FINN 3013 Exam 1 Practice Questions
Changing an accounting estimate?
Is reported prospectively
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
For accounting purposes, which one of the following is an essential characteristic of an asset?
It embodies a probable future economic benefit.
Which of the following would be least likely to cause a change in investing cash flow?
An increase in depreciation expense
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
An unusual event not meeting the criteria for an extraordinary item should be reported in the financial statements:
As a separate item in operating (non-operating) revenues or expenses if material and supplemented by a footnote if deemed appropriate.
Suppose an analyst uses the statement of cash flows to calculate free cash flow to the firm (FCFF) as cash flow from operations less fixed capital investment, and free cash flow to equity (FCFE) as FCFF plus net borrowing. The firm has short- and long-term debt on its balance sheet. Has the analyst correctly stated, overstated, or understated FCFF and FCFE?
understated/correct
An analyst is least likely to use disclosures of accounting policies and estimates to evaluate:
what policies are likely to be modified in future periods
An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used?
Percentage-of-completion method.
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
Which of the following transactions would be classified as an operating activity?
Purchase of materials used in production.
Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)?
Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest.
Which of the following statements correctly describes the financial statement elements reported on the income statement of a company?
The income (loss) from discontinued operations is reported net of tax.
Brown Company reported the following liability and shareholders' equity balances on its December 31,20X0 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 Gerrard, Inc.'s financial activities in the year 2004 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 was $6 in 2006. Dividends were paid in 2006. 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 issued in 2005. 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
Accrued liabilities are disclosed on the financial statements by?
Including them as a liability on the balance sheet
Which of the following correctly describes items on the balance sheet?
Some items that are of financial value are not included
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:
$1.25
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 closest to:
$1.29
An analyst has gathered the following information about a company: Income Statement for the Year 2005 Sales $1500 Expenses COGS $1,300 Depreciation 20 Goodwill 10 lnt Expenses 40 Total expenses 1,370 Income from cont. op. 130 Gain on sale 30 Income before tax 160 Income tax 64 Net Income $96 Additional Information Dividends paid 30 Common stock sold 20 Equipment purchased 50 Bonds issued 80 Fixed asset sold for 60 (onginal cost of $100 with accumulated depreciation of $70) Accounts receivable decreased by 30 Inventory decreased by 20 Accounts payable increased by 20 Wages payable decreased by 10 What is the cash flow from investing?
$10
Given the following information, calculate free cash flow to equity: • Net income= $50. • Working capital investment = $4. • Beginning gross fixed assets = $90;ending gross fixed assets = $136. • Beginning accumulated depreciation = $30; ending accumulated depreciation = $40. • Depreciation expense = $27. • Capital expenditures = $65. • Net borrowing = $0. In addition, a piece of equipment with an original book value of $19 was sold for $10. The equipment had a book value at the time of the sale of $2. The gain was classified as unusual. Free cash flow to equity is closest to
$10
The Better Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, BB had costs of $30 million. The Better Building Company's reported profit for the first year of the contract, using the percentage-of-completion method, is:
$10 million ($30/$75)($100-$75) = $10
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
Carpenter Corporation reported the following statement of shareholders' equity as of December 31, 2006: -common stock at par $600,000 -additional paid-in-capital $900,000 -Treasury stock $(200,000) -retained earnings $10,500,000 -accumulated other comprehensive income $450,000 -$12,250,000 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.
$11,900,000/$515,000
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?
$132,000/$139,000
AAA has a contract to build a building for $ 100,000 with an estimated time to completion of three years. A reliable cost estimate for the project is $60,000. In the first year of the project, AAA incurred costs totaling $24,000. How much profit should AAA report at the end of the first year under the percentage—of-completion method and the completed—contract method?
$16,000/$0
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, 2004. 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, 2004 is:
$4,600,000
the following account balances are provided for echo company: -cash $25 -accounts payable $45 -long term debt $230 -accounts receivable $125 -retained earnings $55 -net property, plant & equip $300 -short term debt $20 -common stock & additional and total liabilities are:
$450/$295
Ludwig company had the following financial highlights for the year ended September 30, 20X2: net income of $20million; current assets of $60 million; property, plant & equipment of $75 million; goodwill $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 (sharholders' 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?
$500,000
The following cash flow information is available for Benitar, Inc. for its most recent fiscal year ($ 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):
$705/$274
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 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?
$75,000/$75,000
An analyst following Barlow Energy has compiled the following information in preparation for additional analysis she has to include in a report she has been asked to produce (data is in hundreds of millions of $): • Preferred share dividends: $14 • Net income available to common: $125 • Investment in working capital: $30 • Investment in fixed capital: $100 • Net new borrowing: $40 • Depreciation: $50 • Tax rate: 40%. • Market value of debt is $600 and interest on this debt is 7.5% The current FCFE for Barlow Energy is closest to:
$85
An analyst following Barlow Energy has compiled the following information in preparation for additional analysis she has to include in a report she has been asked to produce (data is in hundreds of millions of $): • Preferred share dividends: $14 • Net income available to common: $125 • Investment in working capital: $30 • Investment in fixed capital: $100 • Net new borrowing: $40 • Depreciation: $50 • Tax rate: 40%. • Market value of debt is $600 and interest on this debt is 7.5% The current FCFF for Barlow Energy is closest to:
$86
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?
($1,000)/$4,000
Project cost estimate = $10 mil; contract totals $12 mil; $2 mil of costs occur in Years 1 and 2; invoiced amounts $4 mil in Year 1 and $3 mil in Year 2; $1 mil in cash collected each year. Year 2 net income under percentage of completion is:
(2/10)(12 mil - 10 mil) = $400,000
Return on equity using the traditional DuPont formula equals:
(net profit margin) (total asset turnover) (financial leverage multiplier).
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
Which of the following statements regarding the U.S. Financial Accounting Standards Board (FASB) is correct?
. The standards issued by the FASB are only one possible source of U.S. GAAP.
Balance Sheet Assets Year 2006 Year 2007 Cash 200 450 Accounts Receivable 600 660 Inventory 500 500 Total CA 1300 1660 Plant. prop. equip 1000 1580 Total Assets 2600 3240 Liabilities Accounts Payable 500 550 Long term debt 700 1052 Total liabilities 1200 1602 Equity Common Stock 400 538 Retained Earnings 1000 1100 Total Liabilities & Equity 2600 3240 Income Statement Sales 3000 Cost of Goods Sold (1000) Gross Profit 2000 SG&A 500 Interest Expense 151 EBT 1349 Taxes (30%) 405 Net Income 944 Which of the following is closest to the company's return on equity (ROE)?
0.62
A firm's financial statements reflect the following: EBIT $2,000,000 Sales $16,000,000 Interest expense $900,000 Total assets $18,400,000 Equity $7,000,000 Effective tax rate 35% Dividend rate 28% Current liabilities $1,400,000 Based on this information and assuming that the firm's debt has a cost of 9% and has been outstanding for a full year, what is the firm's total debt ratio and interest coverage ratio?
0.62/2.22
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?
1.1/0.8/0.6
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
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
309,091
Analysis has generated the following data: Tax rate 35% Equity multiplier 2.7 Net profit margin 4.6% Equity turnover 5.2 ROE is closest to:
24%
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 securities would least likely be found in a simple capital structure?
3%, $100 par value convertible preferred.
An analyst had gathered the following information about a company: -50,000 common shares outstanding from the beginning of the year -warrants outstanding all year on 50,000 shares, exercisable at $20 per share -Stock is selling at year end for $25 -the average price of the company's stock for the year was $15 How many shares should be used in calculating the company's diluted EPS:
50,000
EBIT $2,000,000 Sales $16,000,000 Interest expense $900,000 Total assets $12,300,000 Equity $7,000,000 Effective tax rate 35% Dividend payout rate 28% Based on this information, what is the firm's sustainable growth rate
7.35%
Balance Sheet Assets Year 2003 Year 2004 Cash 500 450 Accounts Receivable 600 660 Inventory 500 550 Total CA 1300 1660 Plant, prop. equip 1000 1250 Total Assets 2600 2,910 Liabilities Accounts Payable 500 550 Long term debt 700 1102 Total liabilities 1200 1652 Equity Common Stock 400 538 Retained Earnings 1000 720 Total Liabilities & 2600 2,910 Equity Income Statement Year 2004 Sales 3000 Cost of Goods (1000) Sold Gross Profit 2000 SG&A 500 Interest 151 Expense EBT 1349 Taxes (30%) 405 Net Income 944 What is the average receivables collection period?
76.7 days
Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Company's cash needs. Harris began by calculating Longhorn's turnover ratios for 2007. After a discussion with Longhorn's management, Harris decides to adjust the turnover ratios for 2008 as follows: 2007 Actual Turnover Expected Increase/ (Decrease) Accounts receivable 5.0 10% Fixed asset 3.0 7% Accounts payable 6.0 (20%) Inventory 4.0 (5%) Equity 5.5 - Total asset 2.3 8% Longhorn's expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year, is closest to:
86 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 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%
Using the indirect method, which of the following is a cash outflow in the operating activities section of a statement of cash flows?
A decrease in deferred tax liabilities.
Which of the following is least likely a change in cash flow from operations under U.S. GAAP?
A decrease in notes payable.
Which of the following would least likely increase pretax income?
Decreasing the residual value of a depreciable tangible asset
Which of the following items is classified as a liability on the balance sheet?
Capital lease obligations
Which ratio is used to measure a company's internal liquidity?
Current ratio.
when a publicly traded U.S. company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as form:
DEF-14A
Which of the following is least likely a limitation of financial ratios?
Data on comparable firms are difficult to acquire.
Which of the following is most likely to be considered a barrier to developing one universally recognized set of reporting standards?
Different standard-setting bodies of different countries disagree on the best treatment of a particular issue
Which of the following is least likely to be included when calculating comprehensive income?
Dividends paid to common shareholders
Which of the following best reflects the balance sheet carrying values for investments in marketable debt securities classified as indicated?
Fair Value/Amortized Cost
Which of the following best reflects the balance sheet carrying values for investments in marketable debt securities classified as indicated?
Fair value/amortized cost
Which of the following transactions is a financing cash inflow on the statement of cash flows?
Long-term bonds issued.
Which of the following transactions affects owners' equity but does not affect net income?
Foreign currency translation gain
Which principle requires that cost of goods sold be recognized in the same period in which the sale of the related inventory is recorded?
Matching
Which of the following statements regarding basic and diluted earnings per share (EPS) is most accurate?
Neither basic nor diluted EPS considers antidilutive securities in its computation.
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.
Information regarding which of the following items is usually included in the footnotes to financial statements?
Off-balance sheet financing arrangements
Under U.S. GAAP, interest paid would be classified as:
Operating cash flow
If a company recognizes revenue faster than justified, which of the following describes the likely effects on accounts receivable and retained earnings?
Overstated/Overstated
Which of the following is least likely a routinely used operating profitability ratio?
Sales/Total Assets
professional organizations of accountants and auditors that establish financial reporting standards are called:
Standard setting bodies
Which of the following statements is correct?
The Management Discussion and Analysis section of an annual report contains analysis of a company's liquidity and planned capital expenditures.
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 one of the following statements regarding free cash flow is most accurate?
The cash generated from operating activities less capital expenditures is generically referred to as free cash flow.
Which of the following statements about financial reporting standards is least accurate? reporting standards:
are disclosed on form 8K by publicly traded firms in the United States
An analyst can find a company's significant accounting methods and estimates in
both the footnotes to the financial statements and Management's Discussion and Analysis
The process of developing one universally accepted set of accounting standards is best described as:
convergence
which of the following would be most likely to change equity?
declaring a dividend
Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions): E Company G Company Sales 70 90 Cost of Goods Sold (30) (40) Gross Profit 40 50 Sales and Administration (5) (15) Depreciation (5) (10) Operating Profit 30 25 Interest Expense (20) (5) Earnings Before Taxes 10 20 Income Taxes (4) (8) Earnings after Taxes 6 12 The financial risk of E Company, as measured by the interest coverage ratio, is:
higher than 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, they could
increase current assets by 100 or decrease current liabilities by 50
Which of the following items normally appears below operating income (margin) on an income statement?
interest expense
Sale of land would be classified as:
investing cash flow
Regarding the report of independent auditors under U.S. GAAP, the audit report:
must provide an opinion on the firm's internal controls
How would the collection of accounts receivable most likely affect the current and cash ratios?
no effect/increase
Torval, Inc. retires debt securities by issuing equity securities. This is considered a:
noncash transaction.
A company's quick ratio is 1.2. If inventory were purchased for cash, the:
numerator would decrease more than the denominator, resulting in a lower quick ratio.
Sales of inventory would be classified as:
operating cash flow
Under U.S. GAAP, dividends received from investments would be classified as:
operating cash flow
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
Management disclosure of the likely impact of implementing recently issued accounting standards is least likely to:
state that the impact of the standard is impossible to determine.
Which of the following statements is the most accurate?
the SEC requires foreign firms that issue securities in the U.S. to reconcile their financial statements to U.S. GAAP
