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Free CFA-Level-I Exam Braindumps (page: 478)

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Under the current US GAAP, the treatment of R&D expenses:

  1. underestimates current income and leads to lower taxes.
    II. leads to a more conservative balance sheet.
    III. is tantamount to asserting that R&D outlays have no current benefits.
  2. I only
  3. none of these are correct
  4. I, II & III
  5. I & II

Answer(s): C

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 of expensing all the R&D costs (unless they generate tangible or intangible assets which have alternative future uses which are measurable). Since R&D does generate future benefits on an expected basis, the full expensing of the costs when incurred tends to under-estimate current income and leads to lower taxes. Further, when the R&D activities do lead to profitable results, income gets overstated because of non-recognition of a portion of it in previous periods. Thus, R&D expensing adds volatility to income. On the other hand, expensing leads to a more conservative balance sheet since no assets or equity is recognized until the benefits actually materialize. Thus, by assuming that current R&D has no current benefits, the GAAP accounting tries to prevent "bad" surprises.



Which of the following could decrease outstanding capital stock?

  1. The exercise of warrants.
  2. All of these answers.
  3. The retention of earnings.
  4. The payment of a cash dividend.
  5. The purchase of treasury stock.

Answer(s): E

Explanation:

Only the purchase of treasury stock would cause a firm's capital stock account to decrease because the firm acquires outstanding shares and immediately retires these shares.



Which of the following is/are not extraordinary items?

  1. Write-downs of inventory
    II. Expropriation by a foreign government
    III. Losses due to hurricanes
    IV. Gains from disposal of a business segment
  2. I & III
  3. I & IV
  4. II, III & IV
  5. I & II

Answer(s): B

Explanation:

Gains from disposal of a business segment are part of "Discontinued Operations," not extraordinary items.
They appear segregated from the income from continuing operations as well as extraordinary items and are reported net of tax effects. Inventory write-downs and other such asset revaluations are considered unusual but not extraordinary items. These appear as part of income from continuing operations.



A liability can be recognized when

  1. when the amount is uncertain
  2. when the identity of the creditor is uncertain
  3. an obligation exists to make a future payment based on a past event
  4. all of these answers are correct

Answer(s): D

Explanation:

The amount or the creditor need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.






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