1) When the risk of non-collection of installment payments is high or when there is no
reasonable basis for estimating the proportion of installment accounts receivable likely
to prove uncollectible, U.S. GAAP permits the use of the installment sales method.
IFRS follows this approach as well.
2) A term lending agreement has an original maturity of more than 1 year with
maturities ranging from two to five years being the most common.
3) A change in the percentage rate used to estimate bad debts expense will have a
negligible impact on reported earnings.
4) Companies that are able to get people to pay premium prices for their products have
successfully enacted a differentiation strategy.
5) Per current GAAP, the sponsor of a special purpose entity may be required to treat a
securitization as a collateralized borrowing instead of a sale.
6) Annual amortization of discount on bonds payable (bond discount) results in an
increase in interest expense and the bond’s carrying value.
7) The projected benefit obligation is the present value of the retirement benefits earned
to date by the employees and is based on future salary levels.
8) In addition to valuing earnings generated from existing assets, the market values
growth opportunities.
9) In industries that are subject to unwanted attention from politicians, managers
sometimes use accounting methods to make the company seem less profitable than it
really is.
10) A hedge of the exposure to changes in the fair market value of an existing asset or
liability or a firm commitment is a fair value hedge.
11) Negative covenants tend to be less significant than affirmative covenants because
they place direct restrictions on the actions lenders can take.
12) The value of the future growth opportunities of a firm can be determined
considering the firm’s potential earnings from reinvesting current earnings in new
projects that will eventually earn a rate of return in excess of the cost of equity capital.
13) Under IFRS, nonmarketable equity securities whose fair value can be determined
are included in the trading portfolio.
14) All inventory items to which the firm has legal title should be included in the
inventory account although most firms record inventory only when they physically
receive it.
15) Pro-forma financial statements of a business, prepared by a credit analyst, would
include constructing worst-case scenarios that incorporate alternative assumptions
about sales, costs, competitor behavior, etc.
16) When physical inventory levels are decreasing, absorption cost income tends to rise
since fixed overhead that was previously in inventory gets charged against income as
part of the cost of goods sold.
17) If a component of an entity is classified as “held for sale,” its results of operations
are to be reported as discontinued operations.