1. Which statement is FALSE?

a) Some items appear on a company's income statement but never appear on its tax return.

b) If a company depreciates an asset at a faster rate for tax purposes than for financial reporting purposes this will give rise to a deferred tax liability.

c) If a company, operating in an inflationary environment, uses FIFO for tax purposes and weighted-average for financial reporting purposes, this will result in a deferred tax asset.

d) If an expense is recognized for financial reporting purposes but not allowed as a bona-fide deduction for tax purposes, this results in a deferred tax asset.

2. Which statement is FALSE?

a) Under long-term performance contracts—such as product warranty contracts and software maintenance contracts—revenues are often collected in advance and are recognized proportionally over the entire period of the contract.

b) ESOs often are granted to managers in order to make them take fewer risks.

c) Employee stock options (ESOs) usually constitute a wealth transfer from current shareholders to prospective shareholders (employees) and have no effect on total liabilities and shareholders' equity.

d) Only costs of materials, equipment, and facilities having alternative future uses (in R&D projects or otherwise) are capitalized as tangible assets.

3. Which statement is FALSE?

a) Companies can construct the statement of cash flows using either the direct method or the indirect method.

b) Cash flow from operations is usually more volatile than net income.

c) Cash flow from operations will often be negative for companies experiencing tremendous growth.

d) Cash flow from financing is normally negative during the start-up phase for a company.