1) The IASB and the FASB jointly issued an Exposure Draft entitled “Financial
Statement Presentation” that would require firms to use the indirect method of reporting
cash flows from operating activities.
2) Accrual accounting is often based upon subjective judgments that can introduce
measurement errors and uncertainty into reported earnings.
3) When a lease meets one of the Type I criteria and both of the Type II criteria, the
lessor must treat the lease as a capital lease.
4) Firms using the indirect method must separately disclose the amount of income taxes
paid and interest paid.
5) A debt-for-debt swap of debts with equal maturity values that occurs when the
market rate of interest is higher than the stated rate of the old debt will give rise to a
gain on debt extinguishments.
6) During periods of rising inventory costs, LIFO cost of goods sold is understated
because of the inventory holding gains that have occurred during the period.
7) Variable costs are those that do not change in proportion to the level of production
and include raw materials, direct labor, and the salaries of factory supervisors.
8) The allocation of the tax provision across various components of book income within
a given period is called interperiod tax allocation.
9) Under a periodic inventory system, no entry is made at the time of sale to reflect cost
of goods sold.
10) IFRS allows the fair value option for liabilities only to eliminate or significantly
reduce the “mismatch” that arises when different measurement bases are used for
related financial instruments.
11) In a transaction where the transferor surrenders control over its receivables, the
transaction is treated as a collateralized borrowing and any gain or loss is recognized in
earnings.
12) “Big bath” restructuring charges are believed to not adversely affect stock prices.
13) Critics of mark-to-model fair value accounting claim that it is a license for
management to invent the financial statements to be whatever they want them to be.
14) Mandatorily redeemable preferred stock is considered equity because the issuing
firm has the option, but not the obligation, to redeem the shares.
15) A prepaid pension asset will be created during a particular time period when a
company reports pension expense of $219,200 and pension funding of $235,000.
16) Under IFRS firms that use bank overdrafts repayable on demand as part of their
normal cash management activities must include those overdrafts as part of financing
activities.
17) Companies that consistently earn rates of return above the industry’s competitive
floor are said to have a competitive advantage.
18) GAAP establishes specific criteria for the treatment of leases. One of the criteria
states that the lessee must capitalize a lease if the lease agreement contains a bargain
purchase option.
19) A lessee must use the incremental borrowing rate to value a capital lease.
20) A cash payment received from a customer recorded as unearned revenue for book
purposes creates a deferred tax liability.