FSA CFA

he following information for the current year is available for a company that prepares its financial statements in accordance with US GAAP. $ thousandsRevenue7,000Cost of goods sold4,200Other operating expenses500Restructuring costs250Interest expense200 The company's operating profit (in thousands) is closest to: $2,050. $2,300. $1,850.

A is correct. $ thousands Revenue7,000 Minus cost of goods sold-4,200 Minus other operating expenses-500 Minus restructuring expenses-250Under US GAAP, restructuring charges are operating items.Operating profit2,050

he following data are available on a company for the current year:Metric£ thousandsComprehensive income246,000Dividends paid60,000Ending retained earnings821,000Opening retained earnings580,000 The company will most likely report other comprehensive income (OCI) (in £ thousands) as a: loss of 55,000. gain of 186,000. gain of 301,000.

A is correct. Metric£ thousandsEnding retained earnings821,000Less: opening retained earnings(580,000)Add back: dividends paid60,000Net income301,000Comprehensive income246,000OCI = Comprehensive income - net income55,000 LOSS

In 2018, a company using US GAAP made cash payments of $6 million for salaries, $2 million for interest expense, and $4 million for income taxes. Additional information for the company is provided in the table:($ millions)20172018Revenue4237Cost of goods sold1816Inventory3640Accounts receivable2219Accounts payable1412 Q. Based only on the information given, the company's operating cash flow for 2018 is closest to: $6 million. $10 million. $14 million.

A is correct. Operating cash flows = Cash received from customers − (Cash paid to suppliers + Cash paid to employees + Cash paid for other operating expenses + Cash paid for interest + Cash paid for income taxes) Cash received from customers = Revenue + Decrease in accounts receivable = $37 + $3 = $40 million Cash paid to suppliers = Cost of goods sold + Increase in inventory + Decrease in accounts payable = $16 + $4 + $2 = $22 million Therefore, the company's operating cash flow = $40 − $22 - Cash paid for salaries - Cash paid for interest - Cash paid for taxes = $40 − $22 − $6 − $2 − $4 = $6 million.

The following financial data are available for a company:Return on assets (ROA)4.8%Total asset turnover1.92Financial leverage1.75Dividend payout ratio48.1% The company's sustainable growth rate is closest to: 4.40%. 4.78%. 4.00%.

A is correct. Sustainable growth rate = Retention ratio (b) × Return on equity (ROE) b = 1 - Dividend payout ratio = 1 - 0.481 = 0.519 ROE = Return on assets × Financial leverage = 0.048 × 1.75 = 0.084 Sustainable growth rate = b × ROE = 0.519 × 0.084 = 0.044 = 4.40%

Distinguishing between current and non-current items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as: a classified balance sheet. an unclassified balance sheet. a liquidity-based balance sheet.

A is correct. A classified balance sheet is one that classifies assets and liabilities as current or non-current and provides a subtotal for current assets and current liabilities. A liquidity-based balance sheet broadly presents assets and liabilities in order of liquidity.

Operating segments are most likely reportable if they constitute 10% or more of the total for all operating segments of which financial metrics? Assets, profit/loss, or revenue Capital expenditures, liabilities, or profit/loss Amortization expense, assets, or revenue

A is correct. A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments' revenue, assets, or operating profit/loss. B is incorrect. Information about capital expenditures and liabilities must be disclosed for reportable operating segments, but there are no qualifying tests based on these elements. C is incorrect. Information about amortization expenses must be disclosed for reportable operating segments, but there is no qualifying test based on amortization expense.

Using a common-size income statement to compare a company to its peers, an analyst can determine the company's: relative performance. size. revenue recognition policies.

A is correct. A company's relative performance can be evaluated by examining and comparing the percentages shown across the common-size income statements.

Which of the following disclosures regarding new accounting standards provides the most meaningful information to an analyst? The impact of adoption is discussed. The standard will have no material impact. Management is still evaluating the impact.

A is correct. A discussion of the impact would be the most meaningful, although B would also be useful.

After a two-for-one stock split, which of the following will most likely change relative to its pre-split value? Earnings per share (EPS) Price-to-earnings ratio (P/E Dividend payout ratio

A is correct. A two-for-one stock split will double the number of shares, thus reducing the EPS to half of its pre-split value. P/E will remain unchanged because the price also reduces by half and exactly cancels out the effect of the reduced EPS. The dividend payout ratio remains unchanged because the same proportion of earnings will still be used after the split. C is incorrect because the dividend payout ratio is unchanged. B is incorrect because the P/E ratio is unchanged.

Along with relevance, the most critical qualitative characteristic of financial information is: faithful representation. comparability. understandability. Solution

A is correct. According to the conceptual frameworks adopted under both International Financial Reporting Standards and US GAAP, faithful representation and relevance are the two fundamental qualitative characteristics that make financial information useful.

According to the Conceptual Framework for Financial Reporting, which of the following is not an enhancing qualitative characteristic of information in financial statements? Accuracy. Timeliness. Comparability.

A is correct. Accuracy is not an enhancing qualitative characteristic. Faithful representation, not accuracy, is a fundamental qualitative characteristic.

Question Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: Total sales price of items sold during 2009 on consignment was €2,000,000. Total commissions retained by Apex during 2009 for these items was €500,000. Q. How much revenue should Apex report on its 2009 income statement? €500,000. €2,000,000. €1,500,000.

A is correct. Apex is not the owner of the goods and should only report its net commission as revenue.

Equity equals: Assets - Liabilities. Liabilities - Assets. Assets + Liabilities.

A is correct. Assets = Liabilities + Equity and, therefore, Assets - Liabilities = Equity.

A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company's: basic EPS equals its diluted EPS. capital structure is considered complex at year-end. basic EPS is calculated by using a simple average number of shares outstanding.

A is correct. Basic and diluted EPS are equal for a company with a simple capital structure. A company that issues only common stock, with no financial instruments that are potentially convertible into common stock has a simple capital structure. Basic EPS is calculated using the weighted average number of shares outstanding.

Common-size income statements are shown for three companies in the same industry. Which company is most likely to have a technically superior product? Company XCompany YCompany ZRevenue100%100%100%Cost of goods sold655030Administrative expenses202020Research and development0530Advertising expenses51510Operating profit101010 Company Z Company Y Company X

A is correct. Company Z has spent the most on research and development and is able to support the highest gross margin (lowest cost of goods sold). It likely has the technically superior product.

Amounts recorded as deferred revenue are most likely included in income when they are: earned. invoiced. paid.

A is correct. Deferred revenue is a liability account that arises when money has been collected for goods or services that have not been delivered. Revenue is recognized (included in income) as it is earned, and the deferred revenue liability will decrease accordingly. B is incorrect. Unearned revenue is recognized when it is earned, regardless of when the company invoices for the goods or services. C is incorrect. Deferred revenue is recognized when it is earned, regardless of when cash for goods or services have been paid.

When preparing a common-sized income statement, the appropriate denominator for converting the reported cost of sales is: revenues. net income. pretax income.

A is correct. For a common-sized income statement, each line item, including cost of sales, is stated as a percentage of revenue. Common-size statements facilitate comparison across time periods and across companies because the standardization of each line item removes the effect of size.

Carrying inventory at a value above its historical cost would most likely be permitted if: the inventory was held by a producer of agricultural products. financial statements were prepared using US GAAP. the change resulted from a reversal of a previous write-down.

A is correct. IFRS allow the inventories of producers and dealers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to be carried at net realisable value even if above historical cost. (US GAAP treatment is similar.)

LIFO reserve is most likely to increase when inventory unit: costs are increasing. costs are decreasing. levels are decreasing.

A is correct. LIFO reserve is the FIFO inventory value less the LIFO inventory value. In periods of rising inventory unit costs, the carrying amount of inventory under FIFO will always exceed the carrying amount of inventory under LIFO. The LIFO reserve may increase over time as a result of the increasing difference between the older costs used to value inventory under LIFO and the more recent costs used to value inventory under FIFO. When inventory unit levels are decreasing, the company will experience a LIFO liquidation, reducing the LIFO reserve.

Under US GAAP, property, plant, and equipment is reported on the balance sheet based on: a cost model only. a revaluation model only. either a cost model or a revaluation model.

A is correct. Under US GAAP, only the cost model is permitted for reporting property, plant, and equipment (PPE). Under the cost model, PPE is carried at amortized cost (historical cost less any accumulated depreciation or accumulated depletion and less any impairment losses). B is incorrect because, while IFRS permits reporting of PPE using either a revaluation or cost model, US GAAP allows only the use of a cost model for reporting PPE. C is incorrect because, while IFRS permits reporting of PPE using either a revaluation or cost model, US GAAP allows only the use of a cost model for reporting PPE.

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? 1,003,333. 1,006,667. 1,010,000.

A is correct. With stock options, the treasury stock method must be used. Under that method, the company would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares ($100,000/$15). The shares for the denominator would be: Shares outstanding1,000,000Options exercises10,000Treasury shares purchased(6,667)Denominator1,003,333

Resources controlled by a company as a result of past events are: equity. assets. liabilities.

B is correct. Assets are resources controlled by a company as a result of past events.

Interim financial reports released by a company are most likely to be: monthly. unaudited. unqualified.

B is correct. Interim reports are typically provided semiannually or quarterly and present the four basic financial statements and condensed notes. They are not audited. Unqualified is a type of audit opinion

International financial reporting standards are currently developed by which entity? The IFRS Foundation. The International Accounting Standards Board. The International Organization of Securities Commissions.

B is correct. The IASB is currently charged with developing International Financial Reporting Standards.

Compared to using the FIFO method to account for inventory, during periods of rising prices, a company using the LIFO method is most likely to report higher: net income. cost of sales. income taxes.

B is correct. The LIFO method increases cost of sales, thus reducing profits and the taxes thereon.

Which inventory method is least likely to be used under IFRS? First in, first out (FIFO). Last in, first out (LIFO). Weighted average.

B is correct. The last in, first out (LIFO) method is not permitted under IFRS. The other two methods are permitted.

Under IFRS, income includes increases in economic benefits from: increases in liabilities not related to owners' contributions. enhancements of assets not related to owners' contributions. increases in owners' equity related to owners' contributions.

B is correct. Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.

Working capital equals the excess of: cash over current liabilities. current assets over current liabilities. shareholders' equity over non-current assets.

B is correct. Working capital is defined as the excess of current assets over current liabilities. A is incorrect because working capital is defined as the excess of current assets over current liabilities (not cash over current liabilities). C is incorrect because working capital is defined as the excess of current assets over current liabilities (not shareholders' equity over non-current assets).

Accrued expenses (accrued liabilities) are: expenses that have been paid. created when another liability is reduced. expenses that have been reported on the income statement but not yet paid.

C is correct. Accrued liabilities are expenses that have been reported on a company's income statement but have not yet been paid.

A company recently engaged in a non-cash transaction that significantly affected its property, plant, and equipment. The transaction is: reported under the investing section of the cash flow statement. reported differently in cash flow from operations under the direct and indirect methods. disclosed as a separate note or in a supplementary schedule to the cash flow statement.

C is correct. Because no cash is involved in non-cash transactions, these transactions are not incorporated in the cash flow statement. However, non-cash transactions that significantly affect capital or asset structures are required to be disclosed either in a separate note or a supplementary schedule to the cash flow statement.

An example of an expense classification by function is: tax expense. interest expense. cost of goods sold.

C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature.

An analysis used to forecast earnings that shows a range of possible outcomes as specific assumptions change best describes which of the following techniques? Scenario analysis Simulation Sensitivity analysis

C is correct. Sensitivity analysis, also known as "what if" analysis, shows the range of possible outcomes as specific assumptions are changed. A is incorrect. Scenario analysis shows changes in key financial quantities that result from given economic events. B is incorrect. Simulation is a computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes.

In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: activity ratios. liquidity ratios. solvency ratios.

C is correct. Solvency ratios are used to evaluate the ability of a company to meet its long-term obligations. An analyst is more likely to use activity ratios to evaluate how efficiently a company uses its assets. An analyst is more likely to use liquidity ratios to evaluate the ability of a company to meet its short-term obligations.

Cash flows from taxes on income must be separately disclosed under: IFRS only. US GAAP only. both IFRS and US GAAP.

C is correct. Taxes on income are required to be separately disclosed under IFRS and US GAAP. The disclosure may be in the cash flow statement or elsewhere.

The assumption that an entity will continue to operate for the foreseeable future is called: accrual basis. comparability. going concern.

C is correct. The Conceptual Framework identifies two important underlying assumptions of financial statements: accrual basis and going concern. Going concern is the assumption that the entity will continue to operate for the foreseeable future. Enterprises with the intent to liquidate or materially curtail operations would require different information for a fair presentation.

Consider the following information available for a company for last year:ROE4.74%Net profit margin2.6%Revenue$400,000Average total assets$300,000 The average shareholder's equity is closest to: $164,557. $123,418. $219,409.

C is correct. The DuPont equation is Net incomeRevenue×RevenueAverage total assets×Average total assetsAverage shareholders' equity 4.75%=2.6%×$400,000$300,000×$300,000Average shareholders' equity Average shareholders' equity = $219,409

Which of the following statements is least accurate? IFRS Foundation trustees appoint members of the IASB. The IASB is monitored by a board that includes the US SEC. IFRS Foundation trustees oversee the policy decisions of the FASB.

C is correct. The Financial Accounting Foundation, not the IFRS, oversees FASB. A is incorrect. IFRS Foundation trustees do appoint the members of the IASB. B is incorrect. The Monitoring Board that oversees the IASB includes representatives from the European Commission, IOSCO, the Japan Financial Services Agency, and the US SEC.

(£ millions)20142013Accounts receivable, gross6,6204,840Allowance for doubtful accounts9256Write-offs during the year8442 Based on the presented information about a company's trade receivables, the bad debt expense (in £ millions) for 2014 is closest to: 84. 36. 120.

C is correct. The allowance for doubtful accounts increases by the bad debt expense recognized for the year and decreases by the amounts written off during the year. Beginning balance allowance for doubtful accounts£56 millionPlus bad debt expense?Minus write-offs-£84 millionEnding balance allowance for doubtful accounts£92 million Solve for bad debt expense = £120 million.

Mabel Corporation (MC) reported accounts receivable of $66 million at the end of its second fiscal quarter. MC had revenues of $72 million for its third fiscal quarter and reported accounts receivable of $55 million at the end of its third fiscal quarter. Based on this information, the amount of cash MC collected from customers during the third fiscal quarter is: $61 million. $72 million. $83 million.

C is correct. The amount of cash collected from customers during the quarter is equal to beginning accounts receivable plus revenues minus ending accounts receivable: $66 million + $72 million − $55 million = $83 million. A reduction in accounts receivable indicates that cash collected during the quarter was greater than revenue on an accrual basis.

The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is: current cost. present value. realizable value.

C is correct. The amount that would be received in an orderly disposal is realizable value.

"Other current assets" typically include: trade receivables. customer prepayments. items deemed too small to be individually listed on the balance sheet.

C is correct. The amounts shown in "other current assets" reflect items that are individually not material enough to require separate line items on the balance sheet and so are aggregated into a single category. A is incorrect because trade receivables or accounts receivable typically are shown as a separate line item on the balance sheet and so are not aggregated into the "other current assets" category. B is incorrect because prepayments made by customers are deferred income and thus a current liability, not an asset.

Notes to financial statements most likely include: a discussion of significant trends, events, and uncertainties that affect the operating results. an auditor's opinion as to the fair presentation of the financial statements. supplementary information about accounting policies, methods, and estimates.

C is correct. The notes disclose information about the accounting policies, methods, and estimates used to prepare the financial statements. A is incorrect. The management commentary (or MDA), which is not part of the notes to financial statements, includes a discussion of significant trends, events, and uncertainties that affect the operating results. B is incorrect. The Auditor's Report, which is not part of the notes to financial statements, includes the auditor's opinion as to the fair presentation of the financial statements.

A benefit of using the direct method rather than the indirect method when reporting operating cash flows is that the direct method: mirrors a forecasting approach. is easier and less costly. provides specific information on the sources of operating cash flows.

C is correct. The primary argument in favor of the direct method is that it provides information on the specific sources of operating cash receipts and payments. Arguments for the indirect method include that it mirrors a forecasting approach and it is easier and less costly

Trade receivables are: typically reported at gross value. owed by customers for products and services to be delivered. based on the company's estimate of amounts that ultimately will be collectible. Solution

C is correct. Trade receivables are typically reported at net realizable value, based on estimates of collectability A is incorrect because trade receivables are reported net of an allowance for doubtful accounts or at their net realizable value. B is incorrect because trade receivables are amounts owed to a company by its customers for products and services already delivered, not for items with delivery pending.

Inventory cost is least likely to include: production-related storage costs. costs incurred as a result of normal waste of materials. transportation costs of shipping inventory to customers.

C is correct. Transportation costs incurred to ship inventory to customers are an expense and may not be capitalized in inventory. (Transportation costs incurred to bring inventory to the business location can be capitalized in inventory.) Storage costs required as part of production, as well as costs incurred as a result of normal waste of materials, can be capitalized in inventory. (Costs incurred as a result of abnormal waste must be expensed.)

Shares that have been repurchased and not cancelled by the company that issued them are referred to as: preferred shares. contributed capital. treasury stock.

C is correct. Treasury shares or treasury stock are shares in the company that have been repurchased by the company and not cancelled. A is incorrect because preferred shares are a separate class of equity or financial liability based upon their characteristics and rights that take precedence over the rights of common shareholders. B is incorrect because contributed capital is the amount contributed to the company by owners and is evidenced through the issuance of common shares.

Using the same information as in Question 8, what would Accent's cost of goods sold be under the weighted average cost method? ₤120,000. ₤122,000. ₤124,000.

C is correct. Under the weighted average cost method: October purchases10,000 units$100,000November purchases5,000 units$55,000 Total 15,000 units $155,000 $155,000/15,000 units = $10.3333 $10.3333 × 12,000 units = $124,000

If a company repurchases its own shares and can reissue them at a later time, these shares are best described as: preferred stock. marketable securities. treasury stock.

C is correct. When a company repurchases its own shares and does not cancel them, they are referred to as treasury shares (or treasury stock).

Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by: Zimt is too low. Nutmeg is too low. Nutmeg is too high.

A is correct. Zimt uses the FIFO method, so its cost of sales represents units purchased at a (no longer available) lower price. Nutmeg uses the LIFO method, so its cost of sales is approximately equal to the current replacement cost of inventory.

3.2% complete Question An Australian company that reports under International Financial Reporting Standards (IFRS) purchases a plane with an expected useful life of 20 years. All costs are reported in Australian dollars. TOTAL cost is A$10 million. A$1 million of the total cost is allocated to the plane's interior (galleys and seating), which is completely refurbished every four years. A$4 million of the total cost is allocated to the turbines, which are replaced every eight years. No residual value is expected. If the company uses straight-line depreciation, the depreciation expense for the first full year related to the plane would be closest to: A$1,000 thousand. A$500 thousand. A$750 thousand.

Cost (thousands)Useful Life (years)Annual Depreciation Expense (thousands)InteriorA$1,0004A$250Engines4,0008500Remainder of plane5,00020250TotalA$10,000A$1,000

The carrying value of inventories reflects: their historical cost. their current value. the lower of historical cost or net realizable value.

C is correct. Under IFRS, inventories are carried at historical cost, unless net realizable value of the inventory is less. Under US GAAP, inventories are carried at the lower of cost or market.

The first step in cash flow statement analysis should be to: evaluate consistency of cash flows. determine operating cash flow drivers. identify the major sources and uses of cash.

C is correct. An overall assessment of the major sources and uses of cash should be the first step in evaluating a cash flow statement.

What type of audit opinion is preferred when analyzing financial statements? Qualified. Adverse. Unqualified.

C is correct. An unqualified opinion is a "clean" opinion and indicates that the financial statements present the company's performance and financial position fairly in accordance with a specified set of accounting standards.

Under US GAAP, interest paid is most likely included in which of the following cash flow activities? Operating only Financing only Either operating or financing

A

If all of the assets and liabilities are listed on the balance sheet broadly in order of how easily they can be converted into cash, the presentation format is best described as: liquidity based. current/non-current. classified.

A is correct. A liquidity-based presentation format presents all of the assets and liabilities on the balance sheet broadly in order of liquidity. With respect to a particular asset or liability, liquidity refers to its "nearness to cash." B is incorrect. Current/non-current presentation is a type of classified balance sheet presentation that groups assets and liabilities into subcategories. C is incorrect. A classified balance sheet is organized to group together various assets and liabilities into subcategories such as current and non-current.

The most likely company to use a liquidity-based balance sheet presentation is a: bank. computer manufacturer holding inventories. software company with trade receivables and payables.

A is correct. A liquidity-based presentation, rather than a current/non-current presentation, may be used by such entities as banks if broadly presenting assets and liabilities in order of liquidity is reliable and more relevant.

Accounts payable are: amounts a company owes its vendors for purchase of goods and services. financial liabilities owed by a company through a formal loan agreement. reported in a different section of the balance sheet from notes payable due in one year.

A is correct. Accounts payable are amounts that a company owes its vendors for purchases of goods and services. They represent the unpaid amount as of the balance sheet date of the company's purchases on credit.

The following information is available on a company for the current year.Net income$1,000,000Average number of common shares outstanding100,000 Details of convertible securities outstanding:Convertible preferred shares outstanding2,000 Dividend/share$10 Each preferred share is convertible into five shares of common stock Convertible bonds, $100 face value per bond$80,000 8% coupon Each bond is convertible into 25 shares of common stock Corporate tax rate40% The company's diluted EPS is closest to: $7.72. $7.57. $7.69.

A is correct. Because both the preferred shares and the bonds are dilutive, they should both be converted to calculate the diluted EPS. Diluted EPS is the lowest possible value. Basic EPSDiluted EPS: Bond ConvertedDiluted EPS: Preferred ConvertedDiluted EPS: Both ConvertedNet income$1,000,000$1,000,000$1,000,000$1,000,000Preferred dividends-$20,000-$20,00000After-tax cost of interest8% × $80,000 × (1 - 0.40)$3,840$3,840Numerator$980,000$983,840$1,000,000$1,003,840Average common shares outstanding100,000100,000100,000100,000Preferred converted10,00010,000Bond converted20,00020,000Denominator100,000120,000110,000130,000 EPS$9.80$8.20$9.09$7.72 B is incorrect. Preferred dividends were included after preferred conversion (see table). C is incorrect. After-tax interest on bonds was not added back after bond conversion: after-tax interest is (1 - 0.40) × 8% × $80,000 = 3,840 (see table)

. Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: $67 million. $79 million. $83 million.

A is correct. Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).

Debt due within one year is considered: current. preferred. convertible.

A is correct. Current liabilities are those liabilities, including debt, due within one year. Preferred refers to a class of stock. Convertible refers to a feature of bonds (or preferred stock) allowing the holder to convert the instrument into common stock.

For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through retained earnings. They are a component of accumulated other comprehensive income.

A is correct. Financial assets classified as held to maturity are measured at amortised cost. Gains and losses are recognized only when realized.

Other comprehensive income is least likely to include gains or losses on: the sale or disposal of discontinued operations. derivative contracts accounted for as hedges. the translation of foreign currency-denominated subsidiary financial statements.

A is correct. Gains or losses on the disposal of discontinued operations are reported separately near the bottom of the income statement and are included in net income, not other comprehensive income. B is incorrect. Gains or losses on derivative contracts accounted for as cash flow hedges are included in other comprehensive income. C is incorrect. Gains or losses on the translation of certain foreign currency-denominated subsidiary financial statements are included in other comprehensive income.

Fernando's Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando's inventory balance will most likely be: higher if it complies with IFRS. higher if it complies with US GAAP. the same under US GAAP and IFRS.

A is correct. IFRS require the reversal of inventory write-downs if net realisable values increase; US GAAP do not permit the reversal of write-downs.

The role of the International Organization of Securities Commissions (IOSCO) is best described as: promoting cross-border cooperation and uniformity in securities regulation. enforcing financial reporting requirements for entities participating in capital markets. promoting the use of International Financial Reporting Standards (IFRS) and the convergence of national accounting standards.

A is correct. IOSCO provides a forum for regulators from different jurisdictions to work together toward fair, efficient, and transparent markets, promoting cross-border cooperation and uniformity in securities regulation. B is incorrect. This is the role of regulatory authorities such as the Securities Exchange Commission. IOSCO is not a regulator and as such has no authority to regulate. C is incorrect. This is the role of the IFRS Foundation.

During a period of declining prices, a company using the last-in, first-out (LIFO) inventory method instead of first-in, first-out (FIFO) method will most likely report a lower value for: cost of goods sold. gross profit. ending inventory.

A is correct. If prices are declining, using LIFO would match the lower (most recent) costs with current sales. Compared with using FIFO, costs of goods sold would be lower, and gross profit (income) would be higher when using LIFO. Lower cost of goods sold means inventory balances, consisting of older, higher-priced items, would be higher using LIFO, increasing current assets relative to FIFO.

In a period of rising prices and stable inventory levels, which inventory valuation method will most likely result in the highest inventory turnover ratio, all else being equal? Last-in, first-out (LIFO) Weighted average cost First-in, first-out (FIFO) Solution

A is correct. In a period of rising prices, the most recently purchased units of inventory carry the highest cost. Under the LIFO approach, it is these high-cost units (those that are "last in") that are transferred to the income statement ("first out") as cost of goods sold. The lowest-cost units remain on the balance sheet as inventory. With a high cost of goods sold value (numerator) and a low inventory value (denominator), the inventory turnover ratio is highest under LIFO. B is incorrect. Under the weighted average approach, inventory is transferred to the income statement at a cost that falls somewhere between the lowest cost earlier purchases and the higher cost later purchases. The cost of goods sold value is thus higher than the FIFO value, but lower than the LIFO value. Similarly, the inventory value falls between that of LIFO and FIFO. The inventory turnover ratio also falls in between that of LIFO and FIFO. C is incorrect. Under the FIFO approach, the lower cost inventory purchased earlier is transferred to the income statement as cost of goods sold. The resulting cost of goods sold value is lower while inventory remains high. As a result, the inventory turnover ratio is low with a lower numerator and higher denominator.

Information about management and director compensation are least likely to be found in the: auditor's report. proxy statement. notes to the financial statements.

A is correct. Information about management and director compensation is not found in the auditor's report. Disclosure of management compensation is required in the proxy statement, and some aspects of management compensation are disclosed in the notes to the financial statements.

The initial measurement of goodwill is most likely affected by: an acquisition's purchase price. the acquired company's book value. the fair value of the acquirer's assets and liabilities.

A is correct. Initially, goodwill is measured as the difference between the purchase price paid for an acquisition and the fair value of the acquired, not acquiring, company's net assets (identifiable assets less liabilities).

Nutmeg, Inc. uses the LIFO method to account for inventory. During years in which inventory unit costs are generally rising and in which the company purchases more inventory than it sells to customers, its reported gross profit margin will most likely be: lower than it would be if the company used the FIFO method. higher than it would be if the company used the FIFO method. about the same as it would be if the company used the FIFO method.

A is correct. LIFO will result in lower inventory and higher cost of sales in periods of rising costs compared to FIFO. Consequently, LIFO results in a lower gross profit margin than FIFO.

Non-operating items reported on the income statement: include interest expense and interest revenue for non-financial service firms. are shown as either financing or investing items on the cash flow statement. are required to be reported as separate entries.

A is correct. Non-financial service companies disclose interest received, dividends, or profits from the sale of securities held as investments as non-operating items. Interest expense is also disclosed as a non-operating item. B is incorrect because the characterization of certain non-operating items on the income statement is not necessarily consistent with their classification on the statement of cash flows. Some items will be shown as either investing or financing activities, but others may be classified as operating. C is incorrect because non-operating items such as investing or financing activities (e.g., interest expense and interest income) may be reported on a net basis with the components disclosed separately in the notes.

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income? A foreign currency translation adjustment An unrealized gain on a security held for trading purposes A realized gain on a derivative contract not accounted for as a hedge

A is correct. Other comprehensive income includes items that affect shareholders' equity but are not reflected in the company's income statement. In consolidating the financial statements of foreign subsidiaries, the effects of translating the subsidiaries' balance sheet assets and liabilities at current exchange rates are included as other comprehensive income.

The financial statement that presents a shareholder's residual claim on assets is the: balance sheet. income statement. cash flow statement.

A is correct. Owners' equity is the owners' residual interest in (i.e., residual claim on) the company's assets after deducting its liabilities, which is information presented on the balance sheet.

Other factors held constant, the reduction of a company's average accounts payable because of suppliers offering less trade credit will most likely: not affect the operating cycle. reduce the operating cycle. increase the operating cycle.

A is correct. Payables are not part of the operating cycle calculation, which includes receivables and inventory.

The cumulative amount of earnings recognized on a company's income statements that have not been distributed as dividends to the company's owners is best described as: retained earnings. accumulated other comprehensive income. dividends payable. Solution

A is correct. Retained earnings, a component of equity, is defined as the cumulative amount of earnings recognized on the company's income statements that have not been distributed as dividends to the company's owners. B is incorrect. Other comprehensive income is also a component of equity, but it is defined as items of comprehensive income not reported on the income statement. C is incorrect. Dividends payable represent dividends that have been declared but not yet paid. Not all earnings not yet paid out would be accrued as a liability: only those that have been declared as dividends.

An artists' cooperative sells its artwork on a consignment basis through a local art gallery. The cooperative should most likely recognize revenue when the art gallery: sells the artwork. remits payment for the artwork. receives the artwork.

A is correct. Revenue is recognized by the cooperative when the art gallery sells the artwork because that is the point at which the risks and rewards transfer from the cooperative to a third party and the amount of revenue is measurable.

Which of the following is not a constraint on the financial statements according to the Conceptual Framework? Understandability. Benefit versus cost. Balancing of qualitative characteristics.

A is correct. Understandability is an enhancing qualitative characteristic of financial information—not a constraint.

Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? $90 million. $100 million. $110 million.

A is correct. Revenues of $100 million minus the increase in accounts receivable of $10 million equal $90 million cash received from customers. The increase in accounts receivable means that the company received less in cash than it reported as revenue.

Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2018. In addition, the company's income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $10 million, all of which was for the purchase of new equipment. Using the following information from the comparative balance sheets, how much cash did the company receive from the equipment sale? Balance Sheet Item12/31/201712/31/2018ChangeEquipment$100 million$105 million$5 millionAccumulated depreciation—equipment$40 million$46 million$6 million

A is correct. Selling price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss on sale plus book value equals selling price (cash inflow). The amount of loss is given—$2 million. To calculate the book value of the equipment sold, find the historical cost of the equipment and the accumulated depreciation on the equipment. Beginning balance of equipment of $100 million plus equipment purchased of $10 million minus ending balance of equipment of $105 million equals the historical cost of equipment sold, or $5 million. Beginning accumulated depreciation of $40 million plus depreciation expense for the year of $8 million minus ending balance of accumulated depreciation of $46 million equals accumulated depreciation on the equipment sold, or $2 million. Therefore, the book value of the equipment sold was $5 million minus $2 million, or $3 million. Because the loss on the sale of equipment was $2 million, the amount of cash received must have been $1 million.

A company sells a non-refundable, two-year service contract for €420. Based on historical patterns, the company expects to incur 25% of service costs in the first year of the contract and the remainder in the second year. The amount of revenue the company recognizes in the first year is closest to: €105. €420. €210.

A is correct. Service revenues are recognized by reference to the stage of completion of the service contract. Historical patterns provide evidence that 25% of the services performed under the contract are incurred during the contract's first year. As such, only 25% of the contract revenue would be recognized in the first year: CalculationTotal contract value€420Stage of completion at end of first year25%Revenue recognized in first year€10525% × €420

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes? $55,000. $60,000. $65,000.

A is correct. Straight-line depreciation would be ($600,000 − $50,000)/10, or $55,000.

Which of the following suggestions is best aligned with CFA Institute advocacy for financial reporting that reflects economic reality? Cash flow statements prepared using the direct format for cash flow from operations (CFO) Conservatism in revenue recognition policies Detailed cost information for long-lived assets

A is correct. The CFA Institute position paper "A Comprehensive Business Reporting Model: Financial Reporting for Investors" (2007) advocated for financial reporting that reflects economic reality. It specifically identified a preference for using the direct format for CFO in cash flow statements. B is incorrect. The position paper advocated for neutrality in financial reporting. C is incorrect. The position paper advocated for information regarding the current fair value of assets and liabilities, not cost information.

Which of the following is least likely to be a general feature underlying the preparation of financial statements within the International Financial Reporting Standards (IFRS) Conceptual Framework? Matching Accrual basis Materiality

A is correct. The IFRS Conceptual Framework specifies a number of general features underlying the preparation of financial statements, including materiality and accrual basis. Matching is not one of those general features; it is a general principle of expense recognition. B is incorrect. Accrual basis is one of the general features underlying the preparation of financial statements under the IFRS Framework C is incorrect. Materiality is one of the general features underlying the preparation of financial statements under the IFRS Framework

What does the P/E ratio measure? The "multiple" that the stock market places on a company's EPS. The relationship between dividends and market prices. The earnings for one common share of stock.

A is correct. The P/E ratio measures the "multiple" that the stock market places on a company's EPS.

Which of the following best describes a responsibility of the SEC? Overseeing the Public Companies Accounting Oversight Board (PCAOB) Prosecuting analysts who disseminate conclusions based on non-material non-public information Promoting the adoption of global financial reporting standards

A is correct. The SEC is responsible for overseeing the PCAOB under the Sarbanes-Oxley Act of 2002. B is incorrect. Under mosaic theory, it is not a violation of CFA Institute standards or securities laws to disseminate conclusions based on non-material non-public information in combination with an analysis of public information C is incorrect. This is one of the principle objectives of the IFRS Foundation.

The following information is extracted from Sweetfall Incorporated's financial statements.Income StatementBalance Sheet ChangesRevenue$56,800Decrease in accounts receivable$1,324Cost of goods sold27,264Decrease in inventory501Other operating expense562Increase in prepaid expense6Depreciation expense2,500Increase in accounts payable1,063 Q. The amount of cash Sweetfall Inc. paid to suppliers is: $25,700. $26,702. $27,826.

A is correct. The amount of cash paid to suppliers is calculated as follows: = Cost of goods sold - Decrease in inventory - Increase in accounts payable = $27,264 − $501 − $1,063 = $25,700.

Which of the following reports is least likely to be filed with the US SEC? Annual report Form 10-K Proxy statement

A is correct. The annual report is not a requirement of the SEC. B is incorrect. The 10-K is required by the SEC C is incorrect. A proxy statement is required by the SEC

Using the information presented in Exhibit 14 of the reading, the financial leverage ratio for SAP Group at 31 December 2017 is closest to: 1.50. 1.66. 2.00.

B is correct. The financial leverage ratio (Total assets ÷ Total equity) is 1.66 (= €42,497 ÷ €25,540).

Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to: +$0.41 million. -$0.41 million. -$1.22 million.

A is correct. The average accounts receivable balances (actual and desired) must be calculated to determine the desired change. The average accounts receivable balance can be calculated as an average day's credit sales times the DSO. For the most recent fiscal year, the average accounts receivable balance is $15.62 million [= ($300,000,000/365) × 19]. The desired average accounts receivable balance for the next fiscal year is $16.03 million (= ($390,000,000/365) × 15). This is an increase of $0.41 million (= 16.03 million − 15.62 million). An alternative approach is to calculate the turnover and divide sales by turnover to determine the average accounts receivable balance. Turnover equals 365 divided by DSO. Turnover is 19.21 (= 365/19) for the most recent fiscal year and is targeted to be 24.33 (= 365/15) for the next fiscal year. The average accounts receivable balances are $15.62 million (= $300,000,000/19.21), and $16.03 million (= $390,000,000/24.33). The change is an increase in receivables of $0.41 million

A company's financial position would best be evaluated using the: balance sheet. income statement. statement of cash flows.

A is correct. The balance sheet portrays the company's financial position on a specified date. The income statement and statement of cash flows present different aspects of performance during the period.

The most stringent test of a company's liquidity is its: cash ratio. quick ratio. current ratio.

A is correct. The cash ratio determines how much of a company's near-term obligations can be settled with existing amounts of cash and marketable securities.

An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro):FY5 (€)FY4 (€)FY3 (€)Total debt2,0001,9001,750Total equity4,0004,5005,000 Q. Which of the following would be the analyst's most likely conclusion? The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5. The company is becoming increasingly more liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

A is correct. The company is becoming increasingly less solvent, as evidenced by its debt-to-equity ratio increasing from 0.35 to 0.50 from FY3 to FY5. The amount of a company's debt and equity do not provide direct information about the company's liquidity position. Debt to equity: FY5: 2,000/4,000 = 0.5000 FY4: 1,900/4,500 = 0.4222 FY3: 1,750/5,000 = 0.3500

Percentage of Net Revenues2016Cash flows from operating activities Cash received from customers118.7% Cash paid to suppliers and employees(81.4) Dividends received0.2 Net interest and other financial expenses paid(3.8) Taxes paid(5.2) Net cash from operating activities28.5 Cash paid for long-term assets(13.4) Other investing activities(3.1) Net cash used in investing activities(16.5) Dividends paid(8.5) Other financing activities3.8 Net cash flow used in financing activities(4.7) Net change in cash7.3% Cash Flow Coverage Ratios 2015Dividend payment3.69Investing and financing0.82Reinvestment2.18 Compared with 2015, the most appropriate conclusion an analyst can make about 2016 is that the company's ability to use operating cash flows to: pay dividends decreased. acquire assets, pay debts, and make distributions to owners decreased. acquire assets improved.

A is correct. The company's dividend payment coverage ratio worsened; therefore, the company was less able to pay dividends from operating cash flows. Calculations are as follows: Coverage RatioDefinition and Calculation20162015InterpretationDividend paymentCash flow from operations ÷ Dividends paid28.5 ÷ 8.5 =3.353.69Ability to pay dividends decreasedInvesting and financingCash flow from operations ÷ Cash outflows for investing and financing28.5 ÷ (16.5 + 4.7) =1.340.82Ability to acquire assets, pay debts and make distributions improvedReinvestmentCash flow from operations ÷ Cash paid for long term assets28.5 ÷ 13.4 =

Which ratio would a company most likely use to measure its ability to meet short-term obligations? Current ratio. Payables turnover. Gross profit margin.

A is correct. The current ratio is a liquidity ratio. It compares the net amount of current assets expected to be converted into cash within the year with liabilities falling due in the same period. A current ratio of 1.0 would indicate that the company would have just enough current assets to pay current liabilities.

An investor concerned whether a company can meet its near-term obligations is most likely to calculate the: current ratio. return on total capital. financial leverage ratio.

A is correct. The current ratio provides a comparison of assets that can be turned into cash relatively quickly and liabilities that must be paid within one year. The other ratios are more suited to longer-term concerns.

Which of the following elements of financial statements is most closely related to measurement of financial position? Equity. Income. Expenses.

A is correct. The elements of financial statements related to the measurement of financial position are assets, liabilities, and equity.

Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations? Follow-up Analyze/interpret the processed data Develop and communicate conclusions and recommendations

A is correct. The follow-up phase involves gathering information and repeating the analysis to determine whether it is necessary to update reports and recommendations.

Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2018?Balance Sheet Item12/31/201712/31/2018ChangeCommon stock$100$102$2Additional paid-in capital common stock$100$140$40Retained earnings$100$115$15Total stockholders' equity$300$357$57 Issuance of common stock of $42 million; dividends paid of $10 million. Issuance of common stock of $38 million; dividends paid of $10 million. Issuance of common stock of $42 million; dividends paid of $40 million.

A is correct. The increase of $42 million in common stock and additional paid-in capital indicates that the company issued stock during the year. The increase in retained earnings of $15 million indicates that the company paid $10 million in cash dividends during the year, determined as beginning retained earnings of $100 million plus net income of $25 million minus ending retained earnings of $115 million, which equals $10 million in cash dividends.

Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? Operating. Investing. Financing.

A is correct. The operating section may be prepared under the indirect method. The other sections are always prepared under the direct method.

For which of the following inventory valuation methods is the gross profit margin least likely to be the same under both a perpetual inventory system and a periodic inventory system? LIFO Specific identification FIFO

A is correct. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO. B is incorrect. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO. C is incorrect. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO.

Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the results the company would have reported if the write-down had never occurred, Zimt's reported 2018: profit was overstated. cash flow from operations was overstated. year-end inventory balance was overstated.

A is correct. The reversal of the write-down shifted cost of sales from 2018 to 2017. The 2017 cost of sales was higher because of the write-down, and the 2018 cost of sales was lower because of the reversal of the write-down. As a result, the reported 2018 profits were overstated. Inventory balance in 2018 is the same because the write-down and reversal cancel each other out. Cash flow from operations is not affected by the non-cash write-down, but the higher profits in 2018 likely resulted in higher taxes and thus lower cash flow from operations.

Providing information about the performance of a company, its financial position, and changes in financial position that is useful to a wide range of users is most accurately described as the role of: financial reporting. the audit report. financial statement analysis.

A is correct. The role of financial reporting is to provide information about the performance of a company, its financial position, and changes in financial position that is useful to a wide range of users in making economic decisions. B is incorrect. Audit reports express an opinion about the fair presentation of the financial statements. C is incorrect. The role of financial statement analysis is to take the financial reports and evaluate the past, current, and prospective performance and financial position of a company for the purpose of making investment, credit, and other economic decisions.

An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.

A is correct. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This coverage ratio is based on cash flow information; another common coverage ratio uses a measure based on the income statement (earnings before interest, taxes, depreciation, and amortisation).

Trade receivables are most commonly reported at: net realizable value. net present value. face value.

A is correct. Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability. B is incorrect. Present value is the present discounted value of future net cash inflows that the asset is expected to generate in the normal course of business. Trade receivables are typically reported at net realisable value. C is incorrect. Face value would not account for the potential for uncollectability. Trade receivables are typically reported at net realisable value

Under US GAAP, internally created identifiable intangible assets most likely: are expensed and not reported on the balance sheet. have their amortization method and useful life reviewed at least annually. can be revalued only when there is an active market for the specific intangible asset.

A is correct. Under US GAAP, internally created identifiable intangibles are expensed rather than reported on the balance sheet. B is incorrect because under both IFRS and US GAAP, internally created identifiable intangible assets are immediately expensed and not amortized. C is incorrect because a revaluation process applies only to those intangible assets that either have been acquired or are the result of specific contractual or legal rights or privileges and is not used for internally created intangible assets.

Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? Net income. Cash paid to suppliers. Cash received from customers.

A is correct. Under the indirect method, the operating section would begin with net income and adjust it to arrive at operating cash flow. The other two items would appear in the operating section under the direct method.

When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders? Stock options Convertible debt that is dilutive Convertible preferred stock that is dilutive

A is correct. When a company has stock options outstanding, diluted EPS is calculated as if the financial instruments had been exercised and the company had used the proceeds from the exercise to repurchase as many shares possible at the weighted average market price of common stock during the period. As a result, the conversion of stock options increases the number of common shares outstanding but has no effect on net income available to common shareholders. The conversion of convertible debt increases the net income available to common shareholders by the after-tax amount of interest expense saved. The conversion of convertible preferred shares increases the net income available to common shareholders by the amount of preferred dividends paid; the numerator becomes the net income.

If inventory unit costs are increasing from period-to-period, a LIFO liquidation is most likely to result in an increase in: gross profit. LIFO reserve. inventory carrying amounts.

A is correct. When the number of units sold exceeds the number of units purchased, a company using LIFO will experience a LIFO liquidation. If inventory unit costs have been rising from period-to-period and a LIFO liquidation occurs, it will produce an increase in gross profit as a result of the lower inventory carrying amounts of the liquidated units (lower cost per unit of the liquidated units).

Unless it is impractical to do so, changes in accounting policies are to be reported: prospectively. retrospectively. at the bottom of the income statement in the year of change.

B is correct. Changes in accounting policies are reported through retrospective application unless it is impractical to do so.

A company's profitability over a period of time is best evaluated using the: balance sheet. income statement. cash flow statement.

B is correct. A company's profitability is best evaluated using the income statement. The income statement presents information on the financial results of a company's business activities over a period of time by communicating how much revenue was generated and the expenses incurred to generate that revenue

Under IFRS, which of the following balance sheet presentation formats is most acceptable? Classifying assets and liabilities: into operating, investing, and financing categories. in liquidity order. as monetary vs. non-monetary.

B is correct. A liquidity-based presentation can be used when it provides information that is reliable and more relevant. Entities that typically choose this format include banks

An auditor determines that a company's financial statements are prepared in accordance with applicable accounting standards except with respect to inventory reporting. This exception is most likely to result in an audit opinion that is: adverse. qualified. unqualified.

B is correct. A qualified audit opinion is one in which there is some scope limitation or exception to accounting standards. Exceptions are described in the audit report with additional explanatory paragraphs so that the analyst can determine the importance of the exception.

Which of the following would best explain an increase in receivables turnover? The company adopted new credit policies last year and began offering credit to customers with weak credit histories. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement.

B is correct. A write off of receivables would decrease the average amount of accounts receivable (the denominator of the receivables turnover ratio), thus increasing this ratio. Customers with weaker credit are more likely to make payments more slowly or to pose collection difficulties, which would likely increase the average amount of accounts receivable and thus decrease receivables turnover. Longer payment terms would likely increase the average amount of accounts receivable and thus decrease receivables turnover.

The objective of general purpose financial reporting is best described as: providing information about financial performance to a wide range of users. facilitating resource allocation decisions by current and potential investors and creditors. reporting an entity's economic resources and claims, and changes therein, to shareholders.

B is correct. According to the Conceptual Framework for Financial Reporting 2010 within the International Financial Reporting Standards, as well as Concept Statement 8 under US GAAP, "the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity." A is incorrect. The scope of this statement is limited to financial performance, rather than the broader financial reporting scope. Further, the target audience of financial reporting reflects the 1989 version of the framework. C is incorrect. Both the scope and the target audience are too narrow in this statement. The scope reflects the 1989 version of the framework.

The assumption that the effects of transactions and other events are recognized when they occur, not when the cash flows occur, is called: relevance. accrual basis. going concern.

B is correct. Accrual basis reflects the effects of transactions and other events being recognized when they occur, not when the cash flows. These effects are recorded and reported in the financial statements of the periods to which they relate.

which of the following ratios is most likely to be used as a measure of operating performance? Cash ratio Working capital turnover ratio Defensive interval ratio

B is correct. Activity ratios are typically used to measure operating performance. Working capital turnover is an example of an activity ratio; the defensive interval ratio and cash ratio are liquidity ratios used to measure a company's ability to meet its short-term obligations.

When computing net cash flow from operating activities using the indirect method, an addition to net income is most likely to occur when there is a: gain on the sale of an asset. loss on the retirement of debt. decrease in a deferred tax liability.

B is correct. An addition to net income is made when there is a loss on the retirement of debt, which is a non-operating loss. A gain on the sale of an asset and a decrease in deferred tax liability are both subtracted from net-income.

Q. Which is an appropriate method of preparing a common-size cash flow statement? Show each item of revenue and expense as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of total cash outflows

B is correct. An appropriate method to prepare a common-size cash flow statement is to show each line item on the cash flow statement as a percentage of net revenue. An alternative way to prepare a statement of cash flows is to show each item of cash inflow as a percentage of total inflows and each item of cash outflows as a percentage of total outflows.

For a company paying preferred dividends, the components needed to compute basic EPS are net income: and the weighted average number of common shares outstanding. preferred dividends, and the weighted average number of common shares outstanding. preferred dividends, additional shares issued if preferred is converted, and the weighted average number of common shares outstanding.

B is correct. Basic EPS is calculated by subtracting preferred dividends from net income and then dividing the result by the weighted average number of shares outstanding.

To evaluate the potential effect of an innovative and unique type of business transaction on financial statements, an analyst's best approach is to: monitor the actions of standard setters and regulators. gain an understanding of the transaction's economic purpose. consider the approach taken for "new" transactions that arose in the past.

B is correct. By understanding the economic purpose of a transaction and applying the conceptual framework, an analyst may be able to evaluate the potential effect on financial statements, even in the absence of specific standards. A is incorrect. Given the lag between new product development and regulatory action, the actions of standard setters and regulators are unlikely to be helpful when the new transactions initially arise. C is incorrect. New types of transactions have unique elements that distinguish them from the transactions that arose previously. They may or may not affect the financial statements in the same way.

Which statement is most accurate? A common size income statement: restates each line item of the income statement as a percentage of net income. allows an analyst to conduct cross-sectional analysis by removing the effect of company size. standardizes each line item of the income statement but fails to help an analyst identify differences in companies' strategies.

B is correct. Common size income statements facilitate comparison across time periods (time-series analysis) and across companies (cross-sectional analysis) by stating each line item of the income statement as a percentage of revenue. The relative performance of different companies can be more easily assessed because scaling the numbers removes the effect of size. A common size income statement states each line item on the income statement as a percentage of revenue. The standardization of each line item makes a common size income statement useful for identifying differences in companies' strategies.

Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods? An increase or decrease in sales. An increase or decrease in financial leverage. A more efficient or less efficient use of assets.

B is correct. Common-size analysis (as presented in the reading) provides information about composition of the balance sheet and changes over time. As a result, it can provide information about an increase or decrease in a company's financial leverage.

For which of the examples given would common-size income statements generally provide the greatest insight? A liquidity analysis of two companies within the same industry A time-series analysis of a rapidly expanding single company A comparison of similarly sized companies from different industries

B is correct. Common-size income statements facilitate comparison across time periods (time-series analysis) because the standardization of each line item removes the effect of size. They would be particularly useful in neutralizing the size effect for a company experiencing rapid growth. For example, efficiencies gained from increased volume may be more readily apparent. Common-size income statements would be less useful for similarly sized companies from different industries because the size effect is less important in the comparison. A is incorrect. The income statement is of little use in performing a liquidity analysis. C is incorrect. Common-size income statements eliminate the effect of size, so they would be less useful in a comparison of similarly-sized companies.

Financial statementsGBP mGBP mGBP mGBP mGBP mIncome statementsRevenue4,3903,6243,7178,16711,366Profit before interest and taxation (EBIT)8447007049331,579Net interest payable−80−54−98−163−188Taxation−186−195−208−349−579Minorities−94−99−105−125−167Profit for the year484352293296645Balance sheetsFixed assets3,5103,6674,75810,43111,483Current asset investments, cash at bank and in hand316218290561682Other current assets5585146431,2581,634Total assets4,3844,3995,69112,25013,799Interest bearing debt (long term)−602−1,053−1,535−3,523−3,707Other creditors and provisions (current)−1,223−1,054−1,102−2,377−3,108Total liabilities−1,825−2,107−2,637−5,900−6,815Net assets2,5592,2923,0546,3506,984Shareholders' funds2,1612,0062,3095,5726,165Equity minority interests398286745778819Capital employed2,5592,2923,0546,3506,984Cash flowWorking capital movements−5357185107Net cash inflow from operating activities8648599751,5682,292 Question Q. Which of the following choices best describes reasonable conclusions an analyst might make about the company's solvency? Comparing FY14 with FY10, the company's solvency improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27. Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4. Comparing FY14 with FY10, the company's solvency improved, as indicated by the growth in its profits to GBP 645 million.

B is correct. Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 (= 844/80) in FY10 to 8.4 (= 1,579/188) in FY14. The debt-to-asset ratio increased from 0.14 (= 602/4,384) in FY10 to 0.27 (= 3,707/13,799) in FY14. This is also indicative of deteriorating solvency. In isolation, the amount of profits does not provide enough information to assess solvency.

Under US GAAP, a company's comprehensive income is reported as: net income less common stock dividends. the change in equity during a period from transactions and other events and circumstances from non-owner sources. revenue less expense items that are excluded from the net income calculation.

B is correct. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which means comprehensive income is the sum of all transactions and other events and circumstances from non-owners. A is incorrect because common stock dividends are distributions to owners and, as such, they result in a change in equity and therefore are not a subtraction in determining comprehensive income. C is incorrect because this choice is describing other comprehensive income, but comprehensive income is the combination of net income and other comprehensive income.

Which of the following statements about cash flow ratios is most valid? Reinvestment ratio measures a firm's ability to acquire assets with investing cash flows. Debt payment ratio measures a firm's ability to pay debts with operating cash flows. Interest coverage ratio is calculated as operating cash flow divided by interest payments.

B is correct. Debt payment ratio (Cash flow from operations/Cash paid for long-term debt repayment) shows the firm's ability to pay debts with operating cash flows. C is incorrect. Interest coverage ratio is calculated as (CFO + Interest paid + Taxes paid)/Interest paid. It measures the firm's ability to meet interest obligations. A is incorrect. Reinvestment ratio (CFO/Cash paid for long-term assets) shows the firm's ability to acquire assets with operating cash flows.

A payment received for a subscription service at the beginning of the period will most likely be recorded as: trade payable. deferred income. notes payable.

B is correct. Deferred income (also called deferred revenue and unearned revenue) arises when a company receives payment in advance of delivery of the goods and services associated with the payment.

Which of the following items is an example of deferred income? Normal operating expenses that have been paid in advance A payment received for contracted goods and services prior to their delivery An expense recognized on a company's income statement but not paid for as of the balance sheet date

B is correct. Deferred income arises when a company receives payment in advance of delivery of the goods and services associated with the payment. A is incorrect because normal operating expenses that have been paid in advance are a type of prepaid expense and are included in other current assets, not deferred income. C is incorrect because an expense that has been recognized on a company's income statement but has not yet been paid as of the balance sheet date is an accrued expense, not deferred income.

. During periods of rising inventory unit costs, a company using the FIFO method rather than the LIFO method will report a lower: current ratio. inventory turnover. gross profit margin.

B is correct. During a period of rising inventory costs, a company using the FIFO method will allocate a lower amount to cost of goods sold and a higher amount to ending inventory as compared with the LIFO method. The inventory turnover ratio is the ratio of cost of sales to ending inventory. A company using the FIFO method will produce a lower inventory turnover ratio as compared with the LIFO method. The current ratio (current assets/current liabilities) and the gross profit margin [gross profit/sales = (sales less cost of goods sold)/sales] will be higher under the FIFO method than under the LIFO method in periods of rising inventory unit costs.

Compared with a company that uses the FIFO method, during a period of rising unit inventory costs, a company using the LIFO method will most likely appear more: liquid. efficient. profitable.

B is correct. During a period of rising inventory prices, a company using the LIFO method will have higher cost of cost of goods sold and lower inventory compared with a company using the FIFO method. The inventory turnover ratio will be higher for the company using the LIFO method, thus making it appear more efficient. Current assets and gross profit margin will be lower for the company using the LIFO method, thus making it appear less liquid and less profitable.

Which of the following best describes a component of the income statement? Amounts that a company owes its vendors for purchases of goods and services Outflows or depletions of assets in the course of a business's activities Obligations from past events that are expected to result in an outflow of economic benefits

B is correct. Expenses are a component of the income statement and are defined as outflows, asset depletions, and liabilities incurred in the course of a business's activities. A is incorrect. Accounts payable is a liability, a component of the balance sheet, and is defined as amounts that a company owes its vendors for purchases of goods and services. C is incorrect. Liabilities are a component of the balance sheet and are defined as obligations from past events that on settlement are expected to result in an outflow of economic benefits.

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through income into retained earnings. They are a component of accumulated other comprehensive income.

B is correct. For financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders' equity as part of retained earnings.

Which of the following is an appropriate method of computing free cash flow to the firm? Add operating cash flows to capital expenditures and deduct after-tax interest payments. Add operating cash flows to after-tax interest payments and deduct capital expenditures. Deduct both after-tax interest payments and capital expenditures from operating cash flows.

B is correct. Free cash flow to the firm can be computed as operating cash flows plus after-tax interest expense less capital expenditures.

All of the following are current assets except: cash. goodwill. inventories.

B is correct. Goodwill is a long-term asset, and the others are all current assets.

Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements? Current cost. Historical cost. Realizable value.

B is correct. Historical cost is the consideration paid to acquire an asset.

nterest payable decreased during a company's fiscal year. Compared with the amount of cash interest payments made, interest expense is most likely: the same. lower. higher.

B is correct. If the interest payable decreases during the year, then the interest expense on an accrual basis will be lower than the amount of cash interest payments. The cash paid would be the full amount of the expense plus the amounts paid to reduce the interest payable.

Like many technology companies, TechnoTools operates in an environment of declining prices. Its reported profits will tend to be highest if it accounts for inventory using the: FIFO method. LIFO method. weighted average cost method.

B is correct. In a declining price environment, the newest inventory is the lowest-cost inventory. In such circumstances, using the LIFO method (selling the newer, cheaper inventory first) will result in lower cost of sales and higher profit.

Compared to using the weighted average cost method to account for inventory, during a period in which prices are generally rising, the current ratio of a company using the FIFO method would most likely be: lower. higher. dependent upon the interaction with accounts payable.

B is correct. In a rising price environment, inventory balances will be higher for the company using the FIFO method. Accounts payable are based on amounts due to suppliers, not the amounts accrued based on inventory accounting.

In a period of declining inventory unit costs and constant or increasing inventory quantities, which inventory method is most likely to result in a higher debt-to-equity ratio? LIFO FIFO Weighted average cost

B is correct. In an environment of declining inventory unit costs and constant or increasing inventory quantities, FIFO (in comparison with weighted average cost or LIFO) will have higher cost of goods sold and lower net income and inventory. Because both inventory and net income are lower, total equity is lower, resulting in a higher debt-to-equity ratio.

Under general principles of expense recognition, a company should: apply uniform treatment for administrative and depreciation costs. recognize expenses in the period that it consumes the associated economic benefits. allocate lost economic benefits prospectively over the expected period in which the benefits would have been earned.

B is correct. In general, a company recognizes expenses in the period that it consumes (i.e., uses up) the economic benefits associated with the expenditure or loses some previously recognized economic benefit. A is incorrect because administrative and depreciation costs are not treated uniformly; administrative costs are expensed immediately, and depreciation is allocated over time. C is incorrect because a company recognizes expenses in the period that it loses some previously recognized economic benefit or consumes the economic benefits associated with the expenditure, not when benefits would have been earned.

Expenses on the income statement may be grouped by: nature, but not by function. function, but not by nature. either function or nature.

C is correct. IAS No. 1 states that expenses may be categorized by either nature or function.

A creditor most likely would consider a decrease in which of the following ratios to be positive news? Interest coverage (times interest earned). Debt-to-total assets. Return on assets.

B is correct. In general, a creditor would consider a decrease in debt to total assets as positive news. A higher level of debt in a company's capital structure increases the risk of default and will, in general, result in higher borrowing costs for the company to compensate lenders for assuming greater credit risk. A decrease in either interest coverage or return on assets is likely to be considered negative news.

n a period of rising prices, when compared with a company that uses weighted average cost for inventory, a company using FIFO will most likely report higher values for its: inventory turnover. return on sales. debt-to-equity ratio.

B is correct. In periods of rising prices, FIFO results in a higher inventory value and a lower cost of goods sold and thus a higher net income. The higher net income increases return on sales. The higher reported net income also increases retained earnings and thus results in a lower debt-to-equity ratio, not a higher one. The combination of higher inventory and lower cost of goods sold (CGS) decreases inventory turnover (CGS/Inventory). A is incorrect. The combination of higher inventory and lower cost of goods sold decreases inventory turnover (CGS/Inventory). C is incorrect. The higher reported net income increases retained earnings and therefore results in a lower debt-to-equity ratio, not a higher one.

A company using IFRS reports its interest payments on long-term debt as a financing activity. If the company reported under US GAAP, the most likely effect would be a: higher cash flow from operations. higher cash flow from financing activities. lower cash flow from investing activities.

B is correct. Interest payments can be reported either as operating or financing cash flow under IFRS, but they can be reported only as operating cash flow under US GAAP. The interest payment was originally reported as financing activity under IFRS, but under US GAAP it would be an operating activity. Therefore, under US GAAP, cash flow from financing activities would be higher and operating cash flows lower by the same amount.

nventory values under IFRS are recorded at the lower of cost or: market. net realizable value. estimated selling price.

B is correct. Inventories are measured at the lower of cost or net realizable value under IFRS. A is incorrect because inventories are measured at the lower of cost or market under US GAAP. C is incorrect because inventories are measured at the lower of cost or net realizable value under IFRS. Net realizable value is the estimated selling price less the estimated costs of completion and costs necessary to make the sale, not just the estimated selling price.

Q. Mustard Seed PLC adheres to IFRS. It recently purchased inventory for €100 million and spent €5 million for storage prior to selling the goods. The amount it charged to inventory expense (€ millions) was closest to: €95. €100. €105.

B is correct. Inventory expense includes costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. It does not include storage costs not required as part of production.

When preparing the cash flow statement, which of the following purchases is the best example of an investing activity? Equity securities held for trading purposes Equity securities to be held for more than one year Liquid securities held for 30 days

B is correct. Investing activities on the cash flow statement comprise the purchase and sale of long-term assets and other investments. These activities include investments in equity and debt issued by other companies, whether long term or short term, and exclude those classified as cash equivalents (liquid securities held for less than 30 days) or those held for trading purposes. A is incorrect. Although investing activities include both long-term and short-term investments in equity and debt, it specifically excludes securities held for dealing or trading purposes, even for companies where this is not a primary business activity. C is incorrect. Although investing activities include both long-term and short-term investments in equity and debt, it specifically excludes any securities considered cash equivalents (very short-term, highly liquid securities).

Q. Which statement about the calculation of LB's EPS is most accurate? LB's basic EPS is $1.12. LB's diluted EPS is equal to or less than its basic EPS. The weighted average number of shares outstanding is 2,210,000.

B is correct. LB has warrants in its capital structure; if the exercise price is less than the weighted average market price during the year, the effect of their conversion is to increase the weighted average number of common shares outstanding, causing diluted EPS to be lower than basic EPS. If the exercise price is equal to the weighted average market price, the number of shares issued equals the number of shares repurchased. Therefore, the weighted average number of common shares outstanding is not affected and diluted EPS equals basic EPS. If the exercise price is greater than the weighted average market price, the effect of their conversion is anti-dilutive. As such, they are not included in the calculation of basic EPS. LB's basic EPS is $1.22 [= ($3,350,000 − $430,000)/2,400,000]. Stock dividends are treated as having been issued retroactively to the beginning of the period.

Compared to a company that uses the FIFO method, during periods of rising prices a company that uses the LIFO method will most likely appear more: liquid. efficient. profitable.

B is correct. LIFO will result in lower inventory and higher cost of sales. Gross margin (a profitability ratio) will be lower, the current ratio (a liquidity ratio) will be lower, and inventory turnover (an efficiency ratio) will be higher.

Obligations arising from past events that are expected to result in an outflow of economic benefits from an entity are most likely known as: expenses. liabilities. operating activities.

B is correct. Liabilities are an element of the balance sheet and represent obligations of a company arising from past events, the settlement of which is expected to result in an outflow of economic benefits from the entity. A is incorrect. Expenses are a component of the income statement and are defined as outflows, depletions of assets, and incurrences of liabilities in the course of the activities of a business. C is incorrect. Operating activities are a classification used in the cash flow statement and include the cash flows resulting from a company's day-to-day activities that create revenue.

For a company without a clearly identifiable operating cycle, current liabilities are expected to be settled within: six months. one year. two years.

B is correct. Liabilities expected to be settled within one year or within one operating cycle of the business, whichever is greater, are classified as current liabilities. When an entity's normal operating cycle is not clearly identifiable, its duration is assumed to be one year.

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business:Revenue$1,000,000Returns of goods sold$100,000Cash collected$800,000Cost of goods sold$700,000 Q. Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? $200,000. $900,000. $1,000,000.

B is correct. Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000.

Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by: Zimt is too high. Nutmeg is too low. Nutmeg is too high.

B is correct. Nutmeg uses the LIFO method, and thus some of the inventory on the balance sheet was purchased at a (no longer available) lower price. Zimt uses the FIFO method, so the carrying value on the balance sheet represents the most recently purchased units and thus approximates the current replacement cost.

7.4% complete QuestionOceanaqua Apparel (OA) is a manufacturer of swimwear. Abbreviated common-size income statements and relevant industry data are presented below.OA Common-Size Income Statement201520142013Net Revenues100.0%100.0%100.0%Cost of Sales64.362.559.5Gross Profit35.737.540.5Selling, General & Admin23.523.225.5Advertising0.52.93.1Operating Income11.711.411.9Interest Expense1.82.23.8Earnings Before Taxes9.99.28.1Taxes2.02.01.9Net Income7.97.26.2Swimwear IndustryGross Profit Margin38.4%39.1%40.7%Net Profit Margin7.16.86.1 Which statement about OA's three-year financial performance is most accurate? OA's: effective tax rate has been holding steady at approximately 2%. revenues per dollar of sales costs are falling over the time period. profit margins indicate performance superior to the industry average.

B is correct. OA's cost of sales have been steadily rising, causing the firm's gross profit margin to fall below the industry average. A falling gross margin indicates falling revenue per dollar of sales costs. A is incorrect because the effective tax rate did not average 2% over the period. In the case of taxes, it is more meaningful to compare the amount of taxes paid with the amount of pre-tax income, then examine the causes for any differences in effective tax rates. Although taxes as a percent of sales has held steady at roughly 2%, OA's corporate tax rate exceeded 20% each year. Tax rate = Taxes/Earnings before taxes 2013: 1.9%/8.1% = 23.5% 2014: 2.0%/9.2% = 21.7% 2015: 2.0%/9.9% = 20.2% C is incorrect because OA's industry-relative performance shows below-average gross margin results, in contrast to the net profit margin, which exceeds the industry average.

The three major classifications of activities in a cash flow statement are: inflows, outflows, and net flows. operating, investing, and financing. revenues, expenses, and net income.

B is correct. Operating, investing, and financing are the three major classifications of activities in a cash flow statement. Revenues, expenses, and net income are elements of the income statement. Inflows, outflows, and net flows are items of information in the statement of cash flows.

Which of the following is most likely classified as a current liability? Payment received for a product due to be delivered at least one year after the balance sheet date Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle Payment on debt due in six months for which the company has the unconditional right to defer settlement for at least one year after the balance sheet date

B is correct. Payments due within one operating cycle of the business, even if they will be settled more than one year after the balance sheet date, are classified as current liabilities. Payment received in advance of the delivery of a good or service creates an obligation or liability. If the obligation is to be fulfilled at least one year after the balance sheet date, it is recorded as a non-current liability, such as deferred revenue or deferred income. Payments that the company has the unconditional right to defer for at least one year after the balance sheet may be classified as non-current liabilities.

A company's profitability for a period would best be evaluated using the: balance sheet. income statement. statement of cash flows.

B is correct. Profitability is the performance aspect measured by the income statement. The balance sheet portrays the financial position. The statement of cash flows presents a different aspect of performance.

The sale of a building for cash would be classified as what type of activity on the cash flow statement? Operating. Investing. Financing.

B is correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of another company, or a long-term note receivable), it would have been considered a significant non-cash activity.

According to the International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting, the two fundamental qualitative characteristics that make financial information useful are best described as: understandability and verifiability. relevance and faithful representation. timeliness and accrual accounting.

B is correct. Relevance and faithful representation are the two fundamental qualitative characteristics that make financial information useful, according to the IASB Conceptual Framework. A is incorrect. Verifiability and understandability are two characteristics that enhance the usefulness of relevant and faithfully represented financial information. C is incorrect. Timeliness enhances the usefulness of relevant and faithfully represented financial information. Accrual accounting is an underlying assumption.

When a company buys shares of its own stock to be held in treasury, it records a reduction in: both assets and liabilities. both assets and shareholders' equity. assets and an increase in shareholders' equity.

B is correct. Share repurchases reduce the company's cash (an asset). Shareholders' equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners' equity.

An income statement in a single-step format presents a subtotal for: amortization of intangibles. operating income. gross margin. Solution

B is correct. Single-step income statements present a subtotal for operating income. A is incorrect because income statements in single-step format do not present a subtotal for amortization of intangibles. C is incorrect because income statements in single-step format do not present a subtotal for gross margin. When an income statement shows a gross profit subtotal, it is said to use a multi-step format rather than a single-step format.

US generally accepted accounting principles are currently developed by which entity? The Securities and Exchange Commission. The Financial Accounting Standards Board. The Public Company Accounting Oversight Board.

B is correct. The FASB is responsible for the Accounting Standards Codification™, the single source of nongovernmental authoritative US generally accepted accounting principles.

If a company capitalizes an expenditure related to capital assets instead of expensing it, ignoring taxes, the company will most likely report: a lower cash flow per share in that period. the same free cash flow to the firm (FCFF) in that period. a higher earnings per share in future periods.

B is correct. The FCFF [Cash flow from operations (CFO) + Interest × (1 - t) - Capital expenditures] would be the same. CFO and capital expenditures would both increase by the same amount (ignoring taxes). Therefore, the net effect on FCFF would be zero. ExampleCapitalizing delivery cost as opposed to expensing it Ignoring taxes FCFFCFO + Interest × (1 - t) - Capital expenditures Capital expendituresIf capitalized, the amount capitalized increases capital expenditures and is recorded as a cash outflow from investing activities CFOThe CFO will be higher by amount capitalized (i.e., the amount not expensed)

Q. Shareholders' equity reported on the balance sheet is most likely to differ from the market value of shareholders' equity because: historical cost basis is used for all assets and liabilities. some factors that affect the generation of future cash flows are excluded. shareholders' equity reported on the balance sheet is updated continuously.

B is correct. The balance sheet omits important aspects of a company's ability to generate future cash flows, such as its reputation and management skills. The balance sheet measures some assets and liabilities based on historical cost and measures others based on current value. Market value of shareholders' equity is updated continuously. Shareholders' equity reported on the balance sheet is updated for reporting purposes and represents the value that was current at the end of the reporting period.

If a company purchases, at a premium, bonds that it expects to hold until maturity, they are most likely measured on the balance sheet at: historical cost. amortized cost. fair value.

B is correct. The bonds would be a type of financial asset that is measured at amortized cost. This classification applies to financial assets whose cash flows occur on specific dates and consist solely of principal and interest, and if the entity's business model for this investment is to hold the asset to maturity. C is incorrect. Financial assets can be measured at fair value but because the entity intends to hold these bonds to maturity, amortized cost is more likely. A is incorrect. Some financial assets, notably loans to other companies, are measured at historical cost, but not a purchased bond.

Money received from customers for products to be delivered in the future is recorded as: revenue and an asset. an asset and a liability. revenue and a liability.

B is correct. The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called "unearned income" or "unearned revenue." As the product is delivered, revenue will be recognized and the liability will be reduced.

An equity analyst is forecasting next year's net profit margin of a heavy equipment manufacturing firm by using the average net profit margin over the past three years. In making his profit projection, he identifies the following three items: The company reported losses from discontinued operations in each of the past three years. The most recent year's tax rate was only half of the prior two years' rate as a result of a fiscal stimulus. The company reported gains on the sale of investments in each of the past three years. Which of the following statements about the preparation of the forecast is most accurate? The analyst would: use the most recent tax rate because it is the best predictor of future tax rates. exclude the gains on the sale from investments because the company is a manufacturing firm. include the losses from discontinued operations because they appear to be an ongoing feature for this company.

B is correct. The company is a heavy equipment manufacturer. Because gains on investments are not a core part of the company's business, they should not be viewed as an ongoing source of earnings. Discontinued operations are considered to be non-recurring items (even though they have occurred in the past three years); they are normally treated as random and unsustainable and should not be included in a short-term forecast. The change in the current tax rate is best viewed as temporary in the absence of additional information and should not be the basis of the calculation of the average tax rate. A is incorrect. The long(er) run tax rate should be used; the change in the current tax rate is best viewed as temporary in the absence of additional information and should not be the basis of the calculation of the average tax rate. C is incorrect. The discontinued items should be considered random and unsustainable for a short-term forecast.

During 2013, the following events occurred at a company: It purchased a customer list for $100,000, which is expected to provide equal annual benefits for the next four years. It recorded $200,000 of goodwill in the acquisition of a competitor. It is estimated that the acquisition would provide substantial benefits for the company for at least the next 10 years. It spent $300,000 on media placements announcing that the company had donated products and services to the community. The CEO believes the firm's reputation was enhanced substantially and that the company will likely benefit from it for the next five years. Based on those events, the amortization expense that the company should report in 2014 is closest to: $85,000. $25,000. $45,000.

B is correct. The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life: $100,000/4 = $25,000/year. Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, it is an internally generated intangible that is not recorded on the balance sheet and is thus not amortized. A is incorrect. It includes the $300,000 of donation amortized over 5 years (300,000/5 = 60,000) added to the customer list amortization: 25,000 + 60,000 = 85,000. C is incorrect. It amortizes the goodwill over 10 years and adds it to the $25,000 amortization of the customer list: $200,000/10 + $100,000/4 = $45,000.

Which of the following elements of financial statements is most closely related to measurement of performance? Assets. Expenses. Liabilities.

B is correct. The elements of financial statements related to the measure of performance are income and expenses.

Selected information from a company's recent income statement and balance sheets is presented in the following table. Selected Financial Information as of 31 December (C$ thousands)20132012Sales2,240,000Cost of goods sold (COGS)1,320,000 Cash and investments210,700191,600Accounts receivable212,800201,900Inventories63,00071,500Accounts payable129,600157,200Other current liabilities130,700182,700 The company operates in an industry in which suppliers offer terms of 2/10, net 30. The payables turnover for the average company in the industry is 8.5 times. Which of the following statements is most accurate? In 2013, the company, on average: paid its accounts within the payment terms provided. paid its accounts more promptly than the average firm in the industry. took advantage of early payment discounts.

B is correct. The firm's days in payables is 39.9 days (see following calculations), so it appears that the firm does not normally take supplier provided discounts (paying in 10 days) or pay its accounts within the 30-day terms provided. However, on average, the company is paying faster than the average firm in the industry (42.9 days).Payables turnover = Purchases/Average payables = 1,311,500/143,400 = 9.15 timeswhere: Purchases = COGS + End inventory - Beginning inventory = 1,320,000 + (63,000 - 71,500) = 1,311,500 Average payables = (129,600 + 157,200)/2 = 143,400 Days in payables = 365/Payables turnover ratio For firm: 365 days/9.15 = 39.9 days For industry: 365 days/8.5 times = 42.9 days

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is closest to: $5.33. $5.54. $5.94.

B is correct. The formula to calculate diluted EPS is as follows: Diluted EPS = (Net income - Preferred dividends)/[Weighted average number of shares outstanding + (New shares that would have been issued at option exercise - Shares that could have been purchased with cash received upon exercise) × (Proportion of year during which the financial instruments were outstanding)]. The underlying assumption is that outstanding options are exercised, and then the proceeds from the issuance of new shares are used to repurchase shares already outstanding:Proceeds from option exercise = 100,000 × $20 = $2,000,000Shares repurchased = $2,000,000/$25 = 80,000 The net increase in shares outstanding is thus 10

. An independent audit report is most likely to provide: absolute assurance about the accuracy of the financial statements. reasonable assurance that the financial statements are fairly presented. a qualified opinion with respect to the transparency of the financial statements.

B is correct. The independent audit report provides reasonable assurance that the financial statements are fairly presented, meaning that there is a high probability that the audited financial statements are free from material error, fraud, or illegal acts that have a direct effect on the financial statements.

Information about a company's historical performance for the last two years and additional information are summarized in the following table.($ thousands)20132012Sales5,500.05,350.0Cost of goods sold-2,200.0-2,140.0Operating expenses-2,350.0-2,350.0Gain on sale of short-term investments0140.0Tax expense-237.5-325.0Income (loss) from discontinued operations (net of tax)-312.5112.5Net income400.0787.5 Industry sales are expected to increase 5%, and the company expects to maintain its current market share and gross profit margin. Operating expenses are not expected to change with the increase in sales. The company sold off its portfolio of marketable securities in 2012 and used the funds to purchase operating assets. In 2012, the company announced its intention to sell off a division, and that sale was completed in 2013. The results from the division and the gain or loss incurred on the sale are classified as discontinued operations. The projected net income (in thousands) for 2014 is closest to: $745. $836. $635.

B is correct. The loss (gain) from discontinued operations and the gain on the sale of the portfolio investments should not be included in the forecast because they are not recurring items. First, the recurring operating margin before tax should be forecasted, noting that the operating costs are fixed costs, and then the tax rate from 2013 should be used to determine net income. ($ thousands)2014 forecast20132012Sales (increase 5%)$5,775$5,500.0100%$5,350.0100%Cost of goods sold (40% each year)2,3102,200.040%2,140.040%Operating expenses (fixed cost)2,3502,350.02,350.0Recurring operating income1,115950.0860Tax expense (25% × operating income)279237.5(237.5/950) = 25%Net income$836

The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet: as a long-term liability. separately, but as a part of shareholders' equity. as a mezzanine item between liabilities and shareholders' equity.

B is correct. The non-controlling interest in consolidated subsidiaries is shown separately as part of shareholders' equity.

The role of financial statement analysis is best described as: providing information useful for making investment decisions. evaluating a company for the purpose of making economic decisions. using financial reports prepared by analysts to make economic decisions.

B is correct. The primary role of financial statement analysis is to use financial reports prepared by companies to evaluate their past, current, and potential performance and financial position for the purpose of making investment, credit, and other economic decisions.

Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3? The primary use of cash is financing activities. The primary source of cash is operating activities. Telefónica classifies dividends paid as an operating activity.

B is correct. The primary source of cash is operating activities. Cash flow provided by operating activity totaled €13,796 million in the most recent year. The primary use of cash is investing activities (total of €10,245 million). Dividends paid are classified as a financing activity.

Under which section of a manufacturing company's cash flow statement are the following activities reported? Item 1: Purchases of securities held for trading Item 2: Purchases of securities held for investment Both items are investing activities. Only Item 1 is an operating activity. Only Item 2 is an operating activity.

B is correct. The purchase and sale of securities held for trading are considered operating activities even for companies in which this activity is not a primary business activity.

Using the information presented in Exhibit 4 of the reading, the quick ratio for SAP Group at 31 December 2017 is closest to: 1.00. 1.07. 1.17.

B is correct. The quick ratio ([Cash + Marketable securities + Receivables] ÷ Current liabilities) is 1.07 ([= €4,011 + €990 + €5,899] ÷ €10,210). As noted in the text, the largest component of the current financial assets are loans and other financial receivables. Thus, financial assets are included in the quick ratio but not the cash ratio.

When developing forecasts, analysts should most likely: develop possibilities relying exclusively on the results of financial analysis. use the results of financial analysis, analysis of other information, and judgment. aim to develop extremely precise forecasts using the results of financial analysis.

B is correct. The results of an analyst's financial analysis are integral to the process of developing forecasts, along with the analysis of other information and judgment of the analysts. Forecasts are not limited to a single point estimate but should involve a range of possibilities.

Which of the following best describes the link between the cash flow statement and the balance sheet? The statement's investing activities section reconciles the changes in current assets on the balance sheet. The cash flow statement reconciles the beginning and ending balances of cash reported on the balance sheet. The cash flow statement reconciles changes in all accounts on the balance sheet.

B is correct. The statement of cash flows ultimately shows the change in cash during an accounting period. The company's balance sheet shows the beginning and ending cash balances for the previous and current years, and the bottom of the cash flow statement reconciles beginning cash with ending cash. Non-cash changes in accounts may appear on the balance sheet; therefore, not all changes in the balance sheet are reconciled on the cash flow statement.

Which of the following is not a required financial statement according to IAS No. 1? Statement of financial position. Statement of changes in income. Statement of comprehensive income.

B is correct. There is no statement of changes in income. Under IAS No. 1, a complete set of financial statements includes a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows, and notes comprising a summary of significant accounting policies and other explanatory information.

Information about a company's objectives, strategies, and significant risks are most likely to be found in the: auditor's report. management commentary. notes to the financial statements.

B is correct. These are components of management commentary.

Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of: auditing. financial reporting. financial statement analysis.

B is correct. This is the role of financial reporting. The role of financial statement analysis is to evaluate the financial reports.

For a company issuing securities in the United States to meet its obligations under the Sarbanes-Oxley Act, which of the following is management required to attest to? The suitability of management and director compensation agreements The adequacy of internal control over financial reporting The accuracy of estimates and assumptions used in preparing the financial statements

B is correct. To be in compliance with Sarbanes-Oxley, it is mandatory that management's Report to Shareholders discuss internal financial controls and their effectiveness, as well as the company's auditor's opinion of these internal controls. A is incorrect. Information on management and director compensation agreements will be found in the proxy statement and/or notes to the financial statements. C is incorrect. Estimates and assumptions used in preparing financial statements are found in the notes to the financial statements.

Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?Year EndedIncome Statement Item12/31/2018Net income$20 millionDepreciation$2 millionBalance Sheet Item12/31/201712/31/2018ChangeAccounts receivable$25 million$22 million($3 million)Inventory$10 million$14 million$4 millionAccounts payable$8 million$13 million$5 million Add $2 million. Add $6 million. Subtract $6 million.

B is correct. To derive operating cash flow, the company would make the following adjustments to net income: Add depreciation (a non-cash expense) of $2 million; add the decrease in accounts receivable of $3 million; add the increase in accounts payable of $5 million; and subtract the increase in inventory of $4 million. Total additions would be $10 million, and total subtractions would be $4 million, which gives net additions of $6 million.

Eric's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at: £550,000. £1,000,000. £3,000,000.

B is correct. Under IFRS, the reversal of write-downs is required if net realisable value increases. The inventory will be reported on the balance sheet at £1,000,000. The inventory is reported at the lower of cost or net realisable value. Under US GAAP, inventory is carried at the lower of cost or market value. After a write-down, a new cost basis is determined and additional revisions may only reduce the value further. The reversal of write-downs is not permitted.

Which of the following statements about balance sheets is most accurate? For balance sheets prepared under: IFRS, a classified balance sheet must present current assets before non-current assets. US GAAP, intangibles must be valued at historical cost. IFRS, a commercial real estate company should use a liquidity based presentation.

B is correct. Under US GAAP, intangibles must be valued at historical cost; under IFRS they can be valued at cost or revaluation. A is incorrect. Under IFRS, a classified balance sheet does separate current assets from non-current assets, but non-current assets could be presented first. C is incorrect. A commercial real estate company would have many non-liquid assets and would not likely use the liquidity-based presentation under IFRS. A commercial bank would use this format.

Under the International Accounting Standards Board's (IASB's) Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as: understandability. verifiability. comparability.

B is correct. Under the IASB's Conceptual Framework, verifiability means that different knowledgeable and independent users would agree that the information presented faithfully represents the economic events that it is intended to represent. A is incorrect. Understandability is the clear and concise presentation of information. C is incorrect. Comparability allows users to identify and understand similarities and differences of items.

At the start of the year, a company acquired new equipment at a cost of €50,000, estimated to have a three-year life and a residual value of €5,000. If the company depreciates the asset using the double declining balance method, the depreciation expense that the company will report for the third year is closest to: €3,328. €555. €3,705.

B is correct. Under the double declining balance method, the depreciation rate is 2 × Straight-line rate. The straight-line rate is 33.3% (i.e., 1/3 years), so the double declining rate is 66.6%, or two-thirds depreciation rate per year. But the asset should not be depreciated below its assumed residual value in any year. Double Declining Balance Method of Depreciation YearNet Book Value at Start of YearDepreciationNet Book Value at End of Year1€50,000€33,333€16,667216,66711,1115,55535,555*555**5,000 * Alternative calculation for start of Year 3 net book value: €50,000 × (1 - 0.667) × (1 - 0.667) = €5,555.

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009? ₤120,000. ₤122,000. ₤124,000.

B is correct. Under the first in, first out (FIFO) method, the first 10,000 units sold came from the October purchases at £10, and the next 2,000 units sold came from the November purchases at £11.

A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty? Fully recognizing the revenue at the time of the sale but waiting until the actual warranty costs are incurred to recognize the expense. Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty. Deferring all of the revenue and recognizing it over the life of the warranty period.

B is correct. Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue. A is incorrect. Waiting until actual expenses are incurred will not match the expense with the associated revenue. C is incorrect. It is appropriate to record the estimated expense at the time of the sale.

A company has total liabilities of £35 million and total stockholders' equity of £55 million. Total liabilities are represented on a vertical common-size balance sheet by a percentage closest to: 35%. 39%. 64%.

B is correct. Vertical common-size analysis involves stating each balance sheet item as a percentage of total assets. Total assets are the sum of total liabilities (£35 million) and total stockholders' equity (£55 million), or £90 million. Total liabilities are shown on a vertical common-size balance sheet as (£35 million/£90 million) ≈ 39%.

At year end, a company has non-convertible debt, ordinary shares, and employee stock options outstanding. The company's capital structure is considered to be: complex, because the company has both debt and equity. complex, because the options are convertible into ordinary shares. simple, if the options are antidilutive.

B is correct. When a company has issued any financial instruments that are potentially convertible into common stock, it is said to have a complex capital structure. Potentially convertible financial instruments include convertible bonds, convertible preferred stock, employee stock options, and warrants. Any antidilutive effect of a convertible security relates to the calculation of EPS and is not part of the distinction of simple vs. complex capital structure.

. For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to: $3.52. $3.65. $3.70.

C is correct. Diluted EPS = (Net income)/(Weighted average number of shares outstanding + New common shares that would have been issued at conversion) = $200,000,000/[50,000,000 + (2,000,000 × 2)] = $3.70

7.0% complete QuestionThe following data are available on a company:MetricCompanyStock price per share$60.75Comprehensive income (millions)$193.0Other comprehensive income (millions)$87.6Common shares outstanding (millions)46.5 On a net income basis, the company's P/E is closest to: 10.1. 14.6. 26.8.

C is correct. Net income = Comprehensive income - Other comprehensive income = $193.0 - $87.6 = $105.4 million Net income per share (EPS) = Net income/Common shares outstanding = $105.4/46.5 = $2.27 P/E = Stock price/EPS = $60.75/$2.27 = 26.76

The following information is from a company's accounting records: € millionsRevenues for the year12,500Total expenses for the year10,000Gains from available-for-sale securities1,475Loss on foreign currency translation adjustments on a foreign subsidiary325Dividends paid500 The company's total comprehensive income (in € millions) is closest to: 1,150. 3,150. 3,650.

C is correct. Total comprehensive income = Net income + Other comprehensive income Net Income = Revenues - Expenses. Other comprehensive income includes gains or losses on available-for-sale (AFS) securities and translation adjustments on foreign subsidiaries. (Revenues - Expenses) + Gain on AFS securities - Loss on FX translation (12,500 - 10,000) + 1,475 - 325 = 3,650.

The income statement is best used to evaluate a company's: financial position. sources of cash flow. financial results from business activities.

C is correct. A company's revenues and expenses are presented on the income statement, which is used to evaluate a company's financial results (or profitability) from business activities over a period of time. A company's financial position is best evaluated by using the balance sheet. A company's sources of cash flow are best evaluated using the cash flow statement.

The following data is available on two companies that operate in the same industry:Metric ($ millions)Company XCompany YSales11.214.5Cost of goods sold5.77.7Administration costs1.92.2Interest expense0.30.7Research and development expenses1.51.7 Which of the following statements is most appropriate? Better margin performance will be reported by: Company Y at the gross margin level and Company X at the operating margin level. Company Y at both the gross margin and operating margin levels. Company X at the gross margin level and Company Y at the operating margin level.

C is correct. Common size statements offer a convenient way to compare companies of different magnitudes. Company X reports better (higher) gross margin performance. Company Y reports better (higher) operating margin performance. Metric (common size)Company XCompany YComparisonSales100%100%Cost of goods sold5153Gross margin (GM)4947X's GM is higherAdministrative costs1715Research and development expenses1312Operating margin (OM)1920Y's OM is higher

The common shareholders' equity reported on a company's balance sheet is seldom an appropriate measure of the market or intrinsic value of the company's common shares. The most likely reason for this fact is that the balance sheet: evaluates a company's financial position spanning a period of time. recognizes items only when future economic benefits are reasonably certain. fails to include all aspects of a company's ability to generate future cash flow.

C is correct. A company's value is a function of many factors, including expected future cash flows and current market conditions. Important aspects of a company's ability to generate future cash flows—for example, its reputation and management skills—are absent from the balance sheet. B is incorrect. While the statement is true of all financial statements, it is not a reason that intrinsic or market value may be different from equity reported on the balance sheet. The balance sheet is intended to disclose all relevant information about what an entity owns (or controls), what it owes, and what the owners' claims are at a specific point in time. A is incorrect. The balance sheet information is presented as of a specific point in time. The income statement and cash flow statement are financial statements that are evaluated spanning a period of time.

An example of a contra asset account is: depreciation expense. sales returns and allowances. allowance for doubtful accounts.

C is correct. A contra asset account is netted against (i.e., reduces) the balance of an asset account. The allowance for doubtful accounts reduces the balance of accounts receivable. Accumulated depreciation, not depreciation expense, is a contra asset account. Sales returns and allowances create a contra account that reduce sales, not an asset.

A core objective of the International Organization of Securities Commissions is to: eliminate systemic risk. protect users of financial statements. ensure that markets are fair, efficient, and transparent.

C is correct. A core objective of IOSCO is to ensure that markets are fair, efficient, and transparent. The other core objectives are to reduce, not eliminate, systemic risk and to protect investors, not all users of financial statements.

An inventory system that reduces average inventory without affecting sales will most likely reduce the: quick ratio. inventory turnover. cash conversion cycle.

C is correct. A reduction in inventory will increase the inventory turnover (Cost of goods sold/Average inventory), which means that the days in inventory will be reduced (365/Inventory turnover). This will lead to a reduction in the cash conversion cycle (also called net operating cycle). Cash conversion cycle consists of number of days of inventory and number of days of receivables minus number of days of payables.

A company has recorded an expense for interest costs that have not yet been paid as of the balance sheet date. On the balance sheet, they are best reported as: deferred expenses. accounts payable. accrued expenses. Solution

C is correct. Accrued expenses, also known as accrued liabilities, have been recognized on a company's income statement but have not been paid as of the balance sheet date. Unpaid interest costs are an example of an accrued expense. A is incorrect. Deferred expenses refer to payments that have been made but will not be reported as an expense until a future accounting period. B is incorrect. Accounts payable are amounts that a company owes its vendors for purchases of goods and services that have already been delivered. They represent the unpaid amount of the company's purchase on credit as of the balance sheet date.

A write down of the value of inventory to its net realizable value will have a positive effect on the: balance sheet. income statement. inventory turnover ratio.

C is correct. Activity ratios (for example, inventory turnover and total asset turnover) will be positively affected by a write down to net realizable value because the asset base (denominator) is reduced. On the balance sheet, the inventory carrying amount is written down to its net realizable value and the loss in value (expense) is generally reflected on the income statement in cost of goods sold, thus reducing gross profit, operating profit, and net income.

Assuming no changes in other variables, which of the following would decrease ROA? A decrease in the effective tax rate. A decrease in interest expense. An increase in average assets.

C is correct. Assuming no changes in other variables, an increase in average assets (an increase in the denominator) would decrease ROA. A decrease in either the effective tax rate or interest expense, assuming no changes in other variables, would increase ROA.

White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? $18 million. $21 million. $22 million.

C is correct. Beginning salaries payable of $3 million plus salaries expense of $20 million minus ending salaries payable of $1 million equals $22 million. Alternatively, the expense of $20 million plus the $2 million decrease in salaries payable equals $22 million.

The most likely costs included in both the cost of inventory and property, plant, and equipment are: selling costs. storage costs. delivery costs.

C is correct. Both the cost of inventory and property, plant, and equipment include delivery costs, or costs incurred in bringing them to the location for use or resale.

An analyst gathered the following information from a company's 2018 financial statements (in $ millions):Year ended 31 December20172018Net sales245.8254.6Cost of goods sold168.3175.9Accounts receivable73.268.3Inventory39.047.8Accounts payable20.322.9 Q. Based only on the information above, the company's 2018 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to:cash received from customerscash paid to suppliersA249.7169.7B259.5174.5C259.5182.1

C is correct. Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5. Cash paid to suppliers = Cost of goods sold + Increase in inventory - Increase in accounts payable = 175.9 + 8.8 − 2.6 = 182.1.

Which of the following best describes common equity? The initial investment by common shareholders in the company The resources owned or controlled by a company The residual interest in a company's assets after deducting its liabilities

C is correct. Common equity is a component of the balance sheet and represents the owners' residual interest in the company's assets after deducting its liabilities. A is incorrect. Common equity includes the initial investment by the shareholders and the retained earnings; this definition is incomplete. B is incorrect. Assets are a component of the balance sheet and represent resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

Selected year-end financial statement data for Workhard are shown below.$ millionsBeginning shareholders' equity475Ending shareholders' equity493Unrealized gain on available-for-sale securities5Unrealized loss on derivatives accounted for as hedges−3Foreign currency translation gain on consolidation2Dividends paid1Net income15 Q. Workhard's comprehensive income for the year: is $18 million. is increased by the derivatives accounted for as hedges. includes $4 million in other comprehensive income.

C is correct. Comprehensive income includes both net income and other comprehensive income. Other comprehensive income = Unrealized gain on available-for-sale securities - Unrealized loss on derivatives accounted for as hedges + Foreign currency translation gain on consolidation = $5 million − $3 million + $2 million = $4 million

Under International Financial Reporting Standards (IFRS), which of the following is most likely one of the general features underlying the preparation of financial statements? Understandability Timeliness Consistency

C is correct. Consistency is one of the general features underlying the preparation of financial statements based on IFRS. A is incorrect. Understandability is one of the qualitative characteristics of financial statements under IFRS framework for the preparation and presentation of financial statements. It is not a general feature. B is incorrect. Timeliness is one of the qualitative characteristics of financial statements under IFRS framework for the preparation and presentation of financial statements. It is not a general feature.

Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: $73 million. $77 million. $83 million.

C is correct. Cost of goods sold of $80 million plus the increase in inventory of $5 million equals purchases from suppliers of $85 million. The increase in accounts payable of $2 million means that the company paid $83 million in cash ($85 million minus $2 million) to its suppliers.

omparison of a company's financial results to other peer companies for the same time period is called: technical analysis. time-series analysis. cross-sectional analysis.

C is correct. Cross-sectional analysis involves the comparison of companies with each other for the same time period. Technical analysis uses price and volume data as the basis for investment decisions. Time-series or trend analysis is the comparison of financial data across different time periods.

Using the same information as in Question 11, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? $60,000. $110,000. $120,000.

C is correct. Double-declining balance depreciation would be $600,000 × 20 percent (twice the straight-line rate). The residual value is not subtracted from the initial book value to calculate depreciation. However, the book value (carrying amount) of the asset will not be reduced below the estimated residual value.

The following financial statement data are available for a company:MetricCurrent Year (£ thousands)Prior Year (£ thousands)Total debt1,6001,600Total assets4,8005,200Total liabilities2,7003,200 The company's financial leverage ratio for the current year is closest to: 3.12. 0.32. 2.44.

C is correct. Financial leverage ratio = Average total assets/Average shareholders' equity. MetricCalculation (£ thousands)£ thousandsAverage total assets(4,800 + 5,200) × 0.55,000Shareholders' equity (Total assets - Total liabilities) At start5,200 - 3,2002,000 At end4,800 - 2,7002,100Average shareholders' equity(2,000 + 2,100) × 0.52,050Financial leverage ratio = Average total assets/Average shareholders' equity5,000/2,0502.44

The most appropriate statement about financial ratio analysis is that it has limited use as an analytical tool for: providing insights into microeconomic relationships within a company that help analysts project earnings. evaluating management. comparing companies that use different accounting methods.

C is correct. Financial ratio analysis is limited by the use of alternative accounting methods. Accounting methods play an important role in the interpretation of financial ratios. The lack of consistency across companies makes comparability difficult to analyze and limits the usefulness of ratio analysis. A is incorrect. Financial ratios provide insights into microeconomic relationships within a company that help analysts project earnings and free cash flow. B is incorrect. Financial ratios are useful in providing evaluation of management.

Which of the following is most likely not an objective of financial statements? To provide information about the performance of an entity. To provide information about the financial position of an entity. To provide information about the users of an entity's financial statements.

C is correct. Financial statements provide information, including information about the entity's financial position, performance, and changes in financial position, to users. They do not typically provide information about users.

. For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through retained earnings. They are a component of accumulated other comprehensive income.

C is correct. For financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of Shareholders' equity

Denali Limited, a manufacturing company, had the following income statement information:Revenue$4,000,000Cost of goods sold$3,000,000Other operating expenses$500,000Interest expense$100,000Tax expense$120,000 Q. Denali's gross profit is equal to: $280,000. $500,000. $1,000,000.

C is correct. Gross margin is revenue minus cost of goods sold. Answer A represents net income and B represents operating income.

The following table summarizes income statement data for a manufacturing company: 2020(€ thousands)2021(€ thousands)Net Revenue2,3252,611Cost of Goods Sold1,5501,700Gross Profit775930Selling, General & Administrative Expense260295Operating Income515635Interest Expense5555Pre-Tax Income460580Income Tax120155Net Income340425 Compared with 2020, the 2021 common-size income statement most likely indicates: a lower tax rate. cost cutting in selling, general and administration. sale of a new, differentiated product.

C is correct. Gross profit margin improved from 33.3% (€775/€2,325) to 35.6% (€930/€2,611). This may be reflective of selling a new, more highly differentiated product.

In contrast to US GAAP, cash flow statements prepared under IFRS: require adherence to the direct method format when reporting operating activities. are less flexible regarding the classification of dividends paid or received. allow interest receipts to be classified as either operating or investing cash flows.

C is correct. IFRS allows interest receipts to be classified as either operating or investing activities; in contrast, US GAAP requires interest receipts to be classified only as operating cash flows.

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for: all prior periods. current and future periods. prior periods shown in a report.

C is correct. If a company changes an accounting policy, the financial statements for all fiscal years shown in a company's financial report are presented, if practical, as if the newly adopted accounting policy had been used throughout the entire period; this retrospective application of the change makes the financial results of any prior years included in the report comparable. Notes to the financial statements describe the change and explain the justification for the change.

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in: the debt-to-equity ratio but not the total asset turnover. the total asset turnover but not the debt-to-equity ratio. both the debt-to-equity ratio and the total asset turnover.

C is correct. Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.

The following information is available for a company that reports its cash flow using the indirect method: 2015 (€)2014 (€)Other operating expenses80,05076,230Prepaid insurance expenses8,40010,600Accrued utilities payable23,02021,500 Insurance and utilities are the only two components of other operating expenses. The cash the company paid in other operating expenses in 2015 is closest to: €79,370. €80,730. €76,330.

C is correct. In 2015, the company paid €76,330 in cash for other operating expenses, calculated as follows: Other operating expenses€80,050 Less: Decrease in prepaid expenses€8,400 - €10,600 = -€2,200-€2,200A deduction: Prepaid expense declined.Cash-based other operating expenses lower than accrual basisLess: Increase in accrued utilities payable€23,020 - €21,500 = €1,520-€1,520A deduction: Accrued utilities payable increased.Cash-based other operating expenses lower than accrual basisCash paid for other operating expenses€76,330

Which of the following best describes the role of financial statement analysis? To provide information about a company's performance To provide information about a company's changes in financial position To form expectations about a company's future performance and financial position

C is correct. In general, analysts seek to examine the past and current performance and financial position of a company in order to form expectations about its future performance and financial position.

Interest paid is classified as an operating cash flow under: US GAAP but may be classified as either operating or investing cash flows under IFRS. IFRS but may be classified as either operating or investing cash flows under US GAAP. US GAAP but may be classified as either operating or financing cash flows under IFRS.

C is correct. Interest expense is always classified as an operating cash flow under US GAAP but may be classified as either an operating or financing cash flow under IFRS.

Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? $22 million for interest and $10 million for taxes. $16 million for interest and $2 million for taxes. $16 million for interest and $10 million for taxes.

C is correct. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.

Updated information on a company's performance and financial position since the last annual report is most likely found in: management discussion and analysis. proxy statements. interim reports. Solution

C is correct. Interim reports, either quarterly or semi-annual, contain updated information on a company's performance and financial position since the last annual report. A is incorrect. The MD&A is part of the annual report and is not an update since the last annual report B is incorrect. Proxy statements contain information about matters that will be put to a vote at shareholders' meetings.

Which of the following items is most likely to be classified as a non-current asset? Inventories Prepaid insurance Machinery acquired within the past year

C is correct. Machinery is an asset not consumed or sold in the current period and is therefore considered to be a non-current asset. A is incorrect because inventories are classified as current assets, given that they are expected to be sold within one operating cycle of a business. B is incorrect because prepaid insurance is classified as an "other current asset." This type of prepaid expense is recognized in the period in which it is incurred, with the related advance payment creating an asset whose value is reduced in the financial statements as time passes.

Net revenue most likely refers to revenue minus: revenues attributable to non-controlling interests. estimates of warranty expense. volume discounts and estimated returns.

C is correct. Net revenue means that the revenue number is reported after adjustments for cash or volume discounts or for estimated returns. A is incorrect. Revenues attributed to non-controlling interests are not segregated on the income statement. B is incorrect. Warranty expenses are operating expenses and not netted from revenues.

A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: reported as a $1 million investing cash inflow and outflow. reported as a $1 million financing cash outflow and inflow. reported as supplementary information to the cash flow statement.

C is correct. Non-cash transactions, if significant, are reported as supplementary information, not in the investing or financing sections of the cash flow statement.

Debt with a maturity date beyond a company's next operating cycle is most likely classified as a component of: trade payables. accrued liabilities. non-current liabilities.

C is correct. Non-current liabilities include all liabilities not expected to be settled within one year or within one operating cycle of a business. These include financial liabilities such as debt with a maturity date beyond a company's next operating cycle. A is incorrect because trade payables are amounts that a company owes its vendors for purchases of goods and services. Trade payables are generally classified as current liabilities, to be settled within one operating cycle. B is incorrect because accrued liabilities (also called accrued expenses) are expenses that have been recognized on a company's income statement but that have not been paid as of the balance sheet date, while debt is classified as a liability.

When a company pays its rent in advance, its balance sheet will reflect a reduction in: assets and liabilities. assets and shareholders' equity. one category of assets and an increase in another.

C is correct. Paying rent in advance will reduce cash and increase prepaid expenses, both of which are assets.

Which of the following is an example of a financing activity on the cash flow statement under US GAAP? Payment of interest. Receipt of dividends. Payment of dividends.

C is correct. Payment of dividends is a financing activity under US GAAP. Payment of interest and receipt of dividends are included in operating cash flows under US GAAP. Note that IFRS allow companies to include receipt of interest and dividends as either operating or investing cash flows and to include payment of interest and dividends as either operating or financing cash flows.

Common-size financial statements are most likely a component of which step in the financial analysis framework? Collect data Analyze/interpret data Process data

C is correct. Preparing common-size financial statements is part of the process data step. A is incorrect. The financial statements are obtained in the collect data step, but not converted into common-size statements until the process step. B is incorrect. Preparing common-size financial statements is part of the process data stage, after which the analyst will analyze/interpret the processed data.

Ratios are an input into which step in the financial statement analysis framework? Process data. Collect input data. Analyze/interpret the processed data.

C is correct. Ratios are an output of the process data step but are an input into the analyze/interpret data step.

Analysts can best address the challenges of comparing financial statements prepared under US GAAP with those prepared under International Financial Reporting Standards (IFRS) by: referring to the reconciliation from IFRS to US GAAP provided in the notes. assuming differences are minor given US GAAP and IFRS convergence. monitoring changes in both sets of standards and interpreting cautiously.

C is correct. Significant differences still exist between IFRS and US GAAP, and in most cases, analysts will lack the information necessary to make specific adjustments to address these differences. As such, comparisons must be interpreted cautiously. B is incorrect. Significant differences still exist between IFRS and US GAAP, and should not be ignored. A is incorrect. Reconciliations are no longer readily available. The SEC eliminated the reconciliation requirement for companies that prepared their financial statements according to IFRS in 2007.

An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion:FY3FY2FY1Days of inventory on hand323440Days sales outstanding282523Number of days of payables403535 Q. Based on this data, what is the analyst least likely to conclude? Inventory management has contributed to improved liquidity. Management of payables has contributed to improved liquidity. Management of receivables has contributed to improved liquidity.

C is correct. The analyst is unlikely to reach the conclusion given in Statement C because days of sales outstanding increased from 23 days in FY1 to 25 days in FY2 to 28 days in FY3, indicating that the time required to collect receivables has increased over the period. This is a negative factor for Spherion's liquidity. By contrast, days of inventory on hand dropped over the period FY1 to FY3, a positive for liquidity. The company's increase in days payable, from 35 days to 40 days, shortened its cash conversion cycle, thus also contributing to improved liquidity.

Liabilities of a company equal: assets plus equity. equity minus assets. assets minus equity.

C is correct. The assets of a company are equal to sum of its liabilities and stockholders' equity: A = L + E. Therefore, liabilities are equal to assets minus equity: L = A - E.

Which of the following best describes a limitation of the balance sheet in determining a company's intrinsic value? A company's balance sheet: reflects the company's intrinsic value only at the end of the reporting period. adjusts the value of debt obligations only when interest rates change. records some values using different measurement methods.

C is correct. The balance sheet provides important information about a company's financial condition, but it is limited in its ability to provide all the detail necessary to determine a company's market or intrinsic value. One limitation is that under current accounting standards, some assets and liabilities are measured at historical cost but others are measured on a current value basis. A is incorrect. Although the balance sheet reflects values as of the end of the reporting period, the balance sheet should not be viewed as a measure of a company's intrinsic value, even at the end of the reporting period. B is incorrect. The statement is not correct and hence not a limitation.

Which of the following most likely results in an increase of owners' equity? Share repurchase Cash dividend New equity issuance

C is correct. The basic components of owners' equity are paid-in capital and retained earnings. In the paid-in capital account, an example of an increase in owners' equity is a new equity issuance. Cash dividends reduce retained earnings and owners' equity. Share repurchases reduce paid-in capital and owners' equity. A is incorrect because for the paid-in capital account an example of a decrease in owners' equity is the repurchase of previously issued shares. B is incorrect because a cash dividend payment is the most common cause of a decrease in owners' equity

When a firm can choose where in the cash flow statement to classify interest received, which of the following choices is the most appropriate? As an financing activity under IFRS As an investing activity under US GAAP As a operating activity under IFRS

C is correct. Under IFRS, interest received may be classified as either an operating activity or as an investing activity, but under US GAAP, it can be classified only as an operating activity.

An analyst compiles the following data for a company:FY13FY14FY15ROE19.8%20.0%22.0%Return on total assets8.1%8.0%7.9%Total asset turnover2.02.02.1 Q. Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company's: net profit margin and financial leverage have decreased. net profit margin and financial leverage have increased. net profit margin has decreased but its financial leverage has increased.

C is correct. The company's net profit margin has decreased and its financial leverage has increased. ROA = Net profit margin × Total asset turnover. ROA decreased over the period despite the increase in total asset turnover; therefore, the net profit margin must have decreased. ROE = Return on assets × Financial leverage. ROE increased over the period despite the drop in ROA; therefore, financial leverage must have increased.

An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? The company installed a new inventory management system, allowing more efficient inventory management. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

C is correct. The company's problems with its inventory management system causing duplicate orders would likely result in a higher amount of inventory and would, therefore, result in a decrease in inventory turnover. A more efficient inventory management system and a write off of inventory at the beginning of the period would both likely decrease the average inventory for the period (the denominator of the inventory turnover ratio), thus increasing the ratio rather than decreasing it.

A company's most recent balance sheet shows the following values (NZ$ thousands):Accounts payable3,800Long-term debt5,590Other long-term liabilities800Common stock1,200Retained earnings1,810 The company's debt-to-capital ratio is closest to: 0.77. 1.86. 0.65.

C is correct. The debt-to-capital ratio isTotal debtTotal debt+Total shareholders' equity=5,5905,590+1,200+1,810=0.650

An investor worried about a company's long-term solvency would most likely examine its: current ratio. return on equity. debt-to-equity ratio.

C is correct. The debt-to-equity ratio, a solvency ratio, is an indicator of financial risk.

With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data? The decline in the company's equity results from a decline in the market value of this company's common shares. The €250 increase in the company's debt from FY3 to FY5 indicates that lenders are viewing the company as increasingly creditworthy. The decline in the company's equity indicates that the company may be incurring losses, paying dividends greater than income, and/or repurchasing shares.

C is correct. The decline in the company's equity indicates that the company may be incurring losses, paying dividends greater than income, or repurchasing shares. Recall that Beginning equity + New shares issuance - Shares repurchased + Comprehensive income - Dividends = Ending equity. The book value of a company's equity is not affected by changes in the market value of its common stock. An increased amount of lending does not necessarily indicate that lenders view a company as increasingly creditworthy. Creditworthiness is not evaluated based on how much a company has increased its debt but rather on its willingness and ability to pay its obligations. (Its financial strength is indicated by its solvency, liquidity, profitability, efficiency, and other aspects of credit analysis.)

Question A decomposition of ROE for Company A and Company B is as follows:Company ACompany BFY15FY14FY15FY14ROE26.46%18.90%26.33%18.90%Tax burden0.70.750.750.75Interest burden0.90.90.90.9EBIT margin7.00%10.00%13.00%10.00%Asset turnover1.51.41.51.4Leverage4222 Q. An analyst is most likely to conclude that: Company A's ROE is higher than Company B's in FY15, and one explanation consistent with the data is that Company A may have purchased new, more efficient equipment. Company A's ROE is higher than Company B's in FY15, and one explanation consistent with the data is that Company A has made a strategic shift to a product mix with higher profit margins. The difference between the two companies' ROE in FY15 is very small and Company A's ROE remains similar to Company B's ROE mainly due to Company A increasing its financial leverage.

C is correct. The difference between the two companies' ROE in 2010 is very small and is mainly the result of Company A's increase in its financial leverage, indicated by the increase in its Assets/Equity ratio from 2 to 4. The impact of efficiency on ROE is identical for the two companies, as indicated by both companies' asset turnover ratios of 1.5. Furthermore, if Company A had purchased newer equipment to replace older, depreciated equipment, then the company's asset turnover ratio (computed as sales/assets) would have declined, assuming constant sales. Company A has experienced a significant decline in its operating margin, from 10 percent to 7 percent which, all else equal, would not suggest that it is selling more products with higher profit margins.

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 related to the asset sale will most likely be reported as a line item on its income statement for the year? $570,000 $42,000 $70,000

C is correct. 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 effects. A is incorrect. It shows the proceeds from the sale, which would apply if the sale were related to regular operating activities. B is incorrect. It shows the gain net of tax [70,000 × (1 - 0.40) = 42,000], which applies to discontinued operations, but not regular assets dispositions.

Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments? ROA. Total asset turnover. Fixed charge coverage.

C is correct. The fixed charge coverage ratio is a coverage ratio that relates known fixed charges or obligations to a measure of operating profit or cash flow generated by the company. Coverage ratios, a category of solvency ratios, measure the ability of a company to cover its payments related to debt and leases.

Neutrality of information in the financial statements most closely contributes to which qualitative characteristic? Relevance. Understandability. Faithful Representation

C is correct. The fundamental qualitative characteristic of faithful representation is contributed to by completeness, neutrality, and freedom from error.

Question A decomposition of ROE for Integra SA is as follows:FY12FY11ROE18.90%18.90%Tax burden0.700.75Interest burden0.900.90EBIT margin10.00%10.00%Asset turnover1.501.40Leverage2.002.00 Q. Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition? Profitability and the liquidity position both improved in FY12. The higher average tax rate in FY12 offset the improvement in profitability, leaving ROE unchanged. The higher average tax rate in FY12 offset the improvement in efficiency, leaving ROE unchanged.

C is correct. The increase in the average tax rate in FY12, as indicated by the decrease in the value of the tax burden (the tax burden equals one minus the average tax rate), offset the improvement in efficiency indicated by higher asset turnover) leaving ROE unchanged. The EBIT margin, measuring profitability, was unchanged in FY12 and no information is given on liquidity.

The item "retained earnings" is a component of: assets. liabilities. shareholders' equity.

C is correct. The item "retained earnings" is a component of shareholders' equity.

Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the: auditor's report. management commentary. notes to the financial statements.

C is correct. The notes disclose choices in accounting policies, methods, and estimates.

Which of the following best describes why the notes that accompany the financial statements are required? The notes: permit flexibility in statement preparation. standardize financial reporting across companies. provide information necessary to understand the financial statements.

C is correct. The notes provide information that is essential to understanding the information provided in the primary statements.

Question A portion of a company's balance sheet appears in the following table (euros in millions):Cash4,000Marketable securities17,000Accounts receivable225,000Inventory229,000Total current assets475,000Current liabilities339,000 The company's quick ratio is closest to: 1.40. 0.06. 0.73.

C is correct. The quick ratio is Cash+Marketable securities+Accounts receivableCurrent liabilities=4,000+17,000+225,000339,000=0.73

The following data are available on a company for the current fiscal year:Metric£ thousandsAllowance for doubtful accounts balance, 1 January137Write-offs of accounts receivable during the year because of customer bankruptcy86Credit sales21,000Accounts receivable balance, 31 December4,200 During the year, bad debts expense was charged at a rate of 0.5% of credit sales. At year end, an aging analysis of the accounts receivable indicates that the appropriate allowance for doubtful accounts balance is 3% of the outstanding accounts receivable balance. The most appropriate year-end adjustment (in thousands) to the allowance for doubtful accounts is a(n): increase of £126. reduction of £116. reduction of £30.

C is correct. The target allowance for doubtful accounts balance is 3% of £4,200, or £126. The ending balance of allowance for doubtful accounts before the proposed adjustment is as follows: Metric£ thousandsAllowance for doubtful accounts balance, 1 January137Minus write-offs of accounts receivable during the year because of customer bankruptcy-86Plus current year accrual (0.5% of £21,000 credit sales)+105Unadjusted allowance for doubtful accounts balance, 31 December£156 The adjustment required to bring the allowance for doubtful accounts balance to the target balance is as follows: Unadjusted allowance for doubtful accounts balance, 31 December£156Minus target allowance for doubtful accounts balance, 31 December (3% of £4,200 accounts receivable balance)-126Adjustment required (reduction)£30

The International Financial Reporting Standards (IFRS) Conceptual Framework identifies fundamental qualitative characteristics that make financial information useful. Which of the following is least likely to be one of these characteristics? Faithful representation Relevance Materiality

C is correct. The two fundamental qualitative characteristics that make financial information useful are relevance and faithful representation. Materiality relates to the level of detail of the information needed to achieve relevance. A is incorrect. The two fundamental qualitative characteristics that make financial information useful are relevance and faithful representation. Materiality relates to the level of detail of the information needed to achieve relevance. B is incorrect. The two fundamental qualitative characteristics that make financial information useful are relevance and faithful representation. Materiality relates to the level of detail of the information needed to achieve relevance.

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo's basic earnings per share for 2009? $0.80. $0.91. $0.95.

C is correct. The weighted average number of shares outstanding for 2009 is 1,050,000. Basic earnings per share would be $1,000,000 divided by 1,050,000, or $0.95.

Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the ratios that would have been calculated if the write-down had never occurred, Zimt's reported 2017: current ratio was too high. gross margin was too high. inventory turnover was too high.

C is correct. The write-down reduced the value of inventory and increased cost of sales in 2017. The higher numerator and lower denominator mean that the inventory turnover ratio as reported was too high. Gross margin and the current ratio were both too low.

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? Straight-line depreciation with a short useful life. Declining balance depreciation with a long useful life. Declining balance depreciation with a short useful life.

C is correct. This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.

Which of the following statements is most accurate? Non-controlling interest on the balance sheet represents a position the company owns in other companies. A classified balance sheet arises when in an auditor's opinion the financial statements materially depart from accounting standards and are not presented fairly. Treasury stock is non-voting and receives no dividends.

C is correct. Treasury stock is non-voting and does not receive dividends. A is incorrect. Non-controlling interest is the portion in consolidated subsidiaries that is owned by others, i.e., shares in subsidiaries not owned by the parent. B is incorrect. An adverse audit opinion arises when in an auditor's opinion, the financial statements materially depart from accounting standards and are not presented fairly. A classified balance sheet groups together the various classes of assets and liabilities.

Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately: below continuing operations. below discontinued operations. as part of continuing operations.

C is correct. Under US GAAP, material items that are unusual or infrequent and that are both as of reporting periods beginning after 15 December 2015 are shown as part of a company's continuing operations but are presented separately. A is incorrect because, under US GAAP, unusual or infrequent items are not shown below continuing operations; rather, they are shown as part of a company's continuing operations but are presented separately. B is incorrect because, under US GAAP, unusual or infrequent items are not shown below discontinued operations; rather, they are shown as part of a company's continuing operations but are presented separately.

A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company's profitability initially appear: lower. unchanged. higher.

C is correct. Under the converged accounting standards, the incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be capitalized. If a company expensed these incremental costs in the years prior to adopting the converged standards, all else being equal, its profitability will appear higher under the converged standards.

Unrealized gains and losses on securities categorized as available-for-sale: do not affect shareholders' equity. affect the profit and loss statement as unrealized holding gains or losses. affect shareholders' equity through other comprehensive income.

C is correct. Unrealized gains and losses on available-for-sale securities are treated as other comprehensive income under both IFRS and US GAAP. A is incorrect because unrealized gains and losses on available-for-sale securities do affect shareholders' equity. They bypass the income statement and go directly to shareholders' equity through other comprehensive income. B is incorrect because unrealized gains and losses on available-for-sale securities are not reflected in the profit and loss statement.

A company incurred the following unrealized holding gains in the current year: $100,000 on securities held for trading $500,000 on the foreign currency translation adjustment of a self-sustaining non-domestic subsidiary Other comprehensive income for the year is closest to: $600,000. $100,000. $500,000.

C is correct. Unrealized holding gains foreign currency translation adjustments are included in other comprehensive income. A is incorrect. This calculation incorrectly includes the gain on securities held for trading. These gains are recognized in net income, not other comprehensive income: $100,000 + $500,000 = $600,000. B is incorrect. This calculation incorrectly excludes the foreign currency translation adjustment and fails to include the gains on securities held for trading. These gains are recognized in net income, not other comprehensive income.

Which of the following statements is most accurate with respect to the jurisdiction underlying financial reporting? The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of standard-setting bodies. Regulatory authorities are typically private sector, self-regulated organizations. Standard-setting bodies have authority because they are recognized by regulatory authorities.

C is correct. Without the recognition of the standards by the regulatory authorities, such as the US SEC, private sector standard-setting bodies, such as the US Financial Accounting Standards Board, would have no authority. A is incorrect. The requirement to prepare financial statements in accordance with specific accounting standards is the responsibility of regulatory authorities. B is incorrect. Standard-setting bodies (not regulatory authorities) are typically private sector, self-regulated organizations.

Zimt AG started business in 2017 and uses the FIFO method. During 2017, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2018, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2018 ending inventory balance (€ thousands) was closest to: €105. €109. €110.

C is correct. Zimt uses the FIFO method, and thus the first 5,000 units sold in 2018 depleted the 2017 inventory. Of the inventory purchased in 2018, 40,000 units were sold and 10,000 remain, valued at €11 each, for a total of €110,000.

Question The following information is available on a company:Metric Fixed charge coverage ratio required by debt covenant3.50Forecasted interest expense ($ thousands)850Forecasted interest payments ($ thousands)800Forecasted lease payments ($ thousands)300Tax rate30% The minimum net income (in thousands) that the company must generate to meet its debt covenant requirement is closest to: $2,700. $1,890. $2,100.

Net income+Income tax expense+Interest expense+Lease paymentsInterest payments+Lease payments Calculation$ thousandsDenominator ($ thousands): Interest payments + Lease payments800 + 3001,100Minimum numerator: Net income + Income tax expense + Interest expense + Lease paymentsDenominator × 3.503,850Minus interest expense-850Minus lease payments-300Income before tax2,700Minus income tax expense2,700 × 30%-810Minimum net income1,890

The following table shows changes to the number of common shares outstanding for a company during 2012:1 January180,000 shares outstanding1 June60,000 shares issued1 August2-for-1 stock split31 December480,000 shares outstanding To calculate earnings per share for 2012, the company's weighted average number of shares outstanding is closest to: 315,000. 215,000. 430,000.

Solution C is correct. The weighted average number of shares outstanding is time weighted: 1 January to 1 June5/12 × 180,00075,0001 June to December 317/12 × (180,000 + 60,000)140,000Weighted average before considering stock split215,000Stock split is treated retroactively to the start of the year215,000 × 2430,000

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests: held by the corporation in other entities that it does not control, but has significant influence. of minority shareholders in subsidiaries that have been consolidated. of minority shareholders of the corporation who have significant influence, but not control.

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests: held by the corporation in other entities that it does not control, but has significant influence. of minority shareholders in subsidiaries that have been consolidated. of minority shareholders of the corporation who have significant influence, but not control.