Profitability Analysis and Analytical Issues Paper 7

1

At the beginning of last year, Falcon Manufacturing Co. increased its selling price by $10 per unit This price increase has no effect on the volume of sales As a result Falconís operating profit margin will






2

Hampel Corporationís gross profit margin has decreased substantially over the past 3 years Which one of the following best explains this decrease?






3

Grimball Corporationís gross profit margin has remained fairly constant for the past several years. Which one of the following is the best explanation?






4

Network Corporation made a large arithmetic error in the preparation of its year-end financial statements by improper placement of an extra digit in the calculation of bad debt expense allowance. The error caused the net income to be reported at almost half of the proper amount. In accordance with GAAP, correction of the error when discovered in the next year should be treated as






5

A construction company has signed $1,000,000 in new contracts. During the current year, 10% of the required work for these contracts was performed. Historically, the controller has recognized revenue when the contract work was completed using the completed contract method This year the companyís auditors are requiring the new contracts to be recognized under the percentage of completion method. The change in revenue recognition methods will result in a revenue change of






6

A U.S. company and a German company purchased the same stock on the German stock exchange and held the stock for 1 year. The value of the euro weakened against the dollar over this period Comparing the returns of the two companies the United States companyís return will be






7

If an entityís books of account are not maintained in its functional currency U S GAAP require remeasurement into the functional currency prior to the translation process. An item that should be remeasured by use of the current exchange rate is






8

U.S. GAAP require the application of the functional currency concept. Before the financial statements of a foreign subsidiary may be translated into the parent companyís currency the functional currency of the foreign subsidiary must be determined. All of the following factors indicate that a foreign subsidiaryís functional currency is the foreign currency rather than the parentís currency except when






9

The economic effects of a change in foreign exchange rates on a relatively self-contained and integrated operation within a foreign country relate to the net investment by the reporting enterprise in that operation. Consequently, translation adjustments that arise from the consolidation of that operation






10

U.S. GAAP require that, in a highly inflationary economy, the financial statements of a foreign entity be remeasured as if the functional currency were the reporting currency. For this requirement, a highly inflationary economy is one that has






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