Financial Reporting and Analysis

The exhibit below provides relevant data and financial statement information about Acme's inventory purchases and sales of inventory for the last year. Units Unit Price Beginning Inventory 699 $5.00 Purchases 710 $8.00 Sales 806 $15.00 The value of the ending inventory level in dollars using the last-in-first-out (LIFO) method is: A)$3,015. B)$4,824. C)$6,160.

A

Which of the following transactions affects owners' equity but does not affect net income? A)Foreign currency translation gain. B)Repaying the face amount on a bond issued at par. C)Dividends received from available-for-sale securities.

A A foreign currency translation gain is not included in net income but the gain increases owners' equity. Dividends received are reported in the income statement. The repayment of principal does not affect owners' equity. (LOS 21.k, 21.l)

An examination of the cash receipts and payments of Xavier Corporation reveals the following: Cash paid to suppliers for purchase of merchandise$5,000Cash received from customers14,000Cash paid for purchase of equipment22,000Dividends paid2,000Cash received from issuance of preferred stock10,000Interest received on short-term investments1,000Wages paid4,000Repayment of loan to the bank5,000Cash from sale of land12,000 Under U.S. GAAP, Xavier's reported cash flow from operations will be: A)$6,000. B)-$5,000. C)$5,000.

A Cash flow relating to operating activities includes cash paid to suppliers, cash received from customers, interest received, and wages paid. -5,000 + 14,000 + 1,000 + -4,000 = 6,000. (Study Session 7, Module 23.1, LOS 23.a)

Which of the following is least likely a limitation of financial ratios? A)Data on comparable firms are difficult to acquire. B)Determining the target or comparison value for a ratio requires judgment. C)Different accounting treatments require the analyst to adjust the data before comparing ratios.

A Company and industry data are widely available from numerous private and public sources. The other statements describe limitations of financial ratios. (Module 26.1, LOS 24.a)

Which of the following is an analyst least likely to rely on as objective information to include in a company analysis? A)Corporate press releases. B)Government agency statistical data on the economy and the company's industry. C)Proxy statements.

A Corporate reports and press releases are written by management and are often viewed as public relations or sales materials. An analyst should review information on the economy and the company's industry and compare the company to its competitors. This information can be acquired from sources such as trade journals, statistical reporting services, and government agencies. Securities and Exchange Commission (SEC) filings include Form 8-K, which a company must file to report events such as acquisitions and disposals of major assets or changes in its management or corporate governance and proxy statements, which are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options. (Study Session 6, Module 19.2, LOS 19.e)

At the beginning of 2004, the Alaska Corporation had 2 million shares of common stock outstanding and no preferred stock. At the end of August, 2004, Alaska issued 600,000 new shares of common stock. If Alaska reported net income equal to $8.8 million, what was the firm's earnings per share for 2004? A)$4.00. B)$3.67. C)$3.38.

A EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 2 million shares plus 4/12 of the additional 600,000 shares. The 4/12 weight is used because the new shares were only outstanding 4 months of the year. Thus, EPS = $8.8 million / [2 million + (4/12)(600,000)] = 8.8/2.2 = $4.00. (Study Session 7, Module 21.4, LOS 21.g)

During the year, a firm's inventory purchases were as follows: Quarter Purchased Cost/Unit Total 1 400 $3.30 $1,320 2 100 3.60 360 3 200 3.90 780 4 50 4.20 210 750 $2,670 The firm uses a periodic inventory system and calculates inventory and COGS at the end of the year. Beginning inventory was 200 units at $3 per unit = $600. Sales for the year were 600 units. Compute COGS for the year under FIFO and LIFO. FIFO LIFO A)$1,920 $2,175 B)$1,920 $1,850 C)$2,070 $2,175

A FIFO COGS 200 units from beginning inventory × $3.00=$600400 units from 1st quarter × $3.30=1,320$1,920 LIFO COGS 50 units from 4th quarter × $4.20=$210200 units from 3rd quarter × $3.90=780100 units from 2nd quarter × $3.60=360250 units from 1st quarter × $3.30=825$2,175 Note the shortcut. Once FIFO COGS of $1,920 is calculated, look at the LIFO column. We know that during inflation and stable or increasing inventory quantities, LIFO COGS is higher than FIFO. Only LIFO COGS of $2,175 meets this condition. (LOS 25.c)

Which of the following is least likely considered in determining the useful life an intangible asset? A)Initial cost. B)Legal, regulatory, or contractual provisions. C)Provisions for renewal or extension.

A Initial cost has nothing to do with the useful life of an intangible asset. (LOS 26.g)

An analyst has gathered the following information about a company: Balance SheetAssetsCash100Accounts Receivable750Marketable Securities300Inventory850Property, Plant & Equip900Accumulated Depreciation(150)Total Assets2750Liabilities and EquityAccounts Payable300Short-Term Debt130Long-Term Debt700Common Stock1000Retained Earnings620Total Liab. and Stockholder's equity2750 Income StatementSales1500COGS1100Gross Profit400SG&A150Operating Profit250Interest Expense25Taxes75Net Income150 A)1.53. B)0.62. C)2.67.

A Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(short-term debt)] = (1,150 / 430) = 2.67 (Study Session 7, Module 22.7, LOS 22.h)

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as: A)lower ROA in the current period and higher ROA in later periods. B)lower ROA in the current period and no effect on ROA in later periods. C)higher ROA in the current period and lower ROA in later periods.

A ROA=Net Income/Assets Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA. (Study Session 8, Module 25.4, LOS 25.h)

Standard-setting bodies are responsible for: A)establishing financial reporting standards only. B)establishing and enforcing standards for financial reporting. C)enforcing compliance with financial reporting standards only.

A Standard-setting bodies are private-sector organizations that establish financial reporting standards. Enforcement is the responsibility of regulatory authorities. (LOS 20.b)

Paragon Co. has an operating profit margin (EBIT / revenue) of 11%; an asset turnover ratio of 1.2; a financial leverage multiplier of 1.5 times; an average tax rate of 35%; and an interest burden of 0.7. Paragon's return on equity is closest to: A)9%. B)10%. C)11%.

A Tax burden = 1 - 0.35 = 0.65. ROE = 0.65 × 0.7 × 0.11 × 1.2 × 1.5 = 0.0901. (LOS 24.d)

The objective of financial reporting, according to the IASB framework, is to: A)provide information about the firm to current and potential investors. B)decide the acceptable standards for presenting financial performance. C)minimize management discretion in presenting the financial results of a firm.

A The IASB Conceptual Framework states that the objective of financial reporting is to provide information about the firm to current and potential investors that is useful for making decisions about investing in or lending to the firm. (LOS 20.a)

A firm's balance sheet prepared under IFRS is least likely to include: A)market value of the firm's equity. B)fair value of firm PPE. C)market value of inventory.

A The market value of the firm's common equity (common stock) is not included on the balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of inventory to be carried at their market values. (Study Session 7, Module 22.2, LOS 22.b)

The Hall Corporation had 100,000 shares of common stock outstanding at the beginning of the year. Hall issued 30,000 shares of common stock on 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 Average shares, dilutive A)132,000 139,000 B)132,000 146,000 C)139,000 146,000

A The new stock is weighted by 8 / 12. The bonds are weighted by 4 / 12 and are not affected by the stock dividend. Basic shares = {[100,000 × (12 / 12)] + [30,000 × (8 / 12)]} × 1.10 = 132,000 Diluted shares = 132,000 + [21,000 × (4 / 12)] = 139,000 (LOS 21.g, 21.h)

Poulter Products reports under IFRS and wrote its inventory value down from cost of $400,000 to net realizable value of $380,000. The most likely financial statement effect of this change is: A)an increase in cost of sales. B)a decrease in depreciation charges. C)a loss reported as other comprehensive income.

A The write-down in inventory value from cost to net realizable value is reported on the income statement either as an addition to cost of sales or as a separate line item, not as other comprehensive income. Depreciation will not be affected as inventory is not depreciated. (Module 27.4, LOS 25.h)

A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is: A)$3 million. B)zero. C)$5 million.

A Under IFRS, research costs must be expensed but development costs, under certain circumstances, may be capitalized资本化. (Study Session 7, Module 22.5, LOS 22.e)

At the beginning of this year, Fairweather Corp. incurred $200,000 of research costs and $100,000 of development costs to create a new patent. The patent is expected to have a useful life of 40 years with no salvage value. Calculate the carrying value of the patent at the end of this year, assuming Fairweather follows U.S. GAAP. A)$0. B)$97,500. C)$292,500.

A Under U.S. GAAP, research and development costs are expensed as incurred. Thus, the entire $300,000 of R&D is expensed this year. The result is a zero carrying value. (LOS 26.f)

Which of the following statements about the role of depreciable lives and salvage values in the computation of depreciation expenses for financial reporting is most accurate? A)Depreciable lives and salvage values are chosen by management and allow for the possibility of income manipulation. B)The estimated useful life of the same depreciable asset should be the same regardless of which company owns the asset. C)Companies are specifically required to disclose data about estimated salvage values in the footnotes to the financial statements.

A Useful lives and salvage values of long-lived assets are management estimates that may vary among companies. Companies typically do not disclose data about estimated salvage values, except when estimates are changed. (Study Session 8, Module 26.2, LOS 26.e)

When analyzing profitability ratios, which inventory accounting method is preferred? A)Last in, first out (LIFO). B)Weighted average. C)First in, first out (FIFO).

A Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented. (Study Session 8, Module 25.5, LOS 25.k)

Convenience Travel Corp.'s financial information for the year ended December 31, 20X4 included the following: Property Plant & Equipment $15,000,000 Accumulated Depreciation 9,000,000 The only asset owned by Convenience Travel in 20X5 was a corporate jet airplane. The airplane was being depreciated over a 15-year period on a straight-line basis at a rate of $1,000,000 per year. On December 31, 20X5 Convenience Travel sold the airplane for $10,000,000 cash. Net income for the year ended December 31, 20X5 was $12,000,000. Based on the above information, and ignoring taxes, what is cash flow from operations (CFO) for Convenience Travel for the year ended December 31, 20X5? A)$8,000,000. B)$11,000,000. C)$13,000,000.

A Using the indirect method , CFO is net income increased by 20X5 depreciation ($1,000,000) and decreased by the gain recognized on the sale of the plane [$10,000,000 sale price − ($15,000,000 original cost − $10,000,000 accumulated depreciation including 20X5) = $5,000,000]. $12,000,000 + $1,000,000 − $5,000,000 = $8,000,000.

An IFRS-reporting firm reclassifies a building it owns from "owner-occupied" to "investment property." The fair value of the building is greater than its carrying value. Under the fair value model for investment property, the firm will recognize a gain: A)only if it reverses a previously recognized loss. B)equal to the difference between fair value and carrying value. C)in other comprehensive income but not on the income statement.

A When reclassifying a property from owner-occupied to investment property and using the fair value model for valuation of investment property, IFRS specifies that the firm should treat the event as a revaluation, recognizing a gain only if it reverses a previously recognized loss. (Study Session 8, Module 26.4, LOS 26.n)

For a firm that uses the cost basis for valuing its long-lived assets, fair value is a consideration when calculating a gain or loss on: A)exchanging an asset. B)selling an asset. C)abandoning an asset.

A disposal: exchange with money or other assets When exchanging one long-lived asset for another, a gain or loss is recorded as the difference between the old asset's carrying value and its fair value (or the fair value of the asset received in exchange, if that value is more evident). When selling an asset, the gain or loss is the difference between the carrying value and the cash received. When abandoning an asset, a firm records a loss equal to the carrying value of the asset. (Study Session 8, Module 26.3, LOS 26.j)

Three years ago, Ranchero Corporation purchased equipment for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the equipment was greater than its book value. No impairment losses have been recognized on the equipment. Assuming Ranchero follows International Financial Reporting Standards, what is the impact on its total asset turnover ratio and return on equity of reporting the value of the equipment on the balance sheet at fair value? A)Both will decrease. B)Both will increase. C)Only one will increase. Explanation

A it is a revaluation scenario.

In the year after an impairment charge on a finite-lived identifiable intangible asset, compared to not taking the charge, net income is most likely to be: A)lower. B)higher. C)unaffected.

B

Trotters Diversified has 10,000 convertible bonds with a 6.0% coupon and $1,000 par value, each convertible into 8 shares of common stock. How many shares related to the convertible bonds should be included in the denominator of basic EPS? A)10,000. B)0 C)80,000.

B

Which type of a capital structure contains no dilutive securities? A)Basic. B)Simple. C)Complex.

B

Continental Corporation reported sales revenue of $150,000 for the current year. If accounts receivable decreased $10,000 during the year and accounts payable increased $4,000 during the year, cash collections were: A)$154,000. B)$160,000. C)$164,000.

B $150,000 sales + $10,000 decrease in accounts receivable = $160,000 cash collections. The change in accounts payable does not affect cash collections. Accounts payable result from a firm's purchases from its suppliers. (Module 25.3, LOS 23.f, 23.g)

Assume that the exercise price of an option is $5, and the average market price of the stock is $8. Assuming 816 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted EPS? A)510. B)306. C)816.

B (816)(5) = $4,080. $4,080 / $8 = 510 shares. 816 − 510 = 306 new shares or [(8 − 5) / 8]816 = 306. (Study Session 7, Module 21.4, LOS 21.h)

CC Corporation reported the following inventory transactions (in chronological order) for the year: Purchase Sales 40 units at $30 13 units at $35 20 units at $40 35 units at $45 90 units at $50 60 units at $60 Assuming inventory at the beginning of the year was zero, calculate the year-end inventory using FIFO and LIFO. FIFO LIFO A)$5,220 $1,040 B)$2,100 $1,280 C)$2,100 $1,040

B 108 units were sold (13 + 35 + 60) and 150 units were available for sale (beginning inventory of 0 plus purchases of 40 + 20 + 90), so there are 150 - 108 = 42 units in ending inventory. Under FIFO, units from the last batch purchased would remain in inventory: 42 × $50 = $2,100. Under LIFO, the first 42 units purchased would be in inventory: (40 × $30) + (2 × $40) = $1,280. (LOS 21.d)

Given the following information, how many shares should be used in computing diluted EPS? 300,000 shares outstanding. 100,000 warrants exercisable at $50 per share. Average share price is $55. Year-end share price is $60. A)9,091. B)90,909. C)309,091.

B 300,000+100,000*$50/$55=309,091

Which of the following would most likely result in higher gross profit margin, assuming no fixed costs? A)A 10% increase in the number of units sold. B)A 5% decrease in production cost per unit. C)A 7% decrease in administrative expenses.

B A 5% decrease in per unit production cost will increase gross profit by reducing cost of goods sold. Assuming no fixed costs, gross profit margin will remain the same if sale quantities increase. Administrative expenses are not included in gross profit margin. (LOS 21.j)

Do the following characteristics have to be met in order to classify a liability as current on the balance sheet? Characteristic #1 - Settlement is expected within one year or operating cycle, whichever is less. Characteristic #2 - Settlement will require the use of cash within one year or operating cycle, whichever is greater. Characteristic #1 Characteristic #2 A)No Yes B)No No C)Yes No

B A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services. (Study Session 7, Module 22.3, LOS 22.d)

At the beginning of the year, a company that reports under U.S. GAAP purchased some bonds for $80,000. During the year, the bonds paid interest of $4,000. At the end of the year, the bonds had a market value of $75,000. What amounts of investment income should the company report on its income statement if the bonds are treated as trading securities and if they are treated as available-for-sale securities? Trading Available-for-sale A)($1,000) ($1,000) B)($1,000) $4,000 C)($5,000) 0

B A loss of $1,000 is recognized if the securities are considered trading securities ($4,000 interest − $5,000 unrealized loss). Income is $4,000 if the investment in Company S bonds is considered available-for-sale. (Module 22.6, LOS 22.e)

An analyst who needs to model and forecast a company's earnings for the next three years would be least likely to: A)assume that key financial ratios will remain unchanged for the forecast period. B)use common-size financial statements to estimate expenses as a percentage of net income. C)examine the variability of the predicted outcomes by performing a sensitivity or scenario analysis.

B An earnings forecast model would typically estimate expenses as a percentage of sales. (LOS 24.g)

Which of these steps is least likely to be a part of the financial statement analysis framework? A)State the purpose and context of the analysis. B)Determine whether the company's securities are suitable for the client. C)Adjust the financial statement data and compare the company to its industry peers.

B Determining the suitability of an investment for a client is not one of the six steps in the financial statement analysis framework. The analyst would only perform this function if he also had an advisory relationship with the client. Stating the objective and processing the data are two of the six steps in the framework. The others are gathering the data, analyzing the data, updating the analysis, and reporting the conclusions. (Module 19.2, LOS 19.f)

According to International Financial Reporting Standards, how do cash dividends received from trading securities and financial securities measured at fair value through OCI affect net income? Trading securities Fair value through OCI A)Increase No effect B)Increase Increase C)No effect Increase

B Dividends received from trading securities and available-for-sale securities are recognized in the income statement. The difference in trading and available-for-sale classifications relates to the treatment of any unrealized gains and losses. (Study Session 7, Module 22.6, LOS 22.e)

To calculate free cash flow to the firm based on operating cash flow, an analyst should add interest expense net of tax and subtract: A)noncash charges. B)fixed capital investment. C)working capital investment.

B FCFF can be calculated from CFO by adding interest expense net of tax and subtracting fixed capital investment. (Module 25.4, LOS 23.i)

An analyst gathered the following information about a company: 100,000 common shares outstanding from the beginning of the year. Earnings of $125,000. 1,000, 7%, $1,000 par bonds convertible into 25 shares each, outstanding as of the beginning of the year. The tax rate is 40%. The company's diluted EPS is closest to: A)$1.22. B)$1.25. C)$1.34.

B First, calculate basic EPS = $125,000/100,000=$1.25. Next, check if the convertible bonds are dilutive: numerator impact = (1,000 × $1,000 × 7%) × (1 - 40%) = $42,000 denominator impact = (1,000 × 25) = 25,000 shares per share impact=$42,000/25,000 shares=$1.68per share impact=$42,00025,000 shares=$1.68 Since $1.68 is greater than the basic EPS of $1.25, the bonds are antidilutive. Thus, diluted EPS = basic EPS = $1.25. (LOS 21.g, 21.h)

The revaluation model for investment property is permitted under: A)both IFRS and U.S. GAAP. B)neither IFRS nor U.S. GAAP. C)IFRS, but not U.S. GAAP.

B IFRS: cost model , fair value model

Which of the following statements about indefinite-lived intangible assets is most accurate? A)They are amortized on a straight-line basis over a period not to exceed 40 years. B)They are reported on the balance sheet indefinitely不确定的. C)They never appear on the balance sheet unless they are internally developed（这个特指software，而且只有USGAPP可以capitalized）.

B Indefinite-lived intangible assets are not amortized; rather, they are reported on the balance sheet indefinitely unless they are impaired. (LOS 26.f)

Kamp, Inc., sells specialized bicycle shoes. At year-end, due to a sudden increase in manufacturing costs, the replacement cost per pair of shoes is $55. The original cost is $43, and the current selling price is $50. The normal profit margin is 10% of the selling price, and the selling costs are $3 per pair. Using the lower of cost or market method under U.S. GAAP, which of the following amounts should each pair of shoes be reported on Kamp's year-end balance sheet? A)$42. B)$43. C)$47.

B Market is equal to the replacement cost as long as replacement cost is within a specific range. The upper bound is net realizable value (NRV) which is equal to the selling price ($50) less selling costs ($3) for a NRV of $47. The lower bound is NRV ($47) less normal profit margin (10% of selling price = $5) for a net amount of $42. Because replacement cost is greater than NRV ($47), market equals NRV ($47). Additionally, we have to use the lower of cost ($43) or market ($47) principle, so the shoes should be recorded at a cost of $43. (Module 27.4, LOS 25.g)

Assuming U.S. GAAP, use the following data to answer Questions 2 through 4. Net income $45 Depreciation 75 Taxes paid 25 Interest paid 5 Dividends paid 10 Cash received from sale of company building 40 Issuance 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 (converted of debt/bond, 中间没有直接与cash挂钩） Paid off long-term bank borrowings 15 Profit on sale of building 20 Cash flow from operations is: A)$70. B)$100. C)$120. Cash flow from financing activities is: A)$30. B)$55. C)$75.

B Net income − profit on sale of building + depreciation = 45 − 20 + 75 = $100. Note that taxes and interest are already deducted in calculating net income, and that the profit on the sale of the building should be subtracted from net income. (LOS 23.a, 23.f) A Sale of preferred stock + issuance of bonds - principal payments on bank borrowings - repurchase of common stock - dividends paid = 35 + 50 − 15 − 30 − 10 = $30. Note that we did not include $45 of debt retired through issuance of common stock since this was a noncash transaction. Knowing how to handle noncash transactions is important. (LOS 23.a, 23.f)

For the year ended December 31, 2007, Gremlin Corporation reported the following transactions: Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million. Purchased a patent for $3.3 million cash. Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank. Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade. Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million. Calculate Gremlin's cash flow from investing activities and cash flow from financing activities for the year ended December 31, 2007. CFI CFF A)$2.7 million outflow $6.0 million inflow B)$6.0 million outflow $2.7 million inflow C)$1.7 million inflow $1.3 million outflow

B Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement. (Study Session 7, Module 23.1, LOS 23.b)

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 Sub? A)$0. B)$500,000. C)$1,500,000.

B Purchase price of $7,500,000 [$15 per share × 500,000 shares] - fair value of net assets of $7,000,000 [$6,000,000 book value + $1,000,000 increase in property and equipment] = goodwill of $500,000. (Module 24.5, LOS 22.e)

The following information is from the balance sheet of Silverstone Company: Net Income for 5/1/20X5 to 5/31/20X5: $8,000 Balance 5/01/20X5 Account Balance 5/31/20X5 $2,000 Inventory $1,750 $1,200 Prepaid expense $1,700 $800 Accum. Depr. $975 $425 Accounts payable $625 $650 Bonds payable $550 Using the indirect method, calculate the cash flow from operations for Silverstone Company as of 5/31/20X5: A)Increase in cash of $7,725. B)Increase in cash of $8,125. C)Increase in cash of $8,025.

B Silverstone Company's cash flow from operations would be calculated as +Net Income $8,000 + Inventory $250 - Prepaid exp. $500 + Depreciation $175 + A/P $200 = $8,125. Bonds payable is a financing activity and would not be included in the cash flow from operations. The indirect method takes the change in the non-cash accounts and decreases or increases net income to get to the change in cash flow. (Study Session 7, Module 23.2, LOS 23.f)

The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end? A)6,875,000 shares. B)7,500,000 shares. C)5,625,000 shares.

B Stock splits and stock dividends are applied to all shares that existed at the beginning of the period and shares that were issued or repurchased during the period, but prior to the split or dividend. For SSP, the 5 million beginning-of-year shares outstanding are adjusted to 7.5 million shares (5.0 × 3/2) as a result of the 3:2 split.

In the financial statement analysis framework, using the data to address the objectives of the analysis and deciding what conclusions or recommendations the information supports is best described as: A)reporting the conclusions. B)analyzing and interpreting the data. C)processing the data.

B The financial statement analysis framework consists of six steps: State the objective and context. Determine what questions the analysis is meant to answer, the form in which it needs to be presented, and what resources and how much time are available to perform the analysis. Gather data. Acquire the company's financial statements and other relevant data on its industry and the economy. Ask questions of the company's management, suppliers, and customers, and visit company sites. Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets. Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports. Report the conclusions or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations. Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary. (Study Session 6, Module 19.2, LOS 19.f)

Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below: Cash from sale of truck of $7,000. Cash salaries paid of $17,000. Cash from customers of $45,000. Depreciation expense of $5,500. Interest on bank line of credit of $1,000. Cash paid to suppliers of $22,000. Other cash expenses, including rent, of $6,300. No taxes due. Using this information and U.S. GAAP, what is the cash flow from operations for the month? A)$11,200. B)-$1,300. C)-$300.

B The format of the question information suggests the use of the direct cash flow method. In this method, depreciation is not a component of cash flow from operations. Cash flow from operations = (all numbers in thousands of dollars) 45 - 17 - 22 - 6.3 - 1.0 = -1.3, or -$1,300. (Study Session 7, Module 23.1, LOS 23.a)

The most likely result of increasing the estimated useful life of a depreciable asset is that: A)asset turnover will increase. B)net profit margin will increase. C)return on assets will decrease.

B The longer the estimated useful life of an asset, the lower the annual depreciation expense charged to operations. Lower depreciation expense results in higher net income, profit margins, and contributions to shareholder's equity. (Study Session 8, Module 26.2, LOS 26.g)

Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows? A)Principal payments received from loans made to others. B)Purchase of plant and equipment used in the manufacturing process with financing provided by the seller. C)Sale of held-to-maturity securities for cash.

B The purchase of plant and equipment with financing provided by the seller is a non-cash transaction. Non-cash transactions are disclosed separately in a note or supplementary schedule to the cash flow statement. (Study Session 7, Module 23.1, LOS 23.b)

The ZZT Company went public on June 1, 2004, by issuing 25 million shares of common stock. In 2005, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2005? A)10,416,667. B)25,000,000. C)14,583,333.

B The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Since no new common shares were issued in 2005, and there were 25 million shares at the end of 2004, there are 25 million shares at the end of 2005. Note that the preferred stock shares do not affect the common shares outstanding. (Study Session 7, Module 21.4, LOS 21.g)

Selected data from Alpha Company's balance sheet at the end of the year follows: Investment in Beta Company, at fair value $150,000 Deferred taxes $86,000 Common stock, $1 par value $550,000 Preferred stock, $100 par value $175,000 Retained earnings $893,000 Accumulated other comprehensive income $46,000 The investment in Beta Company had an original cost of $120,000. Assuming the investment in Beta is classified as available-for-sale, Alpha's total owners' equity at year-end is closest to: A)$1,618,000. B)$1,664,000. C)$1,714,000.

B Total stockholders' equity consists of common stock of $550,000, preferred stock of $175,000, retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already included in accumulated other comprehensive income. (LOS 22.f)

Lucille Edgewater, CFA, is analyzing Pfaff Company, which reports its long-lived assets using the revaluation model. Edgewater needs to determine 1) what Pfaff's carrying value of property, plant and equipment would be under the historical cost model, and 2) which of Pfaff's intangible assets have finite useful lives. Will these items be disclosed in Pfaff's financial statements? A)Neither of these items is required to be disclosed. B)Both of these items are required to be disclosed. C)Only one of these items is required to be disclosed.

B Under IFRS, firms that use the revaluation model for PP&E must disclose its carrying value under the historical cost model. Firms must also disclose whether the useful lives of intangible assets are finite or indefinite. (Study Session 8, Module 26.4, LOS 26.l)

Under IFRS, if a firm reports investment property using the fair value model, unrealized gains and losses on investment property are: A)disclosed in the financial statement notes. B)recognized on the income statement. C)recognized in other comprehensive income.

B Under the fair value model for investment property, unrealized gains and losses are recognized on the income statement. (Study Session 8, Module 26.4, LOS 26.n)

Two years ago, Metcalf Corp. purchased machinery for $800,000. At the end of last year, the machinery had a fair value of $720,000. Assuming Metcalf uses the revaluation model, what amount, if any, is recognized in Metcalf's net income this year if the machinery's fair value is $810,000? A)$0. B)$80,000. C)$90,000.

B Under the revaluation method, Metcalf reports the equipment on the balance sheet at fair value. At the end of last year, an $80,000 loss was recognized (from $800,000 to $720,000) in the income statement. Any recovery is recognized in the income statement to the extent of the loss. Any remainder is recognized in shareholders' equity as revaluation surplus. Thus, at the end of this year, an $80,000 gain is recognized in the income statement, and a $10,000 revaluation surplus is recognized in shareholders' equity. (LOS 26.h)

At the beginning of the year, Triple W Corporation purchased a new piece of equipment to be used in its manufacturing operation. The cost of the equipment was $25,000. The equipment is expected to be used for 4 years and then sold for $4,000. Depreciation expense to be reported for the second year using the double-declining-balance method is closest to: A)$5,250. B)$6,250. C)$7,000.

B Year 1: (2 / 4) × 25,000 = $12,500. Year 2: (2 / 4) × (25,000 - 12,500) = $6,250.

A firm's purchases and sales during a period occur in the following order: Beginning inventory3 units @ $390 per unitPurchase7 units @ $385 per unitSale5 unitsPurchase4 units @ $380 per unitSale8 unitsPurchase5 units @ $370 per unit Using LIFO and a perpetual inventory system, the firm's cost of sales for the period is: A)$4,605. B)$4,995. C)$5,145.

B 原则：货不购卖的时候就往回一级级找余下来的货，每一级都要注意之前有没有卖过，即还剩多少可以卖。 The cost of the first five units sold is $385 per unit. Of the next eight units sold, the cost of four of them is $380 per unit, two have a cost of $385 per unit, and two have a cost of $390 per unit. Cost of sales = 5 × $385 + 4 × $380 + 2 × $385 + 2 × $390 = $4,995. (LOS 25.c)

A firm revalues its long-lived assets upward. All other things equal, which of the following financial impacts is least likely to occur? A)Higher earnings in the revaluation period. B)Lower solvency ratios. C)Higher profitability in the periods after revaluation.

Because the asset has now been increased to a higher depreciable base, there will now be higher depreciation expense and therefore, lower profitability in the periods after revaluation. There could be higher earnings in the revaluation period because there may be impairment losses that can be reversed on the income statement. Otherwise, there will be an adjustment to earnings through other comprehensive income. Solvency ratios (i.e. debt to equity) will decrease since the increase in assets will be balanced by an increase in equity. Higher denominators and unchanged numerators will result in lower solvency ratios. (Study Session 8, Module 26.3, LOS 26.k) Related MaterialSchweserNotes - Book 3

Under U.S. GAAP, the LIFO reserve is a required financial statement disclosure: A)for all firms except those that use the specific identification cost method. B)for firms that use either the LIFO or FIFO inventory cost methods. C)only for firms that use the LIFO inventory cost method.

C

Red Company immediately expenses its development costs while Black Company capitalizes its development costs. All else equal, Red Company will: A)show smoother reported earnings than Black Company. B)report higher operating cash flow than Black Company. C)report higher asset turnover than Black Company.

C As compared to a firm that capitalizes its expenditures, a firm that immediately expenses expenditures will report lower assets. Thus, asset turnover (revenue / average assets) will be higher for the expensing firm (lower denominator). (LOS 26.c)

An analyst will most likely use the average age of depreciable assets to estimate the company's: A)cash flows. B)earnings potential. C)near-term financing requirements.

C Average age of depreciable assets is useful for estimating financing required for major capital expenditures in the near term to replace depreciated assets. (Study Session 8, Module 26.4, LOS 26.m)

Which of the following is least likely considered a nonoperating transaction from the perspective of a manufacturing firm? A)Dividends received from available-for-sale securities. B)Interest expense on subordinated debentures. C)Accruing bad debt expense for goods sold on credit.

C Bad debt expense is an operating expense. The other choices are nonoperating items from the perspective of a manufacturing firm. (LOS 21.f)

Which of the following most accurately lists a required reporting element that is used to measure a company's financial position and one that is used to measure a company's performance? Position Performance A)Assets Liabilities B)Income Expenses C)Liabilities Income

C Balance sheet reporting elements (assets, liabilities, and owners' equity) measure a company's financial position. Income statement reporting elements (income, expenses) measure its financial performance. (LOS 20.c)

All other things held constant, which of the following transactions will increase a firm's current ratio if the ratio is greater than one? A)Accounts receivable are collected and the funds received are deposited in the firm's cash account. B)Fixed assets are purchased from the cash account. C)Accounts payable are paid with funds from the cash account.

C Current ratio = current assets / current liabilities. If CR is > 1, then if CA and CL both fall, the overall ratio will increase. (Module 26.2, LOS 24.b) e.g.5/4 is smaller than 4/3

An analyst has gathered the following information about Barnstabur, Inc., for the year: Reported net income of $30,000. 5,000 shares of common stock and 2,000 shares of 8%, $90 par preferred stock outstanding during the whole year. Barnstabur, has $60,000 of 6.0% convertible bonds outstanding, with each of the 60 bonds convertible into 110 shares of Barnstabur common stock. If Barnstabur's effective tax rate is 40%, what will Barnstabur report for diluted earnings per share (EPS)? A)$1.53. B)$1.66. C)$2.36.

C Diluted EPS = adjusted earnings after conversion (EAC) / weighted average plus potential common shares outstanding. Step 1: Calculate Adjusted EAC adjusted EAC:net income - preferred dividends+after-tax interest on convertible debt=adjusted earnings available for common shares preferred dividends = (0.08)(90)(2,000) = 14,400 convertible debt interest = (60,000)(0.06)(1 - 0.40) = 2,160 adjusted EAC = (30,000 - 14,400 + 2,160) = $17,760 Step 2: Calculate Weighted average plus potential common shares outstanding. weighted average common shares=5,000shares from conversion of convertible bonds= (60 × 110)=6,600weighted ave. plus potential common shares outst.=11,600 Step 3: Calculate Diluted EPS Diluted EPS = 17,760 / 11,600 = $1.53. (Study Session 7, Module 21.4, LOS 21.h)

According to the Financial Accounting Standards Board, what is the appropriate measurement basis for equipment used in the manufacturing process and inventory that is held for sale? Equipment Inventory A)Historical cost Historical cost B)Fair value Lower of cost or market C)Historical cost Lower of cost or market

C Equipment (PP&E)

Accelerated depreciation methods for financial reporting are most likely to have which of the following effects on a company's financial ratios during the early years of an asset's life? A)Lower current ratio. B)Lower debt-to-equity ratio. C)Higher asset turnover ratio.

C Explanation A:下降的是non-current asset 不是CA Given the higher depreciation expense recorded in the early years under accelerated depreciation methods, total assets will be lower, causing a higher asset turnover ratio versus straight-line. (Study Session 8, Module 26.2, LOS 26.e)

A firm that uses LIFO for inventory accounting reported COGS of $300,000 and ending inventory of $200,000 for the current period, and a LIFO reserve that decreased from $40,000 to $35,000 over the period. If the firm had reported using FIFO, its gross profit would have been: A)the same. B)$5,000 higher. C)$5,000 lower.

C FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve) Ending LIFO reserve - beginning LIFO reserve = $35,000 - $40,000 = -$5,000 With FIFO COGS $5,000 greater than LIFO COGS, gross profit under FIFO would be $5,000 lower than under LIFO. (LOS 25.f)

In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in: A)higher cost of sales, lower income, lower cash flows, and lower inventory. B)lower cost of sales, higher income, identical cash flows, and lower inventory. C)higher cost of sales, lower income, higher cash flows, and lower inventory.

C In periods of rising prices and stable or increasing inventory quantities, the LIFO method will result in higher cost of sales, lower taxes, lower net income, lower inventory balances, lower working capital, and higher cash flows (inventory down, assets down, CFO up). (Study Session 8, Module 25.2, LOS 25.d)

Joplin Corporation reports the following in its year-end financial statements: Net income of $43.7 million. Depreciation expense of $4.2 million. Increase in accounts receivable of $1.5 million. Decrease in accounts payable of $2.3 million. Increase in capital stock of $50 million. Sold equipment with a book value of $7 million for $15 million after-tax. Purchased equipment for $35 million. Joplin's free cash flow to the firm (FCFF) is closest to: A)$66 million. B)$24 million. C)$16 million.

C Operating cash flow is equal to $36.1 million ($43.7 million net income + $4.2 million depreciation expense − $8 million gain on sale − $1.5 million increase in receivables − $2.3 million decrease in payables). Net capital expenditures are equal to $20 million ($35 million equipment purchased − $15 million proceeds from sale). Free cash flow to the firm is equal to $16.1 million ($36.1 million operating cash flow − $20 million net capital expenditures). (Study Session 7, Module 23.4, LOS 23.i)

Martin, Inc. had the following transactions during 20X7: Purchased new fixed assets for $75,000. Converted $70,000 worth of preferred shares to common shares. Received cash dividends of $12,000. Paid cash dividends of $21,000. Repaid mortgage抵押贷款(debt) principal of $17,000. Assuming Martin follows U.S. GAAP, which of the following amounts represents Martin's cash flows from investing and cash flows from financing in 20X7, respectively? Cash flows from investing Cash flows from financing A)($5,000) ($21,000) B)($75,000) ($21,000) C)($75,000) ($38,000)

C Purchased new fixed assets for $75,000 - cash outflow from investing Converted $70,000 of preferred shares to common shares - noncash transaction Received dividends of $12,000 - cash inflow from operations Paid dividends of $21,000 - cash outflow from financing Mortgage repayment of $17,000 - cash outflow from financing CFI = -75,000 CFF = -21,000 - 17,000 = -$38,000 (LOS 23.a, 23.f)

Which of the following would be least likely to cause a change in investing cash flow? A)The sale of a division of the company. B)The purchase of new machinery. C)An increase in depreciation expense.

C Some expenses such as depreciation expense, amortization expense and depletion expense are non-cash expenses. Depreciation does not represent a cash flow. To the extent that it affects the firm's taxes, an increase in depreciation changes operating cash flows, but not investing cash flows. (LOS 23.a)

Which of the following organizations is least likely involved with enforcing compliance with financial reporting standards? A)Financial Conduct Authority. B)Securities and Exchange Commission. C)International Accounting Standards Board.

C The IASB is a standard-setting body. The Securities and Exchange Commission (in the United States) and the Financial Conduct Authority (in the United Kingdom) are regulatory authorities. (LOS 20.b)

A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financial statements prepared for shareholders, the company may: A)use any other inventory method under generally accepted accounting principles (GAAP). B)use the FIFO method, but must disclose a LIFO reserve. C)only use the LIFO method.

C The LIFO conformity rule in the U.S. requires firms to use LIFO for their financial statements if they use LIFO for income tax purposes. (Study Session 8, Module 25.1, LOS 25.b)

An analyst determined the following information concerning Franklin, Inc.'s stamping machine: Acquired seven years ago for $22 million Straight line method used for depreciation Useful life estimated to be 12 years Salvage value originally estimated to be $4 million The stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. Under U.S. GAAP, the stamping machine is: A)not impaired. B)impaired because expected salvage value has declined. C)impaired because its carrying value exceeds expected future cash flows.

C The carrying value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 7 years was ($22,000,000 - $4,000,000) / 12 × 7 = $10,500,000, so carrying value is $22,000,000 - $10,500,000 = $11,500,000. Because the $11,500,000 carrying value is more than expected future cash flows of (5 × $1,500,000) + $1,000,000 = $8,500,000, the stamping machine is impaired. (Study Session 8, Module 26.3, LOS 26.i)

Torval, Inc. retires debt securities by issuing equity securities. This is considered a: A)cash flow from investing. B)cash flow from financing. C)noncash transaction.

C The exchange of debt securities for equity securities is a noncash transaction. (LOS 23.b)

Which principle requires that cost of goods sold be recognized in the same period in which the sale of the related inventory is recorded? A)Going concern. B)Certainty. C)Matching.

C The matching principle requires that the expenses incurred to generate the revenue be recognized in the same accounting period as the revenue. (Module 21.2, LOS 21.b)

Which of the following items is least likely considered a cash flow from financing activity under U.S. GAAP? A)Receipt of cash from the sale of bonds. B)Payment of cash for dividends. C)Payment of interest on debt.

C The payment of interest on debt is an operating cash flow under U.S. GAAP. (LOS 23.a)

How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable? A)Unearned revenue is recognized to the extent that costs have been incurred. B)Revenue is recognized to the extent that costs have been incurred. C)Revenue is deferred until the sporting event is held.

C The ticket revenue should not be recognized until it is earned. Even though the tickets are nonrefundable, the seller is still obligated to hold the event. (Module 24.3, LOS 22.e)

Selected information from Gerrard, Inc.'s financial activities in the most recent year was as follows: Net income was $330,000. The tax rate was 40%. 700,000 shares of common stock were outstanding on January 1. The average market price per share for the year was $6. Dividends were paid during the year. 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 for the entire year. 200,000 shares of common stock were issued on March 1. Gerrard, Inc.'s diluted earnings per share (diluted EPS) was closest to: A)$0.289. B)$0.197. C)$0.261.

C To compute Gerrard's basic earnings per share (EPS) ((net income - preferred dividends) / weighted average common shares outstanding), the weighted average common shares outstanding must be computed. 700,000 shares were outstanding from January 1, and 200,000 shares were issued on March 1, so the weighted average is 700,000 + (200,000 × 10 / 12) = 866,667. Basic EPS was $330,000 − (2,000 × $500 × 0.08)) / 866,667 = $0.289. If the convertible preferred shares were converted to common stock, 2,000 × 200 = 400,000 additional common shares would have been issued and dividends on the preferred stock would not have been paid. Diluted EPS was $330,000 / (866,667 + 400,000) = $0.261. (Study Session 7, Module 21.4, LOS 21.h)

On January 1, 20X4, Cayman Corporation bought manufacturing equipment for $30 million. On December 31, 20X6, Cayman determined the equipment was impaired and recognized a $5 million impairment loss in its income statement. As of December 31, 20X7, the fair value of the equipment exceeded the book value by $7 million. Cayman may recognize a gain in its 20X7 income statement if it reports under: A)either IFRS or U.S. GAAP. B)neither IFRS nor U.S. GAAP. C)IFRS, but not U.S. GAAP.

C U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the recovery is reported in the income statement to the extent that the previous downward adjustment (loss) was reported in net income. Any further increase in value is reported as revaluation surplus in shareholders' equity. (Study Session 8, Module 26.3, LOS 26.h)

The write-off报废 of obsolete老旧 equipment would be classified as: A)operating cash flow. B)investing cash flow. C)no cash flow impact.

C Write-off of obsolete equipment has no cash flow impact. (LOS 23.a)

Issuing bonds would be classified as: A)investing cash flow. B)financing cash flow. C)no cash flow impact.

Issuing bonds would be classified as financing cash flow. (LOS 23.a)