Similar nature and use study session 9 los 29b under

similar nature and use. (Study Session 9, LOS 29.b)
Under both IFRS and U.S. GAAP, unrealized gains and losses on available for sale securities are recorded as other
comprehensive income. LIFO inventory valuation is permitted under U.S. GAAP but not under IFRS. Interest
received must be classified as an operating cash flow under U.S. GAAP, but may be classified as an operating or
investing cash flow under IFRS. (Study Session 8, LOS 25.d, 26.e, 27.c)
ROE = profit margin
x
total asset turnover
x
financial leverage. A decrease in financial leverage will result in a
decrease in ROE. An increase in the profit margin will increase ROE. A loss reported in other comprehensive
income will decrease shareholders' equity but not affect net income, which will increase ROE. (Study Session 8,
LOS 25.k, 28.d)
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-. .. Afternoon Session Answers
66. A When a long-lived asset is sold or otherwise disposed of, its original cost and
accumulated depreciation are removed from the balance sheet. Changing the estimated salvage value or useful life of
a longlived asset will change depreciation expense in the subsequent periods but does not affect accumulated
depreciation. (Study Session 9, LOS 30.i, j)
67. B Tax depreciation is 200 1 4
=
$50; book depreciation is 200 1 5
=
$40. Thus, after two years, the carrying value is
$120 [ZOO - (40
x
2 years)], and the tax base is $100 [200 - (50
x
2 years)]. The effective tax rate is not affected by temporary differences. The deferred tax liability at the end
of the second year is $8 [(I20 carrying value - 100 tax base)
x
40%]. (Study Session 9, LOS 31.c)
68. C Stretching accounts payable (increasing days sales in payables) will increase operating
cash flow. (Study Session 10, LOS 33.h, i)
69. C At points on the investment opportunity schedule that are above the marginal cost
of capital curve, projects have higher IRRs than the cost of capital and these projects should be accepted. The
amount of the optimal capital budget is at the intersection of a firm's investment opportunity schedule and its
marginal cost of capital curve. Capital project investment up to this point creates firm value and increases
shareholder wealth. Capital project investment beyond this amount would mean accepting projects with IRRs less
than the marginal cost of capital. (Study Session 1 I, LOS 36.d)
70. C The yield to maturity correctly measures the pretax cost of debt financing. (Study
Session 11, LOS 36.f)
71. B When the IRR and NPV methods conflict, the general rule is to take the higher
NPV project, as NPV measures the expected increase in the value of the firm from undertaking the project. IRR is
not the best measure for ranking mutually exclusive projects of different sizes, and the capital budget is not large
enough to do both projects. (Study Session 11, LOS 35.d, e)
72. C The percentage change in EBIT caused by a 1% change in sales is the degree of
operating leverage (DOL). The percentage change in EPS caused by a 1% change in sales is the degree of total
leverage (DTL). Samor's DOL and DTL both equal 1.5. A degree of operating leverage greater than one results from
fixed operating costs. Because DTL = DOL
x
DFL, Samor's degree of financial leverage must be equal to 1, which means Samor does not use debt