Exam 4: Analyzing Investing Activities

Companies are supposed to write-down value of assets if a permanent impairment of value or loss of utility occurs. If a company writes down its assets this year, the effect on: $\quad$$\quad$$\quad$$\text {This year's ROA}$ $\quad$$\text {Next year's ROA}$ A. $\quad\quad\quad\text { Increased }\quad\quad \quad \text { No change }$ B. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { No change }$ C. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { Decreased }$ D. $\quad \quad \quad \text { Decreased }\quad \quad \quad \text { Increased }$

The following information can be found in ABC Co.'s financial statements. Finished goods \ 251,690 \ 195,360 Work-in-process and purchased parts 245,123 186,432 Raw materials 136,568 106,789 Total FIFO value 633,381 488,581 Less excess of current cost over stated LIFO value Inventories \5 70,430 \4 17,395 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?

The LIFO conformity rule states that if a company uses LIFO for tax purposes, it must also use it for financial reporting purposes.

Which of the following statements about inventories is true?

Which of the following would rarely be classified as a current asset?

Donuld Company sells many products. Sol is one of its popular items. Below is an analysis of the inventory purchases and sales of Sol for the month of September. Donuld Company uses the periodic inventory system. Date Purchases Description Units Unit Cost Sales Units Selling Price/Unit 9/1 Beginning inventory 100 \ 60 9/3 Purchase 60 \ 78 9/4 Sales 70 \ 120 9/10 Purchase 200 \ 82 9/16 Sales 80 \ 130 9/19 Sales 60 \ 130 9/25 Sales 50 \ 130 9/30 Purchase 40 \ 90 INSTRUCTIONS a. Using the FIFO assumption, calculate the amount charged to cost of goods sold for September. (Show computations) b. Using the LIFO assumption, calculate the amount assigned to the inventory on hand on September 30. (Show computations) c. Calculate the LIFO reserve that would be reported in the company's books on September 30 if using LIFO.

An increasing accounts receivables balance is always a good sign as it means the company has more current assets and is more liquid.

Prepaid expenses are usually classified as current assets.

You are analyzing two companies that operate in the same industry. They are both growing capital-intensive manufacturing companies, Guerr Corp. and Filk Corp. A diligent reading of their annual reports reveals the following: You know that these accounting differences will affect the comparability of the two company's financial results. Consider each of the above items (depreciation method, average depreciable lives and leases) separately and determine all other things being equal, whether the following ratios will be higher, lower or the same for Guerr when compared to Filk. Explain your answers. i. Observed price-to-earning ratio in the initial years ii. Price-to-free cash flow in the initial years iii. Price-to-book value in the initial years

Software development costs are treated the same way as research and development costs under GAAP (Generally Accepted Accounting Principles).

Solvency refers to the ability of a company to meet its short-term obligations.

You are comparing the financial statements of two companies, Ready PLC and Marlet Inc., which operate in the same industry but different countries. Ready Inc. is a British company and prepares its financial statements using British accounting rules. Marlet is a U.S company and prepares its statements using U.S.GAAP. The following differences in accounting methods are noted: Ready Marlet Goodwill Goodwill is immediately Goodwill is capitalized and written-off directly to amortized over 40 years stockholders' equity Inventory costing FIFO is used for financial LIFO allowed for tax and reporting and tax purposes financial reporting purposes Research and Capitalized and amortized Expensed Development costs You want to restate the financial statements of Marlet in order to make them comparable with Ready PLC. Identify the adjustments you would make and the effect on the financial statements.

The inventory costing method used by a company (LIFO, FIFO, etc.) will affect: Asset turnover Debt-to-equity ratio A) Yes Yes B) Yes No C) No No D) No Yes

Look Good Corporation has current assets of $1.1 million and current liabilities of $1 million. It is close to year-end, and it would like to increase its current ratio. Which of the following will achieve this?

The cash operating cycle is the amount of days between making a sale and collecting money from customers.

The following information can be found in Manufacturer Company's financial statements. COGS \ 2,500,000 \ 2,000,000 Inventory \ 180,000 \ 140,000 Net income \ 125,000 \ 100,000 Retained earnings \ 500,000 \ 400,000 LIFO reserve \ 40,000 \ 30,000 Tax rate 40\% 40\% -If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:

Which of the following is not an analysis issue arising with impairment?

Depreciation is a valuation exercise.

Under GAAP, the choice of inventory costing method (LIFO, FIFO, etc.) must be determined by the physical flow of the goods.

Depreciation is based on the principle of: