tài liệu ôn thi CFA

tài liệu ôn thi CFA

CFA Level 1 Practice Questions for Financial Statement Analysis

1 An analyst gathers the following information about a company:

The company’s cash conversion cycle (in days) is closest to:

2 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

Two companies operating in the same industry both achieved the same return on equity with the same net sales, but the two companies were different with respect to return on total assets Compared with the company that had the higher return on total assets, the company with the lower return on total assets most likely had a higher:

A total asset turnover

B financial leverage multiplier

C proportion of common equity in its capital structure

3 If an analyst is preparing common-size financial statements the most appropriate way of expressing the interest expense is as a percentage of:

A sales

B total liabilities

C total interest-bearing debt

Answer: A

Interest expense is an income statement account and the common-size percentage should be computed

as a percentage of sales for that company

4 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst gathers the following information about three equipment sales that a company made at the end of the year:

All else equal for that year, the company’s cash flow from operations will most likely be:

A the same as net income

B $40,000 less than net income

C $140,000 less than net income

Answer: B

Equipment sale 1 results in a gain of $20,000, sale 2 results in a gain of $30,000, and By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose sale 3 results in a loss

of $10,000 The net gain is $40,000 The amount that would be deducted from net income to determine cash flow from operations is equal to the net gain of $40,000

5 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

The following information is from a company’s 2008 financial statements ($ millions):

In 2008 the company declared and paid cash dividends of $5 million and recorded depreciation expense

in the amount of $25 million The company’s 2008 cash flow from operations ($ millions) is closest to:

during 2008 Depreciation expense is added to net income and the changes in balance sheet accounts are also considered to determine cash flow from operations $20 + 5 (dividends) + 25 (depreciation) – 5 (increase in receivables) – 3 (increase in inventory) – 7 (decrease in payables) = $35 million

6 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company using the LIFO inventory method reports a LIFO reserve at year-end of $85,000, which is

$20,000 lower than the prior year If the company had used FIFO instead of LIFO in that year, the company’s financial statements would have reported:

A a lower cost of goods sold, but a higher inventory balance

B a higher cost of goods sold, but a lower inventory balance

C both a higher cost of goods sold and a higher inventory balance

Answer: C

The negative change in the LIFO reserve would increase the cost of goods sold under FIFO compared to LIFO FIFO COGS = LIFO COGS – Change in LIFO reserve The LIFO reserve has a positive balance so that FIFO inventory would be higher than LIFO inventory FIFO inventory = LIFO inventory + LIFO reserve

7 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

The year-end balances in a company’s LIFO reserve are $56.8 million in the company’s financial

statements for both 2007 and 2008 For 2008, the measure that will most likely be the same regardless

of whether the company uses the LIFO or FIFO inventory method is the:

A inventory turnover

B gross profit margin

C amount of working capital

Answer: B

The LIFO reserve did not change from 2007 to 2008 Without a change in the LIFO reserve, cost of goods sold would be the same under both methods Sales are always the same for both; so gross profit margin would be the same in 2008 The FIFO inventory would be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory Because the inventory balances would be different under FIFO, inventory turnover, and net working capital would also be different under FIFO

8 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst gathers the following information about a company:

The bonds were issued at par and can be converted into 300,000 common shares All securities were outstanding for the entire year Diluted earnings per share is closest to:

$280,000 Diluted EPS, assuming conversion, is ($1,360,000 + 280,000) / (1,000,000 +300,000) =

1,640,000/1,300,000= $1.26 per share The bonds are dilutive

9 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

At the beginning of the year, two companies issued debt with the same market rate, maturity date, and total face value One company issued coupon-bearing bonds at par and the other company issued zero-coupon bonds All other factors being equal for that year, compared with the company that issued par bonds, the company that issued zero-coupon debt will most likely report:

A higher cash flow from operations but not higher interest expense

B both higher cash flow from operations and higher interest expense

C neither higher cash flow from operations nor higher interest expense

10 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted Which of the following is the simplest way for a company to increase its reported operating cash flow?

A Record sales on a bill-and-hold basis

B Slow down the rate of payment to suppliers

C Use a third party financial institution to pay suppliers

12 An issue subject to a vote at a stockholders’ meeting is presented in a(n):

13 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company acquires a manufacturing facility in which it will produce toxic chemicals The cost of the facility (exclusive of the underlying land) is $25 million and it is expected to provide a 10-year useful life, after which time the company will demolish the building and restore the underlying land The cost of this restoration and cleanup is estimated to be $3 million at that time The facility will be amortized on a straight-line basis The company’s discount rate associated with this obligation is 6.25 percent The total expense that will be recorded in the first year associated with the asset retirement obligation on this property is closest to:

corresponding ARO liability of $1,636,183 The asset retirement costs will be amortized at the same rate

as the property (10 years, straight-line) and an accretion expense representing the change in the ARO liability will also arise

14 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company receives a payment of $10,000 on 1 December, for rent on a property for December and January On receipt, they correctly record it as cash and unearned revenue If at 31 December, their year-end, they failed to make an adjusting entry related to this payment, ignoring taxes, what is the effect on the financial statements for the year?

A Assets are overstated by $5,000 and Liabilities are overstated by $5,000

B Assets are overstated by $5,000 and Owner’s equity is overstated by $5,000

C Liabilities are overstated by $5,000 and Owners’ equity is understated by $5,000

Answer: C

The company should have made an adjusting entry to reduce the Unearned revenue account (a liability)

by $5,000 and increase Revenue, (and hence net income and retained earnings) by $5,000 As the company failed to make the adjusting entry the liabilities are overstated and owners’ equity is

understated

15 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted An analyst gathers the following information from a company’s accounting records (all figures in

16 Which of the following is least likely to be a characteristic of an effective financial reporting

17 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst gathers the following data about a company and the industry in which it operates:

Which of the following conclusions is most reasonable? Compared to the industry, the company:

A has the same cost structure and net profit margin

B has a lower gross profit margin and spends more on its operating costs

C is better at controlling product costs, but less effective at controlling operating costs

Answer: C

18 A European based company follows IFRS (International Financial Reporting Standards) and

capitalizes new product development costs During 2008 they spent €25 million on new product

development and reported an amortization expense related to a prior year’s new product development

of €10 million Other information related to 2008 is as follows:

An analyst would like to compare the European company to a similar U.S based company and has decided to adjust their financial statements to U.S GAAP Under U.S GAAP, and ignoring tax effects, the cash flow from operations (€ millions) for the company would be closest to:

A 265

B 275

C 290

Answer: A

Compute and describe the effects of capitalizing versus expensing on net income, shareholders’ equity, cash flow from operations, and financial ratios including the effect on the interest coverage ratio of capitalizing interest costs Explain the circumstances in which software development costs and research and development costs are capitalized

If all development costs had been expensed then net income would be reduced by the amount spent, and increased by the amortization of the previously capitalized amounts: 225 – 25 + 10 = 210 million CFO would be lower by the amount spent on development 290 – 25 = 265 million Note: The

amortization of previous development costs is a non-cash expense so does not affect cash flow

19 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted Which of the following best describes taxes payable?

A Total liability for current and future taxes

B Tax return liability resulting from current period taxable income

C Actual cash outflow for income taxes including payments (refunds) for other years

Answer: B

Taxes payable is the current liability resulting from the current period taxable income based on the company’s tax rate and the portion of its income that is subject to income taxes under the tax laws of the jurisdiction

20 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company is considering issuing either a straight coupon bond or a coupon bond with warrants

attached The proceeds from either issue would be the same If the firm issues the bond with warrants attached instead of the straight coupon bond, which of the following ratios will most likely be lower for the bond with warrants?

A Return on assets

B Debt to equity ratio

C Interest coverage ratio

Answer: B

The portion of the proceeds attributable to the warrants would be classified as equity, thus the portion classified as a liability would be smaller (lower) Therefore the debt-to-equity ratio will be lower, for the

bonds with warrants EBIT would be the same regardless of financing method; the coupon on the bond with warrants attached would be lower if the two issues provided the same proceeds, so the interest coverage would be higher for a bond with warrants attached Since interest expense would be lower for a bond with warrants attached, Net Income would be higher and ROA would be higher

21 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst is forecasting EPS for a company She prepares the following common sized data from its recent annual report and estimates sales for 2009

The capital structure of the company has not changed and the company has no short-term interest bearing debt outstanding The projected net income (in $ millions) for 2009 is closest to:

Pretax margin 257.50 Tax (35%) 90.1 Net Income 167.40

22 The unrealized gains and losses arising from changes in the market value of available-for-sale

securities are reported under U.S GAAP and International Financial Reporting Standards (IFRS) in the:

A equity section for both

B equity section for U.S GAAP and the income statement for IFRS

C income statement for U.S GAAP and the equity section for IFRS

accounting income) and the company expects to recover this difference during the course of future operations

24 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

On 1 January 2008 a company enters into a lease agreement to lease a piece of machinery as the lessor with the following terms:

The total affect on 2008 pre-tax income for the lessor from this lease is closest to:

Total income = 57,490 + 25,024 = 82,514

25 An analyst finds information about significant uncertainties affecting a company’s liquidity, capital resources and results of operations in the:

A notes to the financial statements

B balance sheet and income statement

C management discussion and analysis

Answer: C

Management must highlight any favorable and unfavorable trends and identify significant events and uncertainties that affect the company’s liquidity, capital resources and results of operations in the management discussion and analysis (MD&A)

26 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted Which of the following is least likely to be classified as a financial statement element?

liabilities, and shareholders’ equity and the following ratios:

The most reasonable conclusion is that, compared with Company 2, Company 1 had a:

A higher percentage of assets associated with inventory

B higher percentage of assets associated with accounts receivable

C lower percentage of assets associated with marketable securities

Answer: A

The current ratio includes inventory but the quick ratio does not (Current ratio is higher than quick ratio and quick ratio is higher than cash ratio.) The quick ratio includes accounts receivable but the cash ratio does not The denominator for all three ratios is current liabilities, which are the same proportion for both companies The difference in ratios is therefore created by inventory and accounts receivable Company 1 has the higher percentage of inventory because the difference between the current ratio and quick ratio is greater for that company Company 2 had the higher percentage of accounts

receivable because the difference between the quick ratio and the cash ratio is greater for Company 2

28 If a company has a current ratio of 2.0, the effect of repaying $150,000 in short-term borrowing will most likely decrease:

A the current ratio, but not the cash flow from operations

B the cash flow from operations, but not the current ratio

C neither the current ratio nor the cash flow from operations

Answer: C

The repayment of short-term debt would reduce cash flow from financing, not cash flow from

operations Any time the current ratio is above 1, equal changes in a current asset and a current liability will result in an increase in the current ratio: if current assets = 550 and current liabilities are 275, current ratio = 550/275 = 2.0 After the bank borrowing has been paid, the ratio becomes (550-

150)/(275-150) = 3.2 Had the ratio initially been below 1, current assets = 250 and current liabilities are

275, current ratio = 250/275 = 0.91, the equal change in current assets and liabilities would decrease the current ratio: 100/125=0.80

29 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

At the end of the year, a company sold equipment for $30,000 cash The company paid $110,000 for the equipment several years ago and had recorded accumulated depreciation of $70,000 at the time of its sale All else equal, the equipment sale will result in the company’s cash flow from:

A investing activities increasing by $30,000

B investing activities decreasing by $10,000

C operating activities being $10,000 less than net income

Answer: A

The book value of the equipment at the time of sale is $110,000 - $70,000 = $40,000 The proceeds are

$30,000; therefore a loss of $10,000 is reported on the income statement The loss reduces net income, but it is a non-cash amount, so is added back to net income in the calculation of the cash from

operations Therefore, cash from operations is higher than net income, not lower The total amount of the proceeds, $30,000, is the cash inflow from the transaction and is shown as a cash inflow from

investing activities

30 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company reports net income of $800,000 for the year The table below indicates selected items which were included in net income and their associated tax status

The company’s tax rate is 35 percent The company’s current income taxes payable (in $) is closest to:

accounts receivable – increase in inventories + increase in accounts payable (The loss on sale of

equipment is added back when calculating CFO It would have been deducted in the calculation of net income but the loss is not the cash impact of the transaction (the proceeds received, if any, would be the cash effect) and cash flows related to equipment transactions are investing activities, not operating activities CFO = 45.8 + 18.2 +1.6 + 4.2 – 3.4 +2.5 = $68.9 million $68.9 – $7.3 = $61.6 million free cash flow to equity

32 Which of the following statements best describes the level of accuracy provided by a standard audit report with respect to errors? The audited financial statements are:

A fully assured to be free of material errors

B reasonable assured to be free of all errors

C reasonable assured to be free of material errors

Answer: C

Audits provide reasonable assurance that the financial statements are fairly presented, meaning that there is a high degree of probability that they are free of material error, fraud or illegal acts

33 Making any necessary adjustments to the financial statements to facilitate comparison with respect

to accounting choices is done in which step of the financial statement analysis framework?

34 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted For the most recent year a manufacturing company reports the following items on their income

B Loss on disposal of fixed assets

C Realized gain on sale of available-for-sale securities

Answer: B

The loss on the disposal of fixed assets is an unusual or infrequent item but it is still part of normal operating activities The interest expense is the result of financing activities and would be classified as a nonoperating expense by nonfinancial service companies The realized gain on sale of available for sale securities is an investing activity and would also be classified as a nonoperating gain by a manufacturing company

35 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted The following information is available from the accounting records of a company as at 31 December

2008 (all figures in $ thousands):

The working capital for the company (in $ thousands) is closest to:

A 64

B 72

C 176

Answer: A

36 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted During late December 2008 Company A acquires a small competitor, Company

B During the evaluation of the acquisition it is determined that the customer lists of Company B have a fair value of $50,000 Company A has spent $15,000 during the year updating and maintaining its own customer lists What will be the value of the customer list intangible asset on Company A’s 31

December 2008 consolidated financial statements?

37 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company has equipment with an original cost of $850,000, accumulated amortization of $300,000 and

5 years of estimated remaining useful life Due to a change in market conditions the company now estimates that the equipment will only generate cash flows of $80,000 per year over its remaining useful life The company’s incremental borrowing rate is 8 percent Which of the following statements

concerning impairment and future return on assets (ROA) is most accurate? The asset is:

A impaired and future ROA increases

B impaired and future ROA decreases

C not impaired and future ROA increases

Answer: A

The equipment is impaired NBV = $550,000 which is greater than the sum of the undiscounted cash flows 5 yrs x $80,000 = $400,000 The company’s future ROA will increase Once the asset is written down, there will be lower depreciation charges, which will increase net income, and a lower carrying value of assets, which decreases total assets Both factors would increase any future ROA

38 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

On 1 January 2008 a company enters into a lease agreement to lease a piece of machinery as the lessor with the following terms:

Which of the following best describes the classification of the lease on the company’s financial

statements for 2008?

A Operating lease

B Sales type lease

C Direct financing lease

Answer: B It is a sales type lease: the lease period covers more than 75% of its useful life (5/6=83.3%) and the asset is on its books at less than the present value of the lease payments ($199,635) (PMT =

$50,000, N=5, i=8%) The firm must have acquired or manufactured the asset if it is recorded at less than the present value of the lease payments

39 Which of the following is the most useful to an analyst assessing the credit worthiness of a

company? Information related to:

A operating cash flow

B the scale and diversity of a company’s operations

C operational efficiency of the company’s operations

Answer: A

Credit analysis is concerned with a company’s debt-paying ability Returns to creditors are normally paid

in cash, so the company’s ability to generate cash internally is the most important factor in credit

analysis

40 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company acquires some new depreciable assets Which of the following combinations of estimated salvage value and useful life will most likely produce the highest net profit margin?

A low salvage value estimates and long average lives

B high salvage value estimates and long average lives

C high salvage value estimates and short average lives

Answer: B

A high salvage value estimate reduces the depreciable base and thus depreciation expense; long average lives reduce the annual depreciation expense for any given depreciable base The combination of the two would result in the lowest depreciation expense which leads to the highest net income and profit margins

41 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst gathers the following information about a company ($ millions):

If the company uses the FIFO inventory method instead of LIFO, the company’s 2008 gross profit margin

is closest to:

A 22.9%

B 29.8%

C 33.2%

Answer: C

42 Which of the following will most likely be an incentive for management to underreport earnings?

A Meeting analysts’ expectations

B Contract negotiations with unions

C Meeting restrictive debt covenants

Answer: B

Management is most likely to try and report lower earnings when negotiating concessions from a union

43 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

A company uses the LIFO inventory method, but most of the other companies in the same industry use FIFO Which of the following best describes one of the adjustments that would be made to the

company’s financial statements to compare it with other companies in the industry? The amount reported for the company’s ending inventory should be:

A increased by the ending balance in its LIFO reserve

B decreased by the ending balance in its LIFO reserve

C increased by the change in its LIFO reserve for that period

Answer: A

LIFO Reserve = FIFO Inventory – LIFO Inventory Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending balance for inventory on a FIFO basis

44 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

An analyst gathers the following information about a company:

Using the treasury stock method, the number of incremental shares used to compute diluted earnings per share is closest to:

exercise price is below the average market price of the stock Using the treasury stock method, the number of new shares issued on exercise is reduced by the number of shares that could be purchased with the cash received upon exercise of the warrants: 20,000($30) = $600,000 in proceeds $600,000 /

$40 = 15,000 shares treasury stock Incremental shares using the treasury stock method = 20,000 – 15,000 = 5,000

45 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

At the beginning of the year, a lessee company enters into a new lease agreement that is correctly classified as a finance lease, with the following terms:

With respect to the effect of the lease on the company’s financial statements in the first year of the lease, which of the following is most accurate? The reduction in the company’s:

A pretax income is $72,096

B cash flow from financing is $56,742

C cash flow from operations is $72,096

Answer: B

The present value of the lease is $360,477.62 (n = 5, I = 12%, PMT = $100,000) 12% of the original PV is

$43,257.31 and represents the interest component of the payment in the first year The difference between the annual payment and the interest is the amortization of the lease obligation included in cash flow from financing $100,000 – 43,257.31 = $56,742.69 Depreciation is $360,477.62 / 5 or

$72,095.52 so the total reduction in pretax income would be interest plus depreciation or $115,352.83 Cash flow from operations would be reduced by the amount of the interest only because the

depreciation would be added back to determine cash flow from operations

46 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted The following information relates to a profitable company that offers a warranty on a new product introduced in 2008:

If the company’s tax rate is 35 percent, which of the following most accurately describes the deferred tax recorded in 2008 with respect to the new product warranty?

A Deferred tax asset of $35,000

B Deferred tax asset of $65,000

C Deferred tax liability of $35,000

Answer: A

For financial statement purposes, the warranty expense recorded in 2008 is greater than the cash expense they incurred (and that is allowed as a deduction for income tax purposes), resulting in a warranty liability for financial statement purposes, but not for tax purposes As the carrying amount of the liability is greater than the tax base, the $100,000 temporary difference will give rise to a $35,000 (100,000 x 0.35) deferred tax asset

47 Assume U.S GAAP (generally accepted accounting principles) applies unless otherwise noted

At the beginning of the year, a company issues a $1,000 face value, semiannual coupon, bond with an 8 percent coupon rate maturing in 10 years The annual market rate of interest at issuance was 12

percent The initial liability recorded for this bond is closest to:

A $771

B $774

C $1,000

Answer: A

The liability recorded is based on market rates of interest when the bond is issued and not the coupon rate on the bond The market value of the bond at issuance was $770.60 (FV=1,000, PMT=40, N=20, I=6.0)

48 Financial reporting standards are most likely enforced by:

A both standard-setting bodies and regulatory bodies

B regulatory authorities, such as the SEC and IOSC, only

C standard-setting bodies, such as the FASB and IASB, only

The IFRS framework identifies five factors that contribute to reliability: faithful representation,

substance over form, neutrality, prudence and completeness Consistency is not one of them

50 The following information is available about a company ($ millions):

During 2009 the company most likely decreased the:

A proportion of sales made on a cash basis

B inventory, anticipating lower demand for its products in 2010

C proportion of interest-bearing debt relative to trade accounts payable

Answer: A

Sales, net income, and net margin are relatively constant for the two years The substantial drop in cash flow from operations could be attributed to an increase in receivables and/or inventory A decrease in the proportion of cash sales implies an increase in the proportion of credit sales, increasing accounts receivable An increase in accounts receivable would decrease cash flow from operations

51 According to International Financial Reporting Standards which of the following is one of the

conditions that must be met for revenue recognition to occur?

A Costs can be reliably measured

B Payment has been partially received

C Goods have been delivered to the customer

Answer: A

The IASB’s conditions that must be met include that the costs incurred can be reliably measured, there

is assurance of payment, not necessarily an actual receipt of any payment, and that the significant risks and rewards of ownership have been transferred, which is normally (but not always) when the goods have been delivered

52 A company accrued wages of $2,000 and collected accounts receivable of $10,000 Which of the following best describes the effect of these two transactions on the company?

A Net income will increase

B Current ratio will decrease

C Cash from operations will decrease

Calculate, classify, and interpret activity, liquidity, solvency, profitability, and valuation ratios

Accruing wages increases current liabilities and expenses, but collecting receivables has no effect on current assets or sales therefore the current ratio and net income both decrease Collecting accounts receivable increases cash flow from operations and accruing wages increases current liabilities, which also increases cash flow from operations so cash from operations will increase not decrease

53 A company had 100,000 common shares outstanding on 1 January 2009 The company has no plans to issue additional shares or purchase treasury shares during the year, but is planning either a two-for-one stock split or a 100 percent stock dividend on 1 July The number of shares used to determine earnings per share at 31 December 2009, will be closest to:

A 200,000 for both the stock split and the stock dividend

B 200,000 for the stock split and 150,000 for the stock dividend

C 150,000 for the stock split and 200,000 for the stock dividend

54 Under International Financial Reporting Standards (IFRS) the preparation of a complete set of

financial statements is best described as a(n):

A objective of financial reporting

B general requirement for financial statements

C qualitative characteristic of the IFRS Framework

A recording of a warranty expense

B recording of revenue before cash is received

C payment of a property insurance policy for the following year

Answer: A

Illustrate and interpret the components of the balance sheet, and discuss the uses of the balance sheet

in financial analysis

Calculate, classify and interpret activity, liquidity, solvency, profitability, and valuation ratios

The recording of a warranty expense will create a warranty liability and the resulting increase in current liabilities will decrease the current ratio

56 A company issued bonds in 2009 that mature in 2019 The measurement basis that will most likely

be used on the 2009 balance sheet for the bonds is:

A market value

B historical cost

C amortized cost

Answer: C

Bonds payable issued by a company are financial liabilities that are measured at amortized cost

57 Which of the following transactions is least likely to increase a company’s reported cash from

operations?

A Securitizing accounts receivable

B Delaying payments made to suppliers

C Using short-term debt to reduce an existing account payable

Answer: C

Using short-term debt to pay down payables will have no effect on the cash from operations Payables will decrease which decreases cash from operations, but short-term debt will increase, which is an offsetting increase in cash from operations, resulting in no net effect on cash from operations

58 The settlement value for a liability is best described as:

A the amount of proceeds received in exchange for the obligation

B the discounted value of the future cash flows that are required to satisfy the obligation

C the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the

obligation

Answer: C

The settlement value for a liability is the undiscounted amount of cash or cash equivalents expected to

be paid to satisfy the liabilities in the normal course of business

59 A company has just completed the sale of a tract of land for €3.5 million which was originally

acquired at a cost of €2.0 million The purchaser made a down-payment of €200,000 with the

remainder to be paid in equal installments over the next 10 years A short time after the sale, significant doubt arose about the purchaser’s ability to meet the future obligations for the land purchase When compared to the cost recovery method of revenue recognition, the profit (in €) that the company will recognize in the year of the sale under the installment method is most likely to be higher by:

Which of the companies most likely prepares their financial statements in accordance with U.S GAAP (generally accepted accounting principles)?

A Both

B Company A only

C Company B only

Answer: C

Company A prepares its financial statements under IFRS while company B uses

U.S GAAP The common practice under IFRS presentation is to present noncurrent assets before current assets and long term liabilities before current ones Minority interest must be shown as a component of equity under IFRS Under U.S GAAP, current assets are presented before long term assets and current liabilities before long term ones; under U.S GAAP, minority interest is often shown “in-between”

liabilities and equity (although it could also be shown as an equity component)

61 An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for:

A the debt-equity ratio but not the interest coverage ratio

B the interest coverage ratio but not the debt-equity ratio

C both the debt-equity ratio and the interest coverage ratio

Answer: A

The adjustments to convert operating leases into capital leases would increase the amount of total debt

in the debt-equity ratio thus increasing the ratio; the portion of the lease payment estimated to be lease interest expense would lower the interest coverage ratio

62 To gain insight into what portion of a company’s assets is liquid, an analyst will most likely use:

A the cash ratio

B the current ratio

C common-size balance sheets

Answer: C

Compare a company’s liquidity measures with those of peer companies

A common-size balance sheet expresses all balance sheet accounts as a percentage of total assets

63 An analyst gathers the following information ($ millions) about three companies operating in the same industry:

Although the companies have different levels of sales and assets, they are all experiencing sales growth

at about the same rate and use the same type of equipment in the manufacturing process All three companies also use the same depreciation method Which company is least likely to require major capital expenditures in the near future? Company:

64 The following information (U.S $ millions) for two companies operating in the same industry during the same time period is available:

If both companies achieve a return on equity of 15% for the period, which of the following statements is most likely correct? Compared to Company B, Company A has a:

A higher net profit margin

B higher total asset turnover

C lower financial leverage multiplier

Answer: A

65 Is the reversal of an inventory write-down permitted under U.S GAAP (generally accepted

accounting principles) and International Financial Reporting Standards (IFRS)?

A No, under both

B Yes, under both

C Yes under IFRS but not under U.S GAAP

Answer: C

The reversal of an inventory write-down is permitted under IFRS but not under U.S GAAP

66 A retail company prepares its financial statements in accordance with U.S GAAP (generally accepted accounting principles) Its purchases and sales of inventory for its first two years of operations are listed below

In its second year of operation, the company’s ending inventory is $348,003 Which of the following inventory cost flow assumptions is the company was most likely using?

67 A company issued a $50,000 7-year bond for $47,565 The bonds pay 9 percent per annum and the yield-to-maturity at issue was 10 percent The company uses the effective interest rate method to amortize any discounts or premiums on bonds After the first year, the yield to maturity on bonds equivalent in risk and maturity to these bonds is 9 percent The amount of the bond discount

amortization ($) recorded in the second year is closest to:

A 282

B 348

C 2,178

Amortization in the 2nd year is 282

68 The following selected information is from a company’s most recent financial statements:

The 2009 cash conversion cycle, in days, is closest to:

A 23

B 26

C 28

Answer: A

Activity Ratios Calculation

Inventory Turnover 7.39 COGS/Average Inventory 1969/(248+285)/2 DOH (days on hand) 49.4

365/Inventory Turnover 365/7.39

Receivable Turnover 9.27 Sales/Average Receivables 2801/(318+286)/2

69 In the evaluation of credit ratings, a company will most likely be assigned a higher credit rating if it has a:

A lower EBITDA/Interest ratio

B lower dividends-to-total-debt ratio

C higher five year average of its coefficient of variation of its operating margin

Answer: B A lower dividend means more retention and increased equity: higher retained cash flow will result in a higher credit rating

70 A company purchased a €2,000 million long-term asset in 2009 when the corporate tax rate was 30 percent

On January 15, 2010 the government lowered the corporate tax rate to 25 percent for 2010 and beyond The deferred tax liability (€) as at 31 December 2010 is closest to:

71 Which of the following is least likely a condition present in a “fraud triangle”?

A Constraining debt covenants

B Adding independent members to the Board of Directors

C Management’s belief that a decline in performance is due to temporary economic conditions Answer: B

The “fraud triangle” requires incentives (e.g., debt covenants), opportunities, and management’s ability

to rationalize (temporary economic conditions) Adding independent members to the Board of Directors should improve corporate governance and hence decrease the opportunity for fraud

72 A company is buying back its stocks to offset the dilution of earnings from its stock option program Which of the following statements best describes the effect on the financial statements of the amount spent to buy back the stocks? The amount spent reduces:

A net income

B cash from operating activities

C cash from financing activities

74 The table below shows changes to the number of common shares outstanding for a company during 2009:

To calculate earnings per share for 2009, the company’s weighted average

number of shares outstanding is closest to:

75 In the statement of cash flows, a company is allowed to classify interest paid:

A in either the operating or financing section under IFRS

B in either the operating or financing section under U.S GAAP

C only in the financing section under both IFRS and U.S GAAP

Answer: A

US GAAP requires that interest paid be classified as an operating cash flow; IFRS allows interest paid to

be classified as either an operating or financing activity

76 A company entered into a three-year construction project with a total contract price of $5.3 million and an expected total cost of $4.4 million The following table provides cash flow information relating

77 An analyst’s examination of the performance of a company is least likely to include an assessment of

a company’s:

A profitability

B cash flow generating ability

C assets relative to its liabilities

Answer: C

Assessment of performance includes analysis of profitability and cash flow generating ability The

relationship between assets and liabilities is used to assess a company’s financial position, not its performance

78 Which of the following is a constraint as defined in the International Financial Reporting Standards (IFRS) Framework for the Preparation and Presentation of Financial Statements?

A Neutrality

B Timeliness

C Going concern

Answer: B

Timeliness is a constraint in the IFRS Framework Neutrality is a factor that contributes to reliability and going concern is an assumption of the Framework

79 A company, with a tax rate of 40%, sold a capital asset with a net book value of $500,000 for

$570,000 during the year Which of the following amounts (in $) will most likely be reported on its income statement for the year related to the asset sale?

81 A company issued shares to acquire a large tract of undeveloped land for future development The most likely recording of this transaction in the cash flow statement is as a(n):

A disclosure in a note or supplementary schedule

B outflow from investing activities, and an inflow from financing activities

C outflow from operating activities, and an inflow from financing activities

Answer: A

Non-cash transactions are not reported in the cash flow statement but if they are significant they are reported in a note or supplementary schedule

82 The following information is available for a company:

In 2010, the company most likely:

A paid a dividend of $1,000

B paid a dividend of $5,000

C did not pay a dividend because they incurred a loss

Answer: B