CFA study session 7: Financial reporting & analysis

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Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: A. similar barter transactions with unrelated parties. B. similar non-barter transactions with related parties. C. similar non-barter transactions with unrelated parties.

C. similar non-barter transactions with unrelated parties.

An example of an expense classification by function is: A. tax expense. B. interest expense. C. cost of goods sold.

C. cost of goods sold.

Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? A. 1,003,333. B. 1,006,667. C. 1,010,000.

A. 1,003,333.

Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company's income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $10 million, all of which was for the purchase of new equipment. Using the following information from the comparative balance sheets, how much cash did the company receive from the equipment sale? Balance Sheet Item 12/31/2009 12/31/2010 Change Equipment $100 million $105 million $5 million Accum. dep. $40 million $46 million $6 million A. $1 million. B. $2 million. C. $3 million.

A. $1 million.

The following information is extracted from Sweetfall Incorporated's financial statements. REFER TO PAGES 319-320. The amount of cash Sweetfall Inc. paid to suppliers is: A. $25,700. B. $26,702. C. $27,826.

A. $25,700.

Based on Exhibit 1 (REFER TO PAGE 268-269) The quick ratio for Company A is closest to: A. 0.43. B. 0.57. C. 1.00.

A. 0.43.

For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders' equity? A. They are not recognized. B. They flow through retained earnings. C. They are a component of accumulated other comprehensive income.

A. They are not recognized. (recognized only when realized)

Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: Total sales price of items sold during 2009 on consignment was €2,000,000. Total commissions retained by Apex during 2009 for these items was €500,000. How much revenue should Apex report on its 2009 income statement? A. €500,000. B. €2,000,000. C. €1,500,000.

A. €500,000.

An investor worried about a company's long-term solvency would most likely examine its: A. current ratio. B. return on equity. C. debt-to-equity ratio.

C. debt-to-equity ratio.

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is closest to: A. $5.33. B. $5.54. C. $5.94.

B. $5.54.

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Revenue $1,000,000 Returns of goods sold $100,000 Cash collected $800,000 Cost of goods sold $700,000 Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? A. $200,000. B. $900,000. C. $1,000,000.

B. $900,000. (1m - 100k)

Using the information presented in Exhibit 4 (REFER TO PAGES 223-224), the quick ratio for SAP Group at 31 December 2009 is closest to: A. 1.01. B. 1.44. C. 1.54.

B. 1.44.

A company has total liabilities of £35 million and total stockholders' equity of £55 million. Total liabilities are represented on a vertical common-size balance sheet by a percentage closest to: A. 35%. B. 39%. C. 64%.

B. 39%.

Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow? REFER TO PAGE 319 A. Add $2 million. B. Add $6 million. C. Subtract $6 million.

B. Add $6 million.

Which of the following is most likely classified as a current liability? A. Payment received for a product due to be delivered at least one year after the balance sheet date B. Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle C. Payment on debt due in six months for which the company has the unconditional right to defer settlement for at least one year after the balance sheet date

B. Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle

Which statement is most accurate? A common size income statement: A. restates each line item of the income statement as a percentage of net income. B. allows an analyst to conduct cross-sectional analysis by removing the effect of company size. C. standardizes each line item of the income statement but fails to help an analyst identify differences in companies' strategies.

B. allows an analyst to conduct cross-sectional analysis by removing the effect of company size.

An analyst gathered the following information from a company's 2010 financial statements (in $ millions): REFER TO PAGES 317-318 Based only on the information above, the company's 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to: cash received cash paid A 249.7 169.7 B 259.5 174.5 C 259.5 182.1

C 259.5 182.1

Resources controlled by a company as a result of past events are: A. equity. B. assets. C. liabilities.

B. assets.

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes? A. $55,000. B. $60,000. C. $65,000.

A. $55,000.

In 2014, a company using US GAAP made cash payments of $6 million for salaries, $2 million for interest expense, and $4 million for income taxes. Additional information for the company is provided in the table: 2013 2014 Revenue 42 37 Cost of goods sold 18 16 Inventory 36 40 Accounts receivable 22 19 Accounts payable 14 12 Based only on the information given, the company's operating cash flow for 2014 is closest to: A. $6 million. B. $10 million. C. $14 million.

A. $6 million.

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009? A. $600,000. B. $1,000,000. C. $3,000,000.

A. $600,000. (([5m-2m]/5m)*1m)

Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: A. $67 million. B. $79 million. C. $83 million.

A. $67 million.

Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? A. $90 million. B. $100 million. C. $110 million.

A. $90 million.

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income? A. A foreign currency translation adjustment B. An unrealized gain on a security held for trading purposes C. A realized gain on a derivative contract not accounted for as a hedge

A. A foreign currency translation adjustment

Equity equals: A. Assets - Liabilities. B. Liabilities - Assets. C. Assets + Liabilities.

A. Assets - Liabilities.

Based on Exhibit 1 (REFER TO PAGE 268-269), which ratio indicates lower liquidity risk for Company A compared with Company B? A. Cash ratio B. Quick ratio C. Current ratio

A. Cash ratio

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

A. Current ratio.

REFER TO PAGES 318-319 A. Issuance of common stock of $42 million; dividends paid of $10 million. B. Issuance of common stock of $38 million; dividends paid of $10 million. C. Issuance of common stock of $42 million; dividends paid of $40 million.

A. Issuance of common stock of $42 million; dividends paid of $10 million.

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

A. Net income. (all three would appear in the OCF under the direct method)

At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract: Total revenue according to contract $10,000,000 Total expected cost $8,000,000 Cost incurred during 2009 $1,200,000 Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009? A. None. B. $300,000. C. $1,500,000.

A. None.

During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. How much profit will Argo report for 2009 using the cost recovery method? A. None. B. $600,000. C. $1,000,000.

A. None. (1m < 2m)

Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? A. Operating. B. Investing. C. Financing.

A. Operating.

When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders? A. Stock options B. Convertible debt that is dilutive C. Convertible preferred stock that is dilutive

A. Stock options

An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data: FY5 FY4 FY3 Total debt 2,000 1,900 1,750 Total equity 4,000 4,500 5,000 Which of the following would be the analyst's most likely conclusion? A. The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5. B. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5. C. The company is becoming increasingly more liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.

A. The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5. (does not provide direct information about liquidity position)

An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. B. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. C. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.

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

Distinguishing between current and non-current items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as: A. a classified balance sheet. B. an unclassified balance sheet. C. a liquidity-based balance sheet.

A. a classified balance sheet.

The initial measurement of goodwill is most likely affected by: A. an acquisition's purchase price. B. the acquired company's book value. C. the fair value of the acquirer's assets and liabilities.

A. an acquisition's purchase price.

The most likely company to use a liquidity-based balance sheet presentation is a: A. bank. B. computer manufacturer holding inventories. C. software company with trade receivables and payables.

A. bank.

A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company's: A. basic EPS equals its diluted EPS. B. capital structure is considered complex at year-end. C. basic EPS is calculated by using a simple average number of shares outstanding.

A. basic EPS equals its diluted EPS. (A company that issues only common stock, with no financial instruments that are potentially convertible into common stock has a simple capital structure)

The most stringent test of a company's liquidity is its: A. cash ratio. B. quick ratio. C. current ratio.

A. cash ratio.

Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: A. continuing operations. B. discontinued operations. C. other comprehensive income.

A. continuing operations.

An investor concerned whether a company can meet its near-term obligations is most likely to calculate the: A. current ratio. B. return on total capital. C. financial leverage ratio

A. current ratio.

Debt due within one year is considered: A. current. B. preferred. C. convertible.

A. current.

Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3? REFER TO PAGES 282-283. A. The primary use of cash is financing activities. B. The primary source of cash is operating activities. C. Telefónica classifies interest received as an operating activity.

B. The primary source of cash is operating activities.

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

B. 45. (NI = 145-120+10; = 35+ 25 (depreciation) - 5 (change in AR) - 3 (change in inventory) - 7 (change in AP) = 45

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? A. They are not recognized. B. They flow through income into retained earnings. C. They are a component of accumulated other comprehensive income.

B. They flow through income into retained earnings.

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

B. Add operating cash flows to after-tax interest payments and deduct capital expenditures.

Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods? A. An increase or decrease in sales. B. An increase or decrease in financial leverage. C. A more efficient or less efficient use of assets.

B. An increase or decrease in financial leverage.

Under which section of a manufacturing company's cash flow statement are the following activities reported? Item 1: Purchases of securities held for trading Item 2: Sales of securities considered cash equivalents A. Both items are investing activities. B. Both items are operating activities. C. Only Item 1 is an investing activity.

B. Both items are operating activities.

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

B. Investing.

Laurelli Builders (LB) reported the following financial data for year-end 31 December: Common shares outstanding, 1 January 2,020,000 Common shares issued as stock dividend, 1 June 380,000 Warrants outstanding, 1 January 500,000 Net income $3,350,000 Preferred stock dividends paid $430,000 Common stock dividends paid $240,000 Which statement about the calculation of LB's EPS is most accurate? A. LB's basic EPS is $1.12. B. LB's diluted EPS is equal to or less than its basic EPS. C. The weighted average number of shares outstanding is 2,210,000.

B. LB's diluted EPS is equal to or less than its basic EPS.

Which inventory method is least likely to be used under IFRS? A. First in, first out (FIFO). B. Last in, first out (LIFO). C. Weighted average.

B. Last in, first out (LIFO). (not permitted under IFRS)

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

B. Show each line item on the cash flow statement as a percentage of net revenue.

Money received from customers for products to be delivered in the future is recorded as: A. revenue and an asset. B. an asset and a liability. C. revenue and a liability.

B. an asset and a liability.

When a company buys shares of its own stock to be held in treasury, it records a reduction in: A. both assets and liabilities. B. both assets and shareholders' equity. C. assets and an increase in shareholders' equity.

B. both assets and shareholders' equity.

Under IFRS, income includes increases in economic benefits from: A. increases in liabilities not related to owners' contributions. B. enhancements of assets not related to owners' contributions. C. increases in owners' equity related to owners' contributions,

B. enhancements of assets not related to owners' contributions.

All of the following are current assets except: A. cash. B. goodwill. C. inventories.

B. goodwill.

When computing net cash flow from operating activities using the indirect method, an addition to net income is most likely to occur when there is a: A. gain on the sale of an asset. B. loss on the retirement of debt. C. decrease in a deferred tax liability.

B. loss on the retirement of debt.

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

B. operating, investing, and financing.

The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet: A. as a long-term liability. B. separately, but as a part of shareholders' equity. C. as a mezzanine item between liabilities and shareholders' equity.

B. separately, but as a part of shareholders' equity.

Shareholders' equity reported on the balance sheet is most likely to differ from the market value of shareholders' equity because: A. historical cost basis is used for all assets and liabilities. B. some factors that affect the generation of future cash flows are excluded. C. shareholders' equity reported on the balance sheet is updated continuously.

B. some factors that affect the generation of future cash flows are excluded.

The information provided by a balance sheet item is limited because of uncertainty regarding: A. measurement of its cost or value with reliability. B. the change in current value following the end of the reporting period. C. the probability that any future economic benefit will flow to or from the entity.

B. the change in current value following the end of the reporting period.

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009? A. ₤120,000. B. ₤122,000. C. ₤124,000.

B. ₤122,000.

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo's basic earnings per share for 2009? A. $0.80. B. $0.91. C. $0.95.

C. $0.95. ($1m / [(1m x .5) + (.1m x .5)])

Denali Limited, a manufacturing company, had the following income statement information: Revenue $4,000,000 Cost of goods sold $3,000,000 Other operating expenses $500,000 Interest expense $100,000 Tax expense $120,000 Denali's gross profit is equal to A. $280,000. B. $500,000. C. $1,000,000.

C. $1,000,000.

At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. How much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? A. $60,000. B. $110,000. C. $120,000.

C. $120,000. (600k / [2(10)])

Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? A. $22 million for interest and $10 million for taxes. B. $16 million for interest and $2 million for taxes. C. $16 million for interest and $10 million for taxes.

C. $16 million for interest and $10 million for taxes.

White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? A. $18 million. B. $21 million. C. $22 million.

C. $22 million.

For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to: A. $3.52. B. $3.65. C. $3.70.

C. $3.70.

Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: A. $73 million. B. $77 million. C. $83 million.

C. $83 million.

Mabel Corporation (MC) reported accounts receivable of $66 million at the end of its second fiscal quarter. MC had revenues of $72 million for its third fiscal quarter and reported accounts receivable of $55 million at the end of its third fiscal quarter. Based on this information, the amount of cash MC collected from customers during the third fiscal quarter is: A. $61 million. B. $72 million. C. $83 million.

C. $83 million.

Using the information presented in Exhibit 12 (REFER TO PAGES 245-246), the financial leverage ratio for SAP Group at 31 December 2009 is closest to: A. 0.08. B. 0.58. C. 1.58.

C. 1.58

Based on Exhibit 1 (REFER TO PAGE 268-269), the financial leverage ratio for Company B is closest to: A. 0.55. B. 1.22. C. 2.22.

C. 2.22.

Based on Exhibit 1 (REFER TO PAGE 268-269), which statement is most likely correct? A. Company A has below-average liquidity risk. B. Company B has above-average solvency risk. C. Company A has made one or more acquisitions.

C. Company A has made one or more acquisitions. (strong presence of goodwill in comparison to the other two companies)

Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? A. Straight-line depreciation with a short useful life. B. Declining balance depreciation with a long useful life. C. Declining balance depreciation with a short useful life.

C. Declining balance depreciation with a short useful life. (This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.)

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

C. Fixed charge coverage.

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

C. Management of receivables has contributed to improved liquidity. (Time taken to collect receivables has increased)

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

C. Payment of dividends

For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? A. They are not recognized. B. They flow through retained earnings. C. They are a component of accumulated other comprehensive income.

C. They are a component of accumulated other comprehensive income.

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

C. US GAAP but may be classified as either operating or financing cash flows under IFRS.

An example of a contra asset account is: A. depreciation expense. B. sales returns and allowances. C. allowance for doubtful accounts.

C. allowance for doubtful accounts.

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

C. both IFRS and US GAAP.

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in: A. the debt-to-equity ratio but not the total asset turnover. B. the total asset turnover but not the debt-to-equity ratio. C. both the debt-to-equity ratio and the total asset turnover.

C. both the debt-to-equity ratio and the total asset turnover.

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

C. cross-sectional analysis.

The most likely costs included in both the cost of inventory and property, plant, and equipment are: A. selling costs. B. storage costs. C. delivery costs.

C. delivery costs

A company recently engaged in a non-cash transaction that significantly affected its property, plant, and equipment. The transaction is: A. reported under the investing section of the cash flow statement. B. reported differently in cash flow from operations under the direct and indirect methods. C. disclosed as a separate note or in a supplementary schedule to the cash flow statement.

C. disclosed as a separate note or in a supplementary schedule to the cash flow statement. (because no cash is involved)

Expenses on the income statement may be grouped by: A. nature, but not by function. B. function, but not by nature. C. either function or nature.

C. either function or nature.

Accrued expenses (accrued liabilities) are: A. expenses that have been paid. B. created when another liability is reduced. C. expenses that have been reported on the income statement but not yet paid.

C. expenses that have been reported on the income statement but not yet paid.

A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company's profitability initially appear: A. lower. B. unchanged. C. higher.

C. higher. (Under the converged accounting standards, the incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be capitalized. If a company expensed these incremental costs in the years prior to adopting the converged standards, all else being equal, its profitability will appear higher under the converged standards.)

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

C. identify the major sources and uses of cash.

Selected year-end financial statement data for Workhard are shown below. $ millions Beginning shareholders' equity 475 Ending shareholders' equity 493 Unrealized gain on available-for-sale securities 5 Unrealized loss on derivatives accounted for as hedges -3 Foreign currency translation gain on consolidation 2 Dividends paid 1 Net income 15 Workhard's comprehensive income for the year: A. is $18 million. B. is increased by the derivatives accounted for as hedges. C. includes $4 million in other comprehensive income.

C. includes $4 million in other comprehensive income.

When a company pays its rent in advance, its balance sheet will reflect a reduction in: A. assets and liabilities. B. assets and shareholders' equity. C. one category of assets and an increase in another.

C. one category of assets and an increase in another.

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for: A. all prior periods. B. current and future periods. C. prior periods shown in a report.

C. prior periods shown in a report.

A benefit of using the direct method rather than the indirect method when reporting operating cash flows is that the direct method: A. mirrors a forecasting approach. B. is easier and less costly. C. provides specific information on the sources of operating cash flows.

C. provides specific information on the sources of operating cash flows. (A & B are proponents of the indirect method)

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

C. reported as supplementary information to the cash flow statement. (non-cash transaction)

The item "retained earnings" is a component of: A. assets. B. liabilities. C. shareholders' equity.

C. shareholders' equity.

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

C. solvency ratios.

The carrying value of inventories reflects: A. their historical cost. B. their current value. C. the lower of historical cost or net realizable value.

C. the lower of historical cost or net realizable value.

If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is: A. the cost recovery method. B. the completed contract method. C. the percentage-of-completion method.

C. the percentage-of-completion method.

During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. What would Accent's cost of goods sold be under the weighted average cost method? A. ₤120,000. B. ₤122,000. C. ₤124,000.

C. ₤124,000.


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