FA Exam 1

Which of the following items would increase the total equity balance reported on the statement of changes in stockholders equity for a given reporting period?

Positive net income

An analyst produces a table of financial ratios on liquidity and profitability for a healthcare firm. The most likely phase of the financial statement analysis framework is:

Processing data

Brown Company reported the following liability and shareholders' equity balances on its December 3, 20X0 and 20X1 balance sheets and had net income of $1,860 for 20X1. (20X0 20X1) Accounts payable and accrued liabilities $ 7,000 $ 9,500 Short-term notes payable 11,000 11,800 Long-term debt 4,000 3,204 Common stock 2,000 2,300 Retained earnings 1,000 1,996 Net financing cash flow for 20X1 is:

$(560)

Selected information from Llama, Inc.'s financial activities in the year 2020 was as follows: * Net income was $330,000. * The tax rate was 40%. * 700,000 shares of common stock were outstanding on January 1. * 2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of 200 common shares for each preferred share were outstanding at the beginning of the year. * 200,000 shares of common stock were issued on March 1. Gerrard, Inc.'s diluted earnings per share (diluted EPS) was closest to:

$0.261

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

$1,000,000

The Beeline Company has the following balance sheet and income statement. The cash flow from operations for 2004 is:

$210

An analyst is assigned to calculate diluted EPS for a company on the firm's watch list. He assembles the following notes before making the final calculations: - The company has 1,000,000 shares of $100 par value, 5% preferred stock outstanding. - The company has 100,000 warrants outstanding, each convertible into 100 common shares, with an exercise price of $10 per share. The average price of company stock during the year was $12 per share. - The company reported net income of $20,000,000 or $1.50 Basic EPS on 10,000,000 Weighted Average Number of Common Shares Outstanding. Diluted earnings per share (EPS) for the one-year period is

$1.29

Santano & Associates reported net income of $210,000 for the current year. The company had 100,000 shares of $10 par value common stock and 20,000 shares of $50 par value convertible preferred stock outstanding during the year. The dividend rate on the preferred stock is $3 per share. Each share of the convertible preferred stock can be converted into four shares of the company's common stock. None of the convertible preferred stock was converted during the year. The company's basic earnings per share is:

$1.50

An analyst has gathered the following information about a company. What is the cash flow from investing?

$10

BB firm has a contract to build a building for $100 million and an estimated cost of $75 million. In year 1, BB had costs of $30 million. BB reported profit for year 1, using the percentage-of-completion method, is:

$10 million

Net income $45 Depreciation $75 Taxes paid $25 Interest paid $5 Dividends paid $10 Cash received from sale of company building $40 Sale of preferred stock $35 Repurchase of common stock $30 Purchase of machinery $20 Issuance of bonds $50 Debt retired through issuance of common stock $45 Paid off long-term bank borrowings $15 Profit on sale of building $20 Cash flow from operations is:

$100

An analyst has gathered the following information about a company. What is the cash flow from Operations?

$156

Eagle Company's financial statements for the year ended December 31, 2005 were as following (in $ millions). Cash flow from operations (CFO) for Eagle Company for the year ended December 31, 2005 (in $ millions).

$29

An analyst has compiled the following information for a company as of and for the year ended December31, 20X8: Assets $8,200 Contributed capital 4,700 Beginning retained earnings 600 Revenues 6,500 Expenses 5,200 Dividends 500 What is the company's liability balance on December 31, 20X8?

$2,100

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm's basic earnings per share (EPS) for 2004?

$2.64

Net income $45 Depreciation $75 Taxes paid $25 Interest paid $5 Dividends paid $10 Cash received from sale of company building $40 Sale of preferred stock $35 Repurchase of common stock $30 Purchase of machinery $20 Issuance of bonds $50 Debt retired through issuance of common stock $45 Paid off long-term bank borrowings $15 Profit on sale of building $20 Cash flow from investing activities is:

$20

Net income $45 Depreciation $75 Taxes paid $25 Interest paid $5 Dividends paid $10 Cash received from sale of company building $40 Sale of preferred stock $35 Repurchase of common stock $30 Purchase of machinery $20 Issuance of bonds $50 Debt retired through issuance of common stock $45 Paid off long-term bank borrowings $15 Profit on sale of building $20 Cash flow from financing activities is:

$30

JME Construction always uses the percentage of completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available: - Costs incurred to date $2,200,000 - Billings to date $2,000,000 - Cash collected $1,750,000 - Total cost of project $8,800,000 How much gross profit should JME recognize for 2004?

$300,000

The net income for Miller Bat Company was $3 million for the year ended December 31, 2020. Additional information is as follows: Depreciation on fixed assets $1,500,000 Gain from cash sales of land 200,000 Increase in accounts payable 300,000 Dividends paid on preferred stock 400,000 The net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2020 is:

$4,600,000

Project cost estimate is $10 mil; contract totals $12 mil; $2 mil of costs occur in years 1 and 2; invoiced amounts $4 mil in year 1and $3 mil in year 2; $1 mil in cash collected each year. Year 2 net income under percentage of completion is: (Note: Invoiced amounts or cash collected are not used to estimate revenue or net income under the percentage of completion method)

$400,000

Ludwig Company had the following financial highlights for the year ended September 30, 20X2: net income of $20 million; current assets of $60 million; PPE of $75 million; goodwill of $20 million; current liabilities of $50 million; long-term debt of $40 million; and deferred tax liabilities of $15 million. The company's equity capital (shareholder's equity) on September 30, 20X2 is:

$50 million

At the beginning of the year, Parent Company purchased all 500,000 shares of Sub Incorporated for $15 per share. Just before the acquisition date, Sub's balance sheet reported net assets of $6 million. Parent determined the fair value of Sub's property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of a Sub?

$500,000

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

$900,000

Return on equity using the traditional DuPont formula equals:

(net profit margin) (total asset turnover) (financial leverage multiplier).

Which of the following is closest to the company's return on equity (ROE)?

0.62

An unusual event not meeting the criteria for an extraordinary item should be reported in the financial statements: 1. As a separate item in operating (non-operating) revenues or expenses if material and supplemented by a footnote if deemed appropriate. 2. Net of income tax after ordinary net earnings but before extraordinary items. 3. In operating (non-operating) revenues or expenses if material but not shown as a separate item.

1. As a separate item in operating (non-operating) revenues or expenses if material and supplemented by a footnote if deemed appropriate.

Information regarding which of the following items is usually included in the footnotes to financial statements? 1. Off-balance sheet financing arrangements. 2. Capital resources available to the firm and its liquidity. 3. Useful information about stock options and major shareholders.

1. Off-balance sheet financing arrangements.

The following data is from Delta's common size financial statement: Earnings after taxes: 18% Equity: 40% Current assets: 60% Current liabilities: 30% Sales: $300 Total assets: $1,400 What is Delta's total-debt-to-equity ratio?

1.5

Using the indirect method, which of the following is a cash outflow in the operating activities section of a statement of cash flows? 1. A decrease in short-term notes payable. 2. A decrease in deferred tax liabilities. 3. An increase in deferred tax liabilities.

2. A decrease in deferred tax liabilities

For accounting purposes, which one of the following is an essential characteristic of an asset? 1. Its value is known with certainty. 2. It embodies a probable future economic benefit. 3. The amount spent is recorded as an expense on the income statement.

2. It embodies a probable future economic benefit.

In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firm's weighted average number of shares outstanding?

250,000

Which of the following items normally appears below operating income (margin) on an income statement? 1. Cost of goods sold. 2. Selling expenses 3. Interest expense.

3. Interest Expense

Which of the following transactions is a financing cash inflow on the statement of cash flows? 1. Treasury stock repurchases. 2. Proceeds received from a business divestiture. 3. Long-term bonds issued.

3. Long-term bonds issued

Which of the following transactions would be classified as an operating activity? 1. Payment of a dividend to shareholders. 2. Purchase of factory equipment. 3. Purchase of materials used in production.

3. Purchase of materials used in production

Which of the following statements is correct? 1. Information about the number of options granted to corporate executives can be found in interim reports. 2. Quarterly financial statements issued to corporate shareholders and other interested parties are reliable because they must be audited by independent public accountants. 3. The Management Discussion and Analysis section of an annual report contains analysis of a company's liquidity and planned capital expenditures.

3. The Management Discussion and Analysis section of an annual report contains analysis of a company's liquidity and planned capital expenditures.

Which one of the following statements regarding free cash flow is most accurate? 1. Expanding firms often have very positive free cash flows. 2. The cash flow that is least relevant for determining the value of a firm is its free cash flow. 3. The cash generated from operating activities less capital expenditures is generically referred to as free cash flow.

3. The cash generated from operating activities less capital expenditures is generically referred to as free cash flow.

Which of the following statements correctly describes the financial statement elements reported on the income statement of a company? 1. Net income measures the sustainable income from which future income can be projected. 2. Operating income is all income earned by the company before accounting for income taxes. 3. The income (loss) from discontinued operations is reported net of tax.

3. The income (loss) from discontinued operations is reported net of tax.

Q4What is the average receivables collection period?

76.7 days

A firm's financial statements reflect the following: Net profit margin 15% Sales $10,000,000 Interest payments $1,200,000 Avg. assets $15,000,000 Avg. equity $11,000,000 Avg. working capital $800,000 Dividend payout rate 35% Which of the following is the closest estimate of the firm's sustainable growth rate?

9%

If an auditor feels that a company's financial statements are not presented fairly or significantly deviate from accounting standards, she will most likely issue a(n):

Adverse Opinion

An audit is most likely described as:

An independent review of an entity's financial statements

A junior research analyst with a commercial bank is evaluating the financial statements of Troy Technology Company (TTC). The analyst intends to make a recommendation on the stock after completing the steps of the financial statement analysis framework. The analyst notes that TTC's liquidity and capital structure ratios are consistent with the industry averages. The conclusion regarding liquidity and capital structure ratios is most likely made during the:

Analyzing data

The Hall Corporation had 100,000 shares of common stock outstanding at the beginning of they year. Hall issued 300,000 shares of common stock of May 1. On July 1, the company issued a 10% stock dividend. On September 1, Hall issued 1,000, 10% bonds, each convertible into 21 shares of common stock. What is the weighted average number of shares to be used in computing basic and diluted EPS, assuming the convertible bonds are dilutive?

Average shares, basic: $132,000 Average shares, dilutive: $139,000

An analyst with a national ratings agency is concerned about a firm's ability to meet its short-term obligations. To evaluate the firm's liquidity, the analyst would most likely refer to the:

Balance Sheet

Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF: $3,000 CFI: ($10,000)

Which of the following items is classified as a liability on the balance sheet?

Capital lease obligations

A research analyst is evaluating the financial statements of Tripod Photo Company (TPC). The analyst intends to make a recommendation on the stock after careful scrutiny of TPC's financial statements. The analyst observes that TPC initiated a dividend payment exactly two years ago and believes its operating cash flows appear to be able to support an even higher dividend payment next year. The sustainability of dividends is most likely to be evaluated using the:

Cash Flow Statement

Which transaction would best be classified as a gain or loss?

Chase Crafters sold a large piece of equipment no longer used in its manufacturing process for 10 percent below its book value.

A firm's financial statements reflect the following: Current liabilities $4,000,000 Cash $400,000 Inventory $1,200,000 Accounts receivable $800,000 Short-term investments $2,000,000 Long-term investments $800,000 Accounts payable $2,500,000 What are the firm's current ratio, quick ratio, and cash ratio?

Current Ratio: 1.1 Quick Ratio: 0.8 Cash Ratio: 0.6

How would the collection of accounts receivable most likely affect the current and cash ratios?

Current Ratio: No effect Cash Ratio: Increase

Which ratio is used to measure a company's internal liquidity?

Current ratio

Which of the following is least likely a limitation of financial ratios?

Data on comparable firms are difficult to acquire

A financial analyst would most likely use the income statement to:

Evaluate the financial performance of a firm over a period of time

The following cash flow information is available for Altex, Inc. for its most recent fiscal year ($ millions): Cash Flow from Operating Activities (1) 975.0 Cash Flow from Investing Activities (2) (365.0) Cash Flow from Financing Activities (3) (485.0) Effective tax rate 40% (1) Includes interest payments of $25.0 million (2) Includes capital expenditures of $285.0 million (3) Includes dividends paid of $69.0 million and debt (principal) repayments of $416 million The company's free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) for the year are closest to ($ millions):

FCFF: $705 FCFE: $274

During the year ended 20X1, ABC Company paid cash dividends totaling $8.0 million and purchased treasury stock totaling $45.0 million. The effect of these two transactions as reported on the statement of cash flows would be outflows from:

Financing activities of $53.0 million.

LA Corporation has created employee goodwill by reorganizing its retirement benefit package. An independent management consolation estimated the value of the goodwill at $2 million. In addition, LA recently purchased a patent that was developed by a competitor. The patent has an estimated useful life of five years. Should LA report the goodwill and patent on its balance sheet?

Goodwill: No; Patent: Yes

Accrued liabilities are disclosed on the financial statements by?

Including them as a liability on the balance sheet

A research analyst with a large investment firm is evaluating the financial statements of Sunny Lumber Company (SLC). The analyst intends to make a recommendation on the stock after careful scrutiny of SLC's financial statements and other publicly available information. The analyst makes the following comment during his research:Comment: SLC's profitability is far superior to that of its three main competitors. The comment is most likely made after evaluating the:

Income statement and external financial data sources

The following cash flow data were extracted from the cash flow statements of Tack Company ($ millions): 20X2 20X1 20X0 Operating Activities $(67) $81 $319 Investing Activities (462) (363) (279) Financing Activities 629 280 (103) Net Change in Cash $100 $(2) $(63) The most likely conclusion from the reported increase in cash for 20X2 is that Tack:

Issued debt and/or equity during 20X2

The primary disadvantage of the use of accrual accounting for the income statement is that:

It does not recognize revenue and expenses based on the actual exchange of cash for that period.

Which of the following correctly describes the process for classifying current liabilities and long-term liabilities on the balance sheet?

Obligations that are expected to be satisfied in the next twelve months (or one operating cycle if longer) are classified as current liabilities. All other obligations are classified as long-term liabilities.

Carpenter Corporation reported the following statement of shareholders' equity as of December 31, 2006: Common stock at par: $600,000 APIC: $900,000 Treasury Stock: ($200,000) Retained earnings: $10,500,000 Accumulated other comprehensive income: $450,000 During 2007, Carpenter: - Earned net income of $1,700,000. - Declared dividends of $300,000. $75,000 of the dividends remain unpaid. - Purchased held-to-maturity securities for $100,000. The securities have a fair value of $110,000 at year-end. - Purchased available-for-sale securities for $250,000. The securities have a fair value of $225,000 at year-end. - Translated the financial statements of a foreign subsidiary and calculated a $90,000 unrealized gain. - Purchased treasury stock for $75,000. The stock was valued at $60,000 when issued. Calculate Carpenter's retained earnings and accumulated other comprehensive income as of December 31, 2007.

Retained earnings: $11,900,000 Accumulated Other comprehensive income: $515,000

To study trends in a firm's cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by:

Sales

Vertical common size income statements express all income statement items as a percentage of:

Sales

Which of the following is least likely a routinely used operating profitability ratio?

Sales/Total assets

Which of the following correctly describes items on the balance sheet?

Some items that are of financial value are not included

Which of the following statements correctly describes the financial statement element reported on the balance sheet of a company?

The asset and liability values reported on the balance sheet do not necessarily reflect the fair market value of these items

When an auditor issues an unqualified opinion of a company's financial statements, this means that:

The auditor's opinion is that the financial statements are fairly presented.

Which of the following is most accurate?

Thorough financial statement analysis must include sources beyond annual statements and supplementary information

The role of financial reporting is most likely:

To provide information that is useful to a wide range of users in making economic decisions

A firm's financial statements reflect the following:Based on the information shown above, what is the firm's total debt ratio and interest coverage ratio?

Total Debt Ratio: 0.62 Interest Coverage Ratio: 2.22

The following account balances are provided for Echo Company: Cash: $25 m Accounts payable: $45 m Long-term Debt: $230 m Accounts Receivable: $125 m Retained earnings: $55 m Net PPE: $300 m Short-term Debt: $20 m Common stock & APIC: $100 m The company's total assets and total liabilities are:

Total assets: $450 m Total liabilities: $295 m

Which of the following best reflects the balance sheet carrying values for investments in marketable debt securities classified as indicated?

Trading Securities: Fair Value, Held-to-Maturity: Amortized Cost

Which of the following best reflects the balance sheet carrying values for investments in marketable debt securities classified as indicated?

Trading securities: Fair value Held-to-maturity: Amortized cost

At the beginning of the year, Company P purchased 1,000 shares of Company S for $80 per share. During the year, Company S paid a dividend of $4 per share. At the end of the year, Company S's share price was $75.What amount should Company P report on its balance sheet at year-end if the investment in Company S is considered a trading security, and what amount should be reported if the investment is considered an available-for-sale security?

Trading: $75,000 Available-for-sale: $75,000

At the beginning of the year, Company P purchased 1,000 shares of Company S for $80per share. During the year, Company S paid a dividend of $4 per share. At the end of the year, Company S's share price was $75. What amount should Company P report in its income statement at year-end if the investment in Company S is considered a trading security, and what amount should be reported if the investment is considered an available-for-sale security?

Trading: ($1,000) Available-for-sale: $4,000

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #3 - Each line item is expressed as a percentage of the prior year's amount.

Vertical Analysis: Statement #2 Horizontal Analysis: Statement #1

Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions): The financial risk of E Company, as measured by the interest coverage ratio, is:

higher than that of G Company's because its interest coverage ratio is less than one-third of G Company's.

An analyst gathered the following data about a company: Current liabilities are $300. Total debt is $900. Working capital is $200. Capital expenditures are $250. Total assets are $2,000. Cash flow from operations is $400. If the company would like a current ratio of 2, it could:

increase current assets by 100 or decrease current liabilities by 50.