1) When a LIFO firm liquidates old LIFO layers, the net income number under LIFO
can be seriously distorted because the older costs in the LIFO layers that are liquidated
are matched against sales dollars that are stated at higher current prices.
2) Depreciation is subtracted from net income in arriving at a firm’s cash flow from
operations under the indirect approach to cash flow statement preparation.
3) According to generally accepted accounting principles, revenue should be recognized
at the earliest time that the “critical event” has taken place and the proceeds are
collected.
4) Book income does not correspond with taxable income because of different
underlying objectives with respect to income measurement.
5) Cash flows arising from the purchase or sale of productive assets are cash flows from
operating activities.
6) Prior service cost is amortized into pension expense on a straight-line basis over the
remaining service lives of the employees who will be receiving benefits from the plan.
7) A company reported income taxes payable of $199,200, a decrease in deferred tax
assets of $19,900, and a decrease in deferred tax liabilities of $12,450; therefore book
income tax expense equals $191,750.
8) When consolidating foreign subsidiaries, the foreign subsidiary’s financial numbers
must be translated into the parents’ currency unit. Under GAAP, if the foreign
subsidiary is merely an extension of the parent, the current rate method is used.
9) The consolidated financial statements under a pooling of interests combine the
market values of the two entities.
10) Return on assets will generally equal return on common equity except when the
company has no long-term debt.
11) A component that is valuation-relevant and expected to persist into the future is a
permanent earnings component.
12) Earnings are a proxyimperfect but the best we havefor free cash flow.
13) The minimum pension liability that must be shown on the balance sheet of the plan
sponsor is the excess of the projected benefit obligation over the plan assets at fair
value.