15 Correct answer: A “Evaluating Financial Reporting Quality,” Scott Richardson and Irem Tuna 2010 Modular Level II, Vol. 2, pp. 271-272, 284-287 Study Session 7-25-f Discuss problems with the quality of financial reporting, including revenue recognition, expense recognition, balance sheet issues, and cash flow statement issues and interpret warning signs of these potential problems. In 2008, the capitalization of interest costs increased EBIT by $30 million, whereas the capitalization of software costs only increased EBIT by $4.5 million ($6.5 million capitalized less $2.0 million amortized in the year). Since deferred revenue increased in 2008, it decreased EBIT, not increased it.
You know honestly even thinking about it now i still don’t understand how it increases EBIT regardless of what year… so confused.
I noticed 2 questions like that on the sample. Since I took it I started writing RTFQ on all tests at the top. If you are in Minneapolis/Saint Paul and you see a guy writing RTFQ on top of the test that is me 
hmmmmm… read the fkn question?
cpk123 Wrote: ------------------------------------------------------- > 15 > Correct answer: A > “Evaluating Financial Reporting Quality,” Scott > Richardson and Irem Tuna > 2010 Modular Level II, Vol. 2, pp. 271-272, > 284-287 > Study Session 7-25-f > Discuss problems with the quality of financial > reporting, including revenue recognition, expense > recognition, balance sheet issues, and cash flow > statement issues and interpret warning signs of > these potential problems. > In 2008, the capitalization of interest costs > increased EBIT by $30 million, whereas the > capitalization of software costs only increased > EBIT by $4.5 million ($6.5 million capitalized > less $2.0 million amortized in the year). Since > deferred revenue increased in 2008, it decreased > EBIT, not increased it. Based on the explanation, EBIT went up by $34.5 because of capitalizing software costs and interest costs. I’m assuming deferred revenue increased by a larger amount, decreasing your “potential” EBIT. To be honest, I forgot what the question was asking for.
Ugh, EBIT = BEFORE INTEREST, so how can removing interest do ANYTHING to it? The only possible thing that could happen is depreciation from the capitalized interest (now an asset) REDUCES EBIT. Software costs do increase EBIT when capitalized, but the Q asked which one had the biggest effect… and said it was the int exp, WTF? Well at least I feel somewhat redeemed, took the sample II just now and got 83% granted guessed ALOT on derivatives and lucked out mostly.
Having taken a sample and a mock, the sample seemed to be more trivia based, maybe I am confused by the electronic format with an instant response…are the mocks more representative of the real exam?
Just finished Sample II and got a 77%. I got caught in PM, D’s and Econ. I missed two in econ because on one question I accidentally hit next when I meant to change the answer choice. The other econ question that caught me was that monopoly one. I thought there was a profit when MC=MR. I knew if it were below avg. price then its no profit… must have something mixed up here. D’s was kinda nasty. I thought they were asking us to calculate too much. Also, I didn’t like how they did their rounding… it threw me off in a few problems. I missed the currency one and the terminate swap question. PM caught me with that correlation problem and the extended CAPM. FSA caught me with that JV to equity method question. I forgot that since the one firm also now owns 50%, the other firm no longer has consolidation but equity method… doh! Not that 77% isn’t bad, but I should’ve gotten at least two more correct on that exam. I kinda find the computer format a little intimidating and I don’t like that can’t add notes next to certain passages. Owell. NYSSA test this coming weekend then more review.
Finished afternoon section of mock 1 - Got 68%. Better than morning session. Need to catch up a lot by next weekend.
That finquiz test is fkn brutal, and rather annoying. I question how detailed some of that stuff gets and how long the vignettes are, at a certain point it just feels unnecessary and wasteful. Isn’t the debt ratio formula only applicable to FCFE and not FCFF? Meh…
I took a look at the finquiz test and said, I don’t think so. No reason to score horrible and then feel like you are going to fail. Based on their questions, I think they are much much harder than Schweser, Stalla, CFA Mocks. Finquiz is great as a vocab provider. I wouldn’t trust their vignette style questions though unless they are completely different than what is offered otherwise.
If Sample 1 was DEmoralizing, Sample 2 was REmoralizing. I scored a 77%. Felt good on the first few sections (had a 90% going into the second half of the vignettes), and scored 100% on Ethics without really guessing on any. I knew swaps at one point, but forgot it, so I’ll pick that back up by D-day. Maybe they’re just trying to ‘moralize’ me up before cutting my throat in the test center.
Feels so good to read that I wasn’t the only one getting owned in FRA. I will remember the RTFQ thing. I also make notes to remember not to think outside the scope of the questions. Sometimes I felt the questions were just not giving enough information or just badly worded, like the PE vignette. They asked for carried interest to GP without specifying any details about the arrangement. Also, they tested only very few readings, I thing I counted at least 4 questions from 36. I hope the mock has a better distribution of topics and I’ll do better on mocks tomorrow, now it’s FRA drill time.
correct me if I’m wrong but when you capitalize an Asset rather then expensing it, your first yr ebit is going to be higher because you’re not taking the hit on operating income all at once. The depreciation expense is going to be lower then taking the full hit on ebit
Why only first year? Over the life of the lease , initially ( i.e. for a few years ) amortization of the loan will be less than the level operating lease payments . Later on , amortization of the loan will be MORE than the level operating lease payments . So you will have net larger EBIT in the beginning and net lower EBIT at the end
You’re talking about leases. I’m talking about capitalizing interest expense rather than expensing.
JP_RL I believe you are incorrect. Remember EBIT = BEFORE INTEREST BEFORE INTEREST BEFORE BEFORE BEFORE!!! Sorry it’s just that i keep saying this and nobody responds. So if you CAPITALIZE interest it should do NOTHING (in regards to the INTEREST expense portion), but the new asset that is created will depreciate, actually DECREASING EBIT. Interest is NOT operating expense, Depreciation is.
I have to go back and look at my notes on capitalzing int. I have not done that for awhile and in my accting class my professor decided to skip it for some odd reason. Anyway if you capitalize the int and now it becomes depreciation expense then that would lower ebit, yes that I get. However, the real question is, what happens if you do not capitalize interest? Would that now be recorded as int expense? or would that be considered an operating expense like R&D. If so then yea I can see how capitalizing int could lower your EBIT. The real question is, if that is the case, would your Int coverage ratio be higher or lower if you capitalized the int expense? I remember it being higher if you capitalize. For some reason I remember Olinto saying that the reduced int expense from capitalizing has a greater impact then the reduced EBIT. But again I’m not too sure on this topic.
Did you just ask me if interest expense is treated as interest expense if its not capitalized?
Mid 60s in Sample 1 - found it difficult esp FRA which i only got 50%, Alts got 83% but guessed on some of those. Inflation pass thruquestion didnt get…how do you get the real rate? Did they give the nominal rate in the question??..Cant believe they dont give you your answers to keep for the sample…pay 40US too…annoying.