Exam II: Chapters 6, 7, 8, 12

41. If ZP had prepared its financial statement in accordance with IFRS, the inventory turnover ratio (using average inventory) for 2009 would be: A. lower. B. higher. C. the same.

41. A. The inventory turnover ratio would be lower. The average inventory would be higher under FIFO and cost of products sold would be lowered by the increase in LIFO reserve. LIFO is not permitted under IFR S. Inventory turnover ratio = COGS / average inventory. 2009 inventory turnover ratio as reported = 10.63 = 5,822,805 / [(608,572 + 486465) / 2]. 2009 inventory turnover ratio adjusted to FIFO = 10.43 = [5,822,805 - (19660 - 10120)] / [(608,572 + 10120 + 486465 + 19660) / 2].

Which of the following is an off-balance-sheet financing technique? A. The use of capital leases. B. operating leases. C. the last in, first out inventory method.

B. Operating leases can be used as an off-balance-sheet financing technique because neither the asset nor the liability appears on the balance sheet. Inventory and capital leases are reported on the balance sheet.

To compute tangible book value, an analyst would: A. add goodwill to stockholders' equity. B. add all intangible assets to stockholders' equity. C. subtract all intangible assets from stockholders' equity.

C. Tangible book value removes all intangible assets, including goodwill, from the balance sheet.

An analyst gathered the following data for a company ($ millions): 31 Dec 2000 31 Dec 2001 Gross investment in fixed assets $ 2.8 $ 2.8 Accumulated depreciation $ 1.2 $ 1.6 The average age and average depreciable life of the company's fixed assets at the end of 2001 are closest to: Average Age Average Depreciable Life A. 1.75 years 7 years B. 1.75 years 14 years C. 4.00 years 7 years

C. The company made no additions to or deletions from the fixed asset account during the year, so depreciation expense is equal to the difference in accumulated depreciation at the beginning of the year and the end of the year, or $0.4 million. Average age is equal to accumulated depreciation / depreciation expense, or $1.6 / 0.4 = 4 years. Average depreciable life is equal to ending gross investment / depreciation expense = $2.8 / $0.4 = 7 years.

To better evaluate the solvency of a company, an analyst would most likely add to total liabilities A. the present value of future capital lease payments. B. the total amount of future operating lease payments. C. the present value of future operating lease payments.

C. The present value of future operating lease payments would be added to the total assets and total liabilities.

19. What is the most likely justification for Century Chocolate's choice of inventory valuation method for its finished goods? A. It is the preferred method under IFRS. B. It allocates the same per unit cost to both cost of sales and inventory. C. Ending inventory reflects the cost of goods purchased most recently.

19. C. The carrying amount of inventories under FIFO will more closely reflect current replacement value is because the inventories are assumed to consist of the most recently purchased items. FIFO is an acceptable, but not preferred, method under IFRS. Weighted average cost, not FIFO, is the cost formula that allocates the same per unit cost to both cost of sales and inventory.

20 .In Kern's comparative ratio analysis, the 2009 inventory turnover ratio for Century Chocolate is closest to: A. 5.07. B. 5.42. C. 5.55.

20. B. Inventory turnover equals cost of sales divided by average inventory equals (41,043÷7569.5 ) = 5.42 Average inventory is (8100+7039)÷2 = 7569 .5.

21. The most accurate statement regarding Annan's reasoning for requiring Kern to select a competitor that reports under IFRS for comparative purposes is that under U.S. GAAP: A. fair values are used to value inventory. B. the LIFO method is permitted to value inventory. C. the specific identification method is permitted to value inventory.

21. B. Comparative purposes, the choice of a competitor that reports under IFRS is requested because LIFO is permitted under US GAAP.

22. Annan's statement regarding the perpetual and periodic inventory systems is most significant when which of the following costing systems is used? A. LIFO. B. FIFO. C. Specific identification.

22. A. The carrying amount of the ending inventory may differ because the perpetual system will apply LIFO continuously throughout the year, liquidating layers as sales are made. Under the periodic system, the sales will start from the last layer in the year. Under FIFO, the sales will occur from the same layers regardless of whether a perpetual or periodic system is used. Specific identification identifies the actual product sold in remaining in inventory, and there will be no difference under a perpetual or periodic system.

23. Using the inventory record for purchased lemon drops shown in Exhibit D, the cost of sales for 2009 will be closest to: A. CHF 3,550. B. CHF 4,550. C. CHF 4,850.

23. B. The cost of sales is closest to CHS 4550. Under FIFO, the inventory acquired first is sold first. Using exhibit D, a total of 310 cartons were available for sale (100+40+70+100) and 185 cartons were sold (50+100+35), leaving 125 in ending inventory. The FIFO cost would be as follows: 100 (beginning inventory) x 22 = 2200 40 (4 February 2009) ×25 = 1000 45 (23 July 2009) ×30 = 1350 Cost of sales = 2200+1000+1350 = CHF 4550

24. Ignoring any tax effect, the 2009 net realizable value reassessment for the black licorice jelly beans will most likely result in: A. an increase in gross profit of CHF 9,256. B. an increase in gross profit of CHF 11,670. C. no impact on cost of sales because under IFRS, write-downs cannot be reversed.

24. A. Gross profit will most likely increase by CHF 7775. The net realizable value has increased and now exceeds the cost. The write-down from 2008 can be reversed. The write-down in 2008 was 9256 [92560 x (4.05 - 3.95)]. IFRS require the reversal of any write-downs for a subsequent increase in value of inventory previously written down. The reversal is limited to the lower of the subsequent increase or the original write-down. 77,750 kg remain in inventory; the reversal is 77,750× (4.05-3.95) = 7775. The amount of any reversal of a write-down is recognized as a reduction in cost of sales. The reversal is limited to the lower of the subsequent increase or the original right down. The amount of any reversal of a right down is recognized as a reduction in cost of sales. This reduction results in an increase in gross profit.

25. If the trend noted in the ICCO report continues and Century Chocolate plans to maintain constant or increasing inventory quantities, the most likely impact on Century Chocolate's financial statements related to its raw materials inventory will be: A. a cost of sales that more closely reflects current replacement values. B. a higher allocation of the total cost of goods available for sale to cost of sales. C. a higher allocation of the total cost of goods available for sale to ending inventory.

25. C. The FIFO method to value inventories when prices are rising will allocate more of the cost of goods available for sale to ending inventories (the most recent purchases, which are at higher cost, are assumed to remain in inventory) and less to cost of sales (the oldest purchases, which are at the lower costs, are assumed to be sold first).

27. If Karp had used FIFO instead of LIFO, the amount of cost of goods sold reported by Karp for the year ended 31 December 2009 would have been closest to: A. $ 2,056 million. B. $ 2,173 million. C. $ 2,249 million.

27. B. Karp's COGS under FIFO equals Karp's COGS under LIFO minus the increase in the LIFO reserve. Therefore, for the year ended 31 December 2009, Karp's COGS under FIFO equals: COGS (FIFO method) = COGS (LIFO method) - increase in LIFO reserve = 2,221M - (155M - 117M) = 2,173M

28. If Karp had used FIFO instead of LIFO, its reported net income for the year ended 31 December 2009 would have been higher by an amount closest to: A. $ 30 million. B. $ 38 million. C. $ 155 million.

28. A. Karp's net income under FIFO equals Karp's net income under LIFO plus the after-tax increase in the LIFO reserve. For the year ended 31 December 2009, Karp's net income under FIFO equals: NI (FIFO method) = NI (LIFO method) + increase in LIFO reserve x (1 - tax rate) = 247M + 38M × (1-20%) = 277.4M Therefore, the increase in net income is: increase in NI = NI (FIFO method) - NI (LIFO method) = 227M - 247M = 30.4M

29. If Karp had used FIFO instead of LIFO, Karp's retained earnings as of 31 December 2009 would have been higher by an amount closest to: A. $ 117 million. B. $ 124 million. C. $ 155 million.

29. B. Karp's retained earnings under FIFO equals Karp's retained earnings under LIFO plus the after-tax LIFO reserve. Therefore, for the year ended 31 December 2009, Karp's retained earnings under FIFO equals: RE (FIFO method) = RE (LIFO method) + LIFO reserve x (1- tax rate) = 787M + 155M × ( 1 - 20%) = 911M Therefore, the increase in retained earnings is: increase in RE = RE (FIFO method) - RE (LIFO method) = 911M - 787M = 124M

30. If Karp had used FIFO instead of LIFO, which of the following ratios computed as of 31 December 2009 would most likely have been lower? A. cash ratio B. current ratio C. gross profit margin.

30. A. The cash ratio (cash and cash equivalents plus current liabilities) would have been lower because cash would be less under FIFO. Karp's income before taxes would have been higher under FIFO, and consequently taxes paid by Karp would have also been higher and cash would have been lower. There is no impact on current liabilities. Both Karp's current ratio and gross profit margin would have been higher if FIFO had been used. The current ratio would've been higher because inventory under FIFO increases by larger amount than the cash decreases for taxes paid. Because the cost of good sold under FIFO is lower than under LIFO, the gross profit margin would have been higher.

31. If Karp had used FIFO instead of LIFO, its debt to equity ratio computed as of 31 December 2009 would have: A. increased. B. decreased. C. remained unchanged.

31. B. If Karp had used FIFO instead of LIFO, the debt to equity ratio would've decreased. No change in debt would've occurred but shareholders equity would have increased as a result of higher retained earnings.

Questions 32 through 37 SEE BOOK: 32. Crux's inventory turnover ratio computed as of 31 December 2009, after the adjustments suggested by Groff, is closest to: A. 5.67. B. 5.83. C. 6.13.

32. B. exes adjusted inventory turnover ratio must be computed using cost of goods sold under FIFO and excluding charges for increases in valuation allowances. COGS (adjusted) = COGS (LIFO method) - charges included in cost of goods sold for inventory write-downs - change and LIFO reserve = 3,120M - 13M - (55M - 72M) = 3,124M Note: Minus the change in LIFO reserve is equivalent to plus the decrease in LIFO reserve Adjusted inventory turnover ratio is computed using average inventory under FIFO. Ending inventory (FIFO) = ending inventory (LIFO) + LIFO reserve. Ending inventory 2009 (FIFO) = 480+55 = 535. Ending inventory 2008 (FIFO) = 465+72 = 537. Average inventory = (535 + 537) / 2 = 536 Therefore, adjusted inventory turnover ratio equals: Inventory Turnover Ratio = COGS / Avg Inventory = 3,124 / 536 = 5.83

33. Rolby's net profit margin for the year ended 31 December 2009, after the adjustments suggested by Groff, is closest to: A. 6.01%. B. 6.20%. C. 6.28%.

33. B. Rolby's adjusted net profit margin must be computed using net income under FIFO and excluding charges for increases in valuation allowances. NI (adjusted) = NI (FIFO method) + charges, included in COGS for inventory write-downs, after-tax. = 327M + 15M × (1 - 30%) + 337.5M Therefore, adjusted net profit margin equals: Net profit margin = NI / Revenues = 337.5 / 5,442 = 6.20%

34. Compared with its unadjusted debt-to-equity ratio, Mikko's debt-to-equity ratio as of 31 December 2009, after the adjustments suggested by Groff, is: A. lower. B. higher. C. the same.

34. A. Mikko's adjusted debt-to-equity ratio is lower because the debt (numerator) is unchanged and the adjusted shareholders' equity (denominator) is higher. The adjusted shareholders' equity corresponds to the shareholders' equity under FIFO, excluding charges for increases and valuation allowances. Therefore, adjusted shareholders equity is higher than reported (unadjusted) shareholders equity.

35. The best answer to Borghi's Question 1 is: A. Crux's. B. Rolby's. C. Mikko's.

35. C. Mikko's and Crux's gross margin ratio's would better reflect the current gross margin of the industry then Rolby because both use LIFO. LIFO recognizes as cost of goods sold of the most recently purchased units, therefore, it better reflects replacement cost. However, Mkko's gross margin ratio best reflects the current gross margin of the industry because Crux's LIFO reserve is decreasing. This could reflect a LIFO liquidation by Crox which would distort gross profit margin.

36. The best answer to Borghi's Question 2 is: A. stable. B. inflationary. C. deflationary.

36. B. The FIFO method shows a higher gross profit margin than the LIFO method in an inflationary scenario, because FIFO allocates to cost of goods sold the cost of the oldest units available for sale. In an inflationary environment, these units are the ones with the lowest cost.

37. The best answer to Borghi's Question 3 is: A. Activity ratios. B. Solvency ratios. C. Profitability ratios.

37. C. An inventory write-down increases cost of sales and reduces profit and reduces the carrying value of inventory and assets. This has a negative effect on profitability and solvency ratios. However, activity ratios appear positively affected by a write-down because the asset base, whether total assets or inventory (denominator), is reduced. The numerator, sales, in total asset turnover is unchanged and the numerator, cost of sales, in inventory turnover is increased. Thus, turnover ratios are higher and appear more favorable as a result of the write down.

Questions 38 through 45 SEE BOOK: 38. The MD& A indicated that the prices of raw material, other production materials, and parts increased. Based on the inventory valuation methods described in Note 2, which inventory classification would least accurately reflect current prices? A. Raw materials B. Finished goods C. Work in process

38. B. Finished goods least accurately reflects current price because some of the finished goods are valued under the last in, first out (LIFO) basis. The cost of the newest units available for sale are allocated to cost of goods sold, leaving the oldest units (at lower costs )in inventory. ZP values raw materials and work in progress using the weighted average cost method. While not fully reflecting current prices, some inflationary effect will be included in the in the inventory values.

39. The 2008 inventory value as reported on the 2009 consolidated balance sheet if the company had used the FIFO inventory valuation method instead of the LIFO inventory valuation method for a portion of its inventory would be closest to: A. ¥ 104,698 million. B. ¥ 506,125 million. C. ¥ 618,692 million.

39. C. FIFO inventory = reported inventory + LIFO reserve. 608,572 + 10,120 = 618,692. The LIFO reserve is disclosed in note 2 of the notes to consolidated financial statements.

40. What is the least likely reason why ZP may need to change its accounting policies regarding inventory at some point after 2009? A. The U.S. SEC is likely to require companies to use the same inventory valuation method for all inventories. B. The U.S. SEC is likely to prohibit the use of one of the methods ZP currently uses for inventory valuation. C. One of the inventory valuation methods used for U.S. tax purposes may be repealed as an acceptable method.

40. A. The SEC does not require companies to use the same inventory valuation method for all inventories, so this is the least likely reason to change accounting policies regarding inventory. The SEC is currently evaluating whether all US companies should be required to adopt IFRS. If the SEC requires companies to adopt IFRS, the LIFO method of inventory valuation would no longer be allowed.

42. Inventory levels decreased from 2008 to 2009 for all of the following reasons except: LIFO liquidation. sales volume decreased. fluctuations in foreign currency translation rates.

42. A. No LIFO liquidation occurred during 2009; the LIFO reserve increased from 10,120 million in 2008 to 19660 million in 2009. Management stated in the MD&A that the decrease in inventories reflected the impacts of decreased sales volumes and fluctuations in foreign currency translation rates.

43. Which observation is most likely a result of looking only at the information reported in Note 9? A. Increased competition has led to lower unit sales. B. There have been significant price increases in supplies. C. Management expects a further downturn in sales during 2010.

43. C. Finished goods and raw materials inventories are lower in 2009 when compared to 2008. Reduce levels of inventory typically indicate an anticipated business contraction.

44. Note 2 indicates that, "Inventories valued on the LIFO basis totaled ¥ 94,578 million and ¥ 50,037 million at 31 December 2008 and 2009, respectively." Based on this, the LIFO reserve should most likely: A. increase. B. decrease. C. remain the same.

44. B. The decrease in LIFO inventory in 2009 would typically indicate that more inventory units were sold then produced or purchased. Accordingly, one would expect a liquidation of some of the older LIFO layers and the LIFO reserve to decrease. In actuality, the LIFO reserve increased from 10,120 million in 2008 to 19,660 million in 2009. This is not to be expected and is likely caused by the increase in prices of raw materials, other production materials, and parts of foreign currencies as noted in the MD&A. An analyst should seek to confirm this explanation.

45. The Industry and Business Risk excerpt states that, "Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward price pressure." The downward price pressure could lead to inventory that is valued above current market prices or net realizable value. Any write-downs of inventory are least likely to have a significant effect on the inventory valued using: A. weighted average cost. B. first-in, first-out (FIFO). C. last-in, first-out (LIFO).

45. B. If prices have been decreasing, write-downs under FIFO are least likely to have a significant effect because the inventory is valued at closer to the new, lower prices. Typically, inventory value using LIFO are less likely to incur inventory write-downs than the inventories valued using weighted average cost or FIFO. Under LIFO, the oldest costs are reflected in the inventory carrying value on the balance sheet. Given increasing inventory costs, the inventory caring values under the LIFO method are already conservatively presented at the oldest and lowest cost. Thus, it is far less likely that inventory write-downs will occur under LIFO; and if the write-down does occur, it is likely to be of a lesser magnitude.

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. 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: A. + $ 0.41 million. B. -$ 0.41 million. C. -$ 1.22 million.

A. Average Accounts Receivable balances actual in 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 physical year the average accounts receivable balance is $15.62 million [=($300,000,000 / 365) x 19]. The desired average accounts receivable balance for the next fiscal year is $16.03 million [=($390,000,000 / 365) x 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 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

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: A. $ 67 million. B. $ 79 million. C. $ 83 million.

A. COGS of $75M less the decrease in inventory of $6M equals purchases from suppliers of $69M. The increase in accounts payable of $2M means the company paid $67M in cash to its suppliers.

An analyst observes the following data for two companies: Company A ($) Company B ($) Revenue 4,500 6,000 Net income 50 1,000 Current assets 40,000 60,000 Total assets 100,000 700,000 Current liabilities 10,000 50,000 Total debt 60,000 150,000 Shareholders' equity 30,000 500,000 Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies' abilities to pay their current and long-term obligations? A. Company A's current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to-equity ratio. B. Company A's current ratio of 0.25 indicates it is less liquid than Company B, whose current ratio is 0.83, and Company A is also less solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B's debt-to-equity ratio of only 30 percent. C. Company A's current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, and Company A is also more solvent, as indicated by a debt-to-equity ratio of 200 percent compared with Company B's debt-to-equity ratio of only 30 percent.

A. Company A's current ratio of 4.0 (= $40,000 / $10,000) indicates is is more liquid than Company B, whose current ratio is only 1.2 (= $60,000 / $50,000). Company B is more solvent, as indicated by its lower debt-toequity ratio of 30 percent (= $150,000 / $500,000) compared with COmpany A's debt-to-equity ratio of 200 percent (= $60,000 / $30,000).

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

A. IFRS allow the inventories of producers and dealers of agriculture and forest products, agricultural produce after harvest, and minerals and mineral product to be carried a net realizable value even if above historical cost. US GAAP treatment is similar.

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

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

When comparing a US company that uses the last in, first out (LIFO) method of inventory with companies that prepare their financial statements under international financial reporting standards (IFRS), analysts should be aware that according to IFRS, the LIFO method of inventory: A. is never acceptable. B. is always acceptable. C. is acceptable when applied to finished goods inventory only.

A. LIFO is not permitted under IFRS

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. lower than it would be if the company used the FIFO method. B. higher than it would be if the company used the FIFO method. C. about the same as it would be if the company used the FIFO method.

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

When screening for potential equity investments based on return on equity, to control risk, an analyst would be most likely to include a criterion that requires: A. positive net income. B. negative net income. C. negative shareholders' equity.

A. Requiring that net income be positive would eliminate companies that report a positive return on equity only because both net income and shareholders' equity are negative.

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? A. $ 90 million. B. $ 100 million. C. $ 110 million.

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

Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $ 2 million in 2010. 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 Item 12/ 31/ 2009 12/ 31/ 2010 Change Equipment $ 100 million $ 105 million $ 5 million Accumulated depreciation— equipment $ 40 million $ 46 million $ 6 million A. $ 1 million. B. $ 2 million. C. $ 3 million.

A. 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 - $2M. To calculate BV of the equipment sold, find the historical cost of the equipment and the accumulated depreciation on the equipment. 1) Beginning balance of equipment ($100M) + equipment purchased ($10M) - ending balance of equipment ($105M) = historical cost of equipment sold ($5M) 2) Beginning accumulated depreciation ($40M) + depreciation expense for year ($8M) - ending balance of accumulated depreciation ($46M) = accumulated depreciation on equipment sold ($2M) 3) BV of equipment sold is $5M - $2M = $3M 4) because the loss on sale of equipment was $2M, the amount of cash received must have been $1M

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

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

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 debt 2,000 1,900 1,750 Total equity 4,000 4,500 5,000 Which of the following would be the analyst's most likely conclusion? A. 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. B. 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. C. 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. The company is becoming increasingly less solvent as evidence by its debt-to-equity ratio increasing 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

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

A. 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 its current liabilities.

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 2010? Balance Sheet Item 12/ 31/ 2009 12/ 31/ 2010 Change Common stock $ 100 $ 102 $ 2 Additional paid-in capital common stock $ 100 $ 140 $ 40 Retained earnings $ 100 $ 115 $ 15 Total stockholders' equity $ 300 $ 357 $ 57 A. Issuance of common stock of $ 42 million; dividends paid of $ 10 million. B. Issuance of common stock of $ 38 million; dividends paid of $ 10 million. C. Issuance of common stock of $ 42 million; dividends paid of $ 40 million.

A. The increase of $42M in common stock and additional paid-in capital indicates that the company issued stock during the year. The increase in retained earnings of $15M indicates that the company paid $10M in cash dividends during the year, determined as beginning retained earnings of $115M, which equals $10M 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? A. Operating. B. Investing. C. Financing.

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

Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the results the company would have reported if the write-down had never occurred, Zimt's reported 2008: A. profit was overstated. B. cash flow from operations was overstated. C. year-end inventory balance was overstated.

A. The reversal of the write-down shifted cost of sales from 2008 to 2007. The 2007 cost of sales was higher because of the write-down, and the 2008 cost of sales was lower because of the reversal of the write-down. As a result, the reported 2008 profits were overstated. Inventory balance in 2008 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 into 2008 likely resulted in higher taxes and thus lower cash flow from operations.

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? A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. B. 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. C. 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. 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 amortization)

For questions 6 through 17, assume the companies use a periodic inventory system. Carey Company adheres to U.S. GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that: A. Carey has reversed an inventory write-down. B. Jonathan has reversed an inventory write-down. C. Jonathan and Carey both use the FIFO inventory accounting method.

A. US GAAP do not permit inventory write-down to be reversed.

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

A. Under the indirect method, the operating section would begin with the 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.

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. Zimt is too low. B. Nutmeg is too low. C. Nutmeg is too high.

A. 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.

One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/ Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies? A. Net income less than zero B. Debt-to-total assets ratio below a certain cutoff point C. Current-year sales growth lower than prior-year sales growth

B. A lower value of debt / total assets indicates greater financial strength. Requiring that a company's debt / total assets be below a certain cut off point would allow the analyst to screen out highly leveraged and, therefore, potentially financially weak companies.

Which of the following would best explain an increase in receivables turnover? A. The company adopted new credit policies last year and began offering credit to customers with weak credit histories. B. 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. C. 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. 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 will 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.

For questions 6 through 17, assume the companies use a periodic inventory system. Cinnamon Corp. started business in 2007 and uses the weighted average cost method. During 2007, it purchased 45,000 units of inventory at € 10 each and sold 40,000 units for € 20 each. In 2008, it purchased another 50,000 units at € 11 each and sold 45,000 units for € 22 each. Its 2008 cost of sales (€ thousands) was closest to: A. € 490. B. € 491. C. € 495.

B. Cinnamon uses the weighted average cost method, so in 2008, 5,000 units of inventory were 2007 units at €10 each and 50,000 were 2008 purchases at €11. The weighted average cost of inventory during 2008 was thus (5,000 x 10) + (50,000 x 11) = 50,000 + 550,000 = €600,000, and the weighted average cost was approx. €10.91 = €600,000 / 55,000. Cost of Sales was €10.91 x 45,000, which is approximately €490,950.

Which of the following choices best describes reasonable conclusions an analyst might make about the company's profitability? A. Comparing FY14 with FY10, the company's profitability improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27. B. Comparing FY14 with FY10, the company's profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent to 5.7 percent. C. Comparing FY14 with FY10, the company's profitability improved, as indicated by the growth in its shareholders' equity to GBP 6,165 million.

B. Comparing FY14 with FY10, the company's profitability deteriorated, as indicated by its net profit margin from 11.0 percent (= 484 / 4,390) in FY10 to 5.70 percent (= 645 / 11,366) in FY14. Debt-to-assets ratio is a measure of solvency not an indicator of profitability. Growth in shareholder's equity, in isolation, does not provide enough information to assess profitability.

Which of the following choices best describes reasonable conclusions an analyst might make about the company's solvency? A. 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. B. Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4. C. Comparing FY14 with FY10, the company's solvency improved, as indicated by the growth in its profits to GBP 645 million.

B. Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by an decrease in interest coverage from 10.6 (= 844 / 80) in FY10 to 8.4 (= 1,579 / 188) in FY14. This is also indicative of deteriorating solvency. In isolation, the amount of profits does not provide enough information to assess solvency.

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

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

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. FIFO method. B. LIFO method. C. weighted average cost method.

B. 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 a higher profit.

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. lower. B. higher. C. dependent upon the interaction with accounts payable.

B. 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.

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

B. 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 the 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.

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: A. € 95. B. € 100. C. € 105.

B. Inventory expense includes cost of purchase, cost 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.

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. liquid. B. efficient. C. profitable.

B. 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.

An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Balances as of Year Ended 31 December 2009 2010 Retained earnings 120 145 Accounts receivable 38 43 Inventory 45 48 Accounts payable 36 29 In 2010, the company declared and paid cash dividends of $ 10 million and recorded depreciation expense in the amount of $ 25 million. The company considers dividends paid a financing activity. The company's 2010 cash flow from operations (in $ millions) was closest to A. 25. B. 45. C. 75.

B. Net income for 2010 is $35 (all amounts in millions). This amount is the increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted from net income because they are uses of cash. The decrease in accounts payable is also a use of cash and subtracted from net income. Thus, cash flows from operations: $25 + $10 + $25 - $5 - $3 - $7 = $45

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. Zimt is too high. B. Nutmeg is too low. C. Nutmeg is too high.

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

CHAP 6: The three major classifications of activities in a cash flow statement are: A. inflows, outflows, and net flows. B. operating, investing, and financing. C. revenues, expenses, and net income.

B. 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 statements. Inflows, out flows, and net flows are items of information in the statement of cash flows.

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

B. 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 not receivable), it would have been considered a non-cash activity.

For questions 6 through 17, assume the companies use a periodic inventory system. 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: A. net income. B. cost of sales. C. income taxes.

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

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

B. The appropriate method to prepare a common-size SCF is to show each line item on the cash flow statements 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.

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

B. The primary SOURCE of cash is operating activities. The primary USE of cash is investing activities. Interest Received for Telefonica is classified as an investing activity.

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

B. 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.

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 Ended Income Statement Item 12/ 31/ 2010 Net income $ 20 million Depreciation $ 2 million Balance Sheet Item 12/ 31/ 2009 12/ 31/ 2010 Change Accounts receivable $ 25 million $ 22 million ($ 3 million) Inventory $ 10 million $ 14 million $ 4 million Accounts payable $ 8 million $ 13 million $ 5 million A. Add $ 2 million. B. Add $ 6 million. C. Subtract $ 6 million.

B. To derive operating cash flow, the company would make the following adjustments to net income: 1) Add depreciation (non-cash expense) of $2M 2) Add the decrease in accounts receivable of $3M 3) Add the increase in account payable of $5M 4) Subtract the increase in inventory of $4M Total additions would be $10M, total subtractions would be $4M, which gives net additions of $6M

Eric's Used Bookstore 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: A. £ 550,000. B. £ 1,000,000. C. £ 3,000,000.

B. Under IFRS, the reversal write-downs is required if net realizable 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 realizable 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. Reversal of write-downs is not permitted.

CHAPTER 12: Projecting profit margins into the future on the basis of past results would be most reliable when the company: A. is in the commodities business. B. operates in a single business segment. C. is a large, diversified company operating in mature industries.

C. A large, diversified company, margin changes in different business segments may offset each other. Furthermore, margins are most likely to be stable in mature industries.

Galambos Corporation had an average receivables collection period of 19 days in 2003. Galambos has stated that it wants to decrease its collection period in 2004 to match the industry average of 15 days. Credit sales in 2003 were $ 300 million, and analysts expect credit sales to increase to $ 400 million in 2004. To achieve the company's goal of decreasing the collection period, the change in the average accounts receivable balance from 2003 to 2004 that must occur is closest to: A. -$ 420,000. B. $ 420,000. C. $ 836,000.

C. Accounts receivable turnover = 365 / 19 (collection period in days) = 19.2 for 2003 and needs to equal 365 / 15 = 24 .3 in 2004 for Galambos to meet its goal. Sales / turnover = accounts receivable balance. For 2003, $300M / 19.2 = $15,625,000, and for 2004, $400M / 24.3 = $16,460,905. The difference of $835,905 is the increase in receivables needed for Galambos to achieve its goal.

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

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

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

C. Assuming no changes and 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 and 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? A. $ 18 million. B. $ 21 million. C. $ 22 million.

C. Beginning salaries payable $3M plus salaries expense of $20M minus ending salaries payable $1M equals $22M. ALternatively, the expense of $20M plus the $2M decrease in salaries payable equals $22M.

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: A. $ 73 million. B. $ 77 million. C. $ 83 million.

C. COGS of $80M plus the increase in inventory of $5M equal purchases from suppliers of $85M. The increase in accounts payable of $2M means the company paid $83M in cash to its suppliers.

An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Year ended 31 December - 2009 2010 Net sales 245.8 254.6 Cost of goods sold 168.3 175.9 Accounts receivable 73.2 68.3 Inventory 39.0 47.8 Accounts payable 20.3 22.9 Based only on the information above, the company's 2010 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 Customers / Cash Paid to Suppliers A. 249.7 / 169.7 B. 259.5 / 174.5 C. 259.5 / 182.1

C. Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5. Cahs paid to suppliers = COGS + Increase in inventory - increase in accounts payable = 175.9 + 8.8 - 2.6 = 182.1

Which of the following choices best describes reasonable conclusions an analyst might make about the company's liquidity? A. Comparing FY14 with FY10, the company's liquidity improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27. B. Comparing FY14 with FY10, the company's liquidity deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4. C. Comparing FY14 with FY10, the company's liquidity improved, as indicated by an increase in its current ratio from 0.71 to 0.75.

C. Comparing FY14 to FY10, the company's liquidity improved, as indicated by an increase in its current ratio from 0.71 [= (316 + 558) / 1,223] in FY10 to 0.75 [= (682 + 1,634) / 3,108] in FY14. Note, however, comparing only current investments with the level of current liabilities shows a decline in liquidity from 0.26 (= 316 / 1,223) in FY10 to 0.22 (= 682 / 3,108) in FY14. Debt-to-assets ratio and interest coverage are measures of solvency not liquidity.

Credit analysts are likely to consider which of the following in making a rating recommendation? A. Business risk but not financial risk B. Financial risk but not business risk C. Both business risk and financial risk

C. Credit analysts consider both business risk and financial risk.

CHAP 7: Comparison of a company's financial results to other peer companies for the same time period is called: A. technical analysis. B. time-series analysis. C. cross-sectional analysis.

C. 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.

In a comprehensive financial analysis, financial statements should be: A. used as reported without adjustment. B. adjusted after completing ratio analysis. C.. adjusted for differences in accounting standards, such as international financial reporting standards and US generally accepted accounting principles.

C. Financial statements should be adjusted for differences in accounting standards (as well as accounting and operating choices). These adjustments should be made prior to common-size and ratio analysis.

When comparing financial statements prepared under IFRS with those prepared under US GAAP, analysts may need to make adjustments related to: A. realized losses. B. unrealized gains and losses for trading securities. C. unrealized gains and losses for available-for-sale securities.

C. IFRS makes a distinction between unrealized gains and losses on available-for-sale debt securities that arise as a result of exchange rate movements and requires these changes in value to be recognized in the income statement, whereas US GAAP does not make this distinction.

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

C. Interest expense is ALWAYS classified as an operating cash flow under US GAAP, but may be classified as either operating or financing 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? A. $ 22 million for interest and $ 10 million for taxes. B. $ 16 million for interest and $ 2 million for taxes. C. $ 16 million for interest and $ 10 million for taxes.

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

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

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

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

C. 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 IFRS allows 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.

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

C. 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.

When a database eliminates companies that cease to exist because of a merger or bankruptcy, this can result in: A. look-ahead bias. B. back-testing bias. C. survivorship bias.

C. Survivorship bias exists when companies that merge or go bankrupt are dropped from the database and only surviving companies remain. Look-ahead bias involves using updated financial information and back-testing that would not have been available at the time the decision was made. Back-testing involves testing models and prior periods and not, itself, a bias.

An analyst is evaluating the balance sheet of a US company that uses last in, first out (LIFO) accounting for inventory. The analyst collects the following data: 31 Dec 05 31 Dec 06 Inventory reported on balance sheet $ 500,000 $ 600,000 LIFO reserve $ 50,000 $ 70,000 Average tax rate 30% 30% After adjusting the amounts to convert to the first in, first out (FIFO) method, inventory at 31 December 2006 would be closest to: A. $ 600,000. B. $ 620,000. C. $ 670,000.

C. TO convert LIFO inventory to FIFO inventory, the entire LIFO reserve must be added back: $600K + $70K = $670K

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

C. Taxes on income are required to be separately disclosed under IFRS and US GAAP. The disclosure may be in the SCF or elsewhere.

An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion: FY3 FY2 FY1 Days of inventory on hand 32 34 40 Days sales outstanding 28 25 23 Number of days of payables 40 35 35 Based on this data, what is the analyst least likely to conclude? A. Inventory management has contributed to improved liquidity. B. Management of payables has contributed to improved liquidity. C. Management of receivables has contributed to improved liquidity.

C. 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, indicatingg 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 FY! to FY3, a positive for liquidity. THe company's increase in days payable, from 35 to 40 days, shortened its cash conversion cycle, thus also contributing to improved liquidity.

Q12 - 15 USES BALANCE SHEET IN BOOK The company's total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company's efficiency? A. Comparing FY14 with FY10, the company's efficiency improved, as indicated by a total asset turnover ratio of 0.86 compared with 0.64. B. Comparing FY14 with FY10, the company's efficiency deteriorated, as indicated by its current ratio. C. Comparing FY14 with FY10, the company's efficiency deteriorated due to asset growth faster than turnover revenue growth.

C. The company's efficiency deteriorated, as indicated by the decline in its total asset turnover ratio from 1.11 {= 4,390 / [(4,384 + 3,500) / 2]} for FY10 to 0.87 {= 11,366 / [(12,250 + 13,799) / 2]} for FY14. The decline in the total asset turnover ratio resulted from an increase in average total assets from GBP3,942 [= (4,384 + 3,500) / 2] for FY10 to GBP13,024.5 for FY14, an increase of 230 percent, compared with an increase in revenue from GBP4,390 in FY10 to GBP11,366 in FY14, an increase of only 159 percent. The current ratio is not an indicator of efficiency.

An analyst compiles the following data for a company: FY13 FY14 FY15 ROE 19.8% 20.0% 22.0% Return on total assets 8.1% 8.0% 7.9% Total asset turnover 2.0 2.0 2.1 Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company's: A. net profit margin and financial leverage have decreased. B. net profit margin and financial leverage have increased. C. net profit margin has decreased but its financial leverage has increased.

C. The company's net profit margin has decreased in its financial leverage has increased. ROA = net profit margin x 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 x 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? A. The company installed a new inventory management system, allowing more efficient inventory management. B. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. C. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

C. 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.

With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data? A. The decline in the company's equity results from a decline in the market value of this company's common shares. B. The € 250 increase in the company's debt from FY3 to FY5 indicates that lenders are viewing the company as increasingly creditworthy. C. 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. The decline in the companies 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 is 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 solvency liquidity profitability efficiency and other aspects of credit analysis.)

SEE #19 CHART An analyst is most likely to conclude that: A. 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. B. 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. C. 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. 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 the 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% to 7% which, all else equal, would not suggest that it is selling more products with higher profit margins.

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

C. 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.

A decomposition of ROE for Integra SA is as follows: FY12 FY11 ROE 18.90% 18.90% Tax burden 0.70 0.75 Interest burden 0.90 0.90 EBIT margin 10.00% 10.00% Asset turnover 1.50 1.40 Leverage 2.00 2.00 Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition? A. Profitability and the liquidity position both improved in FY12. B. The higher average tax rate in FY12 offset the improvement in profitability, leaving ROE unchanged. C. The higher average tax rate in FY12 offset the improvement in efficiency, leaving ROE unchanged.

C. The increase in the average tax rate in FY12, as indicated by the decrease in the value of tax burden (the tax burden equals one minus the average tax rate), offset the improvement and 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.

For questions 6 through 17, assume the companies use a periodic inventory system. Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the ratios that would have been calculated if the write-down had never occurred, Zimt's reported 2007: A. current ratio was too high. B. gross margin was too high. C. inventory turnover was too high.

C. The write-down reduced the value of inventory and increased cost of sales in 2007. The higher numerator and lower denominator mean that the inventory turnover ratio as reported was too high. Gross margin and the current ratio are both too low.

CHAPTER 8: Inventory cost is least likely to include: A. production-related storage costs. B. costs incurred as a result of normal waste of materials. C. transportation costs of shipping inventory to customers.

C. 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 cost 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.)

For questions 6 through 17, assume the companies use a periodic inventory system. Zimt AG started business in 2007 and uses the FIFO method. During 2007, it pur- chased 45,000 units of inventory at € 10 each and sold 40,000 units for € 20 each. In 2008, it purchased another 50,000 units at € 11 each and sold 45,000 units for € 22 each. Its 2008 ending inventory balance (€ thousands) was closest to: A. € 105. B. € 109. C. € 110.

C. Zimt uses the FIFO method, and thus the first 5000 units sold in 2008 depleted the 2007 inventory. Of the inventory purchased in 2008, 40,000 units were sold and 10,000 remain, valued at €11 each, for a total of €110,000.

Questions 18 through 25 SEE BOOK: 18. The costs least likely to be included by the CFO as inventory are: A. storage costs for the chocolate liquor. B. excise taxes paid to the government of Brazil for the cacao beans. C. storage costs for chocolate and purchased finished goods awaiting shipment to customers.

Questions 18 through 25 SEE BOOK: 18. C. The storage cost for inventory awaiting shipment to customers are not costs of purchase, costs of conversion, or other costs incurred in bringing the inventories to their present location and condition and are not included in inventory. The storage costs for the chocolate liquor occur during the production process and are thus a part of the conversion costs. Excise taxes are part of the purchase cost.

Questions 26 through 31 SEE BOOK: 26. If Karp had used FIFO instead of LIFO, the amount of inventory reported as of 31 December 2009 would have been closest to: A. $ 465 million. B. $ 658 million. C. $ 775 million.

Questions 26 through 31 SEE BOOK: 26. C. Karp's inventory under FIFO equals Karp's inventory under LIFO plus the LIFO reserve. Therefore as of 31 December 2009, Karp's inventory under FIFO equals: inventory (FIFO method) = inventory (LIFO method) + LIFO reserve = 620M + 155M = 775M