Financial Reporting and Analysis Flashcards

Under GAAP, research costs are generally:

Answer: Expensed as incurred

GAAP requires research costs to be expensed as incurred because future benefits are too uncertain to justify capitalization.

Which ratio measures the proportion of earnings paid out as dividends to shareholders?

Answer: Dividend payout ratio

The dividend payout ratio is calculated as dividends per share divided by earnings per share, showing the fraction of earnings distributed.

A company using the LIFO inventory method during a period of rising prices will report:

Answer: Lower net income and lower inventory than FIFO

LIFO assigns the most recent (higher) costs to COGS, resulting in lower net income and a lower (older cost) ending inventory balance compared to FIFO.

The quick ratio differs from the current ratio because the quick ratio excludes:

Answer: Inventory and prepaid expenses

The quick ratio excludes inventory and prepaid expenses because these are less liquid and may not be converted to cash quickly.

On a common-size income statement, each line item is expressed as a percentage of:

Answer: Net sales (revenue)

Common-size income statements express each item as a percentage of net sales, enabling meaningful comparison across companies or periods.

Which of the following would be classified as a financing activity on the cash flow statement?

Answer: Payment of dividends

Payment of dividends is a financing activity because it involves returning capital to equity holders.

Goodwill recognized in a business combination is:

Answer: Tested for impairment annually

Under current GAAP, goodwill is not amortized but must be tested for impairment at least annually (or when triggering events occur).