Question

7. Southwest Supply Company recently decreased the sales prices of its products in order to increase market share. In addition, Southwest began offering credit to customers with weak credit histories. What is the most likely impact on Southwest’s accounts receivable turnover (ARTO) and inventory turnover (INVTO) as a result of the changes?

	ARTO: Increase; INVTO: Increase
	ARTO: Increase; INVTO: Decrease

ARTO: Decrease; INVTO: Increase

8. According to U.S. GAAP and IFRS, where are interest income and dividend income reported in the cash flow statement?

	GAAP: Operating activities only; IFRS: Operating activities only
	GAAP: Operating activities only; IFRS: Operating or investing activities

GAAP: Operating or investing activities; IFRS: Operating activities only

9. Are first-in, first-out (FIFO) and last-in, first-out (LIFO) inventory accounting commonly used outside of the United States?

	FIFO: Yes; LIFO: Yes
	FIFO: Yes; LIFO: No

FIFO: No; LIFO: Yes

10. Toreador Inc. owned a warehouse with a book value of $1,300,000 and a market value of $2,500,000. What is the maximum amount Toreador can report on its balance sheet at year-end under U.S. GAAP and IFRS?

	GAAP = $1,300,000; IFRS = $1,300,000
	GAAP = $1,300,000; IFRS = $2,500,000

GAAP = $2,500,000; IFRS = $1,300,000

Answer 1

7. Answer: If credits are offered to customers with weak credit histories, the expectation of repayment from these Debtors will fall. This will lead to decrease in the Accounts receivable turnover. Further, these customers with weak credit histories are bound to purchase these goods from Southwest Supply company as they would e blacklisted from the market for their weak credit history. This will eventually lead to decrease in Inventory which will result in an increase in the Inventory turnover. So the answer would be:

ARTO: Decrease; INVTO: Increase

8. Answer: Dividends received under US GAAP and IFRS would be classified as below:

US GAAP: Operating activities only; IFRS: Operating or investing activities

IFRS is less restrictive in this regard whereas under US GAAP, any dividends received should be classifiedas Operating activities only.

9. Answer: LIFO method of accounting in banned under the guidelines set by the IFRS. FIFO method is used commonly outside of United states. Hence, the answer would be:

FIFO: Yes; LIFO: No

10. Answer: Under U.S. GAAP, there is only one way to initially record a fixed asset and that is the cost method. Under IFRS, fixed assets are initially valued at cost. After initial recognition, IFRS allows fixed assets to be adjusted to fair value.

Hence the answer would be:

GAAP = $1,300,000; IFRS = $2,500,000