financial accounting 2

MAD

absolute/number of observations

std dev

diff squared/n---root

lifo vs. fifo--inventory, cogs, net income, working capital

lifo lowin lowin

cv

steph dick is mean

captial structure breakpoint

$dollar amount at which k changes/ weight of that type of capital

disclosures...

...

relationship between ROE and leverage

...

47. A manager whose compensation is tied to improving the firm's inventory turnover most likely has an incentive to: A. overstate assets. B. understate earnings. C. overstate working capital.

47. B Inventory turnover is cost of goods sold divided by average inventory. A manager who wishes to manipulate earnings or the balance sheet to show improvement in this ratio can either understate inventories, which would understate working capital and total assets, or overstate cost of goods sold, which would understate earnings.

57. In accounting for a defined benefit pension plan, the amount reported as "prior service cost" refers to the: A. total value of benefits alread)'. paid to retirees who are still receiving pension payments. B. present value of the pension benefits due to employees based on their employment up to the date of the statement. C. present value of the increase in future pension benefits from a change in the terms of the pension plan.

57. C Prior service costs arise when changes in the terms of a defined benefit pension plan increase the future benefits due to employees based on their prior employment with the company.

60. When comparing two firms, an analyst should most appropriately adjust the financial statements when they include significant: A. acquisition goodwill, if one of the firms reports under IFRS and the other under U.S. GAAP. B. property, plant, and equipment, if one of the firms uses accelerated depreciation and the other uses straight-line depreciation. C. unrealized losses from securities held for trading, if one of the firms uses fair value reporting for securities investments and the other does not.

60. B Acquisition goodwill is treated the same way under IFRS and U.S. GAAP: it is not amortized but is tested for impairment at least annually. Securities held for trading are reported at fair value with unrealized gains and losses reported on the income statement.

61. A software company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will: A. reduce net income and shareholders' equity by $2 million. B. increase shareholders' equity by $1 million and have no effect on net mcome. C. reduce net income by $2 million and increase shareholders' equity by $1 million.

61. C Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders' equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 million.

62. Maritza Inc. is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Maritza record this transaction? A. Investing activities section. B. Financing activities section. C. Footnotes to the cash flow statement.

62. C This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

68. Which of the following statements about the treatment of leases on the lessor 's financial statements is least accurate? A. Ifthe present value of the payments on a finance lease is greater than the carrying value of the asset, the lease is a sales-type lease on the books of the lessor. B. In a direct financing lease, the lessor recognizes gross profit at the lease inception, while in a sales-type lease it does not. C. To be a finance lease for the lessor, collectibility must be reasonably certain and the lessor must have substantially completed performance.

68. B When the PV of the lease payments is greater than the carrying value of an asset, the lessor records an immediate gross profit on sale equal to the excess of the PV over the carrying value, and the lease is termed a sales-type lease, not a direct financing lease.

Operating Leases - Effects On: Balance sheet - Income statement Cash flow statement

Balance sheet - No assets or liabilities are recorded. Income statement - The operating-lease payment will be treated as an operating expense. Cash flow statement - Cash flow from operations will include the total lease payment for the specified accounting period.

67. A company fails to record accrued wages for a reporting period. What effect will this error have on the company's financial statements? A. Assets and liabilities are understated. B. Assets and owners' equity are overstated. C. Liabilities are understated and owners' equity is overstated.

C Accrued wages should be recorded as a liability (wages payable). Failing to record a liability for accrued wages will understate wage expense, which leads to an overstatement of net income. Since net income is overstated, retained earnings and owners' equity are both overstated. Assets are unaffected.

Company ABC uses LIFO. Year-end inventory = $2m Beginning inventory = $3m LIFO reserve at year-end = $1m LIFO reserve at the beginning of the years = $500,000 COSG = $5m convert LIFO to FIFO

COGS (FIFO) = COGS (LIFO) - change in LIFO reserve fifo has to be smaller! remember: FIFO inventory= LIFO inventory+LIFO R fifo has to be bigger

do future warranty expenses create dta or dtl?

DTA---warranty expense is accrued prior to payment on the income sheet. pay taxes on it before it happens.

FCFF--NI vs. CFO

Depreciation only added when calculated from NI and not CFO

finance lease vs. op lease

Finance lease= inc. current liabilities, total assets higher, equity is unchanged at start

should inetrest costs be included in captial budgetting cashflows

NO, included in the WACC already.

auditing and reports

Only annual is audited. major statemetns and footnotes updated at interim, semi and quarter-annual basis but not audited.

45. Normal Corp. has a current ratio above 1 and a quick ratio less than 1. Which of the following actions will increase the current ratio and decrease the quick ratio? Normal Corp.: A. buys fixed assets on credit. B. uses cash to purchase inventory. C. pays off accounts payable from cash.

Paying off accounts payable from cash lowers current assets and current liabilities by the same amount. Because the current ratio started off above 1, the current ratio will increase. Because the quick ratio started off less than 1, it will decrease further. The other choices are incorrect. Buying fixed assets on credit decreases both ratios because the denominator increases, with no change to the numerator. Using cash to purchase inventory would result in no change in the current ratio but would decrease the quick ratio by decreasing the numerator.

how does a stock dividend affect retained income, scontributed capital and shareholder equity?

RE down and CC up by same amount SE therefore is unchanged

30. Which of the following statements about the central limit theorem is least accurate? A. The central limit theorem has limited usefulness for skewed distributions. B. The mean of the population and the mean of all possible sample means are equal. C. When the sample size is large, the sampling distribution of the sample means is approximately normal.

The central limit theorem holds for any distribution as long as the sample size is large (i.e., n > 30).

26. The analyst estimates the probability that the project will fail in the first year as well as the conditional probability of failure for each of the remaining four years of the project, as follows: Year 1 2 3 4 5 Failure probability 0.25 0.20 0.20 0.15 0.10 The project will have no payoff if it fails, but it will have a payoff of $20,000 at the end of the fifth year if it succeeds. Because of its high risk, the required rate of return for an investment in this project is 25%. Based on this information, the expected present value of the project is closest to:

The probability of surviving to the end of the fifth year is the product of the probabilities of surviving in each year, or one min us the probability of failure. Therefore, the 5-year survival probability is (1 - 0.25) (I - 0.20) (1 - 0.20) (1 - 0.15) (1 - 0.10) = 0.3672. The present value of the expected payoff is $20,000(0.3672) /1.25^5= $2, 407.

Capital lease CF statement effects

Total cash flow statements remain unaffected by operating and capital leases. That said, cash flow from operations will include only the interest portion of the capital-lease expense. The principal payment will be included as a cash outflow from cash flow from financing activities. As a result, capital leases will overstate CFO and understate CFF.

Capital lease incomes statement effects

Total income over the life of the leased assets will be the same for operating and capital leases. 1. interest expense - which is included in the income statement but is not part of operating income (earnings before taxes from continuing operations) 2. the principal, which is not included in the income statement . 3. depreciation expenses are included in income statement which are part of operating income. 4. The interest portion will be higher in the first few years of the lease, and is consistent with the interest expense of an amortized loan.

54. Which of the following statements about the calculation of earnings per share (EPS) is least accurate? A. Shares issued after a stock split must be adjusted for the split. B. Options outstanding may have no effect on diluted EPS. C. Reacquired shares are excluded from the computation from the date of reacquisition.

a Shares issued post-split need not be adjusted for the split as they are already "new" shares.

20X6 20X5 20X4 Debt-to-capital ratio 56.3% 56.4% 56.2% Fixed charge coverage ratio 3.3x 3.4x 3.5x Interest coverage ratio 4.0x 3.9x 3.8x These ratios most likely suggest that during the period shown, Lebicke's: A. use of operating leases increased. B. interest obligations increased faster than earnings. C. capital structure became more reliant on equity financing.

a The fixed charge coverage ratio is decreasing at the same time the interest coverage ratio is increasing, which means the company's operating lease payments are increasing. (Note that the years are presented right-to-left.) The increasing interest coverage ratio suggests earnings before interest and taxes are increasing more (or decreasing less) than the interest payments on the company's debt. The debt-to-capital ratio is essentially unchanged in the period shown, which implies that the company has not changed its capital structure significantly

52. A reconciliation of beginning and ending carrying values for long-lived tangible assets is required for firms reporting under: A. IFRS. B. U.S. GAAP. C. both U.S. GAAP and IFRS.

a The required disclosures for long-lived assets under IFRS are more extensive than they are under U.S. GAAP. IFRS requires a reconciliation of beginning and ending carrying values for classes of long-lived tangible assets, while U.S. GAAP does not.

51. Jennifer Frye, CFA, is comparing the financial performance of a firm that presents its results under IFRS to that of a firm that complies with U.S. GAAP. The U.S. firm uses the LIFO method for inventory accounting, and the other firm uses the FIFO method. If Frye performs the appropriate adjustments to make the U.S. firm's financial statements comparable to the firm that reports under IFRS, her adjustments are least likely to change the firm's: A. quick ratio. B. debt-to-equity ratio. C. cash conversion cycle.

a add the U.S. GAAP firm's LIFO reserve to its balance sheet inventory and subtract the change in the LIFO reserve from its cost of goods sold. adjustment will increase the firm's total assets and change its pretax income, income taxes, net income, and retained earnings (increasing them if the LIFO reserve increased,) adjustments will change the firm's debt-to-equity ratio by changing total equity, and change the cash conversion cycle by changing inventories. adjustments do not change current liabilities or current assets other than inventories, so the quick ratio is not affected

valuation allowance is

a reserve against dta based ont eh likelihood that those assets will not be realized

Sales-Type Lease

accounted for like a direct-financing lease, except that profit on a sale is recognized upon inception of the lease, in addition to the interest income recognized during the lease term. The gross profit recognized at the inception of the lease is the PV of all lease payments minus the cost of the leased asset.

increase in tax rate does what to DTA and DTL

both increase

contract methods IFRS vs. GAAP

both use % complete GAAP uses the completed contract method IFRS recognizes expenses as incurred, rev= costs and profit only when complete.

capital vs. operating

cap decreases earnings in current reporting compared to op. the interest expense that emerges from capital leases is highest in the first years and decreases over time (unlike depreciation expense, which is constant). This creates a variation in a company's reported total expenses. In the earlier years, a company using a capital lease will report a lower net income than a company using an operating lease. This will also create a tax benefit for the company that uses a capital lease in the first years. This tax benefit will cancel out because in the later years, the interest component will decrease and reported income will increase.

what calculation is used to asses working capital management

cash conversion cycle or op cycle.Longer=poor management. amount of cash isn't necessarily an indicator because good management may mean less on hand.

controlling vs. non controlling interests

controlling interests is >50% ownerships but less than 100% and assets and L are reported on own balance sheet. controlling interest can be achieved with less than 50% ownership of the stock if that person/group owns a significant proportion of the voting shares, because in many cases, not every share carries a vote in shareholder meetings. non controlling is the portion of the firm not owned and it is included on the equity section of the balance sheet

Discontinued operations and extraordinary

disc ops cannot be considered extraordinary are reported like extra after net cont. ops

ddb vs straight line

doubles in the first year and does not include salvage value

accrued wages and financial statements

increases expenses and liabilities. when paid liabilities go down, assets go down.

what is valuation allowance? What does it mean if it is increased?

increasing va means that company has decreased its estimate of future profitability---its ability to take advanatage of DTA. note DTA may also be decreased by change in tax rate

what are the effects of issuing debt to retire equity

issuing debt= more interest expense which decreases net income but not operating income (EBIT) for profitable firm, ROE will increase due to an increase in equity AND ROE variability will increase

capacity analysis for creditors

margin stability leverage operational efficiency scale and diversification collateral is considered but not part of capacity

what is the relationship between GDP and equity markets?

market cap vs. GDP trends can give sense of whether markets are over or undervalued

geometric mean

not squared but nth root

inventory writeup

only as high as original value, gain reported in IS

pretax income taxable income income tax expense taxes payable

pretax income= before deductions taxable income= income subject to taxes (after deductions) income tax expense= taxes payable-DTA+DTL taxes payable aka current tax expense= current taxes recognized in income statemetn but not yet paid

what is lifo better at than FIFO? and vice versa, when are they equal?

regadless of whether prices are increasing or decreasing, wherever teh latest prices are being used, estimate is most accurate: lifo is better at cogs, fifo better at inv. same if prices aren't changing

Direct-Financing Lease

the coupling of a sale and financing transaction. In this case, the lessor removes the leased asset from its books and replaces it with a receivable from the lessee. The only income recognized by the lessor is the interest received. The implied rate is taken by calculating IRR of the asset; cash inflow is equal to lease payments and cash outflow is equal to the book value of the lease asset.

treasury method

use average price to calculate # shares but market price to determine if dilutive

can a project with a small IRR have a larger NPV?

yes, if the projects are very different sizes