CFA Tai lieu on tap

7/27/2019 CFA Tai lieu on tap

1/100

CFA Level 1 Practice Questions for Financial Statement Analysis

Page 1 of100

Berkeley Middle East Inc.Url: www.berkeleyme.com Email: [email protected] Tel: 050-4401915


1. An analyst gathers the following information about a company:

The companys cash conversion cycle (in days) is closest to:

A. 40.

B. 59.

C. 65.

Answer: A

Evaluate overall working capital effectiveness of a company, using the operating and cash conversion

cycles, and compare its effectiveness with other peer companies. Calculate and interpret liquidity

measures using selected financial ratios for a company and compare it with peer companies.

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.


2/100


Page 2 of100


Answer: B

The DuPont system can be used to break down return on equity (ROE) into three components: Profit

margin, total asset turnover, and financial leverage multiplier. The first two components can be

multiplied to calculate the return on total assets (ROA). If the two companies have the same ROE, the

company with the lower ROA must have a higher financial leverage multiplier (lower proportion of

common equity in the 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.


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 companys 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.


3/100


Page 3 of100


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.


The following information is from a companys 2008 financial statements ($ millions):

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

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

A. 25.

B. 30.

C. 35.

Answer: C

The change in retained earnings is $20 and dividends are paid from retained earnings. 2008 net income

equals the change in retained earnings plus any dividends paid 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.

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.


4/100


Page 4 of100



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

companys 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.


The year-end balances in a companys LIFO reserve are $56.8 million in the companys 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.


5/100


Page 5 of100



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:

A. $1.05.

B. $1.26.

C. $1.36.

Answer: B

Dividends of $140,000 (0.07 x 2,000,000) should be deducted from net income to determine the amount

available to common shareholders: $1,360,000 = (1,500,000 140,000). Basic EPS would be $1,360,000 /

1,000,000 or $1.36 per share. Diluted EPS would consider the convertible bonds if they were dilutive.

Interest on the bonds is $400,000 and the after-tax amount add back to net income is $400,000 (1-.30) =

$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.


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.

Answer: A

When a company issues a zero-coupon bond, cash flow from operations is overstated over the life of the

bond. Interest expense is recorded for income statements purposes, but is added back in the statement

of cash flows as a non-cash adjustment to cash flow from operations.


6/100


Page 6 of100



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.

Answer: B

Slowing down the rate or payments to suppliers is the simplest way to increase reported operating cash

flow.

11. When the financial statements materially depart from accounting standards and are not fairly

presented, the audit opinion would be a(n):

A. adverse opinion.

B. qualified opinion.

C. disclaimer of opinion.

Answer: A

An adverse opinion occurs when the financial statements materially depart from accounting standards

and are not fairly presented. A qualified opinion is one in which there is some limitation or exception to

accounting standards.

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

A. interim report.

B. proxy statement.

C. management statement of responsibility.

Answer: B

Proxy statements are prepared and distributed to shareholders on matters that are to be put to a voteat shareholder meetings.


7/100


Page 7 of100



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 companys 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:

A. $163,618.

B. $224,945.

C. $265,879.

Answer: C

The PV of the future cleanup costs = 1,636,183 (FV = 3,000,000; N = 10; I/Y = 6.25; PMT = 0; CPT PV). The

firm will record asset retirement costs of $1,636,183 as part of the cost of the property and a

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.


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, theiryear-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 Owners 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.


8/100


Page 8 of100


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

analyst gathers the following information from a companys accounting records (all figures in

thousands):

The analysts estimate of net income ($ thousands) for 2008 is closest to:

A. 650.

B. 850.

C. 1,050.

Answer: C

Total assets = liabilities + owners equity. Owners equity = $5,250 2,200= 3,050. Owners equity =

contributed capital + ending retained earnings. Ending retained earnings = 3,050 1,400= 1,650. Ending

retained earnings = beginning retained earnings + net income dividends. 1,650= 800 + net income

200; Net income = $1,050

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

framework?

A. Consistency.

B. Comparability.

C. Comprehensiveness.

Answer: B

The characteristics of a coherent financial reporting network are transparency, comprehensiveness and

consistency. Comparability is a qualitative characteristic of financial statements.


9/100


Page 9 of100



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 years 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.


10/100


Page 10 of100


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 ofcapitalizing 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.


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

companys tax rate and the portion of its income that is subject to income taxes under the tax laws of

the jurisdiction.


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


11/100


Page 11 of100


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.


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:

A. 162.8.

B. 164.9.

C. 167.4.

Answer: C

The cost of goods sold and operating expenses are constant over the two-year period and they can

reasonably be used to forecast 2009. Interest expense is declining as a percent of sales, implying it is a

fixed cost. Conversion into dollars for each year shows what interest expense has been; 2008 =$80

(3.72% x 2,150); 2007=$80 (4.02 x 1,990) and that would be a reasonable projected amount to use. The

restructuring charge should not be included as it is a non-recurring item. The tax rate, 35%, is given.

Sales $2,250.00 COGS (45%) 1,012.50 Operating expenses (40%) 900.00 Interest expense 80.00

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


12/100


Page 12 of100


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.

Answer: A

Under both U.S. GAAP and IFRS the unrealized gains and losses arising from carrying available-for-sale

securities at market value are reported in equity as part of accumulated other comprehensive income.

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

company records the following two transactions:

Which of the above transactions will most likely give rise to a deferred tax liability on the balance sheet?

A. I only.

B. II only.

C. Both I and II.

Answer: B

II represents a deferred tax liability: The accounts receivable for financial statement purposes has a

carrying value of 500,000 but with a tax base of 0. The temporary difference creates a deferred tax

liability. Alternatively, accounting income tax expense exceeded taxes payable and the firm expects to

eliminate this difference over the course of future operations. Item I represents a deferred tax asset:

Rent received in advance creates a liability on the financial statements with a carrying value of 300,000

but with a tax base of 0. The temporary difference creates a deferred tax asset. Alternatively an excess

amount has been paid for income taxes based on the cash received (taxable income exceededaccounting income) and the company expects to recover this difference during the course of future

operations.


13/100


Page 13 of100



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:

A. $32,143.

B. $75,000.

C. $82,519.

Answer: C

This is a sales type lease: the lease period covers more than 75% of its useful life (6/7=85.7%) and the

asset is on its books at less than the present value of the lease payments ($357,490) (PMT = $75,000,

N=6, i=7%). The firm must have acquired or manufactured the asset if it is recorded at less than the

present value of the lease payments. The income in the first year will therefore consist of the gross

profit on the sale (357,490-300,000)=57,490 plus interest revenue from financing the lease = 25,024(see

below)

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

25. An analyst finds information about significant uncertainties affecting a companys 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 companys liquidity, capital resources and results of operations in the

management discussion and analysis (MD&A).


14/100


Page 14 of100



Which of the following is least likely to be classified as a financial statement element?

A. Asset.

B. Revenue.

C. Net income.

Answer: C

Net income is not an element of the financial statements, but the net result of revenues less expenses.

The elements are: assets, liabilities, owners equity, revenue and expenses.

27. An analyst prepares common-size balance sheets for two companies operating in the same industry.

The analyst notes that both companies had the same proportion of current liabilities, long-term

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.


15/100


Page 15 of100


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 thecurrent ratio: 100/125=0.80.


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 companys 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.


16/100


Page 16 of100



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 companys tax rate is 35 percent. The companys current income taxes payable (in $) is closest to:

A. 206,500.

B. 276,500.

C. 360,500.

Answer: B

31. An analyst gathers the following annual information ($ millions) about a company that pays no

dividends and has no debt:

The companys annual free cash flow to equity ($ millions) is closest to:


17/100


Page 17 of100


A. 53.1.

B. 58.4.

C. 61.6.

Answer: C

Free cash flow to equity in a company without any debt is equal to cash flow from operations (CFO) less

capital expenditures. CFO = net income + depreciation + loss on sale of equipment + decrease in

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?

A. Collect data.

B. Process data.

C. Analyze/interpret the processed data.

Answer: B

Making any adjustments is part of the processing data step. Commonly used data bases (part of the

collection phase) do not make adjustments for differences in accounting choices.


18/100


Page 18 of100



For the most recent year a manufacturing company reports the following items on their income

statement:

Interest expense $62,500 Loss on disposal of fixed assets $50,000 Realized gain on sale of available-for-sale securities $17,750

Which of the items is classified as an operating item in the companys income statement?

A. Interest expense.

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.


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


19/100


Page 19 of100



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 As 31

December 2008 consolidated financial statements?

A. $15,000.

B. $50,000.

C. $65,000.

Answer: B

The purchased customer list is an identifiable intangible because it can be sold separately from the

company and it would be recorded at its fair market value, the amount paid for it in the acquisition,

$50,000. The amount spent by Company A on its own lists, $15,000, would have to be expensed because

internally generated intangibles are not capitalized.


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 companys 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.


20/100


Page 20 of100


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 companys future ROA will increase. Once the asset is writtendown, 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.


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 companys 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 companys operations.

C. operational efficiency of the companys operations.


21/100


Page 21 of100


Answer: A

Credit analysis is concerned with a companys debt-paying ability. Returns to creditors are normally paid

in cash, so the companys ability to generate cash internally is the most important factor in credit

analysis.


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.


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

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

is closest to:

A. 22.9%.

B. 29.8%.

C. 33.2%.


22/100


Page 22 of100


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.


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

companys financial statements to compare it with other companies in the industry? The amount

reported for the companys 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.


23/100


Page 23 of100



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:

A. 5,000.

B. 15,000.

C. 20,000.

Answer: A

Diluted EPS is calculated using the treasury stock method that considers what would be the effect if the

options or warrants had been exercised. Only options or warrants that are in-the-money are included, as

out-of-the-money options would not be exercised. Therefore only the warrants are dilutive: their

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.


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 companys financial statements in the first year of the

lease, which of the following is most accurate? The reduction in the companys:

A. pretax income is $72,096.

B. cash flow from financing is $56,742.

C. cash flow from operations is $72,096.


24/100


Page 24 of100


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.


The following information relates to a profitable company that offers a warranty on a new product

introduced in 2008:

If the companys 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.


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 12percent. The initial liability recorded for this bond is closest to:

A. $771.

B. $774.

C. $1,000.


25/100


Page 25 of100


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.

Answer: B

49. According to the International Financial Reporting Standards framework, which of the following

qualities of financial information is least likely to improve its reliability?

A. Neutrality

B. Consistency

C. Substance over form

Answer: B

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.


26/100


Page 26 of100


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 IASBs 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.


27/100


Page 27 of100


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.

Answer: A

Describe the components of earnings per share and calculate a companys earnings per share (both

basic and diluted earnings per share) for both a simple and complex capital structure.

Stock dividends and stock splits are treated in the same way for purposes of determining weightedaverage number of shares outstanding; the adjustment in the number of shares is made as if the stock

split or dividend occurred at the beginning of the year.

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.

Answer: B

The preparation of a complete set of financial statements is a general requirement for financial

statements.

55. Which of the following transactions will most likely result in a decrease in a companys current

ratio? The:

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.


28/100


Page 28 of100


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 likelybe 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 companys 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.


29/100


Page 29 of100


59. A company has just completed the sale ofa 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 purchasers 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 willrecognize in the year of the sale under the installment method is most likely to be higher by:

A. 85,714.

B. 114,286.

C. 150,000.

Answer: A

60. Presented below are abbreviated balance sheets for two merchandising companies following the

format found in each of their annual reports.


30/100


Page 30 of100


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 -betweenliabilities 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 companys 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 companys liquidity measures with those of peer companies.


31/100


Page 31 of100


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:

A. 1.

B. 2.

C. 3.

Answer: B

Discuss the use of fixed asset disclosures to compare companies average age of depreciable assets, and

calculate, using such disclosures, the average age and average depreciable life of fixed assets.


32/100


Page 32 of100


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.


33/100


Page 33 of100


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 companys ending inventory is $348,003. Which of the following

inventory cost flow assumptions is the company was most likely using?

A. FIFO

B. LIFO

C. Weighted average cost

Answer: C

The company is accounting for its inventory using the weighted average cost method. In the 2nd year of

operations, under Weighted Average Cost: Units available for sale include ending inventory from year 1

plus purchases for year 2: 7,000 + 100,000 = 107,000 Cost of Goods Available for Sale: 7,000 x $8.43 +

100,000 x $12.25 = $1,284,000 Unit Cost: $1,284,000/107,000 = $12.00 End Inventory = 107,000

78,000 = 29,000 units. $12.00 x 19,000 = $348,003

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.


34/100


Page 34 of100


Answer: A

Interest paid = Market rate at issue x Issued amount of bonds = 9% x $50,000 Interest expense = Market

rate at issue x Carrying (BV) of bonds Amortization of discount = Interest expense -Interest paid

Year Interest Interest Amortization Carrying Paid Expense of Discount Value

0 47,565 1 4,500 4,757 257 47,822 2 4,500 4,782 282 48,104

Amortization in the 2nd year is 282

68. The following selected information is from a companys 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


35/100


Page 35 of100


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:

A. 130.

B. 156.

C. 205.

Answer: A

The deferred tax liability equals the difference between the value for accounting and the value for tax

times the current tax rate in effect. (1,800 1,280) x 0.25 = 520 x 0.25 = 130

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. Managements 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 managements 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.


36/100


Page 36 of100


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.

Answer: C

The amount spent to buy back stocks to offset dilution is classified as a financing activity on the cash

flow statement and therefore cash from financing decreases.

73. A firm reports sales of 50,000,000 for the year ended December 31, 2009. Its accounts receivable

balances were 6,000,000 at January 1, 2009 and 7,500,000 at December 31, 2009. The companyscash collections from sales () for 2009 is

closest to:

A. 42,500,000.

B. 48,500,000.

C. 51,500,000.

Answer: B

The cash collections from sales is equal to sales less the change in receivables: 50,000,000 -

(7,500,000-6,000,000) = 48,500,000.


37/100


Page 37 of100


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 companys weighted average

number of shares outstanding is closest to:

A. 215,000.

B. 420,000.

C. 430,000.

Answer: C

The weighted average number of shares outstanding is time weighted: 5/12 of the year there were

180,000 shares, and 7/12 of the year there were 240,000 (180,000+60,000) on a pre-split basis; the

stock split is treated retroactively to the start of the year. [(180,000 x 5/12) + (240,000 x 7/12)] x 2 =

430,000

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.


38/100


Page 38 of100


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

to the contract:

If the company uses the percentage-of-completion method, the amount of revenue (in $) recognized in

Year 2 will be closest to:

A. 2,800,000.

B. 3,372,727.

C. 3,616,636.

Answer: C

The revenue reported is equal to the percentage of the contract that is completed in that period, where

percentage completion is based on costs. In Year 2, the percent completed is $3,000,000/$4,400,000 =

68.2%, resulting in 68.2% x 5,300,000 = 3,616,636 revenue being recognized.

77. An analysts examination of the performance of a company is least likely to include an assessment of

a companys:

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 companys 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


39/100


Page 39 of100


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?

A. 42,000

B. 70,000

C. 570,000

Answer: B

(including discontinued operations, extraordinary items, and unusual or infrequent items), and changesin accounting standards.

The disposition of a capital asset is reported as a net gain or loss ($570,000 $500,000 = $70,000) on the

income statement before tax affects.

80. Under International Financial Reporting Standards (IFRS) a bank, or other financial institution, would

normally use which type of balance sheet format?

A. Classified

B. Liquidity-based

C. Market-value based

Answer: B

Under IAS No. 1 liquidity-based presentation is recommended when it provides information that is more

relevant and reliable than the current/noncurrent format, such as in the case of banks and financial

institutions.

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.


40/100


Page 40 of100


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


41/100


Page 41 of100


83. A company reported net income of $400,000 for the year. At the end of the year, the company had

an unrealized gain of $50,000 on its available-for-sale securities, an unrealized gain of $40,000 on held-

to-maturity securities and an unrealized loss of $100,000 on its portfolio of held-for-trading securities.

The companys comprehensive income (in $) for the year is closest to:

A. 350,000.

B. 390,000.

C. 450,000.

Comprehensive Income = Net Income + Other Comprehensive Income = NI + OCI Other Comprehensive

Income will include unrealized gains or losses on available for sale securities. Net Income includes

unrealized gains or losses in trading securities, while securities classified as held to maturity are

maintained at historical cost and therefore the unrealized gains wont impact comprehensive income.

OCI = $50,000; Comprehensive Income = NI + OCI = $400,000 + $50,000=$450,000

84. The table below contains selected data from the common-size balance sheets for three different

industries: utilities, financials and consumer discretionary products.

Which of the following statements is most accurate?

A. Industry 1 is the utility industry and Industry 2 is the financial industry.

B. Industry 2 is the utility industry and Industry 3 is the consumer discretionary products industry.

C. Industry 1 is the consumer discretionary products industry and Industry 3 is the financial

industry.

Answer: B

Evaluate and compare companies using ratio analysis, common-size financial statements, and charts in

financial analysis.

The utility industry [2] has a large percentage of PPE and long term debt and low inventories; the

consumer discretionary products industry [3] would have high inventories.


42/100


Page 42 of100


85. Due to global oversupply in the micro-chip industry a company wrote down its 2009 inventory by

4.0 million from 12.0 million. The following year, due to a change in competitive forces in the

industry the market price of these chips rose sharply to 10% above their original 2009 value. If the

company prepares its financial statements in accordance with International Financial Reporting

Standards (IFRS), its 2010 inventory (in -millions) will most likely be reported as:

A. 8.0.

B. 12.0.

C. 13.2.

Answer: B

Although IFRS does require write-downs, it also allows revaluations, but not to exceed the original value,

i.e., 12. The exception to this, where gains are allowed, is in producers of agricultural, forest and

resource products.

86. An analyst calculates the following ratios for a firm:

The return on equity (in %) for this firm is closest to:

A. 6.4.

B. 7.0.

C. 17.9.

Answer: C

ROE = Net Profit Margin x Sales/Total Assets x Total Assets/Equity = 4.0 x 2.8 x 1/0.625 = 17.9%.

Alternatively, ROE = Return on Total Assets x Total Assets/Equity = 11.2 x 1/0.625 = 17.9%

87. A capital lease requires annual lease payments of $2,000 at the start of each year. Fair value of the

leased equipment at inception of the lease is $10,000 and the implicit interest rate is 12 percent. If the

present value of the lease payments equals the fair value of the equipment at the inception of the lease,

the interest expense (in $) recorded by the lessee in the second year of the lease is closest to:

A. 960.

B. 1,104.

C. 1,200.


43/100


Page 43 of100


Answer: A

Determine the effects of finance and operating leases on the financial statements and ratios of the

lessees and lessors.

88. Two software companies that report their financial statements under U.S. GAAP (generally accepted

accounting principles) are identical except as to how soon they judge a project to be technologically

feasible. One firm does so very early in the development cycle while the other usually waits until just

before the project is released to manufacturing. Compared to the company that judges technological

feasibility early, the one that waits until closer to manufacturing will most likely report lower:

A. financial leverage.

B. total asset turnover.

C. cash flow from operations.

Answer: C

U.S. GAAP requires that a company expense costs related to software development until product

feasibility is established and capitalize any costs thereafter. The company that capitalizes these software

development costs reports the expenditures in the investing activities section of the statement of cash

flows; the company that expenses software development costs reports the expenditures in the cashflow from operations.

89. During the past year, a companys production facility was operating at 75% of capacity. The firms

costs were as follows:

The firm ended the year with no remaining work-in-process inventory. The total capitalized inventory

cost (in $ millions) for the year is closest to:

A. 13.25.

B. 15.25.


44/100


Page 44 of100


C. 16.00.

Answer: A

90. A company prepares its financial statements in accordance with U.S. GAAP (generally accepted

accounting principles). It expected to be the sole supplier for a state-wide school milk program and had

production facilities valued at $28.4 million. Recently several other companies were also granted milk-

supply contracts throughout the state and the company now estimates that it will only be able to

generate cash flows of $3 million per year for the next 7 years with its facilities. The firm has a cost of

capital of 10%.

The impairment loss (in $-millions) on the production facilities will most likely be reported in the

companys financial statements as a:

A. 13.8 reduction in operating cash flows. .

B. 13.8 impairment loss in the income statement

C. 7.4 reduction in the balance sheet carrying amount.

Answer: B

The company will report an impairment loss in the income statement: The facilities fail the recoverability

test, the net book value cannot be recovered from undiscounted cash flows: 7 yrs x $3 = $21 < $28.4.

Therefore, the asset is impaired. The asset should be written down to its fair value. Fair Value: PV of

future benefits: (N=7; i=10; PMT=3): PV = 14.6 Impairment Loss: Carrying Value Fair Value: 28.4 - 14.6

= 13.8 to be reported on the income statement

91. Which of the following events will most likely result in a decrease in a valuation allowance for a

deferred tax asset under U.S. GAAP (generally accepted accounting principles)? A(n):

A. reduction in tax rates.

B. decrease in interest rates.

C. increase in the carry forward periods available under the tax law.


45/100


Page 45 of100


Answer: C

Under U.S. GAAP, deferred tax assets must be assessed at each balance sheet date. If there is any doubt

whether the deferral will be recovered, the carrying amount should be reduced to the expected

recoverable amount. The asset is reduced by increasing the valuation allowance. Should circumstances

change, so that it is more probable that the deferred tax benefits will be recovered, the deferred asset

account will be increased (and the valuation allowance decreased). An increase in the carry forward

period for tax losses extends the possibility that benefits will be realized from the deferred tax asset and

would likely result in a decrease in the valuation allowance and an increase in the deferred tax asset.

92. A company presents its financial statements according to U.S. GAAP (generally accepted accounting

principles) and has just issued $5 million of mandatory redeemable preferred shares with a par value of

$100 per share and a 7% dividend. The issue matures in 5 years. Which of the following statements is

least likely correct? At the time of the issue, the companys:

A. debt-to-total capital ratio will improve

B. interest coverage ratio will deteriorate.

C. preferred shareholders will rank below debt holders should the company file for bankruptcy.

Answer: A

SFAS 150 require that issuers report as liabilities any financial instruments that will require repayment of

principal in the future. Mandatory redeemable preferred shares must be reported as debt; dividends on

such stock must be reported as interest expense (consistent with the view that the preferred stock is

debt) which will lower the interest coverage ratio.. In the Debt/(Debt + Equity) ratio, the Debt will

increase making the debt/total capital increase, (the numerator will increase more than the

denominator), thus the ratio will increase (deteriorate), not decrease (improve).

93. A pharmaceutical company has been very successful for the past several years, increasing its sales

many-fold over that of its competition. It has been able to meet or beat analysts optimistic quarterly

earnings estimates and consistently registers very high sales towards the end of each quarter. Most of

the companys sales are to two of its major wholesalers. The firm covers the carrying costs for these

two wholesalers and guarantees them a return on investment until the wholesalers sell the products.

Which of the three risk factors related to fraudulent financial reporting would best explain the behavior

of this company?

A. Opportunities

B. Incentives/Pressures

C. Attitudes/Rationalizations


46/100


Page 46 of100


Answer: B

The company is recognizing revenue for sales on shipment while the risks and rewards of ownership

have not yet been transferred to the wholesalers. The motivation behind the activity is most likely the

pressure to meet the expectations of investment analysts to meet ever increasing sales growth

forecasts.

94. Which of the following is most likely a benefit of debt covenants for the borrower?

A. Reduction in the cost of borrowing.

B. Limitations on the companys ability to pay dividends.

C. Restrictions on how the borrowed money may be invested.

Answer: A

The reduction in the cost of borrowing is a benefit of covenants to the borrower.

95. Under U.S. GAAP what is the most likely effect of the reversal of a valuation allowance related to a

deferred tax asset on net income?

A. No effect

B. A decrease

C. An increase

Answer: C

The reversal of a valuation allowance increases the deferred tax assets and decreases the deferred tax

expense, increasing net income.

96. Which of the following accounting warning signs was evident in the Enron accounting scandal?

A. Recording revenue from contingent sales.

B. Accelerating sales from later periods into the present quarter.

C. Classifying financing cash flows as operating cash flows to increase operating cash flows.

Answer: C

Enron classified financing cash flows as operating cash flows.


47/100


Page 47 of100


97. At the start of a month, a retailer paid $5,000 in cash for different types of candies. He sold candies

costing $2,000 for $3,000 during the month. The most likely effect of these transactions on the retailers

accounting equation for the month is that assets will:

A. be unchanged.

B. increase by $1,000.

C. decrease by $2,000.

Answer = B

Buying $5,000 of candies will decrease cash by $5,000 and increase inventory by $5,000. Selling $2,000

of candies for $3,000 will decrease inventory by $2,000, and increase either cash (if cash collected in the

same accounting period) or accounts receivable (if sold on credit) by $3,000. The combined effect is an

increase of $1,000 in assets.

98. Which of the following statements best describes a trial balance? A trial balance is a document or

computer file that:

A. shows all business transactions by account.

B. lists account balances at a particular point in time.

C. contains business transactions recorded in the order in which they occur.

Answer = B

A trial balance is a document that lists account balances at a particular point in time.

99. Under IFRS, which of the following financial statement elements most accurately represents inflows

of economic resources to a company?

A. Assets.

B. Equity.

C. Revenues.

Answer = C

The financial statement elements under International Financial Reporting Standards (IFRS) are: Assets,

Liabilities, Owners Equity, Revenue, and Expenses. Revenues are inflows of economic resources. Assets

are economic resources, but not inflows.


48/100


Page 48 of100


100. According to the IFRS framework, which of the following is the least likely qualitative characteristic

that makes financial information useful?

A. Materiality.

B. Comparability.

C. Understandability.

Answer = A

The four principal qualitative characteristics that make financial information useful are

understandability, relevance, reliability and comparability. Materiality relates to the level of detail of the

information needed to achieve relevance whether the omission or misstatement of the information

would impact the decision maker's decision.

101. Which of the following statements is most accurate?

A. Treasury stock is non-voting and receives no dividends.

B. Minority interest on the balance sheet represents a position the company owns in other

companies.

C. A classified balance sheet arises when in an auditors opinion the financial statements materially

depart from accounting standards and are not presented fairly.

Answer = A

Treasury stock is non-voting and does not receive dividends.


49/100


Page 49 of100


102. The following information is available on a company for the current year.

The companys diluted EPS is closest to:

A. $7.57.

B. $7.69.

C. $7.72.

Answer = C

Since both the preferred shares and bonds are dilutive, they should both be converted to calculate the

diluted EPS. Diluted EPS is the lowest value. $7.72 has calculated in the following table.


50/100


Page 50 of100


103. During 2010, Company A sold a piece of land with a cost of $6 million to Company B for $10 million.

Company B made a $2 million down payment with the remaining balance to be paid over the next 5

years. It has been determined that there is significant doubt about the ability and commitment of the

buyer to complete all payments. Company A would most likely report a profit in 2010 of:

A. $4 million using the accrual method.

B. $0.8 million using the installment method.

C. $2 million using the cost recovery method.

Answer = B

Under the installment method, the portion of the total profit that is recognized in each period is

determined by the percentage of the total sales price for which the seller has received cash. For

Company A 2/10 x 4 = $0.8 million. Note, cost recovery method could be used in this case, but the

reported profit would be $0.

104. A companys balance sheet shows the following:

Current Assets Cash and cash equivalents $ 2,950 Marketable securities 730 Notes and accounts

receivable, trade 5,740 Allowance for doubtful accounts (650) Inventories 1,320 Deferred income taxes

1,160 Other current assets 690

Total current assets $ 11,940


51/100


Page 51 of100


Current Liabilities Accounts payable and other accrued liabilities $ 5,100 Current portion of borrowings

1,820 Other current liabilities 2,560

Total current liabilities $ 9,480

The companys qui

CFA Tai lieu on tap

Documents

Transcript of CFA Tai lieu on tap