QUESTION: 1833

Under US GAAP accounting, R&D expenses cannot be capitalized. They must be expensed as and when incurred. Which of the following is NOT a reason to support this practice?

Most R&D activities represent intangible benefits which are hard to evaluate objectively from an accounting perspective.
In most cases, there is a significant lag between R&D expenses and the determination of the potential success of the research.
There remains a high uncertainty about the ultimate benefits to be derived from the R&D activities on which the expenses are incurred.
R&D expenses are difficult to measure and hence, must be expensed in accordance with accrual accounting principles.

Answer(s): D

Explanation:

Note that R&D expenses are, for the most part, are clearly ear-marked as such and hence, are not difficult to measure. Of course, some of these expenses go into generating tangible assets like laboratories and flasks but these are easily measurable and do get capitalized under US GAAP. The other three reasons imply that it is difficult to measure the present value of the assets being generated (if at all) by the research. This prevents a consistent and reliable application of the accrual principles, which require allocation of expenses in proportion to the current benefits generated. Hence, US GAAP takes the easiest solution of expensing all the R&D costs.

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QUESTION: 1834

Firm A uses Sum-of-digits and Firm B uses straight-line method of depreciation. In the first year, which of the following is/are TRUE?

A shows higher equity than B.
II. A shows lower assets than B.
III. A shows a higher debt-to-equity ratio than B.
IV. A shows a higher debt-to-asset ratio.
III only
I & III
II, III & IV
I & IV

Answer(s): C

Explanation:

Sum-of-digits results in a higher depreciation in the first year. Hence, Firm A shows lower assets, lower income and hence lower equity. Thus, its debt-to-equity and debt-to-asset ratios are higher than B's.

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QUESTION: 1835

Goodwill should:

be expensed in the period in which it is purchased from another company or organization.
not be amortized as it will be a benefit to the company over its entire life. Companies are assumed to have an indefinite life.
written off over a 40 year period even if the superior earning power justifying its existence disappears.
be amortized to income over a period not exceeding 40 years.

Answer(s): D

Explanation:

Goodwill can be amortized over a maximum of 40 years. However, goodwill should be amortized over a number of periods equal to its ability to deliver superior earning power unless that period is over 40 years.

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QUESTION: 1836

The primary purpose of the statement of cash flows is to:

measure the change in the company's assets
state the company's financial position at period-end
provide information about a company's cash receipts and cash payments during the accounting period
analyze net income during the accounting period

Answer(s): C

Explanation:

Other financial statements are used to analyze revenues, expenses, assets, liabilities, and stockholders' equity.
The statement of cash flows summarizes transactions affecting cash; it is the balance sheet that states the company's financial position at a point in time.

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