QUESTION: 1513

Which of the following is/are true about Treasury stock?

They represent registered shares that have been reacquired from shareholders.
II. Ownership of treasury stock represents part of a firm's assets.
III. Purchase of treasury stock reduces both assets and equity.
I & II
I, II & III
I only
I & III

Answer(s): D

Explanation:

Treasury stock represents the equity that has been repurchased by the company. It should be remembered that treasury stock is not an asset; rather it is a contra equity account, serving to reduce the outstanding equity. A compensating reduction in assets also occurs when the firm has to pay cash to buy-back the shares.

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QUESTION: 1514

A Consolidated Statement of Stockholders' Equity could have all of the following, except

number of shares of cumulative, callable preferred shares.
unrealized gains and losses on securities.
the cumulative effect of exchange rate changes.
the book value of redeemable preferred stock.
the change in reinvested earnings.

Answer(s): D

Explanation:

Redeemable preferred stock is reported after liabilities but before the equity section of the balance sheet.

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QUESTION: 1515

Discrepancies between the changes in accounts reported on the balance sheet and those reported in the cash flow statement are due to

investment in majority interests.
foreign exchange translations.
unfunded pension liabilities.
prior period adjustments and accounting rule changes.
acquisitions and divestitures, and foreign subsidiaries.

Answer(s): E

Explanation:

Acquisitions, divestitures, and continuing corporate reorganizations can distort trends in both cash flows from operations and investing cash flows.

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QUESTION: 1516

After the initial feasibility studies, all software development costs can be capitalized under US GAAP. Ultrasoft and Littlesoft are rival firms which are similar in size and scope of operations. Ultrasoft has decided not to capitalize but expense software development costs in Year

1. Littlesoft, on the other hand, has decided to capitalize a similar amount of development costs, to be amortized over 5 years. Which of the following is/are true over the next 5 years?

Littlesoft will show higher equity than Ultrasoft
II. The difference in Littlesoft's assets and Ultrasoft's assets will be lower in Year 3 than in Year 2.
III. The total tax deductions due to the development costs are equal for the two firms.
III only
II & III
I & II
I, II & III

Answer(s): D

Explanation:

When Littlesoft capitalizes the expenses, its assets increase, net of depreciation and tax expenses. Hence, it shows higher assets than Ultrasoft (but this difference reduces steadily to zero over the period over which the expense is amortized). This difference also translates into an equal difference between the retained earnings as well as equity (Recall assets = liabilities + equity). Thus, over the next 5 years, Littlesoft will show higher equity than Ultrasoft. The difference will reduce to zero by the end of the period over which the capitalized expense is amortized. Over 5 years, the total tax deductions taken by the two firms are equal to the initial expense. Hence, the taxes paid are equal; the difference is that Ultrasoft delays the payment of taxes by expensing. Lesson: Expensing delays tax payments, capitalizing hastens them.

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QUESTION: 1513

Explanation:

QUESTION: 1514

Explanation:

QUESTION: 1515

Explanation:

QUESTION: 1516

Explanation: