1) Under the direct approach to cash flow statement preparation, net cash flows from
operations is arrived at by adjusting earnings for the differences between accrual-basis
revenues and expenses and cash inflows and outflows during the period.
2) When firms sell receivables, the receivables number reported in the ending balance
sheet only includes the remaining receivables and will overstate the true growth in
receivables over the period.
3) Units-of-production depreciation is similar to straight-line depreciation but defines
useful life in terms of expected production rather than in years.
4) A recent survey of six hundred companies indicated that the specific identification
method of inventory accounting is the most prevalent.
5) Convertible bonds that were outstanding during the entire year will not have an
impact on the weighted average number of common shares outstanding used in the
calculation of basic earnings per share.
6) Salvage value of material from demolishing a building is considered a reduction in
the cost of the building.
7) Consolidated financial statements must always be prepared when a corporation
acquires more than 50% of the voting stock of another corporation.
8) Accrual accounting produces an earnings number that smoothes out the unevenness
in year-to-year cash flows, and provides an estimate of sustainable annualized long-run
future free cash flows.
9) When purchases and sales occur continuously, the most recently incurred costs will
be virtually identical to current replacement cost so LIFO provides a good match
between current costs and current revenues.
10) Under the fair value method of accounting for equity investments, unrealized gains
and losses as well as dividends received from the investee are reported in the investor’s
income statement.
11) The key issue in franchise fee accounting centers on when and how much of the
initial franchise fee should be recognized up front as revenue by the franchisor.