Financial Statement Analysis. 13 question(s) in this unit's pool
(2 above the exam). Free up to ten a day; the coach picks which ones based on what you have
already answered and when each is next due.
Financial Statement AnalysisAnalysis of Long-Term Assets
Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own
explanation. Questions you have already answered correctly and confidently stay out of the way until they
are due for review again.
Question 1Exam level
A company purchases equipment for $500,000 with a $50,000 residual value and a 10-year useful life. Under the double-declining balance method, the depreciation expense in Year 2 is closest to:
How sure are you?
Correct: A. The correct answer is $80,000. Year 1 DDB: 2/10 x $500,000 = $100,000. Book value end of Year 1 = $400,000. Year 2 DDB: 2/10 x $400,000 = $80,000. That is the SL method..
B. You might subtract residual before applying DDB in Year 1: 2/10 x ($500,000 - $50,000) = $90,000. DDB applies the rate to book value WITHOUT subtracting residual. Only SL subtracts salvage value first.
C. You might correctly gets Year 1 = $100,000 but incorrectly subtracts residual before Year 2 calc: 2/10 x ($400,000 - $40,000). Residual value is never subtracted in DDB calculations until book value approaches residual, at which point you switch to SL.
Unit: analysis-of-long-term-assets
Question 2Exam level
Company A uses straight-line depreciation. Company B, in the same industry, uses double-declining balance. In the early years of an asset's life, compared to Company A, Company B will most likely report:
How sure are you?
Correct: A. The correct answer is Lower net income and lower asset values. DDB front-loads depreciation expense, producing higher depreciation charges in early years vs SL. This reduces net income AND reduces book value of assets more rapidly..
B. You might confuse which method is more aggressive early on. DDB is more aggressive (higher expense) early, producing LOWER net income, not higher.
C. You might correctly identify lower net income but logic-error on assets. Higher depreciation reduces book value more, so DDB produces lower asset values, not higher.
Unit: analysis-of-long-term-assets
Question 3Exam level
Under IFRS, an asset has a carrying amount of $800,000. Its fair value less costs to sell is $650,000 and its value in use is $700,000. What impairment loss should be recognized? The value is closest to:
How sure are you?
Correct: A. The correct answer is $100,000. Under IFRS (IAS 36), recoverable amount = higher of (a) fair value less costs to sell ($650,000) and (b) value in use ($700,000). Recoverable amount = $700,000. Impairment loss = $800,000 - $700,000 = $100,000..
B. You might use fair value less costs to sell ($650,000) instead of the higher recoverable amount. IFRS requires using the HIGHER of the two amounts as recoverable amount. $700,000 > $650,000, so VIU is used.
C. You might confuse with GAAP Step 1 undiscounted cash flow test and believes no impairment triggers. This is IFRS. There is no undiscounted cash flow threshold test. Compare carrying amount directly to recoverable amount.
Unit: analysis-of-long-term-assets
Question 4Harder
Under US GAAP, an asset has a carrying amount of $1,200,000. Expected undiscounted future cash flows are $1,100,000. Fair value of the asset is $900,000. The impairment loss is closest to:
How sure are you?
Correct: A. The correct answer is $300,000. GAAP two-step test. Step 1: Is $1,100,000 (undiscounted CF) < $1,200,000 (carrying amount)? Yes. Impairment is indicated. Step 2: Impairment loss = carrying amount - fair value = $1,200,000 - $900,000 = $300,000..
B. You might calculate $1,200,000 - $1,100,000 = $100,000, using undiscounted CF as the measurement. Step 1 uses undiscounted CF only as a TRIGGER. The MEASUREMENT in Step 2 uses fair value, not undiscounted CF.
C. You might apply IFRS logic (recoverable amount = max of two figures) and gets confused. Under GAAP: Step 1 undiscounted CF < carrying amount means impairment IS required. Cannot skip to zero.
Unit: analysis-of-long-term-assets
Question 5Exam level
A company capitalizes a $5 million expenditure instead of expensing it. Compared to expensing, in the CURRENT year, capitalizing will most likely result in:
How sure are you?
Correct: A. The correct answer is Higher net income, higher total assets, and higher CFO. Capitalizing moves the $5M from an operating expense to an asset, so operating expenses fall, net income rises, total assets rise. The cash outflow is classified as CFI not CFO, so CFO is artificially higher..
B. You might know net income and assets go up but incorrectly think CFO falls because cash went out. Capitalization reclassifies the outflow to CFI. CFO is HIGHER under capitalization because the operating cash outflow has been removed from operations.
C. Random guess or confusion with contra-asset entries. Capitalizing adds an asset to the balance sheet. Total assets are unambiguously higher.
Unit: analysis-of-long-term-assets
Question 6Harder
Under IFRS, a company recognized an impairment loss of $200,000 on equipment three years ago. The equipment's fair value has since recovered. Which of the following is most likely correct?
How sure are you?
Correct: A. The correct answer is The impairment loss can be reversed, but only up to the amount that would have been the carrying amount if no impairment had occurred. Under IFRS, impairment losses on assets other than goodwill can be reversed if conditions change. The reversal is capped at what the carrying amount would have been (net of depreciation) had the impairment never been recognized..
B. You might know US GAAP prohibits reversal and incorrectly apply this to IFRS. This is the GAAP rule, not IFRS. IFRS allows reversal for assets other than goodwill.
C. You might know IFRS allows reversal but miss the cap. The reversal is capped. You cannot reverse more than what the asset's carrying amount would have been absent the impairment.
Unit: analysis-of-long-term-assets
Question 7Exam level
A company switches from double-declining balance to straight-line depreciation. This change is most likely described as a:
How sure are you?
Correct: A. The correct answer is Change in accounting estimate applied prospectively. In practice, under both IFRS and GAAP, changing the depreciation method is treated as a change in accounting estimate and applied prospectively. Prior periods are NOT restated..
B. You might know that policy changes require restatement and classify method changes as policy changes. Under IFRS (IAS 8) and GAAP (ASC 250), a change in depreciation method is a change in ESTIMATE, not policy. Applied prospectively.
C. If the prior method was 'wrong,' some candidates assume error correction. An error correction requires restatement, but changing methods voluntarily is an estimate change, not an error.
Unit: analysis-of-long-term-assets
Question 8Exam level
Which depreciation method results in the LOWEST total tax paid over the life of an asset, assuming a constant tax rate, most likely?
How sure are you?
Correct: A. The correct answer is All methods result in the same total tax paid over the asset's life. Total depreciation equals cost minus salvage value regardless of method. Total taxable income over the asset's life is unchanged. Only the TIMING of taxes differs, not the total amount..
B. You might confuse annual tax minimization with total lifetime tax. SL does not minimize lifetime taxes. It produces higher early taxes vs accelerated methods, then lower later taxes.
C. DDB does reduce taxes early via time value of money, but total tax is unchanged at constant rates. Total taxes paid (undiscounted) are identical. DDB defers taxes to later years. It does not eliminate them.
Unit: analysis-of-long-term-assets
Question 9Exam level
Under the units-of-production method, an asset costs $400,000 with a $40,000 salvage value and an estimated life of 180,000 units. In Year 1, 30,000 units are produced. Year 1 depreciation is closest to:
How sure are you?
Correct: A. The correct answer is $60,000. Depreciable base = $400,000 - $40,000 = $360,000. Rate per unit = $360,000 / 180,000 = $2.00 per unit. Year 1 depreciation = 30,000 x $2.00 = $60,000..
B. You might forget to subtract salvage value: $400,000 / 180,000 x 30,000 = $66,667. UOP method DOES subtract salvage value before computing the per-unit rate, just like straight-line.
C. You might use 10% of cost as an estimate without proper calculation. Must follow the formula: (Cost - Salvage) / Total units x Units produced this period.
Unit: analysis-of-long-term-assets
Question 10Exam level
Company A expenses a $10 million R&D expenditure. Company B capitalizes $10 million in similar costs. Relative to Company A, Company B's debt-to-equity ratio in Year 1 will most likely be:
How sure are you?
Correct: A. The correct answer is Lower. Capitalizing adds $10M to assets and keeps $10M out of expenses, so equity (via retained earnings) is higher. Assets are higher and equity is higher. With the same total debt, debt-to-equity = Debt / Equity is LOWER when equity is higher..
B. You might think more assets means more leverage. Capitalizing increases BOTH assets AND equity (higher net income flows to retained earnings). The D/E ratio uses equity in the denominator. Higher equity = lower D/E.
C. True that total cash is the same, but ratios are computed from the income statement and balance sheet, not cash flows. Financial ratios use accrual figures. Net income and retained earnings differ, so ratios differ.
Unit: analysis-of-long-term-assets
Question 11Exam level
Which of the following is most likely an indicator of impairment under both IFRS and GAAP?
How sure are you?
Correct: A. The correct answer is A significant decline in the asset's market value. Both IAS 36 and ASC 360 list significant decline in market value as an external indicator of potential impairment requiring further testing..
B. A depreciation change seems like it could indicate something is wrong with the asset. A voluntary change in depreciation method is an accounting estimate change. Not an impairment indicator.
C. Any change in asset parameters sounds like it could be impairment-related. An increase in residual value is favorable. It reduces depreciation and increases carrying value. Not an impairment trigger.
Unit: analysis-of-long-term-assets
Question 12Above the exam
A company tests a piece of equipment for impairment under US GAAP. The asset's carrying amount is $500,000, the sum of estimated future UNDISCOUNTED cash flows is $520,000, and the asset's fair value is $430,000. Combining the two-step US GAAP impairment test with these figures, the impairment loss to be recognized is most likely:
How sure are you?
Correct: B. US GAAP's impairment test is a two-step process. Step 1 (recoverability): compare carrying amount to the SUM OF UNDISCOUNTED future cash flows; impairment is only triggered (moving to Step 2, measurement) if carrying amount EXCEEDS that undiscounted sum. Here $500,000 (carrying) is LESS than $520,000 (undiscounted cash flows), so Step 1 is not triggered, no impairment loss is recognized at all, and the fair value figure in Step 2 is never even reached.
A. Comparing carrying amount directly to fair value skips the mandatory US GAAP Step 1 recoverability test entirely; under US GAAP (unlike the one-step IFRS approach), no impairment loss can be recognized at all unless Step 1 is first triggered, which it is not here.
C. $20,000 correctly computes the Step 1 comparison but misapplies its meaning: Step 1 is a TRIGGER test, not a measurement of the loss. Since undiscounted cash flows exceed carrying amount, the test is not triggered and no loss amount (from Step 1's own numbers or otherwise) should be recognized.
Unit: analysis-of-long-term-assets
Question 13Above the exam
A company operating under IFRS uses the revaluation model for a class of equipment. In Year 1, the equipment's fair value rises $40,000 above its carrying amount (recorded in OCI). In Year 2, the equipment's fair value falls $60,000 below its Year 1 revalued amount. Combining the IFRS revaluation model's treatment of gains and losses, the Year 2 decline is most likely recognized as:
How sure are you?
Correct: B. Under the IFRS revaluation model, a revaluation LOSS is first offset against any prior revaluation GAIN on the SAME asset recorded in OCI (reversing that OCI balance down to zero); only the EXCESS loss beyond the available OCI balance is recognized in profit or loss. Here the prior OCI gain was $40,000; the current $60,000 decline first reverses that $40,000 through OCI, and the remaining $20,000 flows through profit or loss.
A. Not the entire $60,000 loss can be absorbed by OCI; OCI can only absorb up to the amount of the PRIOR GAIN already recorded there for this same asset ($40,000). Beyond that, further declines must flow through profit or loss, not be parked in OCI indefinitely.
C. Revaluation losses are not always expensed in full; the model specifically allows a loss to first reverse any available prior gain sitting in OCI for that same asset before any excess is recognized in profit or loss, which is exactly the mechanism this question is testing.