Under U.S. GAAP (specifically ASC 350-40), costs incurred for internal-use software after the preliminary project stage are capitalized only if they provide additional functionality or service potential. Costs that merely maintain the existing service potential are expensed. The key is whether the upgrade allows the software to perform tasks it couldn’t perform before or significantly enhances its efficiency or capacity, not the cost magnitude or vendor labels.

A decreasing inventory turnover (Cost of Goods Sold / Average Inventory) suggests inventory is growing faster than sales. An increasing gross profit margin suggests either higher sales prices or lower COGS. Building inventory (increasing the denominator) can slow turnover. If this build-up is strategic (e.g., for anticipated demand), it can coexist with strong pricing power (higher margins). The other options would not typically produce this specific combination of trends.

Under the percentage-of-completion method (ASC 606), changes in total estimated contract costs are recognized in the period they are determined using the cumulative catch-up method. Increasing total costs reduces the total estimated profit. The company must immediately adjust revenue and profit recognized to date to the new, lower cumulative profit percentage. This results in a debit to revenue/income and a credit to a liability (often “billings in excess of costs and estimated earnings”) or a reduction in an asset.

Under ASC 470-20, for convertible bonds with a beneficial conversion feature (BCF) or where the conversion option is separately valued, proceeds are allocated between the liability (debt) and equity (conversion option) components. This allocation creates a discount on the debt, which is amortized to interest expense over the bond’s term using the effective interest method. Therefore, equity (APIC) increases, the carrying value of debt is less than the cash received, and total interest expense is higher than the stated cash interest payments.

In a period of rising prices, LIFO results in higher Cost of Goods Sold (because the most recent, higher-cost items are expensed first) and lower ending inventory. This lowers pre-tax income and, consequently, current income tax expense. The tax savings improve cash flow. Under U.S. GAAP, a change to LIFO is made prospectively; prior periods are not restated. The impact on the balance sheet is typically a lower inventory value, not an increase.

In the operating section of the cash flow statement (indirect method), an increase in accounts payable is added to net income because it represents an expense incurred (increasing net income) for which cash has not yet been paid, thus preserving cash. If this increase is large and persistent relative to operations, it often indicates the company is stretching its payables—a potential red flag for supplier relationships and a sign of cash flow pressure, not necessarily efficient financing.

ASC 835-20 requires capitalization of interest costs incurred during the construction period for qualifying assets that require a period of time to get ready for their intended use. Self-constructed assets for a company’s own use typically qualify. General administrative overhead is not capitalized (it’s an period expense). Design costs prior to final commitment are often expensed as R&D. Costs of future dismantlement are capitalized only if there is a legal obligation and a reliable estimate can be made (ASC 410), but the question asks which “should” be capitalized, and interest cost capitalization is a specific, required rule for qualifying self-constructed assets.

For AFS debt and equity securities, ASC 320 requires that unrealized holding gains and losses be measured on an individual security basis. However, for presentation, they are aggregated. The net unrealized gain or loss for the entire portfolio is reported as a single amount in Accumulated Other Comprehensive Income (AOCI) on the balance sheet. The gains and losses on individual securities are not separately reported on the income statement unless realized through a sale or determined to be other-than-temporary impairments.

Under ASC 842, the lease term includes non-cancellable periods plus periods covered by options to extend or terminate the lease if the lessee is reasonably certain to exercise that option. The assessment is based on economic incentives. Here, the lessee is “reasonably certain it will not terminate early.” Therefore, the termination option is not included in the lease term. The lease term is the 5-year non-cancellable period for classification and measurement purposes.

Under U.S. GAAP (specifically ASC 350-40), costs incurred for internal-use software after the preliminary project stage are capitalized only if they provide additional functionality or service potential. Costs that merely maintain the existing service potential are expensed. The key is whether the upgrade allows the software to perform tasks it couldn’t perform before or significantly enhances its efficiency or capacity, not the cost magnitude or vendor labels.0