QUESTION: 1849

Which of the following is/are true about marketable securities?

They are carried on the books at the market value.
II. Transfers between different classifications are carried out at fair market value.
III. Companies are not required to disclose the classification of the specific investment securities in the balance sheet.
I & III
I, II & III
II & III
II only

Answer(s): C

Explanation:

Marketable securities are classified into various categories. Securities that are designated as "held-to- maturity" are reported at historical cost, not fair market value. Other categories prescribe a reporting at fair market value.
Thus, (I) is not necessarily true. Despite this, when the classification of a security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). Companies are not required to disclose securities classification on the balance sheet; disclosure can occur in the footnotes.

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QUESTION: 1850

Which of the following relationship is true about the liquidity ratios?

Cash ratio > Quick ratio > Current ratio.
Quick ratio > Cash ratio > Current ratio.
Cash ratio < Quick ratio < Current ratio.
Cash ratio < Current ratio < Quick ratio.

Answer(s): C

Explanation:

The cash ratio is the most conservative of the 3 liquidity ratios since it considers only cash and marketable securities relative to the current liabilities. The quick ratio considers receivables in addition to cash and marketable securities. The current ratio takes all current assets into account.

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QUESTION: 1851

Which of the following is/are true about expenses?

R&D expenses must always be capitalized.
II. Software expenses may sometimes be capitalized.
III. In extractive industries like oil and gas, companies have a choice of either expensing or capitalizing extractive costs.
I, II & III
II & III
III only
I only

Answer(s): B

Explanation:

Difficulties in measuring the current value of assets being generated by R&D prevent a 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 and dictates that all R&D costs must be expensed immediately (unless they generate tangible or intangible assets which have alternative future uses which are measurable).
On the other hand, software development costs which are similar to R&D costs are capitalized after feasibility of the product is determined. In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized.

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QUESTION: 1852

In periods of rising prices, which inventory costing method results in the highest net income?

FIFO
Average cost
Perpetual
LIFO

Answer(s): A

Explanation:

FIFO assigns the lowest dollar value amounts to COGS when purchase prices are rising, thus resulting in higher net income.

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