1) In applying the discounted free cash flow valuation model, the discount rate used is
the average cost of capital.
2) Special purpose entities generally stay on the balance sheet under both IFRS and
current U.S. GAAP.
3) In practice, no end-of-period accrual is typically made for estimated future returns
and allowances as these items are very difficult to accurately estimate.
4) When a firm purchases an intangible asset the acquired intangible is recorded at its
purchase price.
5) “Cookie jar reserves” are required under GAAP.
6) The balance sheet provides critical information for understanding an entity’s capital
structure.
7) Cash flow assessment plays a central role in analyzing the credit risk of a company.
8) The difference between the actual and expected return on plan assets during year two
is a component of comprehensive income for year two.
9) When depreciable assets are sold, the change in the deferred tax liability balance for
depreciation reflects only current period book-versus-tax depreciation differences.
10) For a firm using the direct method, amortization of bond premium should be added
back to net income when determining cash payments for interest.
11) The efficient markets hypothesis says that any new development is quickly reflected
in a firm’s stock price.
12) Paying dividends to stockholders represents a financing activity.
13) Suppliers assess the financial strength of their customers to determine whether they
will be paid for goods shipped.
14) Some debt covenants preserve repayment capacity by preventing mergers and
acquisitions unless the debt is first repaid.
15) Managerial strategies and decisions clearly affect stock prices both in the short and
long run.