QUESTION: 1857

While comparing a firm that expenses costs with one that capitalizes them:

The capitalizing firm always shows higher cash flow from operations.
II. The cumulative difference between the cash flow from operations increases over time.
III. The capitalizing firm pays lower taxes in the first year.
IV. The capitalizing firm recognizes higher deferred tax liabilities.
II & III
I, II & IV
II, III & IV
I & IV

Answer(s): B

Explanation:

Expensing charges the entire cost to CFO while capitalization leads to a charge against the investing cash flow.
Over time, depreciation reduces the tax payments. Hence, the cumulative difference in the CFOs increases over time. The expensing firm reports lower income in the first year and hence, pays lower taxes.

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QUESTION: 1858

On June 30, 1996, Union Inc. purchased goodwill for $125,000 when it acquired the net assets of Apex Corp. During 1996, Union incurred additional costs of developing goodwill by training Apex employees ($50,000) and hiring additional Apex employees ($25,000). Before amortization of goodwill, Union's December 31, 1996 balance sheet should report goodwill of ________.

$150,000
$200,000
$75,000
$175,000
$125,000

Answer(s): E

Explanation:

Goodwill is recorded only when it is purchased. In this case, only $125,000 was purchased goodwill. The costs incurred to maintain, develop, or restore goodwill must be expensed. In this case, $75,000 will be expensed.

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QUESTION: 1859

Which of the following is/are true under accrual accounting?

Revenues are recognized when goods are delivered.
II. Revenues are recognized when cash is received.
III. Matching principle accounting is followed under accrual accounting.
IV. Cash outflows determine expense recognition.
I, III & IV
III only
I & III
I & IV

Answer(s): C

Explanation:

Accrual accounting follows the Matching Principle, which requires that revenues and gains be recognized when earned and expenses and losses be recognized when incurred. Hence, revenue recognition is completely separate from cash flows. In the sales process, the earnings process is completed when goods are delivered and that's when revenue is recognized under accrual accounting.

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QUESTION: 1860

Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved.
Recognition of revenue does not occur until

the entity has substantially accomplished what it is agreed to do.
the revenue is realizable.
none of these answers.
products or services are exchanged for cash or claims to cash.
the revenue is realized and earned.

Answer(s): E

Explanation:

Revenues are only recognized when they have been earned. Simply exchanging assets or liabilities does not result in revenue recognition.

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QUESTION: 1857

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QUESTION: 1858

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QUESTION: 1859

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QUESTION: 1860

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