CHAPTER 8
Long-Lived Assets

Learning Outcomes

After completing this chapter, you will be able to do the following:

• distinguish between costs that are capitalized and costs that are expensed in the period in which they are incurred;
• compare the financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination;
• explain and evaluate how capitalizing versus expensing costs in the period in which they are incurred affects financial statements and ratios;
• describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense;
• describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, financial statements, and ratios;
• describe the different amortization methods for intangible assets with finite lives and calculate amortization expense;
• describe how the choice of amortization method and assumptions concerning useful life and residual value affect amortization expense, financial statements, and ratios;
• describe the revaluation model;
• explain the impairment of property, plant, and equipment and intangible assets;
• explain the derecognition of property, plant, and equipment and intangible assets;
• explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect financial statements and ratios;
• describe the financial statement presentation of, and disclosures relating to, property, plant, and equipment and intangible assets;
• analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets;
• compare the financial reporting of investment property with that of property, plant, and equipment.

Summary Overview

Understanding the reporting of long-lived assets at inception requires distinguishing between expenditures that are capitalized (i.e., reported as long-lived assets) and those that are expensed. Once a long-lived asset is recognized, it is reported under the cost model at its historical cost less accumulated depreciation (amortization) and less any impairment or under the revaluation model at its fair value. IFRS permit the use of either the cost model or the revaluation model, whereas US GAAP require the use of the cost model. Most companies reporting under IFRS use the cost model. The choice of different methods to depreciate (amortize) long-lived assets can create challenges for analysts comparing companies.

Key points include the following:

• Expenditures related to long-lived assets are capitalized as part of the cost of assets if they are expected to provide future benefits, typically beyond one year. Otherwise, expenditures related to long-lived assets are expensed as incurred.
• Although capitalizing expenditures, rather than expensing them, results in higher reported profitability in the initial year, it results in lower profitability in subsequent years; however, if a company continues to purchase similar or increasing amounts of assets each year, the profitability-enhancing effect of capitalization continues.
• Capitalizing an expenditure rather than expensing it results in a greater amount reported as cash from operations because capitalized expenditures are classified as an investing cash outflow rather than an operating cash outflow.
• Companies must capitalize interest costs associated with acquiring or constructing an asset that requires a long period of time to prepare for its intended use.
• Including capitalized interest in the calculation of interest coverage ratios provides a better assessment of a company’s solvency.
• IFRS require research costs be expensed but allow all development costs (not only software development costs) to be capitalized under certain conditions. Generally, US accounting standards require that research and development costs be expensed; however, certain costs related to software development are required to be capitalized.
• When one company acquires another company, the transaction is accounted for using the acquisition method of accounting in which the company identified as the acquirer allocates the purchase price to each asset acquired (and each liability assumed) on the basis of its fair value. Under acquisition accounting, if the purchase price of an acquisition exceeds the sum of the amounts that can be allocated to individual identifiable assets and liabilities, the excess is recorded as goodwill.
• The capitalized costs of long-lived tangible assets and of intangible assets with finite useful lives are allocated to expense in subsequent periods over their useful lives. For tangible assets, this process is referred to as depreciation, and for intangible assets, it is referred to as amortization.
• Long-lived tangible assets and intangible assets with finite useful lives are reviewed for impairment whenever changes in events or circumstances indicate that the carrying amount of an asset may not be recoverable.
• Intangible assets with an indefinite useful life are not amortized but are reviewed for impairment annually.
• Impairment disclosures can provide useful information about a company’s expected cash flows.
• Methods of calculating depreciation or amortization expense include the straight-line method, in which the cost of an asset is allocated to expense in equal amounts each year over its useful life; accelerated methods, in which the allocation of cost is greater in earlier years; and the units-of-production method, in which the allocation of cost corresponds to the actual use of an asset in a particular period.
• Estimates required for depreciation and amortization calculations include the useful life of the equipment (or its total lifetime productive capacity) and its expected residual value at the end of that useful life. A longer useful life and higher expected residual value result in a smaller amount of annual depreciation relative to a shorter useful life and lower expected residual value.
• IFRS permit the use of either the cost model or the revaluation model for the valuation and reporting of long-lived assets, but the revaluation model is not allowed under US GAAP.
• Under the revaluation model, carrying amounts are the fair values at the date of revaluation less any subsequent accumulated depreciation or amortization.
• In contrast with depreciation and amortization charges, which serve to allocate the cost of a long-lived asset over its useful life, impairment charges reflect an unexpected decline in the fair value of an asset to an amount lower than its carrying amount.
• IFRS permit impairment losses to be reversed, with the reversal reported in profit. US GAAP do not permit the reversal of impairment losses.
• The gain or loss on the sale of long-lived assets is computed as the sales proceeds minus the carrying amount of the asset at the time of sale.
• Estimates of average age and remaining useful life of a company’s assets reflect the relationship between assets accounted for on a historical cost basis and depreciation amounts.
• The average remaining useful life of a company’s assets can be estimated as net PPE divided by depreciation expense, although the accounting useful life may not necessarily correspond to the economic useful life.
• Long-lived assets reclassified as held for sale cease to be depreciated or amortized. Long-lived assets to be disposed of other than by a sale (e.g., by abandonment, exchange for another asset, or distribution to owners in a spin-off) are classified as held for use until disposal. Thus, they continue to be depreciated and tested for impairment.
• Investment property is defined as property that is owned (or, in some cases, leased under a finance lease) for the purpose of earning rentals, capital appreciation, or both.
• Under IFRS, companies are allowed to value investment properties using either a cost model or a fair value model. The cost model is identical to the cost model used for property, plant, and equipment, but the fair value model differs from the revaluation model used for property, plant, and equipment. Unlike the revaluation model, under the fair value model, all changes in the fair value of investment property affect net income.
• Under US GAAP, investment properties are generally measured using the cost model.

Problems

1. JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs:

   Purchase price	$12,980
   Freight and insurance	$1,200
   Installation	$700
   Testing	$100
   Maintenance staff training costs	$500

   The total cost of the machine to be shown on JOOVI’s balance sheet is closest to:

   1. $14,180.
   2. $14,980.
   3. $15,480.
2. Which costs incurred with the purchase of property and equipment are expensed?
   1. Delivery charges.
   2. Installation and testing.
   3. Training required to use the property and equipment.
3. When constructing an asset for sale, directly related borrowing costs are most likely:
   1. expensed as incurred.
   2. capitalized as part of inventory.
   3. capitalized as part of property, plant, and equipment.
4. BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the construction of its manufacturing plant. The loan has the following conditions:

   Borrowing date	January 1, 2009
   Amount borrowed	500 million Brazilian real (BRL)
   Annual interest rate	14 percent
   Term of the loan	3 years
   Payment method	Annual payment of interest only. Principal amortization is due at the end of the loan term.

   The construction of the plant takes two years, during which time BAURU earned BRL 10 million by temporarily investing the loan proceeds. Which of the following is the amount of interest related to the plant construction (in BRL million) that can be capitalized in BAURU’s balance sheet?

   1. 130.
   2. 140.
   3. 210.
5. After analyzing the financial statements and footnotes of a company that follows IFRS, an analyst identified the following intangible assets:
   • product patent expiring in 40 years;
   • copyright with no expiration date; and
   • goodwill acquired 2 years ago in a business combination.

   Which of these assets is an intangible asset with a finite useful life?

   	Product Patent	Copyright	Goodwill
   A	Yes	Yes	No
   B	Yes	No	No
   C	No	Yes	Yes

6. Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of:
   1. revaluation.
   2. impairment.
   3. amortization.
7. Costs incurred for intangible assets are generally expensed when they are:
   1. internally developed.
   2. individually acquired.
   3. acquired in a business combination.
8. Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from:
   1. contractual or legal rights.
   2. assets that can be separated from the acquired company.
   3. assets that are neither tangible nor identifiable intangible assets.
9. All else equal, in the fiscal year when long-lived equipment is purchased:
   1. depreciation expense increases.
   2. cash from operations decreases.
   3. net income is reduced by the amount of the purchase.
10. Companies X and Z have the same beginning-of-the-year book value of equity and the same tax rate. The companies have identical transactions throughout the year and report all transactions similarly except for one. Both companies acquire a £300,000 printer with a three-year useful life and a salvage value of £0 on January 1 of the new year. Company X capitalizes the printer and depreciates it on a straight-line basis, and Company Z expenses the printer. The following year-end information is gathered for Company X.

    	Company X As of December 31
    Ending shareholders’ equity	£10,000,000
    Tax rate	25%
    Dividends	£0.00
    Net income	£750,000

    Based on the information given, Company Z’s return on equity using year-end equity will be closest to:

    1. 5.4%.
    2. 6.1%.
    3. 7.5%.
11. A financial analyst is studying the income statement effect of two alternative depreciation methods for a recently acquired piece of equipment. She gathers the following information about the equipment’s expected production life and use:

    	Year 1	Year 2	Year 3	Year 4	Year 5	Total
    Units of production	2,000	2,000	2,000	2,000	2,500	10,500

    Compared with the units-of-production method of depreciation, if the company uses the straight-line method to depreciate the equipment, its net income in Year 1 will most likely be:

    1. lower.
    2. higher.
    3. the same.
12. A company purchases a piece of equipment for €1,500. The equipment is expected to have a useful life of five years and no residual value. In the first year of use, the units of production are expected to be 15% of the equipment’s lifetime production capacity and the equipment is expected to generate €1,500 of revenue and incur €500 of cash expenses.

    The depreciation method yielding the lowest operating profit on the equipment in the first year of use is:

    1. straight line.
    2. units of production.
    3. double-declining balance.
13. Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be relatively low initially but to increase over time. The method chosen for tax reporting must be the same as the method used for financial reporting. If Martinez wants to minimize tax payments in the first year of the machine’s life, which of the following depreciation methods is Martinez most likely to use?
    1. Straight-line method.
    2. Units-of-production method.
    3. Double-declining balance method.

The following information relates to Questions 14−15

Miguel Rodriguez of MARIO S.A., an Uruguayan corporation, is computing the depreciation expense of a piece of manufacturing equipment for the fiscal year ended December 31, 2009. The equipment was acquired on January 1, 2009. Rodriguez gathers the following information (currency in Uruguayan pesos, UYP):

Cost of the equipment	UYP 1,200,000
Estimated residual value	UYP 200,000
Expected useful life	8 years
Total productive capacity	800,000 units
Production in FY 2009	135,000 units
Expected production for the next 7 years	95,000 units each year

14. If MARIO uses the straight-line method, the amount of depreciation expense on MARIO’s income statement related to the manufacturing equipment is closest to:
    1. 125,000.
    2. 150,000.
    3. 168,750.
15. If MARIO uses the units-of-production method, the amount of depreciation expense (in UYP) on MARIO’s income statement related to the manufacturing equipment is closest to:
    1. 118,750.
    2. 168,750.
    3. 202,500.

16. Which of the following amortization methods is most likely to evenly distribute the cost of an intangible asset over its useful life?
    1. Straight-line method.
    2. Units-of-production method.
    3. Double-declining balance method.
17. Which of the following will cause a company to show a lower amount of amortization of intangible assets in the first year after acquisition?
    1. A higher residual value.
    2. A higher amortization rate.
    3. A shorter useful life.
18. A company purchases equipment for $200,000 with a five-year useful life and salvage value of zero. It uses the double-declining balance method of depreciation for two years, then shifts to straight-line depreciation at the beginning of Year 3. Compared with annual depreciation expense under the double-declining balance method, the resulting annual depreciation expense in Year 4 is:
    1. smaller.
    2. the same.
    3. greater.
19. An analyst in the finance department of BOOLDO S.A., a French corporation, is computing the amortization of a customer list, an intangible asset, for the fiscal year ended December 31, 2009. She gathers the following information about the asset:

    Acquisition cost	€2,300,000
    Acquisition date	January 1, 2008
    Expected residual value at time of acquisition	€500,000
    The customer list is expected to result in extra sales for three years after acquisition. The present value of these expected extra sales exceeds the cost of the list.

    If the analyst uses the straight-line method, the amount of accumulated amortization related to the customer list as of December 31, 2009 is closest to:

    1. €600,000.
    2. €1,200,000.
    3. €1,533,333.
20. A financial analyst is analyzing the amortization of a product patent acquired by MAKETTI S.p.A., an Italian corporation. He gathers the following information about the patent:

    Acquisition cost	€5,800,000
    Acquisition date	January 1, 2009
    Patent expiration date	December 31, 2015
    Total plant capacity of patented product	40,000 units per year
    Production of patented product in fiscal year ended December 31, 2009	20,000 units
    Expected production of patented product during life of the patent	175,000 units

    If the analyst uses the units-of-production method, the amortization expense on the patent for fiscal year 2009 is closest to:

    1. €414,286.
    2. €662,857.
    3. €828,571.
21. A company acquires a patent with an expiration date in six years for 100 million. The company assumes that the patent will generate economic benefits that will decline over time and decides to amortize the patent using the double-declining balance method. The annual amortization expense in Year 4 is closest to:
    1. 6.6 million.
    2. 9.9 million.
    3. 19.8 million.
22. A company is comparing straight-line and double-declining balance amortization methods for a non-renewable six-year license, acquired for €600,000. The difference between the Year 4 ending net book values using the two methods is closest to:
    1. €81,400.
    2. €118,600.
    3. €200,000.
23. MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for its property, plant, and equipment. One of MARU’s machines was purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended March 31, 2010. As of March 31, 2010, the machine has a fair value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine?
    1. Yes.
    2. No, because this revaluation is recorded directly in equity.
    3. No, because value increases resulting from revaluation can never be recognized as a profit.
24. An analyst is studying the impairment of the manufacturing equipment of WLP Corp., a UK-based corporation that follows IFRS. He gathers the following information about the equipment:

    Fair value	£16,800,000
    Costs to sell	£800,000
    Value in use	£14,500,000
    Net carrying amount	£19,100,000

    The amount of the impairment loss on WLP Corp.’s income statement related to its manufacturing equipment is closest to:

    1. £2,300,000.
    2. £3,100,000.
    3. £4,600,000.
25. Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the carrying amount over the asset’s:
    1. fair value.
    2. recoverable amount.
    3. undiscounted expected future cash flows.
26. A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on December 31, 2009. The analyst compiles the following information about the vehicle:

    Acquisition cost of the vehicle	ARP 100,000
    Acquisition date	January 1, 2007
    Estimated residual value at acquisition date	ARP 10,000
    Expected useful life	9 years
    Depreciation method	Straight-line

    The result of the sale of the vehicle is most likely:

    1. a loss of ARP 15,000.
    2. a gain of ARP 15,000.
    3. a gain of ARP 18,333.
27. CROCO S.p.A sells an intangible asset with a historical acquisition cost of €12 million and an accumulated depreciation of €2 million and reports a loss on the sale of €3.2 million. Which of the following amounts is most likely the sale price of the asset?
    1. €6.8 million.
    2. €8.8 million.
    3. €13.2 million.
28. The impairment of intangible assets with finite lives affects:
    1. the balance sheet but not the income statement.
    2. the income statement but not the balance sheet.
    3. both the balance sheet and the income statement.
29. The gain or loss on a sale of a long-lived asset to which the revaluation model has been applied is most likely calculated using sales proceeds less:
    1. carrying amount.
    2. carrying amount adjusted for impairment.
    3. historical cost net of accumulated depreciation.
30. According to IFRS, all of the following pieces of information about property, plant, and equipment must be disclosed in a company’s financial statements and footnotes except for:
    1. useful lives.
    2. acquisition dates.
    3. amount of disposals.
31. According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company’s financial statements and footnotes except for:
    1. fair value.
    2. impairment loss.
    3. amortization rate.
32. Which of the following is a required financial statement disclosure for long-lived intangible assets under US GAAP?
    1. The useful lives of assets.
    2. The reversal of impairment losses.
    3. Estimated amortization expense for the next five fiscal years.
33. Which of the following characteristics is most likely to differentiate investment property from property, plant, and equipment?
    1. It is tangible.
    2. It earns rent.
    3. It is long-lived.
34. If a company uses the fair value model to value investment property, changes in the fair value of the asset are least likely to affect:
    1. net income.
    2. net operating income.
    3. other comprehensive income.
35. Investment property is most likely to:
    1. earn rent.
    2. be held for resale.
    3. be used in the production of goods and services.
36. A company is most likely to:
    1. use a fair value model for some investment property and a cost model for other investment property.
    2. change from the fair value model when transactions on comparable properties become less frequent.
    3. change from the fair value model when the company transfers investment property to property, plant, and equipment.
37. Under the revaluation model for property, plant, and equipment and the fair model for investment property:
    1. fair value of the asset must be able to be measured reliably.
    2. net income is affected by all changes in the fair value of the asset.
    3. net income is never affected if the asset increases in value from its carrying amount.
38. Under IFRS, what must be disclosed under the cost model of valuation for investment properties?
    1. Useful lives.
    2. The method for determining fair value.
    3. Reconciliation between beginning and ending carrying amounts of investment property.

The following information relates to Questions 39−42

Melanie Hart, CFA, is a transportation analyst. Hart has been asked to write a research report on Altai Mountain Rail Company (AMRC). Like other companies in the railroad industry, AMRC’s operations are capital intensive, with significant investments in such long-lived tangible assets as property, plant, and equipment. In November of 2008, AMRC’s board of directors hired a new team to manage the company. In reviewing the company’s 2009 annual report, Hart is concerned about some of the accounting choices that the new management has made. These choices differ from those of the previous management and from common industry practice. Hart has highlighted the following statements from the company’s annual report:

Statement 1 “In 2009, AMRC spent significant amounts on track replacement and similar improvements. AMRC expensed rather than capitalized a significant proportion of these expenditures.”

Statement 2 “AMRC uses the straight-line method of depreciation for both financial and tax reporting purposes to account for plant and equipment.”

Statement 3 “In 2009, AMRC recognized an impairment loss of €50 million on a fleet of locomotives. The impairment loss was reported as ‘other income’ in the income statement and reduced the carrying amount of the assets on the balance sheet.”

Exhibits 1 and 2 contain AMRC’s 2009 consolidated income statement and balance sheet. AMRC prepares its financial statements in accordance with International Financial Reporting Standards.

Exhibit 1 Consolidated Statement of Income

	2009		2008
For the Years Ended December 31	€ Millions	% Revenues	€ Millions	% Revenues
Operating revenues	(2,600)	(100.0)	(2,300)	(100.0)
Operating expenses
Depreciation	(200)	(7.7)	(190)	(8.3)
Other operating expense	,(1,590)	,(61.1)	,(1,515)	,(65.9)
Total operating expenses	,(1,790)	,(68.8)	,(1,705)	,(74.2)
Operating income	810)	31.2)	595)	25.8)
Other income	(50)	(1.9)	—)	0.0)
Interest expense	00(73)	00(2.8)	00(69)	00(3.0)
Income before taxes	687)	26.5)	526)	22.8)
Income taxes	0(272)	0(10.5)	0(198)	01(8.6)
Net income	01415)	00016)	01328)	1014.2)

Exhibit 2 Consolidated Balance Sheet

As of December 31	2009		2008
Assets	€ Millions	% Assets	€ Millions	% Assets
Current assets	00500)	009.4)	00450)	008.5)
Property & equipment:
Land	700)	13.1)	700)	13.2)
Plant & equipment	(6,000)	(112.1)	(5,800)	(109.4)
Total property & equipment	6,700)	125.2)	6,500)	122.6)
Accumulated depreciation	((1,850)	((34.6)	((1,650)	((31.1)
Net property & equipment	(4,850)	(90.6)	(4,850)	0(91.5)
Total assets	(5,350)	100.0)	5,300)	100.0)
Liabilities and Shareholders’ Equity
Current liabilities	,1480)	,19.0)	,1430)	,18.1)
Long-term debt	1,030)	19.3)	1,080)	20.4)
Other long-term provisions and liabilities	1,240)	23.1)	1,440)	27.2)
Total liabilities	2,750)	51.4)	2,950)	55.7)
Shareholders’ equity
Common stock and paid-in-surplus	760)	14.2)	760)	14.3)
Retained earnings	1,888)	35.5)	1,600)	30.2)
Other comprehensive losses	0,1(48))	0,1(0.9))	0,1(10))	,1(0.2))
Total shareholders’ equity	2,600)	48.6)	2,350)	44.3)
Total liabilities & shareholders’ equity	(5,350)	100.0)	(5,300)	100.0)

39. With respect to Statement 1, which of the following is the most likely effect of management’s decision to expense rather than capitalize these expenditures?
    1. 2009 net profit margin is higher than if the expenditures had been capitalized.
    2. 2009 total asset turnover is lower than if the expenditures had been capitalized.
    3. Future profit growth will be higher than if the expenditures had been capitalized.
40. With respect to Statement 2, what would be the most likely effect in 2010 if AMRC were to switch to an accelerated depreciation method for both financial and tax reporting?
    1. Net profit margin would increase.
    2. Total asset turnover would decrease.
    3. Cash flow from operating activities would increase.
41. With respect to Statement 3, what is the most likely effect of the impairment loss?
    1. Net income in years prior to 2009 was likely understated.
    2. Net profit margins in years after 2009 will likely exceed the 2009 net profit margin.
    3. Cash flow from operating activities in 2009 was likely lower due to the impairment loss.
42. Based on Exhibits 1 and 2, the best estimate of the average remaining useful life of the company’s plant and equipment at the end of 2009 is:
    1. 20.75 years.
    2. 24.25 years.
    3. 30.00 years.

The following information relates to Questions 43–48

Brian Jordan is interviewing for a junior equity analyst position at Orion Investment Advisors. As part of the interview process, Mary Benn, Orion’s Director of Research, provides Jordan with information about two hypothetical companies, Alpha and Beta, and asks him to comment on the information on their financial statements and ratios. Both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and are identical in all respects except for their accounting choices.

Jordan is told that at the beginning of the current fiscal year, both companies purchased a major new computer system and began building new manufacturing plants for their own use. Alpha capitalized, and Beta expensed the cost of the computer system; Alpha capitalized and Beta expensed the interest costs associated with the construction of the manufacturing plants.

Benn asks Jordan, “What was the impact of these decisions on each company’s current fiscal year financial statements and ratios?”

Jordan responds, “Alpha’s decision to capitalize the cost of its new computer system instead of expensing it results in lower net income, lower total assets, and higher cash flow from operating activities in the current fiscal year. Alpha’s decision to capitalize its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio.”

Jordan is told that Alpha uses the straight-line depreciation method and Beta uses an accelerated depreciation method; both companies estimate the same useful lives for long-lived assets. Many companies in their industry use the units-of-production method.

Benn asks Jordan, “What are the financial statement implications of each depreciation method, and how do you determine a company’s need to reinvest in its productive capacity?”

Jordan replies, “All other things being equal, the straight-line depreciation method results in the least variability of net profit margin over time, while an accelerated depreciation method results in a declining trend in net profit margin over time. The units-of-production can result in a net profit margin trend that is quite variable. I use a three-step approach to estimate a company’s need to reinvest in its productive capacity. First, I estimate the average age of the assets by dividing net property, plant, and equipment by annual depreciation expense. Second, I estimate the average remaining useful life of the assets by dividing accumulated depreciation by depreciation expense. Third, I add the estimates of the average remaining useful life and the average age of the assets in order to determine the total useful life.”

Jordan is told that at the end of the current fiscal year, Alpha revalued a manufacturing plant; this increased its reported carrying amount by 15 percent. There was no previous downward revaluation of the plant. Beta recorded an impairment loss on a manufacturing plant; this reduced its carrying by 10 percent.

Benn asks Jordan “What was the impact of these decisions on each company’s current fiscal year financial ratios?”

Jordan responds, “Beta’s impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities. Alpha’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.”

At the end of the interview, Benn thanks Jordan for his time and states that a hiring decision will be made shortly.

43. Jordan’s response about the financial statement impact of Alpha’s decision to capitalize the cost of its new computer system is most likely correct with respect to:
    1. lower net income.
    2. lower total assets.
    3. higher cash flow from operating activities.
44. Jordan’s response about the ratio impact of Alpha’s decision to capitalize interest costs is most likely correct with respect to the:
    1. interest coverage ratio.
    2. fixed asset turnover ratio.
    3. interest coverage and fixed asset turnover ratios.
45. Jordan’s response about the impact of the different depreciation methods on net profit margin is most likely incorrect with respect to:
    1. accelerated depreciation.
    2. straight-line depreciation.
    3. units-of-production depreciation.
46. Jordan’s response about his approach to estimating a company’s need to reinvest in its productive capacity is most likely correct regarding:
    1. estimating the average age of the asset base.
    2. estimating the total useful life of the asset base.
    3. estimating the average remaining useful life of the asset base.
47. Jordan’s response about the effect of Beta’s impairment loss is most likely incorrect with respect to the impact on its:
    1. debt to total assets.
    2. fixed asset turnover.
    3. cash flow from operating activities.
48. Jordan’s response about the effect of Alpha’s revaluation is most likely correct with respect to the impact on its:
    1. return on equity.
    2. return on assets.
    3. debt to capital ratio.