Final Exam Review

1. An analyst screening potential equity investments to identify value stocks is most likely to
exclude companies with:
A) high price-to-earnings ratios.
B) low earnings growth rates.
C) high dividend payout ratios.
The correct answer was A
Value stocks are considered to be those that have low prices relative to earnings (or relative to
sales, cash flow, or book value). Screens that exclude firms with low earnings growth rates or
high dividend payout ratios are more likely to be used to identify growth stocks.

2. Junior analyst Xander Marshall sends an e-mail to his boss, Janet Jacobs, CFA,
suggesting that Peterson Novelties is manipulating its results to artificially inflate profits.
He cites four reasons for his conclusion:

 The LIFO reserve is declining. 

 Earnings are much higher in the September quarter than in other quarters.
 Many nonoperating and nonrecurring gains are being recorded as revenue.
 Much of Peterson’s earnings come from equity investments not reflected on the cash-
flow statement.

Jacobs is less concerned about Peterson’s earnings than Marshall is, though she does resolve to
check out one of his concerns. Which of Marshall’s observations best supports his conclusion?

A) Equity investment earnings not reflected on the cash-flow statement.

B) Nonoperating and nonrecurring gains recorded as revenue.
C) The declining LIFO reserve.
The correct answer was A

On its own, a declining LIFO reserve is not a sign of fraud. Peterson Novelties could have
simply moved a lot of inventory and disclosed the LIFO liquidation in its footnotes. When
unusual gains are recorded as revenue they will artificially boost sales growth. Each of the above
issues are potential danger signs, but can also be easily explained in a manner beyond reproach.
However, earnings from equity investments that do not generate cash flow are of very low
quality and warrant further examination.

3. Jacobs is less concerned about Peterson’s earnings than Marshall is, though she does
resolve to check out one of his concerns. Which of Marshall’s observations best supports
his conclusion?
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 A) Equity investment earnings not reflected on the cash-flow statement.
B) Nonoperating and nonrecurring gains recorded as revenue.
C) The declining LIFO reserve.
The correct answer was A

On its own, a declining LIFO reserve is not a sign of fraud. Peterson Novelties could have
simply moved a lot of inventory and disclosed the LIFO liquidation in its footnotes. When
unusual gains are recorded as revenue they will artificially boost sales growth. Each of the above
issues are potential danger signs, but can also be easily explained in a manner beyond reproach.
However, earnings from equity investments that do not generate cash flow are of very low
quality and warrant further examination.

4. To adjust for operating leases before calculating financial statement ratios, what value
should an analyst add to a firm’s liabilities?

A) Present value of future operating lease payments.

B) Sum of future operating lease obligations.
C) Difference between present values of lease payments and the asset’s future earnings.
The correct answer was A
Before calculating ratios involving liabilities, an analyst should estimate the present value of
operating lease obligations and add this value to the firm’s liabilities.
5. For 2007, Morris Company had 73 days of inventory on hand. Morris would like to
decrease its days of inventory on hand to 50. Morris’ cost of goods sold for 2007 was
$100 million. Morris expects cost of goods sold to be $124.1 million in 2008. Assuming a
365 day year, compute the impact on Morris’ operating cash flow of the change in
average inventory for 2008.

A) $3.0 million source of cash.

B) $6.3 million source of cash.
C) $3.0 million use of cash.
The correct answer was A
2007 inventory turnover was 5 (365 / 73 days in inventory). Given inventory turnover and
COGS, 2007 average inventory was $20 million ($100 million COGS / 5 inventory turnover).
2008 inventory turnover is expected to be 7.3 (365 / 50 days in inventory). Given expected
inventory turnover, 2008 average inventory is $17 million ($124.1 million COGS / 7.3 expected
inventory turnover). To achieve 50 days of inventory on hand, average inventory must decline $3
million ($20 million 2007 average inventory – $17 million 2008 expected inventory). A decrease
in inventory is a source of cash.
6. Comet Corporation is a capital intensive, growing firm. Comet operates in an inflationary
environment and its inventory quantities are stable. Which of the following accounting
methods will cause Comet to report a lower price-to-book ratio, all else equal?

Inventory method Depreciation method

A) First-in, First-out Accelerated
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 B) Last-in, First-out Accelerated
C) First-in, First-out Straight-line
The correct answer was C)
First-in, First-out Straight-line
FIFO results in higher assets and higher equity in an inflationary environment as compared to
LIFO. Equity is higher because COGS is lower (and inventory higher) under FIFO. Straight-line
depreciation will result in greater assets and equity compared to accelerated depreciation for a
stable or growing firm. Equity is greater because depreciation expense is less with straight-line
depreciation. Greater equity will result in greater book value per common share, the denominator
of the price-to-book ratio. Greater book value per share will result in a lower price-to-book ratio.
7. Frank Brill, CFA, is concerned that Moses Aviation is overstating its profits. The best
indicator of such action would be Moses Aviation’s:

A) sales-growth rate of nearly twice the industry average.

B) recognition of revenue from barter transactions.
C) rising inventory.
The correct answer was B) recognition of revenue from barter transactions.

While an unusually high sales-growth rate may indicate fraud, it could also indicate good
management. It’s a yellow flag, but not the best indicator of accounting shenanigans. Rising
inventory is also a dual signal. It could be meant to overstate profits, or it could simply reflect an
actual buildup of inventory in response to market forces or corporate operations. However,
companies should not recognize revenue from barter transactions. The additional revenue is
likely to improperly boost profits.

8. Which of the following statements about cash flow is (are) CORRECT?

Statement
The cash effects of decreasing accounts payable turnover are unlimited.
#1:
Statement The tax benefits from employee stock options can result in a significant source of
#2: investing cash flow.
Statement #1 Statement #2
A) Correct Incorrect
B) Incorrect Incorrect
C) Incorrect Correct
The correct answer was B)
Incorrect Incorrect
Statement #1 is an incorrect statement. The cash effects of decreasing accounts payable turnover
are limited. Suppliers will eventually stop extending credit because of delayed payments.
Statement #2 is an incorrect statement. The tax benefits from employee stock options can result
in a significant source of operating and financing cash flows. Tax benefits do not affect investing
cash flows

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 9. Patch Grove Nursery uses the LIFO inventory accounting method. Maria Huff, president,
wants to determine the financial statement impact of changing to the FIFO accounting
method. Selected company information follows:

 Year-end inventory: $22,000

 LIFO reserve: $4,000
 Change in LIFO reserve: $1,000
 LIFO cost of goods sold: $18,000
 After-tax income: $2,000
 Tax rate: 40%

Under FIFO, the nursery’s ending inventory and after-tax profit for the year would have been:

FIFO ending inventory FIFO after-tax profit

A) $18,000 $2,600
B) $26,000 $2,600
C) $26,000 $1,400
The correct answer was B)
$26,000 $2,600

FIFO ending inventory = LIFO ending inventory + LIFO reserve = 22,000 + 4,000 = $26,000

FIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 − t) = $2,000 +
($1,000)(1 − 0.4) = $2,000 + $600 = $2,600

10. Samson Therapeutics records all leases as operating leases. The company most likely
wanted to reduce:

A) leverage.
B) expenses.
C) inventory.
The correct answer was A
Finance (capital) leases are recorded on the balance sheet, and by recording all leases as
operating leases, the company can reduce its leverage. Lease accounting has no effect on
inventory. "Expenses" is not the best answer as operating leases will result in higher expenses in
the later years relative to the finance (capital) lease.
11. At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of
$20 million, cost of goods sold (COGS) of $64 million, and inventory purchases of $58
million. If the LIFO reserve was $6 million at the end of 2006 and $16 million at the end
of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS
for the year ended 2007.
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 FIFO
FIFO COGS
Inventory
A) $36 million $54 million
B) $26 million $54 million
C) $36 million $74 million
The correct answer was A
2007 FIFO inventory was $36 million ($20 million LIFO inventory + $16 million reserve). 2007
FIFO COGS was $54 million ($64 million LIFO COGS – $10 million increase in LIFO reserve).
12. Earlier this year, Barracuda Company issued 5,000 employee stock options. Recently,
2,000 options were exercised at a price of $10 per share. To avoid dilution, Barracuda
purchased 2,000 shares at an average price of $12 per share. Barracuda reported both
transactions as financing activities in its cash flow statement. For analytical purposes,
what adjustment is necessary to better reflect the substance of the stock repurchase?

Operating cash Financing cash

flow flow
A) Decrease $4,000 No adjustment
Increase
B) Decrease $4,000
$4,000
Increase
C) No adjustment
$4,000
The correct answer was B)
Increase
Decrease $4,000
$4,000
Barracuda reported a $4,000 net outflow from financing activities [2,000 options × ($12 average
market price – $10 exercise price)]. However, since the options are a form of compensation, the
$4,000 outflow should be reclassified as an operating activity for analytical purposes. This is
accomplished by increasing financing cash flow $4,000 and decreasing operating cash flow
$4,000.
13. Joan Zeller, CFA, suspects Cornwall Carpets is overstating its profits. Which of the
following is least likely to motivate Cornwall to overreport?

A) Cornwall depends heavily on stock options to compensate its employees.

B) Cornwall is attempting to get lawmakers to institute a tariff.
C) Cornwall’s debt covenants are strict.
The correct answer was B) Cornwall is attempting to get lawmakers to institute a tariff.
The satisfaction of debt covenants and profit estimates are strong incentives to overstate
earnings. Since stock prices tend to follow earnings over time, the use of stock for compensation
could drive executives to inflate profit numbers. However, a company attempting to get trade
relief is more likely to underreport earnings.
14. Mammoth, Inc. reports under U.S. GAAP. Mammoth has begun a long-term project to
develop inventory control software. On its financial statements, Mammoth should:

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 A) expense all costs of this project until technological feasibility has been established.
B) expense all costs of this project in the periods incurred.
C) capitalize all costs of this project.
The correct answer was A
Under IFRS and U.S. GAAP, costs of developing software are expensed until technological
feasibility is established, and capitalized after technological feasibility has been established.
15. A firm acquires investment property for €3 million and chooses the fair value model for
financial reporting. In Year 1 the market value of the investment property decreases by
€150,000. In Year 2 the market value of the investment property increases by €200,000.
On its financial statements for Year 2, the firm will recognize a:

€150,000 gain on its income statement and a €50,000 revaluation surplus in

A)
shareholders’ equity.
B) €200,000 gain on its income statement.
C) €150,000 increase in shareholders’ equity.
The correct answer was B) €200,000 gain on its income statement.
Under the fair value model, all gains and losses from changes in the value of investment property
are recognized on the income statement. The firm will recognize a loss of €150,000 in Year 1
and a gain of €200,000 in Year 2.
16. This information pertains to equipment owned by Brigade Company.

 Cost of equipment: $10,000.

 Estimated residual value: $2,000.
 Estimated useful life: 5 years.
 Depreciation method: straight-line.

The accumulated depreciation at the end of year 3 is:

A) $1,600.
B) $4,800.
C) $5,200.
The correct answer was B) $4,800.

Accumulated depreciation at the end of year 3 = [($10,000 − $2,000) / 5] × 3 = $4,800

17. Under U.S. GAAP, an asset is impaired when:

A) accumulated depreciation plus salvage value exceeds acquisition costs.

B) the firm can no longer fully recover the carrying amount of the asset.
C) the present value of future cash flows exceeds the carrying amount of the asset.
The correct answer was B) the firm can no longer fully recover the carrying amount of the asset.

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An asset is impaired if its future cash flows (undiscounted) are less than its carrying value.

18. If a company has a net profit margin of 15%, an asset turnover ratio of 4.5 and a ROE of
18%, what is the equity multiplier?

A) 0.267.
B) 2.667.
C) 0.523.
The correct answer was A

There are many different ways to illustrate ROE one of which is:

ROE = (net profit margin)(asset turnover)(equity multiplier)

0.18 = (0.15)(4.5)(equity multiplier)

0.18 ÷ [(0.15)(4.5)] = equity multiplier

0.18 ÷ 0.675 = equity multiplier

0.18 ÷ 0.675 = 0.267

19. At the beginning of 20X7, Bryan’s Bakery Company purchased a secret cookie recipe for
$25,000. In addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan
expects to use both recipes indefinitely; however, the useful (economic) life of similar
recipes has been 10 years. Assuming straight-line amortization, what amount of recipe
expense should Bryan report for the year ended 20X7 and what amount should Bryan
report as assets related to these recipes on its balance sheet at the end of 20X7?

Recipe expense Balance sheet

A) $7,500 $22,500
B) $5,000 $25,000
C) $3,000 $30,000
Your answer: A was correct!
The recipes are intangible assets. The purchased cookie recipe is capitalized and amortized over
10 years at $2,500 per year ($25,000 cost / 10 years). Since the cake recipe was developed
internally, it is expensed immediately. Thus, total expense for 20X7 is $7,500 ($2,500
amortization expense + $5,000 cake recipe expense). The balance sheet value of the purchased
recipe at the end of 20X7 is $25,000 – $2,500 = $22,500.
20. When the return on equity equation (ROE) is decomposed using the original DuPont
system, what three ratios comprise the components of ROE?

A) Net profit margin, asset turnover, asset multiplier.

B) Net profit margin, asset turnover, equity multiplier.
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 C) Gross profit margin, asset turnover, equity multiplier.
The correct answer was B) Net profit margin, asset turnover, equity multiplier.

The three ratios can be further decomposed as follows:

Net profit margin = net income/sales

Asset turnover = sales/assets

Equity multiplier = assets/equity

21. Juniper Corp’s stock transactions during the year 20X4 were as follows:

 January 1            540,000 shares issued and outstanding

 March 1              50 percent stock dividend

 July 1                 180,000 treasury shares reacquired

 October 1            60,000 treasury shares reissued

When computing for earnings per share (EPS) computation purposes, what was Juniper’s weighted
average number of shares outstanding during 20X4?

A) 735,000.
B) 930,000.
C) 870,000.
The correct answer was A

The January 1 balance is adjusted retroactively for the stock dividend and (540,000 × 1.5) =
810,000 shares are treated as outstanding from January 1. The weighted average number of
shares is computed by multiplying the shares by the number of months held, as follows:

January 1 Initial shares (810,000 × 12) = 9,720,000

July 1 Reacquired shares (-180,000 × 6) = 1,080,000
October 1 Reissued shares (60,000 × 3) = 180,000
8,820,000
Weighted average shares was (8,820,000 / 12) = 735,000 shares

22. Determine the cash flow from operations given the following table.

Item Amount
Cash payment of dividends $30
Sale of equipment $25
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Net income $25
Purchase of land $15
Increase in accounts payable $20
Sale of preferred stock $25
Increase in deferred taxes $5
Profit on sale of equipment $15
A) $20.
B) $35.
C) $45.
The correct answer was B) $35.
Using the indirect method, CFO = Net income 25 + increase in accounts payable 20 + increase in
deferred taxes 5 − profit on sale of equipment 15 = $35.

Increases in accounts payable and deferred taxes are sources of operating cash that are not
included in net income and must be added. Profit on sale of equipment is a CFI item that must be
removed from net income.

No adjustment needs to be made for cash payment of dividends (CFF), sale of preferred stock
(CFF), or purchase of land (CFI) because they are not included in net income. Only the profit on
sale of equipment, not the full proceeds from sale, is included in net income.

23. The following data pertains to the Sapphire Company:

 Net income equals $15,000.

 5,000 shares of common stock issued on January 1st.
 10% stock dividend issued on June 1st.
 1,000 shares of common stock were repurchased on July 1st.
 1,000 shares of 10%, $100 par preferred stock each convertible into 8 shares of common
were outstanding the whole year.

What is the company’s diluted earnings per share (EPS)?

A) $2.50.
B) $1.00.
C) $1.15.
The correct answer was B) $1.00.

Number of average common shares:

1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000

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7/1 1,000 shares repurchased × 6 months = -6,000

= 60,000

60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)(1,000) = $10,000

Number of shares from the conversion of the preferred shares = (1,000 preferred shares)(8 × 1.1
shares of common/share of preferred) = 8,800 common

Diluted EPS = [$15,000(NI) − $10,000(pfd) + $10,000(pfd)] / (5,000 common shares + 8,800

shares from the conv. pfd.) = $15,000 / 13,800 shares = $1.09/share

This number needs to be compared to basic EPS to see if the preferred shares are antidilutive.

Basic EPS = [$15,000(NI) − $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000

shares = $1/share

Since the EPS after the conversion of the preferred shares is greater than before the conversion
the preferred shares are antidilutive and they should not be treated as common in computing
diluted EPS. Therefore diluted EPS is the same as basic EPS or $1/share.

24. A firm has a weighted average number of 25,000 common shares selling at an average of $11
throughout the year and 10,000, 6%, $100 par value preferred shares. If the firm earns $210,000
after taxes, what is its Basic EPS?

A) $7.50 / share.
B) $5.00 / share.
C) $6.00 / share.
The correct answer was C) $6.00 / share.
(210,000 − 60,000) / 25,000 = $6 share

25. Based on the following data, how many shares of common stock should be used to
calculate diluted earnings per share?

 Net income of $1,500,000, tax retention rate of 60%

 1,000,000 shares of common are outstanding at the beginning of the year.
 10,000, 6% convertible bonds with each bond convertible into 20 shares of common
stock were issued at par ($100) on June 30th of this year.
 The firm has 100,000 warrants outstanding all year with an exercise price of $25 per
share.
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  The average stock price for the period is $20, and the ending stock price is $30.

A) 1,266,667.
B) 1,000,000.
C) 1,100,000.
The correct answer was C) 1,100,000.

First, Check for dilution: Basic EPS = 1,500,000 / 1,000,000 = 1.50

Warrants: anti-dilutive since the average stock price is less than the exercise price

Convertible bonds: numerator impact = (# bonds) × (par value) × (interest rate) × (tax retention
rate) × (0.5 for 1/2 year outstanding) = (10,000) × (100) × (0.06) × (0.6) × (0.5) = 18,000, so the
numerator = 1,518,000 Denominator impact: increase in average shares = [(# bonds) ×
(conversion factor) × (# months outstanding)] / 12 = (1,200,000 / 12 = 100,000) so, the
denominator = 1,100,000 and EPS with conversion = 1,518,000 / 1,100,000 = 1.38, which is less
than 1.50. The bonds are dilutive and the diluted EPS calculation should use 1,100,000 shares of
common stock in the denominator. The warrants are out of the money based on the average price
of $20.

26. Wichita Corporation reported the following balances as of December 31, 2007:

Cash $?
Accounts payable 16,000
Accounts receivable 56,000
Additional paid-in capital 42,000
Common stock 19,600
Inventory 12,000
Plant and equipment 26,800
Notes payable 20,000
Retained earnings 30,000

Calculate Wichita’s cash and total assets as of December 31, 2007 based only on these entries.

Cash Total assets

A) $16,000 $129,600
B) $32,800 $129,600
C) $32,800 $127,600
The correct answer was C)
$32,800 $129,600

Liabilities plus equity are equal to $127,600 ($16,000 accounts payable + $20,000 notes payable
+ $19,600 common stock + $42,000 additional paid-in capital + $30,000 retained earnings).
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Since assets must equal liabilities plus equity, cash must equal $32,800 ($129,600 total assets –
$56,000 accounts receivable – $12,000 inventory – $26,800 plant and equipment).

27. The standard auditor's report is most likely required to:

A) provide reasonable assurance that the financial statements contain no material errors.
B) provide an "unqualified" opinion if material uncertainties exist.
C) provide reasonable assurance that management is reliable.
The correct answer was A

The standard auditor's report contains three parts:

1. The financial statements are prepared by management and are their responsibility and the
auditor has performed an independent review.
2. The audit was conducted using generally accepted auditing standards, which provides
reasonable assurance that there are no material errors in the financial statements.
3. The auditor is satisfied the statements were prepared in accordance with accepted
accounting principles, and the principles chosen and estimates are reasonable.

Under U.S. GAAP, the auditor is required to state an opinion on the company's internal controls.
The auditor may add this opinion as a fourth element of the auditor's report or provide it
separately.

28. The following amounts were drawn from the records of JME Company: total assets =
$1,800; total liabilities = $750; contributed capital = $600. Based on this information
alone, retained earnings must be equal to:

A) −$150.
B) $150.
C) $450.
The correct answer was C
(1,800 − 750 − 600) = −150

29. Allowance for bad debts and investment in affiliates are most likely to be shown as what
types of accounts?

Allowance for bad debts Investment in affiliates

A) Contra-asset Liabilities
B) Liabilities Asset
C) Contra-asset Asset
The correct answer was C)
Contra-asset Asset
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Allowance for bad debts is a contra-asset account to accounts receivable. Investments in
affiliates are considered assets.

30. Which of the following is the least likely to be considered an accrual for accounting
purposes?

A) Wages payable.
B) Accumulated depreciation.
C) Unearned revenue.
The correct answer was B) Accumulated depreciation.

Accruals fall into four categories:

1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.

Accumulated depreciation is considered a contra-asset account to property, plant and equipment,

not an accrual.

31. In January 2014, Finley Corporation, a newly formed company, issued 10,000 shares of
its $10 par common stock for $15 per share. On July 1, 2014, Finley Corporation
reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of
these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.

32. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the
operation of the plan for the year 2015.

Service cost $ 230,000

Contributions to the plan 220,000

Actual return on plan assets 180,000

Projected benefit obligation (beginning of year) 2,400,000

Fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of
pension expense reported for 2015 is

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 a. $230,000.
b. $290,000.
c. $310,000.
d. $470,000.

33. Prior service cost is amortized on a

a. straight-line basis over the expected future years of service.

b. years-of-service method or on a straight-line basis over the average remaining
service life of active employees.
c. straight-line basis over 15 years.
d. straight-line basis over the average remaining service life of active employees or 15
years, whichever is longer.

34. A company that uses the LIFO inventory cost method records the following purchases and
sales for an accounting period:

Beginning inventory, July 1: $5,000, 10 units

July 8: Purchase of $2,600 (5 units)
July 12: Sale of $2,200 (4 units)
July 15: Purchase of $2,800 (5 units)
July 21: Sale of $1,680 (3 units)

The company’s cost of goods sold using a perpetual inventory system is:

A) $3,780.
B) $3,500.
C) $3,760.
Your answer: A was incorrect. The correct answer was C) $3,760.
With a perpetual inventory system, units purchased and sold are recorded in inventory in the
order that the purchases and sales occur. Cost of goods sold for the July 12 sale uses 4 of the
units purchased on July 8: 4 × ($2,600 / 5) = $2,080. Cost of goods sold for the July 21 sale uses
3 of the units purchased on July 15: 3 × ($2,800 / 5) = $1,680. COGS = $2,080 + $1,680 =
$3,760.

35. The present value of benefits earned during the current period by participants in a defined
benefit pension plan is best described as the plan's:

A) service cost.
B) past service cost.
C) net pension liability.
Your answer: A was correct!
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Service cost refers to the benefits earned in the current period by a defined benefit plan's
participants. Past service costs are benefits awarded retroactively when a plan is initiated or
changed. Net pension liability or net pension asset is the difference between the fair value of a
defined benefit plan's assets and the firm's estimated obligation to pay benefits.

36. Which of the following ratio levels would suggest that a company is holding obsolete
inventory?

A) Low inventory value compared to cost of goods sold.

B) Low number of days in inventory.
C) Low inventory turnover ratio.
Your answer: A was incorrect. The correct answer was C) Low inventory turnover ratio.
Low inventory turnover (high number of days in inventory) may be a sign of slow-moving or
obsolete inventory, especially when coupled with low or declining revenue growth compared to
the industry. Low inventory value compared to cost of goods sold, however, implies a high
inventory turnover ratio. This suggests much less risk of obsolescence.

37. Mammoth, Inc. reports under U.S. GAAP. Mammoth has begun a long-term project to
develop inventory control software. On its financial statements, Mammoth should:

A) expense all costs of this project in the periods incurred.

B) expense all costs of this project until technological feasibility has been established.
C) capitalize all costs of this project.
Your answer: A was incorrect. The correct answer was B) expense all costs of this project until
technological feasibility has been established. Under IFRS and U.S. GAAP, costs of developing
software are expensed until technological feasibility is established, and capitalized after
technological feasibility has been established.

38. Given the following inventory data about a firm:

 Beginning inventory 20 units at $50/unit

 Purchased 10 units at $45/unit
 Purchased 35 units at $55/unit
 Purchased 20 units at $65/unit
 Sold 60 units at $80/unit

What is the inventory value at the end of the period using LIFO?

A) $1,575.
B) $1,225.
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 C) $3,450.
Your answer: A was incorrect. The correct answer was B) $1,225.

Ending inventory equals 20 + 10 + 35 + 20 − 60 = 25 of the first units purchased equals:

(20 units)($50/unit) + (5 units)($45/unit) =

$1,000 + $225 = $1,225

39. A firm is most likely to lease an asset rather than purchasing it if the asset:

A) may be made obsolete by rapid technological advances.

B) is costly to move from place to place.
C) has a high salvage value relative to its cost.
Your answer: A was correct!
One of the motivations for leasing assets instead of purchasing them is that a leased asset that has
been made obsolete by new technology can be returned to the lessor at the end of the lease.
Neither of the other choices is a motivation for leasing assets instead of purchasing them.

40. A company is switching from straight-line depreciation to an accelerated method of depreciation.

Assuming all other revenue and expenses are at the same levels for the next period, switching to
an accelerated method will most likely increase the company’s:

A) total assets on the balance sheet.

B) fixed asset turnover ratio.
C) net income/sales ratio.
Your answer: A was incorrect. The correct answer was B) fixed asset turnover ratio.
The use of an accelerated depreciation method will increase depreciation expenses early in the
asset’s life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed
assets) will increase, because the book value of the fixed assets will be lower.

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