Quiz

Chapter 4 – Implementing Accounting Analysis
Q4.1. Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000,
and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory
(and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s
beginning equity and non-current assets if she assumes that company A’s depreciation percentage
should be 12%?
A. Decrease non-current assets by €1,000; decrease equity by €1,000

B. Decrease non-current assets by €2,000; decrease equity by €2,000
C. Decrease non-current assets by €1,000; decrease equity by €700
D. Decrease non-current assets by €2,000; decrease equity by €1,400
Q4.2. Company A’s non-current assets have a residual value of zero, a beginning book value of €5,000,
and an initial cost of €10,000. Company A uses an annual depreciation percentage of 10%. Its statutory
(and effective) tax rate is 30 percent. What adjustments would an analyst make to company A’s current
year’s tax expense if she assumes that company A’s depreciation percentage should be 12%?
A. Decrease tax expense by €60

B. Increase tax expense by €60
C. Decrease tax expense by €30
D. Increase tax expense by €30
E. No adjustment
Q4.3. An analyst makes an adjustment for understated depreciation, increasing Company ABC’s
Accumulated Depreciation (on PP&E) by an amount of €10 million. The Company’s tax rate is 40 percent.
In the financial statements, this adjustment
A. Decreases net non-current assets by €10 million and decreases equity by €10 million.
B. Increases net non-current assets by €10 million and increases equity by €10 million.
C. Decreases net non-current assets by €10 million, decreases equity by €6 million, and decreases
other non-current liabilities by €4 million.
D. Decreases net non-current assets by €10 million, decreases equity by €6 million, and decreases
net debt by €4 million.
Q4.4. Prior to the implementation of IFRS 16, incorrectly treating finance leases as operating leases in
the financial statements helped firms to
A. Overstate asset turnover and overstate leverage

B. Overstate profit margins and understate asset turnover
C. Understate asset turnover and overstate leverage
D. Overstate asset turnover and understate leverage
Q4.5. A pharmaceutical company spends €5,000, €6,000, and €4,000 on research in 2016, 2017, and
2018, respectively. Assume that research investments have an expected life of two years and occur
evenly throughout the year. If an analyst decides to capitalize all research expenditures and uses the
straight-line method to amortize research assets, her estimate of the book value of the pharmaceutical’s
research asset at the end of 2018 equals
A. €15,000
B. €10,000
C. €4,500
D. €0
Q4.6. A pharmaceutical company spends €5,000, €6,000, and €4,000 on research in 2016, 2017, and
2018, respectively. Assume that research investments have an expected life of two years and occur
evenly throughout the year. If an analyst decides to capitalize all research expenditures and uses the
straight-line method to amortize research assets, her estimate of the pharmaceutical’s research
amortization expense in 2018 equals
A. €4,000
B. €5,000
C. €5,200
D. €5,250
Q4.7. A car manufacturer recognizes the sale of 40,000 cars in its income statement. The cars have a
total selling price of €450,000 and a total cost of €350,000. All cars have been prepaid but not yet
shipped to the customer. The car manufacturer’s statutory and effective tax rate is 0 percent. The
recognition of this sale leads to the following distortions:
A. No overstatement/understatement of profit or loss and equity; overstatement of total assets

and total liabilities by €350,000.
B. Overstatement of profit or loss and equity by €100,000; overstatement of total assets by
€350,000; overstatement of total liabilities by €250,000.
C. Overstatement of profit or loss and equity by €100,000; overstatement of total assets by
€100,000.
D. Overstatement of profit or loss and equity by €100,000; understatement of total assets by
€350,000; understatement of total liabilities by €450,000
Q4.8. On December 31, 2018, a company reported the following values for its allowances for doubtful
accounts:
Allowance for doubtful accounts 31/12/2018

Balance at the beginning of the year €30,000
Provision for bad debts (=bad debt expense) 2,000
Write-offs 5,000
Balance at the end of the year €27,000
Gross trade receivables on December 31, 2018 and January 1, 2018 were €80,000 and €100,000,
respectively. The company’s tax rate equals 30 percent.
If an analyst decides that the company’s allowance for doubtful accounts should have been 25 percent
of gross trade receivables on 31 December 2018 and 1 January 2018, the adjustments to the income
statement would be to
A. Zero
B. Decrease the bad debt expense by €2,000, increase the tax expense by €600, and increase profit
or loss by €1,400.
C. Increase the bad debt expense by €5,000, decrease the tax expense by €1,500, and decrease
profit or loss by €3,500.
D. Increase the bad debt expense by €3,000, decrease the tax expense by €900, and decrease
profit or loss by €2,100.
Q4.9. To improve comparability over time, an analyst has decided to capitalize the operating leases of
Company A in its pre-IFRS 16 financial statements. Using information in the notes to the company’s 2017
financial statements, she has determined that the present value of future minimum lease payments, at a
discount rate of 10 percent, on December 31, 2017 equals €500 million. All lease contracts last another
5 years on December 31, 2017. As expected at the beginning of the year, the company reports an
operating lease expense in its income statement for 2018 of €80 million. The company’s tax rate equals
30 percent. The company does not engage in any new operating leases in 2018. The following
information is also available from Company A’s financial statements (all ratios use beginning-of-the-year
balance sheet values)
Debt to capital (at beginning of 2018) 0.55

Return on beginning equity in 2018 0.10
Assets / Capital (at beginning of 2018) €3,400 million
The effect of capitalizing Company A’s operating leases on its leverage ratio (debt to capital) at the
beginning of 2018 equals
A. An increase from 0.55 to 0.61 (rounded).

B. An increase from 0.55 to 0.74 (rounded).
C. An increase from 0.55 to 0.82 (rounded).
D. A decrease from 0.55 to 0.51 (rounded).
Q4.10. To improve comparability over time, an analyst has decided to capitalize the operating leases of
Company A in its pre-IFRS 16 financial statements. Using information in the notes to the company’s 2017
financial statements, she has determined that the present value of future minimum lease payments, at a
discount rate of 10 percent, on December 31, 2017 equals €500 million. All lease contracts last another
5 years on December 31, 2017. As expected at the beginning of the year, the company reports an
operating lease expense in its income statement for 2018 of €80 million. The company’s tax rate equals
30 percent. The company does not engage in any new operating leases in 2018. The following
information is also available from Company A’s financial statements (all ratios use beginning-of-the-year
balance sheet values)
Debt to capital (at beginning of 2018) 0.55

Return on beginning equity in 2018 0.10
Assets / Capital (at beginning of 2018) €3,400 million
The effect of capitalizing Company A’s operating leases on its return on beginning equity in 2018 equals
A. An increase from 0.10 to 0.15 (rounded).

B. An increase from 0.10 to 0.13 (rounded).
C. A decrease from 0.10 to 0.07 (rounded).
D. A decrease from 0.10 to 0.05 (rounded).
Q4.11. Company B reduces the discount rate it uses to estimate its post-employment benefit obligation
from 8 percent (at the beginning of fiscal year 2017) to 7 percent (at the beginning of fiscal year 2018).
Analysts following company B believe that this reduction is unjustified. According to these analysts
company B
A. Understates its 2018 interest cost, overstates its 2018 service cost; overstates the cumulative
actuarial losses at the beginning of 2018.
B. Understates its 2018 interest cost, overstates its 2018 service cost; overstates the fair value of
plan assets at the beginning of 2018.
C. Overstates its 2018 interest cost, understates its 2018 service cost; understates the cumulative
actuarial losses at the beginning of 2018.
D. Understates its 2018 interest cost, understates its 2018 service cost; understates the fair value
of plan assets at the beginning of 2018.
Q4.12. Under IFRS the pension expense recognized in the income statement may not be equal to the
economic cost of the post-employment benefit plan because
A. Firms can recognize current actuarial gains or losses in other comprehensive income.
B. Firms can recognize past service cost in other comprehensive income.
C. Firms can recognize unexpected plan contributions in other comprehensive income.
D. Both A and B are correct
E. Both A and C are correct

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Chapter 4 – Implementing Accounting Analysis

A. Decrease non-current assets by €1,000; decrease equity by €1,000

A. Decrease tax expense by €60

A. Overstate asset turnover and overstate leverage

A. No overstatement/understatement of profit or loss and equity; overstatement of total assets

Allowance for doubtful accounts 31/12/2018

Debt to capital (at beginning of 2018) 0.55

A. An increase from 0.55 to 0.61 (rounded).

Debt to capital (at beginning of 2018) 0.55

A. An increase from 0.10 to 0.15 (rounded).

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