses and gains are recognized immediately. inventory accounting.
C. Inventory losses and gains are recognized only when an item in inventory is sold. 24
D. Inventory gains are recognized immediately, but inventory losses are recognized only when an . Which of the following is a false statement regarding the effect that inventory costing methods
item in inventory is sold. (LIFO versus FIFO) will have on financial ratios?

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A. Under LIFO the gross margin will be lower (versus FIFO) assuming a rising price environment. B. II only D. II and IV only
B. Under FIFO the inventory turnover will be higher (versus LIFO) assuming a declining price
29
environment. . Under the LIFO method of inventory valuation, when a firm sells a greater quantity of its
C. Under LIFO leverage ratios (debt/equity) will be higher (versus FIFO) assuming a declining inventory than it produces or acquires, the result is:
pricing environment. I. An understatement of the cost of goods sold
D. Under FIFO the current ratio will be higher (versus LIFO) assuming a rising price environment. II. Lower earnings during a period of inflation
III. Lower earnings than would have occurred under the FIFO method of inventory valuation
A. I only C. III only
25
. When analyzing the financial statement effects of different inventory costing methods, the change B. II only D. II and III only
in LIFO reserve is used to obtain all of the following, except:
30
A. Converting the LIFO inventory balance to a FIFO inventory balance. . During a period of falling price levels, the financial statements of a company using FIFO
B. Converting LIFO cost of goods sold to FIFO cost of goods sold. (versus LIFO) for inventory accounting would show:
C. Converting the LIFO profit to a FIFO profit. A. Lower total assets and lower net income
D. Both "b" and "c". B. Lower total assets and higher net income
C. Higher total assets and lower net income
26
. The LIFO reserve declines when: D. Higher total assets and higher net income
A. The prices of goods in inventory decline
31
B. The economy is booming . Which of the following is a true statement regarding the use of the average inventory costing
C. The physical volume of inventories increases method on a company's financial statements (under a rising price environment) versus the
D. Price levels are rising use of either FIFO or LIFO?
A. Average costing will result in a lower cost of goods sold than FIFO, but a higher inventory
27
. Which of the following statements best describes the cause of a decline in LIFO reserve for an balance versus FIFO.
accounting period and the corresponding adjustment needed on the financial statements? B. Average costing will result in a higher cost of goods sold than FIFO, but a lower inventory
A. Declining prices could result in a decline in LIFO Reserve, which requires a restatement in the balance than FIFO.
Cost of Goods Sold. C. Average costing will result in a lower cost of goods sold and lower inventory balance than
B. Inventory liquidation could result in a decline in LIFO Reserve, but no adjustment is necessary LIFO.
to Cost of Goods Sold. D. Average costing will result in a higher cost of goods sold and higher inventory balance
C. Excessive markdowns and markups of products sold could result in a decline in LIFO Reserve, than LIFO.
with adjustments to Cost of Goods Sold necessary.
32
D. Both declining prices and inventory liquidation could result in a decline in LIFO Reserve. There . The primary reason why firms select the LIFO inventory costing method under a rising price
is no adjustment needed for declining prices, but Cost of Goods Sold should be restated for environment is to:
inventory liquidations. A. Report higher net income.
B. Show better liquidity ratios.
28
. All else remaining equal, when LIFO liquidations occur during a period of rising prices, which of the C. Obtain the favorable tax effect.
following statements about the effects on a firm's financial statements is generally true? D. Appear less leveraged due to a lower debt-to-equity ratio.
I. Cost of goods sold increases
33
II. Gross profit margin increases . To minimize the present value of income tax payments, which action should a firm undertake?
III. Taxes decrease A. Capitalize exploration costs instead of expensing them.
IV. Net income increases B. Depreciate fixed assets on the straight-line method rather than an accelerated
A. I only C. I and II only depreciation method.
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C. Use the LIFO inventory method instead of the FIFO inventory method during periods of rising steadily over the last several years. Which statement below would be incorrect when
prices (inflationary periods). comparing the financial statements of these two companies?
D. All of the above. A. The inventory for Ayala Company would be higher than the inventory for Brittany
Company.
34
. In a period of rising prices, the use of the FIFO inventory costing method, will result in: B. The retained earnings for Ayala Company would be higher than the retained earnings for
A. Higher pre-tax cash flow versus LIFO Brittany Company.
B. Lower after-tax cash flow versus LIFO C. The net income in the current year for Ayala Company would be higher than the net
C. Lower pre-tax cash flow versus LIFO income for Brittany Company.
D. Higher after-tax cash flow versus LIFO D. The tax liability for Ayala Company would be less than the tax liability for Brittany
Company.
35
. If the Remington Landscaping Services Company has no beginning inventory, but the cost of
39
goods sold computed under the FIFO method exceeds the cost of goods sold under the LIFO . The most meaningful inventory turnover ratios for analytical purposes is calculated by dividing
method, what can be concluded about the trend of inventory prices? a company's:
A. Prices increased A. LIFO - based cost of goods sold by its FIFO - based inventory
B. Prices decreased B. FIFO - based cost of goods sold by its LIFO - based inventory
C. Prices were stable C. FIFO - based cost of goods sold by its FIFO - based inventory
D. A price trend cannot be determined based on the information provided D. LIFO - based cost of goods sold by its LIFO - based inventory
36
. When the prices of items that are held in inventory are rising overtime, and inventory quantities are . During a period of rising prices, use of the FIFO inventory method (versus
40

stable, which of the following statements about the effect of the FIFO and LIFO cost flow methods LIFO) will have which of the following impact on the Company's financial
on the financial statements is true? statements and ratios?
FIFO LIFO A. B. C. D.
I. Value of the inventory Higher Lower Net Income Higher Lower Higher Lower
II. Profits Higher Lower Inventory Balance Higher Lower Higher Lower
III. Pretax cash flows Higher Lower Debt/Equity Ratio Higher Lower Lower Higher
IV. Income taxes Lower Higher
41
A. I only C. I, II, and III only . Which of the following accurately describes how the use of the FIFO inventory costing
B. I and II only D. I, II, III and IV method (versus LIFO) will affect a company's financial ratios during a period of rising prices?
A. B. C. D.
37
. Which of the following inventory cost flow methods is usually chosen by management because it Operating Profit Margin Higher Higher Higher Lower
minimizes taxes and maximizes net cash flow? Asset Turnover Lower Higher Higher Lower
A. The average cost method Current Ratio Higher Lower Lower Higher
B. The specific identification method Debt-to-Equity Ratio Lower Higher Lower Higher
C. The first-m, first-out (FIFO) method
D. The last-in, first-out (LIFO) method 42
. Which of the following statements about inventories is true?
38
A. Reductions in inventory appear as an addition to net income in the operating activities
. Ayala Company and Brittany Company are identical in all respects except that Ayala Company section of the statement of cash flows when calculating cash flow from operations.
uses FIFO and Brittany Company uses LIFO in costing its inventories. Prices have been rising B. During periods of rising prices, the unrealized holding gain recognized on the income
statement under FIFO is greater than the amount recognized under LIFO.
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C. The FIFO cost flow assumption assigns the costs of the most recent purchases to ending A. Sum-of-the-years' digit method C. Units-of-production method
inventory and the costs of the earliest units purchased to cost of goods sold. B. Straight-line method D. Double-declining balance
D. Both "a" and "c" are true statements. method
43 49
. During each of the past 10 years, per unit inventory costs have risen for Big Mfg. Inc. In 1985, per . Anna Screws, Inc. acquired a machine for $48,000 on January 1, 20X1. The machine has a
unit inventory costs were unchanged. As compared to 1984, per unit cost of goods sold in 1985 will salvage value of $12,000. The machine has a three-year life. If Quigley recorded depreciation
decrease if Big Mfg. Inc. utilizes: expense of $12,000 in 20X1, which depreciation method was used?
A. LIFO inventory costing and several inventory levels are disposed of. A. Double-declining balance C. MACRS
B. LIFO inventory costing and inventory levels remain unchanged. B. Straight line D. Sum-of-the-years'-digits
C. FIFO inventory costing and several inventory levels are disposed of.
50
D. FIFO inventory costing and inventory levels remain unchanged. . Which of the following statements about depreciation methods is false?
A. There are four GAAP-permitted methods of depreciating fixed assets.
44
. Which of the following expenditures to build a new plant should not be capitalized as property, B. Firms must use the same depreciation method for financial reports that they use for tax
plant, and equipment? purposes.
A. Interest costs during construction. C. Depreciation is not a means of adjusting the asset to its fair market value.
B. Freight expenses incurred shipping new machinery to the plant. D. The sum-of-the-years'-digits depreciation method subtracts the salvage value from the
C. Increases in the fair value of the plant assets during construction. original cost in calculating depreciation.
D. Personnel expenses incurred to set up the new machinery before the plant begins operations.
51
. The accounting method for exploration costs of a mineral resource that best attains income
45
. Which of the following items should be capitalized? tax accounting objectives is to:
A. Normal research and development activities. A. Expense costs in total immediately when incurred.
B. The price paid to obtain a restaurant franchise. B. Capitalize all cost associated with productive as well as non-productive mineral deposits.
C. Costs incurred to develop a new patented product. C. Capitalize only those costs related to mineral deposits.
D. Costs incurred to develop computer software. D. None of the above.
46 52
. Which of the following is the correct book value calculation? . Which of the following statements about depletion methods is false?
A. Fair market value minus accumulated depreciation at calculation date. A. Only those costs associated with a successful discovery of natural resources are
B. Acquisition cost minus accumulated depreciation at calculation date. depleted over the useful life of the property using the successful efforts method.
C. Fair market value at calculation date. B. Costs associated with both successful and unsuccessful projects are depleted over the
D. Fair market value at calculation date minus original estimated salvage value. life of the successful projects using the full cost method.
C. The full cost method is the more conservative method of accounting for acquisition and
47
. Which of the following is false, regarding depreciation accounting under U.S. GAAP? development costs.
A. Depreciation is a cash expense. D. All acquisition and development costs associated with the purchase of natural resources
B. Original costs of physical assets are systematically expensed overtime. are capitalized as fixed assets using the full cost method.
C. Depreciation is not a means of adjusting the physical asset to its fair market value.
53
D. Depreciation impacts the balance sheet and income statement for a given period (point) in . Which method of allocation is most appropriate for intangibles, excluding goodwill?
time. A. Expense immediately C. Accelerated amortization
B. Straight-line amortization D. No amortization
48
. Which of the following depreciation methods best matches the cost with expected benefits when
54
asset use varies from period to period? . Which of the following statements about the effects of capitalizing versus expensing items is false?

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59
Capitalizing Expensing . African Construction Company is financing construction of a building with $10,000,000 of
Income Higher Lower debt, $8,000,000 of which is a construction loan directly on the building. The remainder is
Pre-tax operating cash flow Lower Higher financed out of the general debt of the company. When construction is completed the facility
Total assets Higher Lower will be used by the company. The debt structure of the firm is:
Leverage ratios Lower Higher Construction Loan @10% $ 8,000,000
Long-Term Debt @ 8% $12,000,000
55 Long-Term Debt @11% $ 2,000,000
. Which of the following is true regarding capitalizing versus expensing costs?
Capitalized interest costs will initially appear in the financial statements as
A. Total assets and shareholders equity are higher for a firm that capitalizes the cost of an
A. A footnote only C. A contra-asset (liability)
item(s).
B. An asset D. An intangible
B. Net income and profitability ratios are higher for firms that capitalize the cost of item(s).
C. The decision to capitalize or expense an item(s) has the same impact on a company's pre-tax 60
. The period of time during which interest must be capitalized ends when:
cash flow total.
A. No further interest cost is being incurred.
D. All of the above items are true.
B. The asset is sold or fully depreciated.
56 C. The activities needed to get the asset ready for use have begun.
. Which of the following is a false statement regarding the impact of capitalizing versus expensing an
D. The asset is substantially complete and ready for use.
item on the financial statements?
A. Expensing an item results in lower profitability (versus capitalizing) in the period of immediate 61
. Which of the following statements regarding the capitalization of interest expense is true?
recognition.
A. The amount of interest expense capitalized during a period must not exceed the actual
B. Capitalizing an item results in income smoothing on the income statement.
interest expense incurred.
C. Expensing an item results in no balance sheet impact.
B. The period of time during which interest must be capitalized terminates when the asset is
D. Capitalizing an item affects cash flow from operations (only) on the statement of cash flows.
sold or fully depreciated.
C. The period of time during which interest must be capitalized terminates when no further
. Capitalizing (versus expensing) a cost item during the initial period will have
57
interest expense is being incurred.
which of the following effect on financial ratios? D. None of the above.
A. B. C. D.
Profit Margin Lower Higher Lower Higher 62
. How is capitalized interest reflected in the financial statements, assuming the plant being
Asset Turnover Lower Higher Higher Lower constructed is not operational?
Long-term Debt-to-Equity Higher Lower Lower Lower A. As an asset on the balance sheet (only).
B. An asset on the balance sheet and a reduction of interest expense on the income
58
. Which of the following is correct with regard to capitalizing interest for companies in an expansion statement.
phase? C. As a liability on the balance sheet (only).
A. The amount of interest amortization will not catch up with the amount of interest capitalized in D. As a reserve account on the balance sheet and an addition to interest expense on the
the current period. income statement.
B. The average projected expenditures for the period exceed specific borrowings.
63
C. The cost of financing project debt exceeds the cost of equity financing. . All of the following are accurate statements regarding the effect of capitalized interest costs
D. Earnings are greater under capitalization than under the expense method over the life of the on the financial statements per GAAP except for:
qualifying asset. A. The capitalization of interest costs reduces interest expense on the income statement.
B. Capitalized interest costs may be treated as regular interest expense or as a reduction
(contra) interest expense account on the income statement.
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69
C. The capitalized interest cost associated with the debt financing of a new construction project is . Which of the following is true regarding sum-of-the-years'-digits method of calculating
recorded as an asset on the balance sheet during the construction phase. depreciation?
D. None of the above (all are accurate statements). A. Book value should not be reduced below salvage value.
B. Salvage value is ignored.
64
. All of the following intangible assets would be capitalized and amortized periodically on the income C. The denominator in the calculation is the number of years remaining at the beginning of
statement, except for: the year.
A. Goodwill C. Brands acquired D. None of the above are true statements.
B. Franchises D. Patents purchased
70
. Which of the following statement(s) is true?
65
. When should software development costs be capitalized? A. The useful life of an asset for computing depreciation should be the total number of years
A. Software development costs should always be capitalized since they represent an asset of the for which an asset is physically capable of performing.
firm. B. The goal for computing depreciation is the same for tax purposes and financial
B. Only the costs incurred to establish the technological and economic feasibility of software accounting even though different methods maybe used.
should be capitalized. C. Depreciation can be recorded as a part of cost of goods sold or as a direct operating
C. All software development costs should be expensed. expense.
D. When economic or technological feasibility is determined. D. None of the above are true.
66 71
. Which of the following types of intangible assets must be expensed as incurred? . Which of the following statements is not correct in determining the best depreciation method
A. The cost of acquiring brands and trademarks for tax purposes?
B. The acquisition price paid to obtain a franchise A. A decelerated depreciation method should be used.
C. R & D activities conducted for others under contract B. Faster write-offs are preferable.
D. The cost incurred in developing one's own patented products C. Earlier depreciation deductions are more valuable to the firm than ones that occur in later
years of the asset's life.
67
. Which of the following is an accurate statement regarding either the straight-line or accelerated D. Maximizing the present value of the future tax savings from the depreciation charges is
depreciation methods. preferable.
A. Accelerated depreciation methods recognize greater depreciation expense in the early part of
72
an asset's life and less depreciation expense in the latter portion of its life . Which one of the following combinations of accounting practices will lead to the highest near
B. The straight-line method applies a constant amount of depreciation for each period over the term reported earnings in an inflationary environment?
life of the fixed asset Depreciation Method Inventory Method Revenue Recognition Method
C. The straight-line method yields an increasing rate of return over the life of the asset, using the Straight-line FIFO Percentage-of-completion
beginning period book values Double-declining balance LIFO Completed-contract
D. All of the above Double-declining balance FIFO Percentage-of-completion
68 Straight-line FIFO Completed-contract
. Which of the following statements regarding the use of the double-declining balance method of
depreciation is true? 73
. Which depreciation method will produce the lowest fixed asset turnover ratio in the early
A. The book value of the asset should not be reduced below salvage value.
years of an asset's life?
B. Depreciation expense for the asset will decrease overtime.
A. Double-declining balance C. Straight-line
C. Salvage value is not deducted in determining the depreciable base of the asset.
B. Sum-of-the-years'-digits D. Cannot be determined
D. All of the statements above are true.

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74
. To account for the purchase of a machine, a company may use either straight-line (SL) B. Its fair market value.
depreciation or the sum-of-the-years'-digits (SYD) depreciation. Return on investment for the C. Undiscounted future cash flows from the asset's use and disposal.
machine will: D. None of the above.
A. Initially be higher under SYD than under SL
81
B. Remain constant under SL . The Brook Corporation has determined that one of its machines is permanently impaired in
C. Decrease overtime under SL value. The company should write down the asset to:
D. Initially be higher under SL than under SYD A. Zero.
B. Its current fair market value.
75
. Which of the following statements about the effect of depreciation methods on financial ratios and C. The sum of its undiscounted cash flows.
cash flows is true? D. Anyone of the above is permissible as long as it is disclosed in the footnotes to the
Straight - Line Accelerated financial statements.
Cash flows Lower Higher
82
Return on assets Lower Higher . In 2000, Baker Company owned machinery that became permanently impaired. As of
Current ratio Same Same December 31, 2000, the machinery had a book value of $800,000 and a market value of
Debt-to-equity Higher Lower $100,000. Baker also owned a warehouse that, as of December 31, 2000, had a book value
of $1,200,000 and a market value of $2,500,000 Baxter:
A. Must recognize both the loss on the machinery and the gain on the warehouse in 2000.
. Which of the following depreciation methods experience understated net income
76
B. May recognize the loss on the machinery and the gain on the warehouse in 2000 or in
when salvage value is excluded from the calculation? later years.
A. B. C. D. C. Must recognize the loss on the machinery in 2000, but must not recognize the gain on
Units-of-Production No Yes Yes No the warehouse until it is sold.
Straight-line No Yes No Yes D. May recognize the loss on the machinery in 2000 or in later years, but must not
recognize the gain on the warehouse until it is sold.
77
. Straight-line depreciation:
A. Results in higher total tax payments over the life of an asset than accelerated depreciation. 83
. Which of the following statements is correct when an asset is written down?
B. Results in a decreasing return on equity over the asset's life. A. The firm can take a tax deduction for the asset written down.
C. Results in increasing return on assets over the asset's life. B. Asset turnover ratios tend to decrease.
D. Recognizes the increasing rate of obsolescence of an asset with the passage of time. C. The value of the asset is reduced by the amount of the write down.
D. Future profitability of the firm tends to decrease.
78
. Which of the following results from a change from straight-line depreciation to an accelerated
depreciation method? 84
. Which of the following is a false statement regarding the impact that an asset write-down due
A. Decreased cash flow C. A lower profit margin to impairment has on the financial statements in a given period?
B. A higher current ratio D. A higher return on assets A. Deferred tax liabilities are increased C. Net income will decrease
B. Total assets are reduced D. Shareholders equity will be
79
. A loss on selling a depreciable asset means that the proceeds from the sale were: reduced
A. Greater than book value C. Greater than acquisition cost
B. Less than book value D. Less than fair market value 85
. An asset that is written down due to impairment will have which of the following future impact
on a firm's financial statements?
80
. According to FASB 121, an asset becomes impaired when its book value is greater than: A. Lower pre-tax cash flow C. Higher depreciation expense
A. Discounted future cash flow from the asset's use and disposal. B. Higher profitability D. All of the above
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A. $645 C. $846
86
. The implementation of SFAS 143 (Accounting for Asset Retirement Obligations) will have which of the B. $759 D. $867
following impact on a company's financial statements?
Assets Liabilities Shareholders’ Net income . During the fiscal year ended December 31, 2002, Shell, Inc. had net sales of
90

Equity $28,500,000 and net income of $3,400,000. Based on the inventory

Lower Lower Lower Higher information below and assuming that the company uses the average cost
Higher Higher Lower Lower inventory method, what was the reported ending inventory at December 31,
Lower Lower Higher Higher 2002?
Higher Higher Higher Lower Beginning Inventory: 50,000 units @ $250 = $12,500,000
Purchases:
87
. Which of the following items are recorded on the financial statements as part of the primary March 31st 5,000 units @ $275 = $4,125,000
requirement of SFAS 143 (Accounting for Asset Retirement Obligations)? June 30th 25,000 units @ $290 = $7,250,000
A. Accretion expense is recorded on the income statement.
September 30th 8,000 units @ $315 = $2,520,000
B. The fair value of the ARO liability must be recognized on the balance sheet.
C. Additional depreciation expense is recorded on the income statement. Ending Inventory: 35,000 units
D. All of the above. A. $8,750,000 C. $9,426,900
B. $9,150,000 D. $10,320,000
88
. A review of Denmark Cheese Factory's inventory purchases and sales shows the following:
91
October 1 Beginning Inventory 200 units @ $3.00 . The Tyler Company is a widget wholesaler that uses the FIFO inventory cost method. At the
October 8 Purchase 300 units @ $3.30 end of 1982, it had 200 widgets in inventory valued at $100 each. During 1983, Tyler bought
October 16 Purchase 100 units @ $3.60 100 more widgets at $80 each, and sold 80 widgets. At year-end 1983, the recession caused
October 27 Purchase 200 units @ $3.90 the wholesale widget price to drop to $60 each. Based on the above, the 1983 year-end
October 30 Purchase 40 units @ $4.20 inventory value for Tyler Company is:
A. $13,200 C. $20,000
Units sold: 620 units
B. $17,600 D. $21,600
Assume that 50 of the items remaining are from the October 16 purchase and the remainder are
from the October 27 purchase. Using the specific identification method, what is the cost of the 92
. The Queen Rice Company sells Rice-O-Matics, a device that reduces the time required to
ending inventory?
prepare rice. Inventory at the beginning of the accounting period was one unit at $35. Two
A. $843 C. $975
more units were purchased during the period, the first at $39, and the second at $43. One
B. $923 D. $1,005
unit was sold at $65. Replacement cost at the close of the accounting period was $46. What
is the gross profit under FIFO?
89
. A review of Magnolia Cheese Factory's inventory purchases and sales shows the A. $30 C. $22
following: B. $26 D. None of the above
October 1 Beginning Inventory 200 units @ $3.00
October 8 Purchase 300 units @ $3.30 93
. Musicmasters, Inc. currently uses the FIFO method of accounting for the inventory reporting
October 16 Purchase 100 units @ $3.60 on its financial statements. On December 31, 2000, the company sold 200 special order
October 27 Purchase 200 units @ $3.90 music units at a price of $30 each. Using the beginning inventory and Year 2000 purchase
October 30 Purchase 40 units @ $4.20 information presented below, what is the ending inventory balance and gross profit on the
Units sold: 620 units music (sales) for the fiscal year ended December 31, 2000?
The cost assigned to ending inventory using the average-cost method is: Beginning Inventory Year 2000 Purchases
2007 CFA Level 1 Review Program 9
 PRACTICE SET: FSA ASSETS

Date Units Unit Price Date Units Unit Price 31, 2001, calculate the inventory turnover ratio for the year ended December
6/30/99 30 $14 3/31/00 60 $16 31, 2002 under the LIFO inventory costing method.
9/30/99 25 $15 6/30/00 75 $18 Beginning Inventory: 50,000 units @ $250 = $12,500,000
12/30/99 40 $13 9/30/00 70 $19 Purchases:
March 31st 5,000 units @ $275 = $4,125,000
A. B. C. D. June 30th 25,000 units @ $290 = $7,250,000
Ending Inventory $1,870 $1,395 $1,395 $1,870 September 30th 8,000 units @ $315 = $2,520,000
Gross Profit $2,696 $2,440 $2,833 $2,915
Ending Inventory: 35,000 units
94
A. 1.72X C. 2.05X
. A company has 100 machines in beginning inventory. In order of purchase, they were bought as B. 1.83X D. 2.14X
follows: 60 machines at $1,000 per unit, and 40 machines at $1,100 per unit. During the year, the
company purchased additional machines in the following order: 20 machines at $1,200 per unit, 97
. If a Corporation understates its purchases by $6,000,000 and understates its ending
and 10 machines at $1,300 per unit. The company sold 105 machines at a price of $2,000 per unit. inventory by $4,000,000, the reported gross profit of the firm will be:
What is the gross profit of the company under the last-in, first-out cost flow assumption? A. Overstated by $2 million C. Understated by $2 million
A. $116,000 C. $100,000 B. Overstated by $4 million D. Understated by $10 million
B. $94,000 D. $104,000
98
95
. After a year-end audit of Heckle Corporation, it was noted that the company overstated its
. The Siamese Company uses the LIFO inventory costing method for inventories. Included below is beginning inventory by $800,000 and overstated its ending inventory by $1,200,000. Given
a summary of the company's financial data for the year ended December 31, 2002: this discrepancy, the reported gross profit of Heckle was:
(millions) A. Overstated by $400,000 C. Understated by $400,000
Net Sales $200 B. Understated by $2,000,000 D. Overstated by $2,000,000
Cost of Goods Sold 120
Gross Profit 80 99
. Apple Construction Company is financing construction of a building with $10,000,000 of debt,
Pretax Income 40 $8,000,000 of which is a construction loan directly on the building. The remainder is financed
Taxes (40% rate) 16 out of the general debt of the company When construction is completed the facility will be
Net Income 24 used by the company. The debt structure of the firm is:
Inventory 350 Construction Loan @10% $ 8,000,000
Beginning LIFO Reserve 30 Long-Term Debt @ 8% $12,000,000
Ending LIFO Reserve 38 Long-Term Debt @11% $ 2,000,000
Total Assets 900 The interest payable during the year is:
Retained Earnings 175 A. $1,960,000 C. $2,180,000
To provide an earnings comparison with other competitors within the industry, calculate Siamese’s B. $1,980,000 D. $2,420,000
net income on a FIFO basis for the year ended December 31, 2002.
A. $19 million C. $29 million 100
. HF Company has decided to build a new production facility that will make it
B. $23 million D. $32 million
one of the largest producers of private label stereo system components in the
. During the fiscal year ended December 31, 2002, Squeeze, Inc. had net sales of
96 U.S. The cost of this facility is $60 million, which will be financed by a
$28,500,000 and net income of $3,400,000. Based on the inventory information construction loan of $40 million and internally generated debt financing of
below and assuming a LIFO ending inventory balance of $8,425,000 at December $20 million. Assuming the construction loan has a fixed interest rate of 4.5%
and the company has $200 million of outstanding debt (with a weighted-
2007 CFA Level 1 Review Program 10
 PRACTICE SET: FSA ASSETS

average interest rate of 5.75%), what is the amount of capitalized interest recorded . A firm uses straight-line depreciation and reports the following income
105

on the balance sheet and the amount of interest expense reported for the fiscal information for 20X1. sales were $800,000, depreciation expense was
year? $50,000, and net profit was $102,000. On the year-end balance sheet,
A. B. C. D. property, plant and equipment was recorded at a net value of $800,000 and
Capitalized Interest $2,950,000 $1,800,000 $2,950,000 $1,800,000 the footnotes disclosed that accumulated depreciation was $300,000.
Interest Expense $13,300,000 $11,500,000 $10,350,000 $13,300,000 Calculate the average age and average depreciable life of fixed assets.
A. B. C. D.
101
. The Almeda Corporation on January 1 has machinery on the books that originally cost $200,000. Average Age 6.0 years 16.0 years 22.0 years 6.0 years
During the year, the firm made expenditures of $11,000 for minor repairs, $20,000 for Average Depreciable Life 16.0 years 6.0 years 6.0 years 22.0 years
improvements and $38,000 for additions Depreciation is $40,000. How much is recorded in the
machinery account on December 31? 106
. The following are excerpts from Brinstone, Inc financial statements related to its fixed assets
A. $160,000 C. $229,000 activity for the fiscal year ended June 30, 2001:
B. $218,000 D. $198,000 As of 6/30/2001 ($million)
102
Capital Expenditures - $30.0
. Asian Corporation acquired an automobile that cost $20,000 with a 5-year estimated life and a Depreciation Expense - $20.0
$2,000 salvage value. What is the first-year's depreciation expense for the automobile using the Gross Property, Plant & Equipment - $390.0
sum-of-t he-years' digits method? Net Property, Plant & Equipment - $275.0
A. $6,000 C. $8,000
B. $6,667 D. $4,800 Which of the following is correct based on the above scenario?
103 A. B. C. D.
. A research analyst gathered the following information about a fixed asset purchased by a
Avg. Age of Fixed Assets 7.3 years 6.8 years 6.8 years 5.8 years
company:
Avg. Depreciable Life 13.8 years 21.0 years 13.8 years 19.5 years
1. Purchase price $12,000,000
2. Estimated useful life 5 years 107
3. Estimated salvage value $2,000,000 . Based on the fixed asset information presented below, calculate the Average Depreciable Life
What is year 2 depreciation expense using the double-declining balance method? and the Relative Age of Minestone Company's fixed assets.
A. $2,000,000 C. $2,880,000 As of December 31, 2002
B. $2,400,000 D. $4,800,000 Gross Property, Plant & Equipment $50,000,000
Accumulated Depreciation 20,000,000
104
. Global Exploration acquired natural gas reserve properties for $250 million with the capability of Net Property, Plant & Equipment 30,000,000
producing 175 million units of natural gas over its estimated useful life of 15 years based on an 2002 Depreciation Expense* 4,000,000
*Straight-Line Depreciation Method used
average range of production. The natural gas properties are expected to have a salvage value of
$5 million. Assuming that 20 million units of natural gas are produced in the first year of production, A. B. C. D.
what is the depletion (depreciation) expense recorded in the first year under the units-of-production Average Depreciable Life 12.5 years 7.5 years 12.5 years 7.5 years
method? Relative Age % 40% 67% 67% 40%
A. $16.3 million C. $28.0 million
B. $16.7 million D. $28.6 million

2007 CFA Level 1 Review Program 11

 PRACTICE SET: FSA ASSETS

ANSWER EXPLANATION

2007 CFA Level 1 Review Program 12

1
. Answer is B. The oldest costs are reflected in the beginning inventory, which under the FIFO method is sold first
(applied to cost of goods sold). Therefore only the most current costs are reflected in ending inventory.
2
. Answer is D. Until a product is sold, a manufacturing company's inventory should include raw materials, work in
process, and finished goods.
3
. Answer is A. The lower-of-cost-or-market method is not a cost flow assumption, but the required reporting treatment
under U.S. GAAP.
4
. Answer is D. Sales minus cost of goods sold equals gross profit.
5
. Answer is D. In an inflationary environment, the difference between the historical cost of ending inventory and the
replacement cost is the unrealized holding gain.
6
. Answer is C. Under a rising price environment, the difference between the historical cost and the replacement cost
is a realized holding gain since the sale has taken place.
7
. Answer is C. Unrealized holding gains are not recognized in net income under either LIFO or FIFO.
8
. Answer is A
There is no operational difference.
9
. Answer is D
Firms that capitalize costs will show higher profitability ratios in early years due to the costs being spread out.
10
. Answer is C
Firm A will have a lower level of assets, making the expensing firm's debt ratio appear higher.
11
. Answer is B
For analysis purposes, interest expense should be added to cash flows for investment.
12
. Answer is D
All statements are true. The company will have a lower debt ratio because total equity (the denominator) will increase
while the numerator is unchanged. The higher future depreciation expense results from the amortization of the
capitalized interest, which an expensing firm would not have. This also results in lower reported income.
13
. Answer is B
Software development costs are operational in nature and must be expensed.
14
. Answer is C
R&D costs are expensed, only acquired brand names are capitalized, and goodwill is capitalized.
15
. Answer is B
If a firm develops the patent as part of its own operations, the cost is expensed. Only costs for purchasing a patent are
capitalized.
16
. Answer is B
Establishing software is an operational activity and costs should be expensed. Interest related to construction should be
capitalized.
17
. Answer is D. Since U.S. GAAP requires the lower of cost or market reporting on inventory, the company must
recognize a $50,000 loss ($550,000 -$600,000) on the income statement for 20X1. When the inventory is sold in 20X2,
 a profit of $70,000 ($620,000 - $550,000) is recognized on the income statement.
18
. Answer is A. This statement is true. Since U.S. GAAP is based on conservatism, inventory losses (write-downs)
must be recognized immediately on the financial statements, whereas inventory gains are recognized when an inventory
item is actually sold.
19
. Answer is A. This is a true statement, as U.S. GAAP requires the use of the lower-of-cost-or-market valuation when
accounting for inventories on the financial statements.
20
. Answer is A. FIFO is better at reflecting actual inventory pricing because the newer costs are reflected in ending
inventory, while the older products purchased or produced are applied to cost of goods sold first.
21
. Answer is C. Since the use of LIFO would not match the actual physical flow of inventory, it is not a basis for
selecting this method.
22
. Answer is A. If LIFO is used for income tax purposes, it must be used for financial reporting purposes (LIFO
conformity rule).
23
. Answer is D. From an analyst's perspective, a more meaningful debt-to-equity ratio is obtained when shareholders'
equity includes the impact from FIFO accounting.
24
. Answer is C. This is a false statement since under price deflation, LIFO will result in higher net income and
corresponding higher equity, which causes the leverage ratio (debt/equity) to be lower than with the use of FIFO.
25
. Answer is A. To obtain the FIFO inventory balance you add the LIFO inventory balance to the ending LIFO reserve.
The change in LIFO reserve does not apply here.
26
. Answer is A. When the prices of inventory decline, the LIFO reserve also declines.
27
. Answer is D. This statement accurately describes a LIFO reserve scenario and the corresponding treatment on the
financial statements.
28
. Answer is D. Dipping into lower-cost LIFO liquidation layers reduces cost of goods sold, resulting in a higher gross
profit margin and an increase in net income.
29
. Answer is A. Under the above scenario, LIFO liquidation occurs resulting older, outdated costs applied to cost of
goods sold, which understates cost of goods sold and overstates net income.
30
. Answer is A. When prices are falling, FIFO produces higher cost of goods sold and lower net income, as well as
lower ending inventory balances resulting in lower total assets.
31
. Answer is B. Under a rising pricing environment, the average costing method will produce a cost of goods and
inventory balance that is between the FIFO and LIFO inventory costing methods. As a result, the average costing
method will generate a higher cost of goods sold than FIFO (low end) and lower inventory balance than FIFO (high end)
in a rising price environment.
32
. Answer is C. The primary reason why the management of companies select the LIFO inventory costing method is
for the favorable tax effect.
33
. Answer is C. LIFO results in higher cost of goods sold and lower pretax income, which minimizes income taxes.
34
. Answer is B. The use of FIFO under an inflationary pricing environment will lead to higher pre-tax income, higher
taxes and lower after-tax cash flow.
35
. Answer is B. Since FIFO applies the earlier items purchased or produced to cost of goods sold in each period,
prices decreased if cost of goods sold under FIFO exceeds cost of goods sold under LIFO.
36
. Answer is B. Under a rising price environment, FIFO results in lower cost of goods sold, higher profits, higher taxes
and higher ending inventory, as well as lower pre-tax cash flows. The reverse is true for LIFO under a rising price
environment.
37
. Answer is D. The primary advantages for the use of LIFO in a rising price environment is that it minimizes taxes due
to lower pre-tax income and maximizes net cash flow.
38
. Answer is D. This is an incorrect statement since the use of the FIFO method produces higher inventory values,
higher pretax profits and higher taxes than the LIFO method.
39
. Answer is A. From an analyst's perspective, the most meaningful inventory turnover ratios in an inflationary
environment are obtained by using LIFO when applying cost of goods sold and FIFO when applying ending inventory.
Under this methodology the most current costs in the numerator are matched with the most current costs in the
denominator.
40
. Answer is C. Using the FIFO inventory method in a period of rising prices results in lower cost of goods sold,
resulting in higher net income. It also results in a higher inventory balance as the most recent inventory is maintained on
the balance sheet, and a lower debt/equity ratio due to a higher equity base resulting from the higher net income.
41
. Answer is A. During an increasing price environment, FIFO will result in lower cost of goods sold, higher operating
(net) income and higher inventory (asset) balances. This will lead to a higher operating margin and a lower debt-to-
equity ratio since the higher net income increases equity. The higher inventory (asset) balance will generate a higher
current ratio and a lower asset turnover ratio due to the higher asset base from the FIFO method.
42
. Answer is D. Both choices "a" and "c" are true statements. Choice "b" is false since unrealized holding gains are not
recognized in net income under either LIFO or FIFO.
43
. Answer is A. Cost of goods sold will decrease in 1985 if LIFO is used and inventory is depleted because older,
lower-cost inventory layers will be charged to expenses.
44
. Answer is C. The balance sheet recognizes property, plant and equipment at historical cost and does not recognize
increases to fair value at acquisition or during useful life.
45
. Answer is B. The costs of acquiring a franchise may be capitalized and amortized overtime.
46
. Answer is B. Book value is historical acquisition cost less accumulated depreciation expense.
47
. Answer is A. Depreciation is a non-cash rather than cash expense. Depreciation expense reduces net income but is
added back as a non-cash expense on the statement of cash flows.
48
. Answer is C. The units-of-production method matches depreciation expense with the actual units produced.
Depreciation costs better match the quantity of units produced from period to period.
49
. Answer is B. The straight-line method was used to calculate depreciation expense:
 Initial cost - Salvage value
Useful life
48,000  12,000
3years
 $12,000 / per year

50
. Answer is B. Firms typically use different methods for financial reporting than for tax reporting. This statement is
therefore false.
51
. Answer is D. The successful efforts method should be used to best attain the income tax accounting objective for
exploration costs of a mineral resource. Under this method, successful efforts are capitalized and unsuccessful methods
are expensed. The other viable method, full cost, capitalizes all expenses associated with purchase or discovery of
natural resources.
52
. Answer is C. The full cost method is less rather than more conservative because it capitalizes all costs associated
with discovering natural resources and results in less depletion expense and higher net income than the successful
efforts method.
53
. Answer is B. Straight-line amortization is the most appropriate method for intangible assets unless another method
can be shown to be more appropriate.
54
. Answer is B. Depreciation and amortization are a non-cash expense added back to net income for cash flow
reporting. Pre-tax operating cash flow is unaffected by the capitalization versus expense decision.
55
. Answer is D. Capitalizing costs increase total assets and shareholders equity, increases net income and profitability
ratios because depreciation expense is less, and has the same effect on a company's pre-tax cash flow as expensing
costs.
56
. Answer is D. This represents a false statement. When an item is capitalized (versus expensed) the capitalized asset
impacts cash flow from investments on the statement of cash flows. When an item is expensed, cash flow from
operations (only) is affected.
57
. Answer is D. Since net income will be higher when the cost item is capitalized, the profit margin will be higher
versus expensing in the initial period. When an item is capitalized it becomes an asset, which results in a lower asset
turnover ratio (versus expensing) as total assets are higher. Although long-term debt is the same under either method,
capitalizing an item results in higher net income and higher equity, causing the long-term debt-to-equity ratio to be lower.
58
. Answer is A. Growing firms may capitalize more interest than is expensed in a given period.
59
. Answer is B. Capitalized interest costs will appear in the value of the asset on the balance sheet, but the firm may
detail capitalized interest in a footnote.
60
. Answer is D. Capitalizing costs associated with the construction project end when the project is completed and
ready for use.
61
. Answer is A. The firm may not capitalize more interest expense than was actually incurred.
62
. Answer is B. Capitalized interest increases the value of the plant asset to which it relates. Capitalized interest does
not appear on the income statement in the current period, but depreciation of the plant asset captures the interest
expense in later periods after the asset is operational.
63
. Answer is B. This is an inaccurate statement since GAAP does not allow capitalized interest costs to be treated as
regular interest expense. This method is often preferred for financial analysis purposes (only).
64
. Answer is A. Although goodwill is considered an unlimited life (no definite legal life) intangible asset that is recorded
on the balance sheet, it is no longer amortized on the income statement per U.S. GAAP. Instead U.S. GAAP allows an
annual goodwill impairment test, which may result in a write-down of goodwill directly on the income statement.
65
. Answer is D. Costs are capitalized when economic or technological feasibility of the software is determined.
66
. Answer is D. Costs incurred to develop a company's patented product(s) must be expensed in that period.
67
. Answer is D. All of the above represent accurate statements for the straight-line or accelerated depreciation
methods. In the early years of an asset's life more depreciation expense is recorded under the sum-of-the-year's digits
method and double-declining balance method, however, in the latter years of an asset's life more depreciation expense
is recorded under the straight-line method. Two shortcomings of the straight-line method is that it yields an increasing
rate of return over an asset life and that the straight-line method applies a constant rate of depreciation expense each
period even though repairs and maintenance generally increase over an asset's life.
68
. Answer is D. Book value cannot go below salvage value in determining depreciation expense. Depreciation
expense decreases in each period since the depreciation rate is applied to a decreasing book value Acquisition cost is
not reduced by salvage value.
69
. Answer is A. Ending book value (after current period depreciation is applied) should not fall below salvage value
using the sum-of-the-years'-digits method.
70
. Answer is C. Depreciation is a non-cash operating expense that can be recorded in cost of goods sold or as part of
direct operating expenses.
71
. Answer is A. In order to minimize taxes, you want to select the depreciation method that gives you the highest cost,
thereby minimizing your tax liability. An accelerated rather than decelerated method should be used.
72
. Answer is A. Under an inflationary environment, straight-line depreciation would result in higher reported earnings
(versus double-declining balance) in the near term, while the FIFO inventory method would lead to lower cost of goods
sold and higher reported earnings (versus LIFO). Since the percentage-of-completion method recognizes income based
on the estimated phase of the project, it would report periodic earnings instead of waiting until the project is totally
complete before recognizing income.
73
. Answer is C. The straight-line method has the lowest depreciation and highest fixed asset value in the early years.
Asset turnover is sales divided by average net fixed assets, and the higher fixed asset value causes asset turnover to be
lower.
74
. Answer is D. The straight-line method results in less depreciation than the sum-of-the-years'-digits method in the
early years, which produces higher profits and a higher return on investment.
75
. Answer is C. Depreciation expense accumulates in a contra asset account in the long-term assets section of the
balance sheet and does not affect the current assets section.
76
. Answer is B. Both depreciation methods subtract salvage value from the acquisition cost to determine the
depreciable base. Failure to subtract salvage value results in greater depreciation expense and less net income.
77
. Answer is C. Depreciating an asset using the straight-line method and assuming a constant or increasing income
stream results in a declining asset value and growing return on assets (measured as net income divided by assets).
78
. Answer is C. Accelerated depreciation increases reported depreciation expense, reduces income, and lowers the
profit margin.
79
. Answer is B. The loss on selling the asset means the asset book value was greater than the selling price.
80
. Answer is C. The recoverability test under FASB 121 states that impairments must be recognized when the book
value of an asset is greater than the undiscounted future cash flows from the asset's use and disposal.
81
. Answer is B. GAAP required immediate write down to fair market value when an asset becomes impaired.
82
. Answer is C. Asset impairment must be recognized in the year of impairment when its book value exceeds its
market value. The warehouse market value gain is unrealized, however, and is not recognized until sold.
83
. Answer is C. The value of an asset is reduced on a one-for-one basis for the amount of the write down.
84
. Answer is A. This is a false statement. An asset that is written down, will result in a probable reduction in the firm's
future tax liabilities.
85
. Answer is B. The write-down of an asset will result in lower future depreciation expense and higher future
profitability. This is the rationale behind "Big Bath" accounting where firms take a large asset write-off in a down year
with the anticipation of higher future net income.
86
. Answer is B. The recognition of the carrying value of the ARO obligation as both an asset and a liability, increases a
firm's total assets and total liabilities. The recognition of both accretion expense and depreciation expense reduces a
firm's net income and corresponding shareholder's equity.
87
. Answer is D. The implementation of SFAS 143 increases the carry values of a company's total assets and liabilities,
as well as recognizing both accretion and depreciation expense on the income statement.
88
. Answer is A. The answer was derived based on the following calculation:
50 @ $3.60 = $180
170 @ $3.90 = $663
$180 + $663 = $843
89
. Answer is B. The answer was derived based on the following calculation:
Average Cost = [(200 x $3.00) + (300 x $3.30) + (100 x $3.60) + (200 x $3.90) +(40 x $4.20)] / (200 + 300 + 100 +
200 + 40) = $2,898/840 = $3.45
Ending Inventory Units = Beginning Inventory + Purchases – Sold Inventory =200 + 640 – 620 = 220
Ending Inventory = $3.45 average cost x 220 units = $759
90
. Answer is C. The answer was derived based on the following calculation:
Total units = 50,000 + 15,000 + 25,000 + 8,000 = 98,000 units
Total Inventory Costs = 12,500,000 + 4,125,000 + 7,250,000 + 2,520,000
= $26,395,000

Average Cost per Unit = Total Costs/Total Units

= $26,395,000/98,000 units
= $269.34
 Ending Inventory = Units in Ending Inventory x Average Cost
= 35,000 x $269.34
= $9,426,900
91
.Answer is A. The answer was derived based on the following lower of cost-or-market calculation:
Ending Inventory = 200 + 100 - 80 = 220 units
Lower of cost-or-market = $60/unit
220x$60 = $13,200

92
. Answer is A. The answer was derived based on the following calculation:
1 Unit$ 35Beginning Inventory1 Unit39Purchases1 Unit 43Purchases$117Goods Available for Sale1 Unit82Less:
Ending Inventory$ 35Cost of Goods SoldProfit = $65 - $35 = $30
93
. Answer is D. The answer was derived based on the following calculations:
Beginning Inventory + Purchases = Goods Available for Sale
$1,315 + $3,640 = $4,955

Ending Inventory (100 units)

70unitsx$19 = $1,330
30 units x $18 = $ 540
Total Ending Inventory = $1,870

Goods Available for Sale - Ending Inventory = Cost of Goods Sold

$4,955 - $1,870 = $3,085

FIFO Gross Profit

Sales-Cost of Goods Sold
(200 units x $30) - $3,085
= $2,915
94
. Answer is B. The answer was derived based on the following calculation:
Sales (105 machines at $2,000)$210,000Beginning Inventory:60 machines at $1,000 = $60,00040 machines at $1,100 =
$44,000$104,000Purchases:20 machines at $1,200 = $24,00010 machines at $1,300 = $13,000 37,000Goods Available for
Sale$141,000Less: Ending Inventory (25 machines)25 machines at $1,000 = $25,000Cost of Goods Sold$116,000Gross
Profit$94,000
95
. Answer is C. The answer was derived based on the following calculation:
FIFO Net Income = LIFO Net Income + (Change in LIFO Reserve)
(1 – Tax Rate)
= 24 + (38 – 30) (1 – .40)
= 28.8 million (rounded to $29 million)
96
. Answer is C. The answer was derived based on the following calculations:
Units Sold = Total Units (98,000) - Ending Inventory (35,000)
= 63,000 units
LIFO Cost of Goods Sold = $2,520,000 (8,000 units) + $7,250,000
(25,000 units) + $4,125,000 (15,000 units) + $3,750,000
(15,000 units @ $250) = $17,645,000

2002 Ending Inventory Total = 35,000 units x $250

= $8,750,000
 Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
= $17,645,000 / ($8,425,000 + $8,750,000 / 2)
= 2.05X
97
. Answer is A. The answer was derived based on the following calculation:
VCost of Goods Sold=VBeginning Inventory+ VPurchases-VEnding Inventory
=0+(-$6,000,000)-(-$4,000,000)
=-$2,000,000

98
. Answer is A. The answer was derived based from the following calculation:
VCost of Goods Sold=VBeginning Inventory+ VPurchases VEnding Inventory
= + $800,000+ 0 - $1,200,000
= - $400,000
Since the cost of goods sold is understated by $400,000, then gross profit will be overstated by $400,000.
99
. Answer is B. Although there is a temptation to double count the $2 million self-financed construction cost, the
correct calculation is:
Interest expense = $8,000,000 x 0.10) + ($12,000,000 x 0.08) + ($2,000,000 x 0.11)
= $800,000 + $960,000 + $220,000
= $1,980,000
100
. Answer is C. The answer was derived as follows:
Capitalized Interest = .045 x $40,000,000 + .0575x $20,000,000
= $1,800,000 + $1,150,000
= $2,950,000
Interest Payable = .045 x $40,000,000 + .0575 x $200,000,000
= $ 1,800,000 + $11,500,000
= $13,300,000
Interest Expense = $13,300,000 - $2,950,000 (Capitalized Interest)
= $10,350,000
101
. Answer is B. Book value in the machinery account is:
Initial cost+ Improvements + Additions- Depreciation
200,000 + 20,000 + 38,000 - 40,000 = $218,000

Minor repairs are expensed as incurred.

102
. Answer is A. Depreciation using sum-of-the-years' digits method is
5 + 4 + 3+2+1 = 15
(5/15) ($20,000-2,000) = $6,000
103
. Answer is C. Year 2 depreciation expense using the double-declining balance method is:
Year 1 = 2/5 (12,000,000) = $4,300,000
Year 2 = 2/5 (12,000,000 - 4,800,000) = $2,880,000
104
. Answer is C. The answer is derived based on the following calculation:
Depreciation Base = Cost ($250 million) - Salvage Value ($5 million)
= $245 million
Depreciation Rate = Depreciation Base/Total Units Available
= $245 million/175 million units
= $14 per unit of production
 Depreciation Expense = Period Production x Depreciation Rate
= 20 million units x 1.4
= $28 million
105
. Answer is D. Average age and depreciable life of fixed assets are:
Avg. age = Accumulated depreciation / Depreciation expense
=$300,000 / $50,000
= 6 years
Ending gross property, plant and equipment
Avg. depr life =
Depreciation expense
$800,000  $300,000

$50,000
 22years

106
. Answer is D. Average fixed asset age and depreciable life are:
Accumulated depreciation = Gross PP&E – Net PP&E
= 390 – 275
= $115
Average age = Accumulated depreciation / Depreciation expense
= 115 / 20
= 5.8 years
Depreciable life = Gross PP&E / Depreciation expense
= 390 / 20
= 19.5 years
107
. Answer is A. The answer was derived based on the following formula calculations:
Gross Property, Plant & Equipment
Average Depreciable Life =
Depreciable Expense
$50,000,000

$4,000,000
 12.5years
Accumulated Depreciation
Re lative Age(%) =
Gross Property, Plant & Eqiupment
$20,000,000

$50,000,000
 40%