QUESTION: 1809

In a common-size balance-sheet statement, a firm's current assets are reported at 37% and the long- term liabilities are at 12%. The equity is shown to be 64%. The firm's current ratio equals ________.

1.12
1.54
0.65
1.37

Answer(s): B

Explanation:

In a common-size balance-sheet statement, all quantities are expressed as a fraction of the total assets.
Therefore, since equity equals 64%, total liabilities equal 36%, of which 12% equals long-term liabilities. Thus, current liabilities equal 24%, giving the current ratio equal to 37%/24% = 1.54.

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QUESTION: 1810

Under an inflationary environment with stable inventories, a firm may change to FIFO from LIFO due to which of

the following reason(s)?

To allow earnings manipulation.
II. To improve the reported working capital.
III. To reduce tax drain on cash.
IV. Show a more accurate representation of reported assets than LIFO.
II & IV
III only
I & IV
I & III

Answer(s): A

Explanation:

Under FIFO, inventory is overstated and hence, working capital is overstated under normal, inflationary conditions. At the same time, COGS is lower than under LIFO due to rising prices, increasing the taxable income and leading to higher taxes. However, firms cannot manipulate earnings under FIFO by changing purchasing patterns at the end of an accounting period, as it is able to do under LIFO, because FIFO prices are determined by the earliest goods purchased in the inventory.

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QUESTION: 1811

The classification guidelines of SFAS 95 have not created problems for analysts of the cash flow statement in the following area

differences due to some accounting methods.
noncash transactions.
long-term borrowings.
interest and dividends received.
interest paid.

Answer(s): C

Explanation:

The classification guidelines of SFAS 95 have created problems for analysts of the cash flow statement in cash flows involving property, plant, and equipment, interest and dividends received, interest paid, noncash transactions, and differences due to some accounting methods.

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QUESTION: 1812

The GAAP require inventory to be valued using ________.

Lower of market or cost
LIFO or FIFO
LIFO
FIFO

Answer(s): A

Explanation:

Inventory valuation is a balance sheet consideration and is distinct from the calculation of COGS, which is an income statement item. US GAAP requires that inventory valuation be carried out using the lower of cost or market. The "cost" is determined by the inventory costing method chosen, like LIFO or FIFO. If the market value of the inventory falls below that obtained under the inventory costing method, then the firm must take a charge against the current income and "write the inventory down." Under this scenario, the basic inventory equation, Ending inventory = Beginning inventory + Purchases - COGS no longer holds. If the market price rises in the subsequent period, the firm can only write-up to the original cost of the inventory under the costing method chosen. In all periods in which there is no write-up or write-down, the basic inventory equation holds true.

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QUESTION: 1809

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QUESTION: 1810

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QUESTION: 1811

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QUESTION: 1812

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