Test 2 A414

Under IFRS, if a firm can estimate the outcome of the project reliably, it is most likely to use which of the following revenue recognition methods? Recognize revenue to the extent of costs incurred Percentage‐of‐completion method Cost‐recovery method

Percentage‐of‐completion method

Which of the following is least likely another name for the income statement? Statement of operations Statement of earnings Statement of financial position

Statement of financial position

Which of the following is the most appropriate classification of profit on sale of discontinued operations by a manufacturing firm? Gain reported after continuing operations Gain reported as a part of continuing operations Revenue considered a part of operating activities

Gain reported after continuing operations

Which of the following statements regarding revenue recognition methods is most accurate? The percentage‐of‐completion method relies less on management estimates and is, therefore, more objective as compared to the completed‐contract method. The completed‐contract method is more conservative as compared to the percentage‐of‐completion method in recognizing revenue. The completed‐contract method results in better matching of revenue recognition with the accounting period in which it was earned.

The completed‐contract method is more conservative as compared to the percentage‐of‐completion method in recognizing revenue.

The Cause of Change Analysis reconciles change in which major Income Statement item from Base Year to End Year? Net Sales Both Net Sales and Net Income Net Income

Net Income

Which of the following statements regarding inventory valuation is most accurate? The retail method reduces selling price by the gross profit margin to determine the cost of inventory. Standard cost should take into account normal levels of material, labor, and excess capacity. Under IFRS, inventory is reported at the lower of fair value or net realizable value

Standard cost should take into account normal levels of material, labor, and excess capacity.

Mega Construction Pvt. Ltd. obtains a $75 million contract to construct a building. It estimates that it will take 4 years to complete the project. The estimated cost of the project is $60 million. Mega Construction incurs costs amounting to $20 million in Year 1, $15 million in Year 2, $13 million in Year 3, and $12 million in Year 4. Assuming that the outcome of the project cannot be estimated reliably, and that Mega follows U.S. GAAP, the profit that the company should recognize in Year 4 is closest to? $3 million $0 $15 million

$15 million Under U.S. GAAP, if the outcome of the project cannot be estimated reliably, the entire amount of revenues, costs, and net income will be recognized in Year 4 on the income statement.

In conducting a common-size analysis for the below Statement of Cash Flows, total outflows for Firm B exceed inflows of Firm A by: Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197) $440,261 $189,320 $250,941

$189,320

In 20x5, ABC Department Store 50 stores at the beginning of the year and 60 stores at the end of the year. Sales for the year were $1,800 and Net Income for the year was $260. What were Net Profit per Store in 20x5?

$260 / ((50 + 60)/2) = $4.72

Listed below are several account ending balances for Abel Company as of December 31, 20x7. Combine the appropriate balances to determine comprehensive income and ending stockholder's equity balances as of December 31, 20x7: Beginning stockholder equity balance 49,000 Minimum pension liability adjustment (75) Net income 4,000 Repurchases of common stock (8,000) Unrealized loss on AFS Securities (100) Unrealized loss on cash flow hedge (150) $4,100 Comprehensive Income and $56,775 Ending Stockholder's Equity $3,600 Comprehensive Income and $48,675 Ending Stockholder's Equity $3,675 Comprehensive Income and $44,675 Ending Stockholder's Equity

$3,675 Comprehensive Income and $44,675 Ending Stockholder's Equity Beginning balance 49,000 Net income 4,000 Unrealized loss on AFS Securities (100) Unrealized loss on cash flow hedge (150) Minimum pension liability adjustment (75) Comprehensive income 3,675 Repurchases of common stock (8,000) Ending balance 44,675

Listed below are several account ending balances for Abel Company as of December 31, 20x7. Combine the appropriate balances to determine comprehensive income and ending stockholder's equity balances as of December 31, 20x7: Beginning stockholder equity balance 49,000 Dividends (2,500) Minimum pension liability adjustment (75) Net income 4,000 Unrealized loss on AFS Securities (100) Unrealized loss on cash flow hedge (150) $4,000 Comprehensive Income and $50,500 Ending Stockholder's Equity $3,675 Comprehensive Income and $50,175 Ending Stockholder's Equity $3,750 Comprehensive Income and $50,250 Ending Stockholder's Equity

$3,675 Comprehensive Income and $50,175 Ending Stockholder's Equity Beginning balance 49,000 Net income 4,000 Unrealized loss on AFS Securities (100) Unrealized loss on cash flow hedge (150) Minimum pension liability adjustment (75) Comprehensive income 3,675 Dividends (2,500) Ending balance 50,175

Listed below are several account ending balances for Abel Company as of December 31, 20x7. Combine the appropriate balances to determine comprehensive income and ending stockholder's equity balances as of December 31, 20x7: Beginning stockholder equity balance 49,000 Dividends (2,500) Issuance of common stock 3,000 Net income 4,000 Translation adjustment 90 Unrealized loss on cash flow hedge (150)

$3,940 Comprehensive Income and $53,440 Ending Stockholder's Equity Beginning balance 49,000 Net income 4,000 Unrealized loss on cash flow hedge (150) Translation adjustment 90 Comprehensive income 3,940 Issuance of common stock 3,000 Dividends (2,500) Ending balance 53,440

Which of the following is an analyst most likely to examine in order to learn more about a firm's operating activities? Dividends declared Accounts receivable Goodwill

Accounts receivable

ABC Department Stores has the following Base year and end Year Income Statement End Base 12/31/15 12/31/11 Sales 1,800 1,000 COGS 1,000 700 Gross Profit 800 300 General & Admin Exp 300 200 Operating Income 500 100 Interest Exp 40 25 Income Before Taxes 460 75 Income Taxes 200 40 Net Income 260 35 43.48% 53.33% The non-base year Operating Margin percent used in the Cause of Change Analysis would be closest to: 10.00% 500.00% 27.78%

27.78%

Which of the following balance sheet presentation formats reports assets on the left‐hand side, and liabilities and equity on the right‐hand side? Account format Report format Classified balance sheet

Account format

Which of the following is least likely classified as a financing activity under U.S. GAAP? A bank issuing common stock A manufacturing firm paying dividends A bank receiving interest payments on a loan

A bank receiving interest payments on a loan

Which of the following statements is least accurate? A correction of prior period errors is made by restating all the financial statements presented in the financial report. A change in an accounting estimate is applied prospectively. A change in accounting principle is applied prospectively.

A change in accounting principle is applied prospectively.

Which of the following is least likely a current liability? A liability that the entity has an unconditional right to defer settlement of for 2 years after the balance sheet date. Trade payables expected to be settled within 18 months after the balance sheet date. Financial liabilities expected to be settled within 1 year after the balance sheet date, whose original term was 3 years.

A liability that the entity has an unconditional right to defer settlement of for 2 years after the balance sheet date.

Which of the following is least likely an investing activity under IFRS? A manufacturing company receiving an interest payment on a loan A manufacturing firm investing in held‐for‐trading securities A manufacturing firm investing in property, plant, and equipment

A manufacturing firm investing in held‐for‐trading securities

Held‐to‐maturity investments are most likely measured at: Historical cost. Fair value. Amortized cost.

Amortized cost.

An accrued expense liability is most likely recognized when: Cash is paid prior to expense recognition. An expense is recognized before cash payment. Revenue is recognized prior to the receipt of cash.

An expense is recognized before cash payment.

Which of the following is most likely a use of cash for a company? An increase in inventory A decrease in accounts receivable An increase in accounts payable

An increase in inventory

Which of the following is least likely to be included in equity? Retained earnings Bank borrowings Noncontrolling interest

Bank borrowings

Which of the following is least likely to be included in equity? Retained earnings Noncontrolling interest Bank borrowings

Bank borrowings

The information provided here pertains to Liu Plc. for the year ended December 31, 20x8. Calculate basic EPS for the company. Net income for 20x8 = $2,625,000 Preferred dividends for the year = $420,000 Weighted average number of common shares outstanding = 600,000

Basic EPS = ($2,625,000 − $420,000) / 600,000 = $3.68

Blue Rose Inc. is an event management company and is currently involved in organizing a rock concert. It hires Howard and Co. as its agent to sell tickets for the concert. Howard only pays for the tickets that it manages to sell to customers. It purchases a ticket for $1,500 and sells it for $1,650. Assume that Howard sells 20,000 tickets for the concert and that there are no other revenues and expenses involved. The amount of revenue recognized by Blue Rose Inc. is closest to:

Blue Rose Inc. recognizes revenue on the basis of gross reporting. Hence, it will recognize revenue equal to: 1,500 20,000 = $30 million

Which of the following financial assets/liabilities is most likely to be measured at amortized cost? Nonderivative instruments with face value exposures hedged by derivatives Derivatives Bonds payable

Bonds payable

Which of the following financial assets/liabilities is most likely to be measured at amortized cost? Bonds payable Nonderivative instruments with face value exposures hedged by derivatives Derivatives

Bonds payable

After conducting a common-size analysis for the below Statement of Cash Flows, which of the following statements is least likely to be true? Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197) Firm B's dividend policy is not concerning given its CFO Firm A's dividend policy is concerning given its CFO Both firms' dividend policy is concerning given its CFO

Both firms' dividend policy is concerning given its CFO

A company reported the following information: • Cash received from customers = $27,300 • Cash paid to suppliers = $11,400 • Cash paid for other operating expenses = $7,400 • Cash paid for income taxes = $3,250 The company's cash flow from operating activities is closest to? $5,250 $15,900 $8,500

Cash flow from operating activities = Cash received from customers - Cash paid to suppliers - Cash paid for other operating expenses - Cash paid for taxes. Therefore, CFO = 27,300 - 11,400 - 7,400 - 3,250 = $5,250

Use the date below to answer the following question: • Net income = $1,120,000 • Depreciation expense for the year = $27,000 • Decrease in inventory = $13,800 • Increase in taxes payable = $1,500 • Issuance of common stock = $60,000 • Dividends paid = $32,300 • Purchase of land = $28,300 • Investment in associate = $58,000 • Purchase of held‐for‐trading securities = $7,200 • Sale of available‐for‐sale securities = $84,700 Assume the company uses U.S. GAAP to prepare its financial statements. The company's cash flow from financing activities is closest to: $60,000 $92,300 $27,700

CFF = Issuance of common stock - Dividends paid. CFF = 60,000 - 32,300 = $27,700

Proceeds from sale of securities held for trading are classified as: CFO. CFF. CFI.

CFO

Given the following information for a company, its CFO is closest to: • Net income = $1,000 • Decrease in interest payable = $85 • Gain on sale of equipment = $45 • Increase in accounts payable = $90 • Decrease in inventory = $35 • Increase in prepaid assets = $105 • Depreciation = $85 • Increase in taxes payable = $125 $1,050 $1,250 $1,100

CFO = 1,000 - 85 - 45 + 90 + 35 - 105 + 85 +125 = $1,100

The following information relates to XYZ Company for 2009: • Net income = $2,050 • Depreciation = $345 • Interest expense = $150 • Tax rate = 30% • Net capital expenditure = $1,500 • Net debt repayment = $20 • Working capital investment = $325 • Net borrowing = $1,500 XYZ's free cash flow to equity for 2009 is closest to: $2,090 $5,050 $2,050

CFO = 2,050 + 345 - 325 = $2,070. FCFE = 2,070 - 1,500 + 1,500 - 20 = $2,050

Solitaire Inc. prepares its financial statements according to U.S. GAAP. During 2009, the company earned net income amounting to $102 million. During the year, it purchased machinery worth $22 million and recognized a total depreciation expense of $2.4 million. The company also paid an annual dividend amounting to $1.5 million. Based on this information, the company's cash flow from operations is closest to: $104.4 million. $100.5 million. $80.9 million.

CFO = Net income + Depreciation expense. CFO = 102 + 2.4 = $104.4 million

Under U.S. GAAP, interest and dividends received may be classified as: CFF or CFO. CFO only. CFF only.

CFO only

Under IFRS, interest paid may be classified as: CFO or CFF. CFI or CFF. CFO only

CFO or CFF.

Magma Industries Ltd. reported net profit of $104 million for 2009 with revenues of $500 million and COGS of $270 million. During the period, Magma made purchases worth $40 million. If the company's accounts payable increased by $4 million, cash paid to the company's suppliers was closest to: $36 million. $186 million. $44 million.

Cash paid to suppliers = Purchases - Increase in accounts payable. Cash paid to suppliers = 40 - 4 = $36 million

According to the Cause of Change Analysis, which of the items below is not one of the four basic reasons profits change over time? Change in Sales -- Higher or lower sales with same previous cost structure Change in Interest Expense / Interest Income - more/less interest expense/interest income Change in Cost of Goods Sold - Improvement or decline in Gross Margins

Change in Cost of Goods Sold - Improvement or decline in Gross Margins

Listed below is the common-size balance sheet for Company A and Company B. Company A ('000) Company B ('000) ASSETS Current assets Cash and cash equivalents 10.7% 32.4% Short-term marketable securities 5.3% 14.1% Accounts receivable 13.3% 10.8% Inventory 2.7% 3.2% Total current assets 32.0% 60.5% Property, plant, and equipment, net 54.7% 28.6% Intangible assets 13.3% 0.0% Goodwill 0.0% 10.8% Total Assets 100.0% 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable 21.3% 6.5% Total current liabilities 21.3% 6.5% Long-term bonds payable 0.3% 91.9% Total liabilities 21.6% 98.4% Total shareholders' equity 78.4% 1.6% Total Liabilities and Shareholders' Equity 100.0% 100.0% Which company has likely grown through acquisitions?

Company B - The presence of goodwill on Company B's balance sheet shows that the company has grown via acquisitions. In contrast, Company A seems to have pursued a strategy of internal growth as evidenced by the lack of goodwill on its balance sheet.

Listed below is the common-size balance sheet for Company A and Company B. Company A ('000) Company B ('000) ASSETS Current assets Cash and cash equivalents 10.7% 32.4% Short-term marketable securities 5.3% 14.1% Accounts receivable 13.3% 10.8% Inventory 2.7% 3.2% Total current assets 32.0% 60.5% Property, plant, and equipment, net 54.7% 28.6% Intangible assets 13.3% 0.0% Goodwill 0.0% 10.8% Total Assets 100.0% 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable 21.3% 6.5% Total current liabilities 21.3% 6.5% Long-term bonds payable 0.3% 91.9% Total liabilities 21.6% 98.4% Total shareholders' equity 78.4% 1.6% Total Liabilities and Shareholders' Equity 100.0% 100.0% Which company is more solvent?

Company B has financed 98.4% of its total assets with liabilities. In contrast, Company A finances only 21.6% of its assets with liabilities. Therefore, Company A is more solvent than Company B. If Company B sees significant volatility in cash flows, it may struggle to meet its debt-servicing obligations.

Listed below is the common-size balance sheet for Company A and Company B. Company A ('000) Company B ('000) ASSETS Current assets Cash and cash equivalents 10.7% 32.4% Short-term marketable securities 5.3% 14.1% Accounts receivable 13.3% 10.8% Inventory 2.7% 3.2% Total current assets 32.0% 60.5% Property, plant, and equipment, net 54.7% 28.6% Intangible assets 13.3% 0.0% Goodwill 0.0% 10.8% Total Assets 100.0% 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable 21.3% 6.5% Total current liabilities 21.3% 6.5% Long-term bonds payable 0.3% 91.9% Company A ('000) Company B ('000) Total liabilities 21.6% 98.4% Total shareholders' equity 78.4% 1.6% Total Liabilities and Shareholders' Equity 100.0% 100.0% Company B is more liquid because?

Company B has larger percent of cash and short-term marketable securities

Listed below is the common-size balance sheet for Company A and Company B. Company A ('000) Company B ('000) ASSETS Current assets Cash and cash equivalents 10.7% 32.4% Short-term marketable securities 5.3% 14.1% Accounts receivable 13.3% 10.8% Inventory 2.7% 3.2% Total current assets 32.0% 60.5% Property, plant, and equipment, net 54.7% 28.6% Intangible assets 13.3% 0.0% Goodwill 0.0% 10.8% Total Assets 100.0% 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable 21.3% 6.5% Total current liabilities 21.3% 6.5% Long-term bonds payable 0.3% 91.9% Total liabilities 21.6% 98.4% Total shareholders' equity 78.4% 1.6% Total Liabilities and Shareholders' Equity 100.0% 100.0% Company B is more liquid because?

Company B has larger percent of cash and short-term marketable securities

Working capital is the excess of a company's: Current assets over its current liabilities. Assets over its liabilities. Noncurrent liabilities over its noncurrent assets.

Current assets over its current liabilities.

Goodwill based on a company's performance and its future prospects is most likely known as: Accounting goodwill. Potential goodwill. Economic goodwill.

Economic goodwill.

Supernova Inc. is a manufacturer of industrial chemicals. At the beginning of 20x9, it purchased a machine for $875,000. The machine has an estimate useful life of 8 years and a residual value of $60,000. Supernova's depreciation expense for 20x9 under the straight line method is closest to:

Depreciation expense = (Cost - Residual Value) / Useful life. Depreciation expense = (875,000 - 60,000) / 8 = $101,875

Which of the following is least likely an example of the measurement bases used to value items listed on the balance sheet? Present value Current cost Economic cost

Economic cost

The following information relates to XYZ Company for 2009: • Net income = $2,050 • Depreciation = $345 • Interest expense = $150 • Tax rate = 30% • Net capital expenditure = $1,500 • Net debt repayment = $20 • Working capital investment = $325 • Net borrowing = $1,500 XYZ's free cash flow to the firm for 2009 is closest to: $675 $615 $720

FCFF = 2,050 + 345 + (150 (1 − 0.3)) - 1,500 - 325 = $675

Use the date below to answer the following question: • Net income = $880,000 • Cost of goods sold = $600,000 • Depreciation expense = $49,000 • Interest expense = $27,000 • Investment in fixed assets = $32,000 • Investment in working capital = $13,000 • Funds borrowed = $16,000 • Debt repaid = $10,000 • Marginal tax rate = 40% Free cash flow to the firm is closest to: $893,200 $900,200 $911,000

FCFF = NI + NCC + [Int (1 - tax rate)] - FCInv - WCInv. FCFF = 880,000 + 49,000 + [27,000 (1 - 0.4)] - 32,000 - 13,000 = $900,200

Which of the following statements is most accurate regarding recognition of revenue from barter transactions under IFRS? Under IFRS, revenue from barter transactions is based on the: Fair value of revenues from similar barter transactions by other firms. Fair value if the company has a history of making or receiving cash payments for such goods and services. Fair value of revenues from similar nonbarter transactions with unrelated parties.

Fair value of revenues from similar nonbarter transactions with unrelated parties.

Use the following data to solve the below question: Cash = $22,250 Marketable securities = $13,480 Receivables = $4,330 Inventory = $4,240 Noncurrent assets = $79,700 Current liabilities = $31,450 Long‐term liabilities = $33,340 Equity = $59,210 The company's financial leverage ratio is closest to:

Financial leverage ratio = Total assets / Total equity Total assets = 44,300 + 79,700 = $124,000 Financial leverage ratio = 124,000 / 59,210 = 2.0942

After conducting a common-size analysis for the below Statement of Cash Flows, which of the following statements is least likely to be true? Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197) The total Cash Flows From Operations of Firm A is insufficient to pay for its investments in Property Plant and Equipment Firm A is using a larger percentage of its total cash inflows to invest in Property Plant & Equipment Firm B is using a larger percentage of its total cash inflows to invest in Property Plant & Equipment

Firm A is using a larger percentage of its total cash inflows to invest in Property Plant & Equipment

Paxel Construction Company has a $30 million contract to construct a building. It estimates that it will take three years to complete the project. The estimated cost of the project is $21 million. Paxel incurs costs amounting to $10.5 million in Year 1, $7.35 million in Year 2, and $3.15 million in Year 3. If the outcome of the contract can be reliably measured, what is the net profit recognized in year 3? $4.5 million $1.35 million $3.15 million

First we calculate the percentage of total costs incurred in each year. YR 1 10.50 / 21 = 50%; YR 2 7.35 / 21 = 35%, and YR 3 3.15 / 21 = 15%. Then we multiply the percentage of total costs incurred each year by the total revenue earned over the term of the project to determine the amount of revenue recognized each year. YR 1 $30 x 50% = $15, YR 2 $30 x 35% = 10.5, and YR 3 $30 x 15% = $4.5. Finally, subtract each year's revenue from each year's given level of expenses to equal yearly profit. YR 1 15.00 - 10.50 = 4.50; YR 2 10.50 - 7.35 = 3.13; YR 3 4.50 - 3.15 = $1.35 million

A travel agent purchases discounted tickets and sells them to customers. The agent pays only for the tickets that she manages to sell to customers. She purchases a ticket for $1,000 and sells it for $1,100. Assume that there are no other revenues and expenses involved. What is the reporting of revenues under gross and net reporting and which is the correct method under IFRS and GAAP? Gross Reporting of $100 and Net Reporting of $1,100. Either method is correct Gross Reporting of $1,100 and Net Reporting of $100. The Gross Method is correct Gross Reporting of $1,100 and Net Reporting of $100. The Net Method is correct

Gross Reporting of $1,100 and Net Reporting of $100. The Net Method is correct The travel agent should report revenue on a net basis because: She pays only for tickets that she is able to sell to customers. Therefore, she does not bear any inventory risk. The airline, not the travel agent, is the primary obligator under the contract.

Blue Rose Inc. is an event management company and is currently involved in organizing a rock concert. It hires Howard and Co. as its agent to sell tickets for the concert. Howard only pays for the tickets that it manages to sell to customers. It purchases a ticket for $1,500 and sells it for $1,650. Assume that Howard sells 20,000 tickets for the concert and that there are no other revenues and expenses involved. The amount of revenue recognized by Howard and Co. is closest to:

Howard and Co. should report revenue on a net basis because: It only pays for tickets that it is able to sell to customers. Therefore, it does not bear any inventory risk. Howard is not the primary obligor under the contract. Therefore, Howard will recognize revenue equal to (1,650 - 1,500) 20,000 = $3 million.

MSK sold property worth $1,850,000 and allowed the buyer to make the payment in installments. MSK itself had bought the property 5 years ago for $1,140,000. The first two installments of $550,000 and $400,000 have been received in Years 1 and 2 respectively, while the rest of the payment is expected to be received in Year 3. The amount of profit that will be recognized in Year 2, given that the collectability of revenues is highly uncertain is closest to:

If the collectability of revenues is highly uncertain, the cost‐recovery method is used and profits are only recognized once the total cash collections exceed total costs. Since total cash received by the company ($950,000) does not exceed the cost of the property ($1,140,000), MSK will not recognize any profits in Year 2.

Panorama Inc. invests $5,000,000 in a 10% semiannual coupon fixedincome security. After six months, Panorama receives the first coupon payment of $250,000. Additionally, interest rates have declined over the period, and the value of the securities has increased by $1,000,000. If Panorama treats the securities as Available for Sale, the $1,000,000 unrealized gain will be included as: An unrealized gain of $1,000,000 on the income statement An increase of $1,000,000 in retained earnings Increase of $1,000,000 in other comprehensive income

Increase of $1,000,000 in other comprehensive income

During 2009, Royal Superstores saw its accounts receivable and inventory increase by $5,600 and $3,700 respectively. At the same time, its accounts payable increased by $2,500. Based only on this information, the company's cash flow from operations will most likely: Decrease by $9,300. Increase by $6,800. Decrease by $6,800.

Increases in accounts receivable and inventory are uses of cash while the increase in accounts payable is a source of cash. Therefore, CFO will decrease by $6,800 (-5,600 - 3,700 + 2,500).

Which of the following is least likely included in the statement of changes in shareholders' equity? Treasury stock Accumulated other comprehensive income Interest received

Interest received

A company purchases inventory and incurs the following costs: Direct material = $28,000 Direct labor = $18,000 Abnormal overheads = $16,000 Administrative overheads = $20,000 Normal wastage of materials = $6,000 Storage cost of raw material = $24,000 Inventory reported on the company's balance sheet is closest to:

Inventory = 28,000 + 18,000 + 6,000 + 24,000 = $76,000

Which of the following financial assets/liabilities is least likely to be measured at fair value? Available‐for‐sale financial assets Financial liabilities held for trading Loans and receivables

Loans and receivables

A company has a net income of $150, an increase in accounts receivable of $30, depreciation of $55, and a decrease in accounts payable of $25. Its operating cash flow is closest to: $95 $150 $200

Operating cash flow = 150 - 30 + 55 - 25 = $150.

Which of the following is least likely an example of a potentially dilutive security? Preference shares Stock options Convertible bonds

Preference shares

Which of the following is least likely an example of a potentially dilutive security? Convertible bonds Preference shares Stock options

Preference shares

The following information relates to Alpha One Ltd. for the year ended 2009: Net income = $2,360,000 10% preferred stock = $500,000 Dividends paid to common shareholders = $44,000 Weighted average number of shares outstanding = $500,000 The company also has 500 convertible preferred shares outstanding, which pay a dividend of $75 per share every year. Each convertible preferred share can be converted into 50 common shares. Alpha One's basic and diluted earnings per share are closest to: Basic EPS ($) Diluted EPS ($) I 4.65 4.5 II 4.55 4.4 III 4.62 4.42

Preferred dividend = 500,000 × 0.1 = $50,000 Dividend paid on convertible preferred stock = 500 × 75 = $37,500 Basic EPS = (2,360,000 - 50,000 - 37,500) / 500,000 = $4.545 In calculating diluted EPS, it is assumed that convertible preferred shares are converted into common shares. Hence, no dividend is paid on them and the number of converted shares is added to the denominator. Number of converted shares = 500 × 50 = 25,000 Diluted EPS = (2,360,000 - 50,000) / (500,000 + 25,000) = $4.4

Which of the following is least likely to be reported as a liability on the balance sheet? Deferred revenue Accrued expense Prepaid expense

Prepaid expense

If a company pays cash before it recognizes the associated expense it results in a(n): Unearned revenue liability. Accounts receivable asset. Prepaid expense asset.

Prepaid expense asset.

The converged standards most likely follow which of the following approaches to revenue recognition? Principles‐based approach. Objectives‐oriented approach. Rules‐based approach.

Principles‐based approach.

Bingo Inc. sold property worth $500,000 and allowed the buyer to make the payment in installments. The cost of the property sold is $300,000. The first installment of $250,000 has been received in Year 1, while the rest of the payment is expected to be received in Year 2. Calculate the amount of profit that will be recognized each year using the Installment sales method.

Profit (Year 1) = (250,000/500,000) × 200,000 = $100,000. Profit (Year 2) = (250,000/500,000) × 200,000 = $100,000.

A company incurs the following costs on a particular project: Year 20X6 20X7 20X8 Total Cost Incurred in thousands 500 700 300 1,500 The total revenue from the project is expected to be $2,000,000. Under the percentage‐of‐completion method, the project's net income in 20X8 is closest to:

Profit recognized in 20X8 = (300,000/1,500,000) (2,000,000 - 1,500,000) = $100,000

Which of the following statements is most accurate? Under the completed‐contract method: Revenues, expenses, and profits are recognized when the project is complete. A firm should recognize revenue only to the extent of contract costs. Revenues, expenses, profits, or losses are recognized when the project is complete.

Revenues, expenses, and profits are recognized when the project is complete.

Howard Inc. (a manufacturing concern) uses U.S. GAAP to report its financial statement. Which of the following is most likely to be classified as an investing activity by this firm? Receipt of dividends on investments. Payment of interest on a loan. Sale of securities classified as available for sale.

Sale of securities classified as available for sale

The following information relates to Beta Inc. for the year ended 20x8: Shares outstanding on January 1, 20x8 = 2,000,000 3‐2 stock split on March 1, 20x8 Shares issued on July 31, 20x8 = 200,000 5% stock dividend on October 31, 20x8 Shares repurchased on December 1, 2008 = 100,000 Shares outstanding on December 31, 20x8 = 2,800,000 Beta Inc. reported net income of $3.34 million for the year ended 20x8. The company's EPS is closest to: $1.03 $1.19 $1.09

Shares outstanding on January 1 2,000,000 3‐for‐2 stock split 1,000,000 3,000,000 5% stock dividend 150,000 Shares outstanding since January 1 (12 months) 3,150,000 Shares issued on July 31 200,000 5% stock dividend 10,000 Shares outstanding since July 31 (for 5 months) 210,000 Shares repurchased on December 1 (not outstanding for a month) 100,000 Weighted average number of ordinary shares outstanding = (3,150,000 × 12/12) + (210,000 × 5/12) − (100,000 × 1/12) = 3,150,000 + 87,500 − 8,333.33 = 3,229,166.67 Basic EPS = 3,340,000 / 3,229,166.67 = $1.034

Xingia Inc. earns profits of $2,500,000 for the year ended December 31, 20x8. Xingia has 1,000,000 shares outstanding during the year and pays taxes at the rate of 40%. Xingia paid preference dividends amounting to $50,000 in 20x8. The average market price of Xingia's stock over the year was $50. Xingia has 10,000 stock options outstanding, which have an exercise price of $30. Calculate Xingia's diluted EPS for 20x8. $2.45 Non-Dilutive EPS $2.44 Diluted EPS $2.45 Diluted EPS

Since the average market price exceeds the exercise price of the options, they should be assumed to have been exercised. Number of common shares issued to option holders = 10,000 Cash proceeds from exercise of options = $300,000 (10,000 shares × $30) Number of shares that can be purchased at average market price with these funds = $300,000/$50 = 6,000 Net increase in common shares outstanding from the exercise of options = 10,000 − 6,000 = 4,000 Diluted EPS = $2,500,000 − $50,000 / (1,000,000 + 10,000 − 6,000) = $2.44 Diluted EPS ($2.44) is lower than basic EPS ($2.45). Therefore, the options are dilutive and should be considered in the calculation of diluted EPS.

In retail operations, sales change happen primarily as a result of: Systematic growth/decline and Organic growth/decline Systematic growth/decline Organic growth/decline

Systematic growth/decline and Organic growth/decline

Under the IASB, the transfer of risks and rewards of ownership most likely occurs when: The buyer makes the payment. The seller dispatches the order. The goods are delivered to the buyer.

The goods are delivered to the buyer.

Jacob wants to calculate and compare the financial ratios of two companies, Alpha Inc. and Beta Inc. He observes the following: • Alpha Inc. has acquired several subsidiaries and has recognized the associated goodwill amounting to $40,000. Further, the company has recognized impairment of goodwill amounting to $5,000. • Beta Inc. has recognized internally generated goodwill amounting to $32,000. Which of the following statements is least accurate regarding adjustments to be made by Jacob to the two companies' financial statements in order to make their ratios comparable? Both of the companies' goodwill should be excluded from the balance sheet. The impairment expense of $5,000 should be added back to Alpha Inc.'s income statement. Only Beta Inc.'s goodwill should be excluded from the balance sheet, as it has been generated internally.

The impairment expense of $5,000 should be added back to Alpha Inc.'s income statement.

The percentage-of-completion method is most likely to be used when? The projects revenues and cost are certain to fluctuate. The outcome of the project can be reliably measured. The costs associated with the project can be reliably measured

The outcome of the project can be reliably measured.

Listed below is the common-size balance sheet for Company A and Company B. Company A ('000) Company B ('000) ASSETS Current assets Cash and cash equivalents 10.7% 32.4% Short-term marketable securities 5.3% 14.1% Accounts receivable 13.3% 10.8% Inventory 2.7% 3.2% Total current assets 32.0% 60.5% Property, plant, and equipment, net 54.7% 28.6% Intangible assets 13.3% 0.0% Goodwill 0.0% 10.8% Total Assets 100.0% 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable 21.3% 6.5% Total current liabilities 21.3% 6.5% Long-term bonds payable 0.3% 91.9% Total liabilities 21.6% 98.4% Total shareholders' equity 78.4% 1.6% Total Liabilities and Shareholders' Equity 100.0% 100.0% Which company has likely grown through an internal growth strategy?

The presence of goodwill on Company B's balance sheet shows that the company has grown via acquisitions. In contrast, Company A seems to have pursued a strategy of internal growth as evidenced by the lack of goodwill on its balance sheet.

Which of the following statements regarding available‐for‐sale securities is least accurate? Gains and losses associated with these securities are reported on the income statement. They are reported at fair market value on the balance sheet. They are neither expected to be traded in the near term, nor held till maturity

They are neither expected to be traded in the near term, nor held till maturity

In order to evaluate a company's ability to meet its long‐term obligations, an analyst will most likely examine its: Net operating cycle. Total debt ratio. Quick ratio.

Total debt ratio

Paxel Construction Company has a $30 million contract to construct a building. It estimates that it will take three years to complete the project. The estimated cost of the project is $21 million. Paxel incurs costs amounting to $10.5 million in Year 1, $7.35 million in Year 2, and $3.15 million in Year 3. If the outcome of the contract cannot be reliably measured, under IFRS what is the net profit recognized in year 3?

Under IFRS, if the outcome of the contract cannot be measured reliably and it is probable that costs will be recovered, revenue may only be recognized to the extent of contract costs incurred. Year 1: The company will recognize construction costs amounting to $10.5 million as well as revenue of $10.5 million and hence $0 income. Year 2: The company will recognize construction costs amounting to $7.35 million as well as revenue of $7.35 million and hence $0 income. Year 3: The company will recognize construction costs amounting to $3.15 million. Further, since the contract is complete, the company will also recognize the remaining revenue of $12.15 million, and therefore report $9 million in net income.

Bingo Inc. sold property worth $500,000 and allowed the buyer to make the payment in installments. The cost of the property sold is $300,000. The first installment of $250,000 has been received in Year 1, while the rest of the payment is expected to be received in Year 2. Calculate the amount of profit that will be recognized each year using the cost recovery method.

Under the cost-recovery method, the company will not recognize any profits in Year 1 because total cash received from the buyer ($250,000) does not exceed the cost of the property ($300,000). If the second installment of $250,000 is received in Year 2, Bingo will recognize a profit of $200,000 in Year 2.

Which of the following statements most accurately defines the completed‐contract method for recognizing revenue? Under this method, profits are recognized as cash is received. Under this method, revenue is only recognized to the extent of costs incurred during the period. Under this method, no revenues or costs are recognized on the income statement until the entire project is completed.

Under this method, no revenues or costs are recognized on the income statement until the entire project is completed.

Paxel Construction Company has a $30 million contract to construct a building. It estimates that it will take three years to complete the project. The estimated cost of the project is $21 million. Paxel incurs costs amounting to $10.5 million in Year 1, $7.35 million in Year 2, and $3.15 million in Year 3. Under the completed contract method, what is the net profit recognized in year 3?

Under this method, no revenues or costs are recognized until the contract is completed. Therefore, for the first two years, Paxel will not recognize any revenues and costs. The entire amount of revenues, costs, and net income will be recognized in Year 3 on the income statement. On the balance sheet, for Years 1 and 2, Paxel would report all incurred costs under a "Construction-in-progress" head, which would be eliminated in Year 3. 30-21=9

Which of the following statements regarding held‐to‐maturity securities is most accurate? Unrealized gains and losses from changes in market value are ignored and not recognized on the financial statements. They are purchased with the intent of holding them for at least 10 years. Realized gains and losses are included in other comprehensive income as part of shareholders' equity.

Unrealized gains and losses from changes in market value are ignored and not recognized on the financial statements.

Under U.S. GAAP, a firm is most likely to use net revenue reporting in which of the following circumstances? When it has reasonable latitude to establish the price. When it is able to choose its supplier. When it does not bear the inventory and credit risk.

When it does not bear the inventory and credit risk.