Exam 2: Asset and Liability Valuation and Income Measurement

Use of acquisition costs generally results in more reliable asset and liability valuations than do

What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations.

The use of acquisition cost as a valuation method is justified on the basis that acquisition cost is:

If a portfolio manager had to estimate the fair value of publicly traded bonds, which of the following would he/she most likely identify as the level of inputs to determine this?

Balance Sheet Equation Cash + Non-Cash = Liabilities + Contributed + AccunulatedOther + Retained Assets Capital Comprehensive Earning: Income Refer to Balance Sheet Equation. If ORP Corporation sells $25,000 of its product on account, it will see an increase in non-cash assets and ___________________________________.

Approximately what percentage of assets reported under fair value by S&P 500 companies currently incorporate Level 3 inputs for fair value estimation?

What level are inputs for estimating fair values are based on inputs that are readily available via prices for identical assets or liabilities in actively traded markets such as securities exchanges?

The existence of subjectivity in an asset valuation does not necessarily mean the valuation will not be reliable. All of the following are examples of this except:

Revenues and expenses that firms include in both net income to shareholders and in taxable income, but in different periods are referred to as _____________________________________________.

Deferred tax assets and liabilities are created due to temporary differences between the tax and financial reporting basis of certain assets and liabilities. Discuss which scenarios result in a deferred tax asset and which result in deferred tax liabilities.

If a portfolio manager had to estimate the fair value of real estate, which of the following would he/she most likely identify as the level of inputs to determine this?

If a portfolio manager had to estimate the fair value of private equity funds invested in a young, privately-held start-up company, which of the following would he/she most likely identify as the level of inputs to determine this?

Which of the following is not one of methods used by GAAP for treating value changes?

Net income equals revenues plus ____________________ minus expenses and ____________________.

U.S. GAAP, IFRS, and other major accounting standards are best characterized as

Jurgen Company's income tax return shows income taxes for 2010 of $75,000 (that is, $75,000 is owed for 2010). For financial reporting, the firm reports deferred tax assets of $67,900 at the beginning of 2010 and $63,600 at the end of 2010. It reports deferred tax liabilities of $53,600 at the beginning of 2010 and $59,400 at the end of 2010. Required: a. Compute the amount of income tax expense for 2010. b. Assume for this part that the firm's deferred tax assets are as stated above for 2010 but that its deferred tax liabilities were $83,500 at the beginning of 2010 and $72,100 at the end of 2010. Compute the amount of income tax expense for 2010. c. Explain contextually why income tax expense is higher than taxes owed in Part a and lower than taxes owed in Part b.

What level are inputs for estimating fair values are those inputs include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates?

The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as

____________________ assets and liabilities represent amounts of cash a firm can expect to receive or pay in the future.

The financial statement disclosures for Able Company, a retail chain, revealed the following information regarding the firm's income taxes: For the Year Ended January 31: 2011 2010 Income before Income Taxes: United States Income Tax Expense Current: Federal \ 919 \6 80 State and Local Total Current Deferred: Federal \ 94 \1 95 State and Local Total Deferred Total $\begin{array}{c}\begin{array}{|l|}\hline\text {January 31}\\\hline\text {Components of Deferred T ax Assets and Liabilities}\\\hline\text {Deferred Tax Assets}\\\hline \text { Self-Insured Benefits} \\\hline \text { Deferred Compensation} \\\hline\text { Inventory} \\\hline\text { Postretirement Health Care Obligation} \\\hline \text {Uncollectible Accounts} \\\hline\text { Other} \\\hline \text {Total Deferred Tax Assets }\\\hline \text {Deferred Tax Liabilities: }\\\hline\text { Depreciation} \\\hline\text { Pensions }\\\hline\text { Other} \\\hline\text { Total Deferred Tax Liabilities }\\\hline\text { Net Deferred Tax Liability }\\\hline \end{array}\begin{array}{lll}\hline 2011\\\hline \\\hline \\\hline \$ 190 \\\hline 333 \\\hline 48 \\\hline 39 \\\hline 148 \\\hline\underline{ 129} \\\hline \underline{\$ 887} \\\hline\\\hline \$(1,137)\\\hline (269)\\\hline\underline{ (97)}\\\hline \underline{ \$(1,503)} \\\hline\underline{ \$(610)}\\\hline \end{array}\begin{array}{|l|}\hline 2010\\\hline \\\hline \\\hline \$ 54 \\\hline 298 \\\hline 45 \\\hline 43 \\\hline 134 \\\hline\underline{ 54} \\\hline \underline{\$ 728} \\\hline\\\hline \$(946)\\\hline (219)\\\hline\underline{ (85)}\\\hline \underline{ \$(1,250)} \\\hline\underline{ \$(522)}\\\hline \end{array}\begin{array}{l|}\hline 2009\\\hline \\\hline \\\hline \$ 199\\\hline 185 \\\hline 57 \\\hline 42 \\\hline 114 \\\hline\underline{ 167} \\\hline \underline{\$ 764} \\\hline\\\hline \$(827)\\\hline (191)\\\hline\underline{ (60)}\\\hline \underline{ \$(1,078)} \\\hline\underline{ \$(314)}\\\hline \end{array}\end{array}$ Required: a. Assuming that Able had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2010? Explain. b. Did income before taxes for financial reporting exceed or fall short of taxable income for 2011? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2010? For 2011? d. Able does not contract with an insurance agency for property and liability insurance; instead, it self-insures. Able recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses. When it experiences an actual loss, it charges that loss against the liability. The income tax law permits self-insured firms to deduct such losses only in the year sustained. Why are deferred taxes related to self-insurance disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. e. Able treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in inventory for tax reporting. Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. f. Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services, but claim an income tax deduction only when they make cash payments under the benefit plan. Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between 2009 and 2011. g. Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues, but claim an income tax deduction when they deem a particular customer's accounts uncollectible. Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. h. Able uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2009 and 2011.