1) A convertible bond’s net-of-tax interest expense is added back to net income when
determining diluted earnings per share only if the bond is known to be dilutive.
2) Subsequent events are required to be disclosed if they are material and likely to
influence investors’ appraisal of the risk and return prospects of the reporting entity.
3) The fixed asset turnover ratio helps the analyst identify efficiency gains from
improved accounts receivable and inventory management.
4) In the U.S., there are a large number of companies that assess and grade the
credit-worthiness of companies and public entities that sell debt to investors by issuing
letter-based grades that express the rating agency’s opinion about default risk.
5) The details of free cash flow valuation are important only for stock analysts and
investors.
6) Delaying the payment of accrued expenses until a later period is a technique that
management can use to manipulate the current year’s cash flow from operating
activities.
7) If the book value of an indefinite-lived intangible asset (e.g., a brand name) exceeds
the fair value, then the asset is considered impaired.
8) When a firm that follows IFRS chooses to use the revaluation method for its tangible
long-lived assets, it must use that method for all of its tangible long-lived assets.
9) Floating-rate debt protects investors from losses because the market value of this
debt remains constant when the market rate of interest changes.
10) Under the “cost recovery method,” after the cost of the merchandise sold on an
installment basis has been recovered, any cash collected in excess of this amount is
recorded as recognized gross profit on the seller’s income statement.
11) Under IFRS firms are encouraged to use the direct method. The result is that firms
that follow IFRS rarely use the indirect method of presenting cash flows from operating
activities.
12) Liquidity refers to the ability of a company to generate sufficient cash flows to
maintain its productive capacity and still meet interest and principal payments on
long-term debt.
13) Managers are the stewards of the company’s resources and thus responsible for their
efficient use and for protecting them from adversity.
14) The amount charged to expense over the life of a lease is the same for operating and
capital leases.
15) Treating a lease as an operating lease rather than a capital lease results in an
increase in the asset turnover ratio.
16) Financial reporting regulatory requirements are designed to ensure that companies
meet certain minimum levels of financial disclosure.
17) A firm’s earnings conservatism ratio is computed as Net income (adjusted for
permanent differences)/Taxable income per the tax return.