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Exam 3

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Magma Corporation's pre‐tax margin for 2008 is closest to:

22.64%

Magma Corporation's current ratio for 2008 is closest to:

3.13

The following information relates to Alpha Inc.: •Opening inventory = $47,000 •Ending inventory = $28,000 •Sales = $77,000 •Cost of goods sold = $54,000 The amount of purchases made by the company is closest to:

35000

Three companies, Company A, Company B, and Company C, purchase an identical piece of manufacturing equipment for use in their operations. The cost of the equipment is $3,000, the estimated salvage value is $200, and the useful life of the equipment is 4 years. Further, the total production capacity of the equipment over its useful life equals 1,000 units. Each company earns $3,500 in revenues, and incurs expenses of $1,500 (excluding depreciation) every year. The companies are subject to a tax rate of 30%. Actual output levels of each of the companies over the 4 years are: Year 1 2 3 4 Production (units) 300 400 200 100 Company B uses the double declining method. Calculate it's ending net book value for year 2

$1,040

A company borrows $10 million to finance the construction of an office building where it expects to base its headquarters for the next 50 years. The interest rate on the loan is 6%. Construction takes 3 years, and over this period the company earns $65,000 from investing the borrowed funds in money-market instruments. What amount of interest cost would the company capitalize under IFRS?

$1,735,000

$1,800,000

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. The amount of depreciation expense the company should recognize in Year 2 if it uses the component method of depreciation is closest to:

$10,250

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. Given that the company replaced the part at the end of Year 3, the amount of depreciation expense it should recognize in Year 4 if it does not use the component method is closest to:

$11,000

Katayama Inc. incurred the following expenses to purchase a piece of manufacturing equipment: Purchase price (including taxes) $15,000 Delivery charges 55 Installation charges 200 Cost of training machine maintenance staff 300 Reinforcement of factory floor to support machine 150 Cost of repairing factory roof 500 Cost of painting factory walls 325 Note: Factory roof repairs are expected to extend the life of the factory by 3 years. What is the total of these expenses that should be capitalized?

$15,905

The following information relates to Jupiter Inc.: • Cost of inventory = $155,000 • Estimated selling price = $205,000 • Estimated selling costs = $35,000 • Replacement cost = $165,000 • Normal profit margin = $10,000 Assuming that the company follows U.S. GAAP, the amount of inventory it should report on its balance sheet is closest to:

$155,000

Winterfell Inc. (WNF) is a U.S. company that uses the LIFO cost flow assumption to value inventory. Assume that inventory levels have been stable and prices have gradually risen over the years. Assume tax rate of 20% for 2012 and 30% for earlier years. These assumed rates are based on the provision for taxes as a percentage of consolidated profits before taxes (as opposed to the U.S. statutory tax rate of 35%). What would WNF's COGS for 2012 and 2011 be if it had used FIFO instead of LIFO?

$16,525 and $14,700 respectively

At the end of 2008, Mega Constructors purchases a piece of machinery for $1.2 million. The company uses the straight‐line method of depreciation and estimates that the machinery would have a useful life of 8 years and zero salvage value at the end of its useful life. At the end of 2010, the company estimates that the expected future cash flows from the machine will amount to $700,000 (present value equals $680,000). It further estimates that the fair value of the machine is $720,000 and selling costs would amount to $25,000. Given that the company uses U.S. GAAP for financial reporting purposes, the amount of impairment loss it will recognize on its income statement is closest to:

$180,000

A company purchases a machine with an expected useful life of 10 years and an estimated salvage value of $2,000 for $10,000; $4,000 of the cost of the machine represents the cost of the wheel, which is a significant component of the machine. The company estimates that the wheel will need to be replaced every 2 years. Answer the following questions assuming that the wheel has zero salvage value and that the company uses straight-line depreciation for all assets. Assuming that a new wheel is purchased at the end of Year 2, how much depreciation would the company record (in Year 3) if it uses the component method, and if it does not use the component method?

$2,400 and $2800 respectively

A company purchases a machine with an expected useful life of 10 years and an estimated salvage value of $2,000 for $10,000; $4,000 of the cost of the machine represents the cost of the wheel, which is a significant component of the machine. The company estimates that the wheel will need to be replaced every 2 years. Answer the following questions assuming that the wheel has zero salvage value and that the company uses straight-line depreciation for all assets. How much depreciation would the company record for Year 1 if it uses the component method, and if it does not use the component method?

$2,400 and $800 respectively

At the end of 2008, Mega Constructors purchases a piece of machinery for $1.2 million. The company uses the straight‐line method of depreciation and estimates that the machinery would have a useful life of 8 years and zero salvage value at the end of its useful life. At the end of 2010, the company estimates that the expected future cash flows from the machine will amount to $700,000 (present value equals $680,000). It further estimates that the fair value of the machine is $720,000 and selling costs would amount to $25,000. Given that the company uses IFRS for financial reporting purposes, the amount of impairment loss it will recognize on its income statement is closest to:

$205,000

Given that Magna sold 12, 24, 24, and 26 units in the four quarters respectively, answer the following questions: Given that the company uses FIFO, ending inventory under the periodic system is closest to:

$308

Winterfell Inc. (WNF) is a U.S. company that uses the LIFO cost flow assumption to value inventory. Assume that inventory levels have been stable and prices have gradually risen over the years. Assume tax rate of 20% for 2012 and 30% for earlier years. These assumed rates are based on the provision for taxes as a percentage of consolidated profits before taxes (as opposed to the U.S. statutory tax rate of 35%). What is the cumulative amount of income tax savings that WNF has generated as of the end of 2012 by using LIFO instead of FIFO?

$410 million

At the beginning of the year, Nakamura Inc. had 5 units of inventory, which cost $8 each. Over the year the company purchased 52 units and sold 50 units, leaving it with 7 unsold units at the end of the year. Nakamura purchased 10 (cost = $10/unit), 12 (cost = $11/unit), 14 (cost = $12/unit), and 16 (cost = $13/unit) units and sold 13, 13, 12, and 12 units in the four quarters, respectively. All units were sold at $20 each. Determine Gross Profit under LIFO method.

$412

Given that Magna sold 12, 24, 24, and 26 units in the four quarters respectively, answer the following questions: Given that the company uses LIFO, cost of goods sold for the third quarter under the perpetual system is closest to:

$415

ABC Company manufactures a single product. Various costs incurred during 20x9 are listed here: · Cost of raw materials $12,000,000 · Direct labor conversion costs $25,000,000 · Production overheads $5,000,000 · Freight charges for raw materials $2,000,000 · Storage costs for finished goods $800,000 · Abnormal wastage $80,000 · Freight charges for finished goods $100,000 Given that there is no work-in-progress inventory at the end of the year, what costs should be included in inventory for 20x9?

$44,000,000

$443

Blue Water Inc. purchased inventory for $57,000. Due to an unfavorable economic outlook, the company decides to immediately liquidate its stock of inventory. It estimates that the stock will only sell for $52,700 and the company will have to bear further expenses of $3,500 in the process. Assuming that the company follows IFRS, the value of inventory that Blue Water should record on its balance sheet is closest to:

$49,200

Winterfell Inc. (WNF) is a U.S. company that uses the LIFO cost flow assumption to value inventory. Assume that inventory levels have been stable and prices have gradually risen over the years. Assume tax rate of 20% for 2012 and 30% for earlier years. These assumed rates are based on the provision for taxes as a percentage of consolidated profits before taxes (as opposed to the U.S. statutory tax rate of 35% By what amount would WNF's 2012 and 2011 net cash flow from operating activities change if it had used FIFO instead of LIFO?

$50 and $360 respectively

$557

Star Manufacturers uses the LIFO method for inventory valuation. For the year ended 2009, it reported the following information in its financial statements: • Beginning inventory = $57,000 • Ending inventory = $78,000 • 2008 cost of goods sold = $62,000 • 2009 cost of goods sold = $87,000 • Ending LIFO reserve = $7,300 • Beginning LIFO reserve = $5,200 Star Manufacturers' ending inventory if it used the FIFO method for inventory valuation would be closest to:

$85,300

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. The amount of depreciation expense the company should recognize in Year 1 if it does not use the component method is closest to:

$9,000

$91

$980,000

Magma Corporation's debt‐to‐assets ratio for 2008 is closest to:

.25

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's debt‐to‐capital ratio for 2009 is closest to:

0.382

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's debt‐to‐equity ratio for 2009 is closest to:

0.619

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's total asset turnover for 2009 is closest to:

1.13

Magma Corporation's financial leverage ratio for 2009 is closest to:

1.537

Magma Corporation's return on assets for 2009 is closest to:

16.60%

Magma Corporation's working capital turnover for 2009 is closest to:

19.663

Magma Corporation's quick ratio for 2008 is closest to:

2.00

The following information relates to Blue Inc.: • Revenue = $442,200 • Cost of goods sold = $239,100 • Net income = $53,100 • Total assets at the beginning of the period = $544,000 • Total assets at the end of the period = $775,000 • Financial leverage ratio = 0.55 Blue Inc.'s return on equity for the period is closest to:

4.43%

Magma Corporation's fixed charge coverage ratio for 2009 is closest to:

4.785 Fixed charge coverage ratio = (EBIT + Lease payments) / (Interest + Lease payments). Fixed charge coverage ratio = (76,200 + 17,100) / (2,400 + 17,100) = 4.785

Magma Corporation's fixed charge coverage ratio for 2009 is closest to:

4.79

Referring to the enclosed Statement of Financial Position and Income Statement, Magma Corporation's receivables turnover for 2009 is closest to:

57.45

Magma Corporation's cash conversion cycle for 2009 is closest to:

6.145

Consider the following information regarding ABC Company: 2011 2010 2009 EBIT 586,225 467,350 354,300 Interest expense 59,786 43,556 23,864 Interest capitalized 10,000 3,300 7,000 Net cash flow from operating activities 15,206 15,964 15,735 Net cash flow from investing activities 52,436 (176,376) (192,363) Calculate ABC's interest coverage ratio for 2011 after adjusting for capitalized interest. Assume that interest capitalized in previous periods increased depreciation expense by $620 in 2011, by $580 in 2010, and by $560 in 2009.

8.41

Which of the following is most likely to suggest that a company's low receivables turnover is due to credit management issues?

A history of higher bad debts than competitors

Which of the following is most likely to indicate that a company has too many resources tied up in inventory?

A relatively high number of days of inventory on hand

If management wants to report an improving return on assets over time, it would most likely use:

An accelerated depreciation method.

A company purchases an asset for $5,000. After one year, it determines that the value of the asset is $7,700 and another year later it determines that the fair value of the asset is $2,400. Assuming that the company follows the revaluation model to report this asset, which of the following is false about the financial statement impact of the revaluation in Year 1 and Year 2.

At the end of Year 2, the company will report its fair value ($7,700). The decrease in its value ($2,700) will be recorded directly on the balance sheet under shareholders' equity in the revaluation surplus.

A company purchases an asset for $10,000. After one year, it determines that the value of the asset is $8,000 and another year later it determines that the fair value of the asset is $15,000. Assuming that the company follows the revaluation model to report this asset, which of the following is false about the financial statement impact of the revaluation in Year 1 and Year 2.

At the end of Year 2, the company will report the asset at its fair value ($8,000). The decrease in its value ($2,000) will be charged as a loss on the income statement.

Consider the following statements: • Statement 1: If inventory is subsequently classified as investment property and valued using the fair value model, the difference in value between the carrying amount and fair value at the time of transfer is recognized as profit or loss. • Statement 2: If investment property is valued using the cost model, a move to owner‐occupied property will not lead to a change in the carrying amount of the property transferred. Which of the following is most likely?

Both statements are correct.

Consider the following statements: •Statement 1: The number of days of sales outstanding is inversely related to revenue. •Statement 2: The number of days of inventory is directly related to average inventory. Which of the following is most likely?

Both statements are correct.

Use the following table to find the correct statement about this company's five way DuPont decomposition The following conclusions may drawn from the given information:

Both statements are likely correct.

Which of the following statements is most likely regarding the effects of capitalization on a company's financial statements?

Capitalization reduces the company's reported total asset turnover.

An analyst obtains the following information about the assets of two companies, both of which follow U.S. GAAP for financial reporting purposes. Alpha Inc. owns a piece of equipment that has a carrying value of $5,200. The company estimates that the total expected future cash flows from this piece of equipment would amount to $4,200 (present value equals $3,800). The company estimates that the fair value of the asset is $5,000 and selling costs would amount to $500. Beta Inc. owns a piece of equipment that has a carrying value of $6,600. The company estimates that the total expected future cash flows from this piece of equipment would amount to $6,700 (present value equals $6,400). The company estimates that the fair value of the asset is $6,300 and selling costs would amount to $400. The impairment loss will most likely reduce Alpha Inc.'s:

Carrying value of the equipment to $5,000.

Which of the following tools and techniques are the most useful to the financial statement analyst?

Common size financial statements and financial ratios.

Which of the following statements is least accurate? Capitalization:

Decreases cash flow from operating activities in the year of recognition.

A higher working capital turnover most likely indicates:

Higher operating efficiency.

Which of the following is most likely to be used to conduct trend analysis?

Horizontal common‐size financial statements

Which of the following statements about reversals of impairment losses is least accurate?

IFRS allows reversals of impairment losses only for assets held‐for‐sale.

Over 2009, Magma Corporation's ability to service its debt obligations (as measured by its interest coverage ratio) has most likely:

Improved.

XYZ Company manufactures watches and prepares its financial statements in accordance with IFRS. In 2008, its carrying value of inventory was $2,500,000 before a write-down of $220,000 was recorded. In 2009, the fair value of XYZ's inventory was $400,000 greater than its carrying value. What was the effect of the write-down on XYZ's 2008 financial statements?

In 2008, XYZ would have recorded a write-down of $220,000

Which of the following types of assets are most likely amortized?

Intangible assets with finite lives

Which of the following is least likely to be capitalized under U.S. GAAP?

Internally generated goodwill

In a period of falling prices and stable inventory quantities, which of the following is most likely?

LIFO CF ﹤ FIFO CF

If software development costs incurred in the current period exceed amortization of prior periods' capitalized development costs, net income for the current period would most likely be:

Lower under expensing.

Which of the following is least likely a credit rating procedure per Standard & Poor's Corporate Ratings Criteria?

Meetings of ratings committees where the analyst's recommendations are voted on

Which of the following is least likely included in the credit rating process?

Occupancy Risk Analysis

An analyst obtains the following information about the assets of two companies, both of which follow U.S. GAAP for financial reporting purposes. Alpha Inc. owns a piece of equipment that has a carrying value of $5,200. The company estimates that the total expected future cash flows from this piece of equipment would amount to $4,200 (present value equals $3,800). The company estimates that the fair value of the asset is $5,000 and selling costs would amount to $500. Beta Inc. owns a piece of equipment that has a carrying value of $6,600. The company estimates that the total expected future cash flows from this piece of equipment would amount to $6,700 (present value equals $6,400). The company estimates that the fair value of the asset is $6,300 and selling costs would amount to $400. Which of the following statements is most accurate?

Only Alpha Inc.'s asset has been impaired.

Use the following table to find the correct statement about this company's two way DuPont decomposition ROE = ROA × Leverage 2008 7.56% 4.70% 1.61 2007 2.91% 2.05% 1.42 2006 2.82% 2.05% 1.38 2005 −0.54% −0.34% 1.61

Over the period, the company's financial leverage ratio was relatively stable. The increase in the company's ROE was primarily due to an increase in profitability (ROA).

Which of the following ratios is least likely to be used to evaluate a company's inventory management?

Quick ratio

Global Traders purchases a piece of equipment for $1.5 million and incurs the following expenses: • Freight charges = $250,000 • Installation charges = $25,000 • Cost of training machine maintenance staff = $12,000 • Cost of strengthening the factory floor = $5,500 • Cost of painting factory walls = $7,000 The amounts capitalized and expensed by the company are closest to:

Row II

XYZ Corp is a mining company. During the year 2008, it wrote down its inventory by $20,500 to $400,000. In 2009, the fair value of its inventory rose to $450,000. The value of inventory recognized by XYZ at the end of 2009 under IFRS and U.S. GAAP is closest to:

Row II Companies that are engaged in agriculture, forest products, and mining are allowed to value inventory at NRV even if it exceeds historical cost under IFRS and U.S. GAAP. Therefore, the company will write‐up its inventory in 2009 to $450,000.

A company purchased an asset at the end of 2008. Its purchase price and the fair values at the end of 2009 and 2010 are given below: Asset Purchase Price ($) Fair value at the end of 2009 ($) Fair value at the end of 2010 ($) A 37,500 41,100 35,400 Given that the company follows the revaluation model to report the asset, answer the following question: The revaluation‐related entry on the company's income statement and revaluation surplus at the end of 2009 is closest to: Income Statement ($) Evaluation Surplus ($) I 0 41,100 II −5,700 3,600 III 0 3,600

Row III

Which of the following is least likely a financial sector ratio?

Same store sales

IFRS requires companies to make all of the following disclosures relating to inventory except:

Significant estimates applicable to inventories.

Which of the following classifications of ratios is least likely to be used to evaluate a firm's operating efficiency?

Solvency ratios

Which of the following classifications of ratios is most likely to be used to evaluate a firm's ability to meet its long‐term debt obligations?

Solvency ratios

Which of the following least likely describes the effects of capitalization of interest costs?

The company's reported investing cash flow is inflated.

Which of the following statements is least accurate regarding the recognition of a gain/loss on the sale of long‐lived assets?

The gain/loss is reported on the income statement as part of other gains and losses if the amount is material.

Use the following table to find the correct statement about this company's three way DuPont decomposition

The increase in Company A's ROE is a result of better NP margins (improved profitability) and higher asset turnover (improved efficiency), which improved its ROA and its ROE

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. Given that the part is replaced every 3 years for $6,000, total depreciation expense over the 8‐year period if the company does not use the component method will most likely be:

The same as if the company uses the component method.

Two companies, Clark Inc. and Noon Inc., commence operations and issue $500 of common stock for cash. In Year 1, they each spend $450 to purchase a piece of equipment. Both companies make cash sales of $750 and incur cash operating expenses of $250 each year for 3 years. Clark estimates the useful life of the equipment to be 3 years with zero salvage value, while Noon expenses the entire cost of the equipment in Year 1. Both companies are subject to a 30% tax rate. Clark capitalizes the cost of the asset with annual depreciation equals $150 (straight-line basis). Noon expenses the entire cost of the asset in Year 1. Which company reports higher total cash flow over the 3 years?

They each report the same amount

Which of the following statements is least likely regarding the effects of expensing on a company's financial statements?

Magma Corporation's liquidity position over 2009 (as measured by its current ratio) has most likely:

Worsened.

In a period of rising prices and stable inventory quantities, which of the following is most likely?

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