Contingent Liabilities and Financial Statement Analysis

Q1: A contingent liability should be recorded on the balance sheet only if the obligation is

Reasonably possible and reasonably estimable
Probable and reasonably estimable
Reasonably possible
Reasonably estimable

Answer: Probable and reasonably estimable

Q2: Which of the following statements is FALSE?

Paying cash dividends does not affect net income.
Underestimation of the expected cost of warranty repair will lead to higher NOA.
Gains on resale of treasury stocks will increase net income.
Loss on bond repurchase will decrease net income.

Answer: Gains on resale of treasury stocks will increase net income

Q3: Which of the following statements is FALSE?

Total lease-related expense is lower under an operating lease than under a finance lease in earlier periods.
AOCI is an equity account that accumulates unrealized gains and losses.
Share repurchases could increase earnings per share.
Dividends from investments using the fair value method do not affect net income.

Answer: Dividends from investments using the fair value method do not affect net income

Q4: Which of the following statements is FALSE?

For lessees with only operating leases, NOA is lower under the new lease standard than the old one.
For lessees with only operating leases, financial leverage is higher under the new standard than under the old standard.
The equity method overstates net operating profit margin compared to the consolidation method.
Pro-forma consolidation of equity method investments increases the liabilities-to-equity ratio.

Answer: NOA is lower under the new lease standard than under the old one

Q5: The carrying value of Wildcat Co.'s 9% bonds due 2030 decreased from $510.5 million in 2022 to $510 million in 2023, while the fair value increased. The bonds were issued at:

Do not have enough information to answer
A discount
Par value
A premium

Answer: A premium

Q6: Eller Co. has issued 500,000 shares of common stock and 100,000 shares of treasury stock. It declares a 15% stock dividend with a $20 market price per share. How much will retained earnings decrease?

$1,500,000
$1,200,000
$60,000
$75,000

Answer: $1,200,000

Comcast owns 33%. Hulu's 2023 net income was $200 million, with $6 million in dividends. How much income will Comcast report for Hulu?

$134 million
$200 million
$167 million
$66 million

Answer: $66 million

Q8: PI Co.'s 6.25% Notes ($400 million) had a carrying value of $394.6 million at year-end 2024 and $394.5 million in 2023. What interest expense did PI Co. report for 2024?

$24.9 million
$25.1 million
$25 million
$24.66 million

Answer: $25.1 million

Q9: Berkshire Hathaway owns 25% of Kraft Heinz. In 2023, Kraft Heinz's net income was $2,800 million, dividends $2,000 million. By how much did Berkshire's book value of investment in Kraft Heinz change?

Decreased by $650 million
Increased by $800 million
Increased by $700 million
Increased by $200 million

Answer: Increased by $200 million

Q10: Wildcat Co. owns 70% of Sundevil Co. Wildcat's 2024 net income is $2,500 million, Sundevil's is $1,000 million. What is the consolidated net income attributable to Wildcat shareholders?

$2,800 million
$2,450 million
$3,200 million
$3,500 million

Answer: $3,200 million

Q11: Cocoa Beach Surf Shop receives information requiring an increase in expected uncollectible accounts receivable. Which of the following is FALSE regarding financial statement effects?

NOPBT is reduced
It has no effect on reported Accounts Receivable
Bad debt expense is increased
Allowance for Doubtful Accounts is increased

Answer: It has no effect on reported Accounts Receivable

Q12: In periods of rising inventory prices, how does choosing LIFO over FIFO affect financial statements?

Cost of goods sold will be higher, and ending inventory will be lower
Cost of goods sold will be lower, and ending inventory will be lower
Cost of goods sold will be higher, and ending inventory will be higher
Cost of goods sold will be lower, and ending inventory will be higher

Answer: Cost of goods sold will be higher, and ending inventory will be lower

Q13: Which of the following statements is FALSE?

Write-off of uncollectible accounts reduces Allowance for Doubtful Accounts (ADA)
Write-off of uncollectible accounts reduces gross Accounts Receivable
Write-off of uncollectible accounts reduces reported Accounts Receivable
Write-off of uncollectible accounts does not affect Net Income

Answer: Write-off of uncollectible accounts reduces reported Accounts Receivable

Q14: Which of the following statements is FALSE?

Underestimation of Allowance for Doubtful Accounts will overstate current period Net Income
When valuation allowance is reversed, a company's NOA will increase
LIFO liquidation results in lower current period Gross Profit
Inventory write-down reduces future period Cost of Goods Sold

Answer: LIFO liquidation results in lower current period Gross Profit

Q15: Which of the following statements is FALSE?

Higher PP&E turnover is preferred
Longer Days Payable Outstanding is preferred
Managers' overestimation of useful life for PP&E will overstate net income
Managers' underestimation of valuation allowance will understate net income

Answer: Managers' underestimation of valuation allowance will understate net income

Q16: Wildcat Co.'s ADA shows a beginning balance of $351 million, accounts written off totaling $151 million, and an ending balance of $360 million. What was Wildcat Co.'s reported bad debt expense for the year?

$160 million
$142 million
$209 million
$200 million

Answer: $160 million

Q17: Sedona Co.'s special equipment has a net book value of $50,000. Its fair value is $47,000, but managers expect $51,000 in future cash inflows. Which statement is TRUE?

An impairment loss of $3,000 should be recorded
Sedona should record a gain of $1,000
The equipment should be written down to its fair value of $47,000
According to U.S. GAAP, this equipment is not considered impaired

Answer: According to U.S. GAAP, this equipment is not considered impaired

Q18: TUS Co.'s 2022 net sales were $42,000 million. What is its 2022 Accounts Receivable Turnover?

7.4
7.5
7.3
7.6

Answer: 7.4

Q19: Wildcat Co. uses LIFO for inventory costing. If Wildcat had used FIFO, how would 2022 pretax income differ?

$3,476 higher
$3,476 lower
$201 higher
$201 lower

Answer: $201 higher

Q20: Wildcat Co. uses LIFO for inventory costing. What would be Wildcat's Inventory Turnover under FIFO for 2022?

2.68
2.66
2.59
2.57

Answer: 2.66