1) Once the deferred income tax allowance is established, it can be either increased or
decreased in future years.
2) For tax purposes lessees prefer operating leases.
3) A firm generates a return that exceeds the cost of debt financing if the return on
equity exceeds the return on assets.
4) Issuing common stock in exchange for equipment will create a cash outflow in the
investing activities section of the cash flow statement and a cash inflow in the financing
activities section of the cash flow statement.
5) For a firm using the indirect method, the gain on sale of equipment should be added
back to net income to arrive at cash flow from operating activities.
6) When a company’s financial instruments are perceived to be of low quality, there is a
cost to the company in the form of lower proceeds from issuing stock or higher interest
rates when it borrows funds.
7) The only consistently renewable source of cash is from financing activities.
8) The likelihood that a lender will receive promised interest and principal payments is
solely determined by the borrower’s ability to repay.
9) Residual value guarantees protect lessors against lessees who abuse leased assets.
10) U.S. GAAP has been criticized as being too “rules-based” thus allowing managers
to invent “loopholes” that conform to the letter of a standard but simultaneously violate
its spirit.
11) To get revenue and expense account balances to zero an adjusting entry is made.
12) Taxing authorities sometimes use financial statement information as a basis for
establishing tax rules to match accounting rules.
13) The FASB believes that the most useful predictor of future cash flows is future
accrual accounting earnings.
14) When firms use different accounting principles to account for similar accounting
events in adjacent periods, the period-to-period consistency of the reported numbers can
be compromised.
15) The economic status of the pension plan at a given date is the difference between
the fair value of the plan assets and the projected benefit obligation.
16) A pension liability arises when pension expense exceeds pension funding.
17) GAAP defines fair value as “the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date.”
18) Market forces lead to commonalities that usually make comparisons across firms
within the same industry meaningful.
19) The unrealized gain from an investment classified as available-for-sale reduces net
income.