CFA Financial Statement Analysis

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Which of the following is not an example of earnings management within GAAP in the quality spectrum of financial reports? -Cutting down of allowance for doubtful debts in a period of rising prices -Improper capitalization of research expenses to overstate the profits of the current reporting period -Deferral of research and development expenses into the next reporting period to smoothen profits.

Improper capitalization of research expenses to overstate the profits of the current reporting period.

ABC Corporation sells electronic goods. It typically offers a 2-year warranty on its products. It calculates annual warranty expense as 2% of total sales. ABC Corporation should recognize a particular year's warranty expense on its income statement:

In the current period, based on the matching principle.

A company had recognized a valuation allowance against a significant portion of its deferred tax assets. If the company now believes that its future profitability is set to rise it will most likely result in a(n):

Increase in deferred tax assets.

When a lease is classified as a finance lease, a long-lived asset is recognized and depreciated on the:

Lessee's financial statements.

Information about extraordinary items and other unusual or infrequent events is most likely found in:

Management Discussion & Analysis

Consider the following statements: Statement 1: Forecasting each expense item as a percentage of sales is a very objective method to calculate a firm's future net income. Statement 2: Forecasting is relatively more difficult for mature companies that operate in non‐volatile markets, compared to new companies operating in volatile markets. Which of the following is most likely? -Only one statement is correct. -Both statements are correct. -Both statements are incorrect.

Only one statement is correct.

Elite Traders uses the LIFO method for inventory valuation. It reported the following information in its financial statements: 2008 cost of goods sold = $3.9 million 2009 cost of goods sold = $5.3 million 2009 beginning LIFO reserve = $500,000 Elite Traders estimates that if it used the FIFO method for inventory valuation, its 2008 and 2009 cost of goods sold would be $3.1 million and $4.7 million respectively. Elite Traders' 2009 ending LIFO reserve is closest to:

$1,100,000 5.3-4.7 =0.6 5.3+0.6 = 1.1

Houston Data Processing is computing the amortization of an intangible asset, acquired January 2011, for the fiscal year ended 31 December 2012. The acquisition cost of the asset is $6,000,000 and the residual value is expected to be $500,000 on 31 December 2014. If the company uses the double‐declining method, the amortization expense during fiscal year 2012 is closest to:

$1,500,000

The following information relates to Beta Inc. for the year ended 2018: Shares outstanding on January 1, 2018 = 2,000,000 3-2 stock split on March 1, 2018 Shares issued on July 31, 2018 = 200,000 5% stock dividend on October 31, 2018 Shares repurchased on December 1, 2018 = 100,000 Beta Inc. reported net income of $3.34 million for the year ended 2018. The company's EPS is closest to:

$1.03 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 (for 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

During 2009, Solar Corporations earned profits amounting to $4.5 million and paid preference dividends amounting to $100,000. The company had 3.5 million shares outstanding throughout the year with an average market price of $50. It also had 50,000 stock options outstanding, which had an exercise price of $40. Given that the market price of the company's shares at year‐end was $60 and that the company pays taxes at the rate of 35%, its diluted EPS using the treasury stock method is closest to:

$1.254 50,000($40)= $2,000,000 $2,000,000/$50 = $ shared repurchased = 40,000 net change = 50,000-40,000 = 10,000 4,500,000-100,000/3,500,000 + 10,000 = 1.254

XYZ Company recently purchased a machine for $75,000. It expects to use the machine for 6 years, after which it will have a residual value of $5,000. How much depreciation should the company charge in the second year using double-declining balance depreciation?

$16,667 Depreciation expense (first year) = 2/6 × (75,000) = $25,000 Depreciation expense (second year) = 2/6 × (75,000 − 25,000) = $16,667

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:

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

A company buys a piece of machinery for $50,000 and it estimates the life of the machine to be four years, after which it will have a salvage value of $10,000. Using the double‐declining‐balance method of depreciation, the depreciation charge in the third year will be:

$2,500.

The following information relates to Pharma One Ltd. for the year ended 2009: Net income = $2,150,000 Preferred dividends = $210,000 Dividends paid to common shareholders = $170,000 Weighted average number of common shares outstanding = 800,000 Pharma One's basic EPS is closest to:

$2.43 Basic EPS = (Net income - Preferred dividends)/Weighted average number of shares outstanding Basic EPS = (2,150,000 - 210,000)/800,000 = $2.425

Tiara Corporation reported net income of $8 million for the year 2009. Total revenue and cost of goods sold for the period amounted to $35 million and $20 million respectively. If accounts receivable is increased by $5 million during the period, cash received from customers during the period was closest to:

$30 million.

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 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

On January 1, 2014, Bar Company issued its 10‐year, 10% semiannual coupon bond with a face value of $7,000,000 when the market rate is 12%. What is the carrying amount of the bond at December 31, 2016?

$6,349,351 n = 7x14 I/y = 12/2 =. 6 pmt = 0.05(7,000,000) = 350 fv = 7,000,000

The following information relates to XYZ Company for 2009: Net income$2,050Depreciation=$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 FCFF = 2,050 + 345 + (150 × (1 − 0.3)) - 1,500 - 325 = $675

Moon Traders uses the LIFO method for inventory valuation. For the year ended 2009, it reported the following information in its financial statements: Beginning inventory = $84,000 Ending inventory = $105,000 2008 cost of goods sold = $52,000 2009 cost of goods sold = $76,000 Ending LIFO reserve = $8,300 Beginning LIFO reserve = $7,100 Moon Traders' 2009 cost of goods sold, if it used the FIFO method for inventory valuation, would be closest to:

$74,800 COGS under FIFO = COGS under LIFO - (Change in LIFO reserve) COGS under FIFO = 76,000 - (8,300 - 7,100) = $74,800

The following information relates to Rose Inc.: Net profit margin = 15.7% Return on assets = 20.57% Financial leverage = 1.42 Asset turnover = 1.31 Rose Inc.'s return on equity is closest to:

29.21% 15.7*1.31*1.42=29.21%

The following information relates to Blue Inc.: Revenue = $442,200 Cost of goods sold = $239,100 Net income = $53,100 Total assets at the beginning of the period = $544,000 Total assets at the end of the period = $775,000 Financial leverage ratio = 0.55 Blue Inc.'s return on equity for the period is closest to:

4.43% Return on equity = (Net income / Average total assets) × (Average total assets/Average shareholders' equity) Return on equity = (53,100 / 659,500) × 0.55 Return on equity = 4.43%

If an auditor feels that a company's financial statements are not presented fairly or significantly deviate from accounting standards, she will most likely issue a(n):

Adverse opinion.

Held-to-maturity investments are most likely measured at:

Amortized cost.

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

An increase in inventory

An audit can most likely be described as:

An independent review of the company's financial statements.

Under International Accounting Standards (IAS), which of the following is not required to be included in the financial statements? -An internal audit report. -Notes of significant accounting policies. -A statement of changes in stockholders' equity.

An internal audit report.

Common‐size statements are an input for which step in the financial statement analysis framework?

Analyzing data

Which of the following will most likely result in a deferred tax liability? -Higher expenses are charged in the income statement compared to the tax return. -Pre-tax profit is higher than taxable income. -An asset's tax base is higher than its carrying value.

Pre-tax profit is higher than taxable income.

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

Preference shares

Mercury Traders issued a 12% annual coupon bond with a par value of $100,000 and a 4-year term. Market interest rates at issuance were 10%. Mercury Traders most likely issued the bond at:

Premium.

The role of the IASB is most accurately described as:

Providing accounting standards that can form a solid base for harmonization of accounting practices.

Which of the following ratios is least likely to be used to evaluate a company's inventory management? -Inventory turnover -Quick ratio -Number of days of inventory on hand

Quick ratio

A company defers certain R&D expenditure until the next accounting period in order to improve reported performance for the current year. This is most likely an example of managing earnings via:

Real actions.

Under U.S. GAAP, the value of a brand name is:

Reported in the balance sheet only when purchased from another party.

Permanent difference do not arise from:

Research and development costs.

Global Traders purchases a piece of equipment for $1.5 million and incurs the following expenses: Freight charges = $250,000 Installation charges = $25,000 Cost of training machine maintenance staff = $12,000 Cost of strengthening the factory floor = $5,500 Cost of painting factory walls = $7,000 The amounts capitalized and expensed by the company are closest to: Balance Sheet ($) | Income Statement ($) A. 1,775,000 | 24,500 B. 1,780,500 | 19,000 C. 1,792,500 | 7,000

Row B

Which of the following classifications of ratios is least likely to be used to evaluate a firm's operating efficiency? -Profitability ratios -Solvency ratios -Activity ratios

Solvency ratios

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

Statement of financial position

In relation to forecasting financial statements, which of the following statements is/are true? Statement 1: Constant noncash working capital, presented as a percentage of sales, is often assumed when forecasting. Statement 2: The effects of increased debt must properly be reflected in the forecasted interest expense of these future periods.

Statements 1 and 2 are true.

Deductible temporary differences least likely arise when:

The carrying amount of a liability is less than its tax base.

Taxable temporary differences would most likely arise when:

The carrying amount of an asset exceeds its tax base.

Bilbo Inc. is a company that engages in activities that involve the use of leased assets. Bilbo Inc. has categorized these leases as operating leases because the lessor retains most of the benefits and risks relating to the assets. Which of the following statements is most accurate regarding the treatment of these leases under US GAAP? -Due to being operating leases, there is no requirement to show the leased asset on the balance sheet. -The cash payment for the lease will all be shown as CFO. -Depreciation must be shown on the leased asset.

The cash payment for the lease will all be shown as CFO.

Which of the following least likely describes the effects of capitalization of interest costs? -The company's reported interest coverage ratio improves. -The company's reported operating cash flow is inflated. -The company's reported investing cash flow is inflated.

The company's reported investing cash flow is inflated.

Which of the following is the most accurate description of the going concern assumption? -The entity will continue to exist in the foreseeable future. -Management has no realistic alternative but to cease trading. -The entity will cease to exist in the foreseeable future.

The entity will continue to exist in the foreseeable future.

Which of the following statements regarding the qualitative characteristics of reporting financial statement elements under the IFRS framework is least accurate? -Financial statements may omit nonquantifiable information. -The framework requires the presentation of all financial information irrespective of how long it takes to gather that information. -Information should be presented in a consistent manner between entities.

The framework requires the presentation of all financial information irrespective of how long it takes to gather that information.

Which of the following statements is least accurate regarding the recognition of a gain/loss on the sale of long-lived assets? -The gain/loss is reported on the income statement as part of other gains and losses if the amount is material. -Asset disposal-related gains/losses are included in income from continuing operations. -The gain/loss on sale of a subsidiary is recognized on the income statement below income from continuing operations.

The gain/loss is reported on the income statement as part of other gains and losses if the amount is material.

Which of the following is least likely to be a constraint in preparing useful financial statements?

The requirement to include information regardless of whether it is relevant or not.

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. Given that the part is replaced every 3 years for $6,000, total depreciation expense over the 8-year period if the company does not use the component method will most likely be:

The same as if the company uses the component method.

A company incurred $1 million in research and development costs. All of these were expensed for financial reporting, but for tax purposes these costs will be written off over 2 years. Which of the following statements is most likely at the end of Year 1? -The tax base of the asset exceeds the carrying value by $500,000 at the end of Year 1. -This is an example of a permanent difference. -The tax base of the asset is lower than its carrying value by $500,000 at the end of Year 1.

The tax base of the asset exceeds the carrying value by $500,000 at the end of Year 1.

According to the Conceptual Framework for Financial Reporting (2010), which of the following is most likely considered to be a constraint on the financial statements? -The requirement for comparability. -The need to achieve faithful representation. -The tradeoff between timeliness and verifiability.

The tradeoff between timeliness and verifiability.

Deferred tax liabilities should be treated as equity when:

They are not expected to reverse.

Which of the following is the most accurate definition of assets? -They are tangible resources controlled by the enterprise from which future economic benefits are expected to flow to the enterprise. -They are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. -They are resources controlled by the enterprise from which it has earned economic benefits.

They are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Lessors usually prefer to classify leases as finance leases rather than operating leases because:

They can report larger sales revenue immediately.

Which of the following is most likely a qualitative characteristic that enhances the value of relevant and faithfully represented financial information? -Neutrality -Completeness -Timeliness

Timeliness

In order to evaluate a company's ability to meet its long-term obligations, an analyst will most likely examine its:

Total debt ratio.

Printing and legal fees incurred when bonds are issued are most likely to be included in the measurement of the liability under:

U.S. GAAP and IFRS.

Given stable inventory quantities and falling prices, use of FIFO will most likely:

Understate profits.

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.

If construction and sale of buildings is a company's core business activity, interest expenses incurred in financing construction are most likely included as a part of the company's:

Current assets and COGS.

Amortization of an intangible asset most likely:

Decreases retained earnings.

Rent received in advance is deferred for accounting purposes, but taxed on a cash basis. This will most likely result in:

a deferred tax asset.

To compute tangible book value, an analyst would most likely:

subtract intangible assets, including goodwill, from stockholders' equity.

a company other comprehensive income most likely includes:

unrealized gains and losses from cash flow hedging derivates

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

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

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. The amount of depreciation expense the company should recognize in Year 2 if it uses the component method of depreciation is closest to:

$10,250 Depreciation expense = [(80,000 - 6,000 - 8,000) / 8] + (6,000 / 3) = $10,250

Supernova Inc. is a manufacturer of industrial chemicals. At the beginning of 2009, 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 2009 under the straight-line method is closest to:

$101,875

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 current ratio is closest to:

1.41 Current ratio = Current assets / Current liabilities Current assets = 22,250 + 13,480 + 4,330 + 4,240 = $44,300 Current ratio = 44,300 / 31,450 = 1.4086

Mike sold goods worth $4,500, but is yet to receive cash for them. This will most likely lead to an increase in:

Accrued revenue.

A manufacturing company leasing a machine to use for a five-year project must show a lease liability:

Always under both IFRS and US GAAP.

If management wants to report an improving return on assets over time, it would most likely use:

An accelerated depreciation method.

An accrued expense liability is most likely recognized when:

An expense is recognized before cash payment.

Which of the following is not a desirable attribute of an accounting standards board? -The development of standards that are recognized and adopted by regulators. -Decisions that are made independently, but at the same time the decisions are consistent with the framework's objective. -An unwillingness to consider input from parties other than investors in order to avoid conflicts and to not allow pressure from external forces to influence decisions.

An unwillingness to consider input from parties other than investors in order to avoid conflicts and to not allow pressure from external forces to influence decisions.

Which of the following elements of financial statements is least likely related to the measurement of performance? -Income -Expenses -Assets

Assets

Which of the following financial statements is the analyst least likely to review to assess a company's performance over a period of time? -Income statement -Balance sheet -Statement of cash flows

Balance sheet

If a user wants to know about the current position of a company's assets, she is most likely to refer to the:

Balance sheet.

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

Bank borrowings

The following are ways by which cash flows can be manipulated except: -Needing quick financing, a firm arranges to have its payables financed by a third party in one period. -Believing its stock to be undervalued, a company repurchases its own stock. -The company's accounts receivables are securitized.

Believing its stock to be undervalued, a company repurchases its own stock.

ABC Company reports the following amounts on its 2009 income statement and balance sheet: Net income after tax: $25 million Total assets: $400 million Total liabilities: $300 million Deferred tax assets: $35 million Deferred tax liabilities: $45 million A reduction in the statutory tax rate will most likely:

Benefit the income statement and improve the balance sheet.

Under US GAAP, from the lessee's perspective, which of the following is most likely to be higher under an operating lease compared to a finance lease? -CFO -CFI -CFF

CFF

U.S. GAAP allows interest expense to be classified under:

CFO only.

Under U.S. GAAP, interest and dividends received may be classified as:

CFO only.

IFRS allows interest expense to be classified under:

CFO or CFF.

Which of the following companies is most likely to have low credit risk? -Small start-up companies -Companies with high free cash flow to total debt ratios -Companies that have a low return on their assets

Companies with high free cash flow to total debt ratios

What activity can aid in assessing whether extraordinarily high gross and operating profit margins are brought about by excellent management and cost controls or simply a result of accounting irregularities?

Comparing the firm's accounting principles, disclosed in the footnotes, against those of industry peers

Which of the following is least likely a characteristic of an effective financial reporting framework? -Completeness -Transparency -Consistency

Completeness

An increase in DTL most likely results in a(n):

Decrease in shareholders' equity

Conservative accounting choices are least likely to:

Decrease reported debt in the current period.

To which of the following factors does Moody's usually give the greatest weighting when assigning credit ratings to companies?

Financial policies.

Details relating to a company's revenue recognition policies are most likely found in:

Financial statement footnotes.

If an analyst wants to review a firm's revenue recognition policies, she is most likely to refer to:

Financial statement footnotes.

An increase in which of the following ratios most likely suggests an improvement in a company's solvency position? -Debt-to-equity ratio -Financial leverage ratio -Fixed charge coverage ratio

Fixed charge coverage ratio

Which of the following is least likely a step in the financial statement analysis framework? Processing data Forecasting data Interpreting data

Forecasting data

An increase in earnings per share on the income statement is least likely to be explained by the firm:

Increasing the number of shares outstanding.

Which of the following types of assets are most likely amortized? -Goodwill -Tangible assets with finite useful lives -Intangible assets with finite lives

Intangible assets with finite lives

Assuming IFRS, which of the following is most likely classified as a financing activity by a manufacturing company? -Dividends received -Interest paid -Indirect borrowings using accounts payable

Interest paid

A company's operating income is most useful in the analysis of:

Its underlying performance independent of the use of financial leverage.

Which of the following inventory methods is not allowed under IFRS? -First in, first out (FIFO) -Last in, first out (LIFO) -Weighted average

LIFO

In a period of falling prices and stable inventory quantities, which of the following is most likely? LIFO COGS ﹥ FIFO COGS LIFO CF ﹤ FIFO CF LIFO EI ﹤ FIFO EI

LIFO CF ﹤ FIFO CF In a period of falling prices and stable inventory quantities, use of LIFO results in lower COGS, higher NI, and higher taxes. Therefore, CF under LIFO is lower.

Consider the following statements: Statement 1: Ignoring any effects on taxes, amortization of a bond premium or discount is a non-cash item. Statement 2: If the cash flow statement is prepared using the indirect method, amortization of a bond premium is added back to net income. Which of the following is most likely? -Only Statement 1 is correct. -Only Statement 2 is correct. -Both statements are incorrect.

Only Statement 1 is correct.

Credit analysis will be most likely to focus on which of the following? -Net income. -Operating income. -Operating cash flows.

Operating cash flows.

Which the following statements is true? -According to the IFRS, an entity should present the income statement and other comprehensive income separately, and cannot combine them into one statement. -Presentation of income statement and other comprehensive income is the same under both U.S. GAAP and IFRS, except that in U.S. GAAP, the firm could choose to report comprehensive income in the statement of shareholders' equity. -Presentation of income statement and other comprehensive income is the difference under U.S. GAAP and under IFRS, but both allow the reporting of comprehensive income in the statement of shareholders' equity.

Presentation of income statement and other comprehensive income is the same under both U.S. GAAP and IFRS, except that in U.S. GAAP, the firm could choose to report comprehensive income in the statement of shareholders' equity.

Which of the following approaches is adopted by the IASB? -Objectives-oriented -Principles-based -Rules-based

Principles-based

Which of the following is least likely a financial sector ratio? -Capital adequacy -Net interest margin -Same store sales

Same store sales

An analyst wants to evaluate the use of ratio analysis in analyzing the financial performance and condition of Go Inc. Which one is not a limitation of the use of ratio analysis?

Similar accounting practices and policies can distort comparisons.

Which of the following statements is most accurate regarding depreciation expense in the year that a depreciable asset is acquired? A company using straight‐line depreciation with a useful life of 5 years is more conservative than a company using: -Double‐declining balance depreciation with a shorter useful life -Straight‐line depreciation with a longer useful life -Declining balance method with the same useful life

Straight‐line depreciation with a longer useful life

Under US generally accepted accounting principles (GAAP), impairment of an asset must be recognized in a firm's accounts when:

The carrying value of the asset is higher than the expected future cash flows from the use of the asset plus its disposal value.

What adjustment must be made in order to more accurately compare two firms where one uses a LIFO inventory accounting and the other FIFO?

The cost of sales should be reduced by the change in LIFO reserve.

Which of the following statements are false? -The notes to financial statements include disclosures on commitments and contingencies. -The notes to financial statements exclude information on related‐party transactions. -The notes to financial statements exclude management compensation.

The notes to financial statements exclude information on related‐party transactions.

Which of the following is most likely classified as an identifiable intangible asset? -Trademarks -Land and buildings -Goodwill

Trademarks

Which of the following statements regarding a company's internal controls is most accurate? -Under U.S. GAAP, an independent auditor is responsible for the effectiveness of a company's internal controls system. -The internal controls system seeks to ensure the reliability of the company's process for analyzing financial statements. -Under U.S. GAAP, an auditor is also required to express an opinion on the company's internal controls system.

Under U.S. GAAP, an auditor is also required to express an opinion on the company's internal controls system.

If a company receives cash before it recognizes the associated revenue it results in a(n):

Unearned revenue liability.

A company's other comprehensive income most likely includes:

Unrealized gains and losses from cash flow hedging derivatives.

Comparing an income statement ratio like net profit margin against industry rivals would be an example of -cross sectional analysis -common-size analysis -time-series analysis

cross sectional analysis

Examination of two companies for a market‐based valuation (e.g., P/E multiple) with the relevant benchmark being the competitor's performance is considered:

cross‐sectional analysis.

An investor concerned whether a company can meet its long‐term obligations is most likely to calculate the:

financial leverage ratio.

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

gain reported after continuing operations

Defined contribution plans are:

have limited employer liability compared with defined benefit plans.

A common‐size cash flow statement shows each line item as a percentage of:

net revenues.

Which of the following items is least likely a capitalized inventory cost? -Costs of purchase -Costs of conversion -Administrative expenses

Administrative expenses

If an auditor believes that the financial statements materially depart from accounting standards and are not presented fairly, she is most likely to issue a(n):

Adverse opinion.

Tax credits that directly reduce taxes are most likely classified as:

Permanent differences.

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

Gain reported after continuing operations

If a user wants to measure the financial position of a company, she is least likely to refer to:

Gains

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

Gains and losses associated with these securities are reported on the income statement.

If a firm delivers a good or a service for which cash will be received in the following month, it is most likely to record the transaction as an:

Accrued revenue asset.

In a period of rising prices and stable inventory quantities, which of the following is most likely? -Profitability ratios are lower under FIFO. -Solvency ratios are higher under FIFO. -Activity ratios are lower under FIFO.

Activity ratios are lower under FIFO.

Accounting standards allow ABC Company to recognize interest income on its financial statements. However, ABC is not allowed to recognize such items on its tax return. This will most likely result in:

Neither a deferred tax asset nor a deferred tax liability.

The Statement of Changes in Owners' Equity would be least likely to include information on:

Net assets.

Given stable inventory quantities and falling prices, use of LIFO will least likely:

Overstate net income.

Owners' equity is best described as:

Owners' residual interest in the assets of an entity after deducting its liabilities.

A company has employed a new financial controller who has installed a new system to improve the efficiency of inventory management, and who has written off a large amount of uncollectible receivables. This is likely to: - a: INV TURNOVER (increase) | REC TURNOVER (increase) - b: INV TURNOVER (increase) | REC TURNOVER (decrease) - c: INV TURNOVER (decrease) | REC TURNOVER (increase)

a: INV TURNOVER (increase) | REC TURNOVER (increase)

Under U.S. GAAP, an asset's carrying amount is considered recoverable if the carrying amount:

is less than the undiscounted expected future cash flows.

A warning sign that a company may be deferring expenses is sales revenue growing at a slower rate than:

property, plant, and equipment.

The requirement for a company to prepare its financial reports in accordance with specified accounting standards is most likely the responsibility of:

regulatory authorities, only.

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.

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. Given that the company replaced the part at the end of Year 3, the amount of depreciation expense it should recognize in Year 4 if it does not use the component method is closest to:

$11,000 Depreciation expense = [(80,000 - 8,000) / 8] + (6,000 / 3) = $11,000

PLC Group reported other operating expenses of $10 million. Prepaid insurance expense increased by $1.5 million and accrued utilities payable decreased by $1 million. Insurance and utilities comprise the only components of other operating expenses for the company. How much cash did the company pay out for other operating expenses?

$12.5 million 10million + 1 million + 1.5 million

Sun Corporation is a manufacturer of a single product. The following information relates to its production levels and costs for 2009: Number of units produced = 7.5 million Cost of raw materials = $24 million Direct labor conversion costs = $52 million Production overheads = $18 million Freight-in charges = $3.4 million Storage costs of finished goods = $980,000 Abnormal wastage = $37,000 Given that there is no work-in-progress inventory at the end of the year, the company's capitalized cost per unit of inventory is closest to:

$12.99 Total capitalized costs = 24 + 52 + 18 + 3.4 = $97.4 million Storage costs of finished goods are not capitalized inventory costs. Therefore, capitalized cost per unit = 97.4 / 7.5 = $12.99

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:

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

The following information relates to Jupiter Inc.: Cost of inventory = $155,000 Estimated selling price = $205,000 Estimated selling costs = $35,000 Replacement cost = $165,000 Normal profit margin = $10,000 Assuming that the company follows U.S. GAAP and uses the LIFO method, the amount of inventory it should report on its balance sheet is closest to:

$155,000 Net realizable value = 205,000 - 35,000 = $170,000 NRV - Normal profit margin = 170,000 - 10,000 = $160,000 Replacement cost of $165,000 lies between $160,000 and $170,000 and therefore, need not be adjusted. The original cost of $155,000 is lower than the replacement cost of $165,000 so inventory will be reported at $155,000.

At the end of 2008, Mega Constructors purchases a piece of machinery for $1.2 million. The company uses the straight-line method of depreciation and estimates that the machinery will have a useful life of 8 years and zero salvage value at the end of its useful life. At the end of 2010, the company estimates that the expected future cash flows from the machine will amount to $700,000 (present value equals $680,000). It further estimates that the fair value of the machine is $720,000 and selling costs will amount to $25,000. Given that the company uses U.S. GAAP for financial reporting purposes, the amount of impairment loss it will recognize on its income statement is closest to:

$180,000 Under U.S. GAAP, an asset is considered impaired when its carrying value exceeds the total value of its undiscounted expected future cash flows. The impairment loss is then calculated as the asset's carrying value minus its fair value. Depreciation expense = 1,200,000 / 8 = $150,000 Therefore, carrying value at the end of 2010 = 1,200,000 - (150,000 × 2) = $900,000 The asset's carrying value ($900,000) is greater than its undiscounted expected future cash flows ($700,000) and is therefore impaired. Impairment loss = 900,000 - 720,000 = $180,000

An analyst obtains the following information about the assets of two companies, both of which follow U.S. GAAP for financial reporting purposes. Alpha Inc. owns a piece of equipment that has a carrying value of $5,200. The company estimates that the total expected future cash flows from this piece of equipment would amount to $4,200 (present value equals $3,800). The company estimates that the fair value of the asset is $5,000 and selling costs would amount to $500. Beta Inc. owns a piece of equipment that has a carrying value of $6,600. The company estimates that the total expected future cash flows from this piece of equipment would amount to $6,700 (present value equals $6,400). The company estimates that the fair value of the asset is $6,300 and selling costs would amount to $400. The amount of impairment loss recognized by Alpha Inc. is closest to:

$200 Impairment loss under U.S. GAAP = Carrying value - Fair value = 5,200 - 5,000 = $200

At the end of 2008, Mega Constructors purchases a piece of machinery for $1.2 million. The company uses the straight-line method of depreciation and estimates that the machinery would have a useful life of 8 years and zero salvage value at the end of its useful life. At the end of 2010, the company estimates that the expected future cash flows from the machine will amount to $700,000 (present value equals $680,000). It further estimates that the fair value of the machine is $720,000 and selling costs would amount to $25,000. Given that the company uses IFRS for financial reporting purposes, the amount of impairment loss it will recognize on its income statement is closest to:

$205,000 Carrying value of the asset at the end of 2010 = $900,000 Fair value less costs to sell = 720,000 - 25,000 = $695,000 Value in use = $680,000 Therefore, recoverable amount = $695,000 Impairment loss = 900,000 - 695,000 = $205,000

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

Account format

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:

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

Cape Cod Crunch, a fictitious company, reported interest expense of $5 million and taxes of $2 million. Over the period, interest payable increased by $2 million and taxes payable decreased by $2.5 million. How much cash did the company pay for interest and taxes, respectively?

$3 million in interest and $4.5 million in taxes. 2+2.5 = 4.5 5-2=3

Revenue = $85 million Cost of goods sold = $44 million Decrease in inventory = $7 million Increase in accounts payable = $4 million Decrease in accounts receivable = $5 millions Cash paid to suppliers is closest to:

$33 million. Cash paid to suppliers = Purchases - Increase in accounts payable Purchases = Cost of goods sold - Decrease in inventory Purchases = 44 - 7 = $37 million Therefore, cash paid to suppliers = 37 - 4 = $33 million

The following information relates to Alpha Inc.: Opening inventory = $47,000 Ending inventory = $28,000 Sales = $77,000 Cost of goods sold = $54,000 The amount of purchases made by the company is closest to:

$35,000

Magma Industries Ltd. reported a 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. Cash paid to suppliers = Purchases - Increase in accounts payable Cash paid to suppliers = 40 - 4 = $36 million

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

A construction company, ABC Inc., enters into a contract with XYZ Inc. to construct a commercial building. The construction contract specifies consideration of $4 million. ABC expects to incur costs amounting to $3,400,000 to satisfy the terms of the contract. During Year 1, ABC incurs $2,380,000 in costs. Now assume that at the beginning of Year 2, the two parties to the contract agree to change the building floor plan and modify the contract. As a result, the contract will now be worth $4.4 million, and there will be a $600,000 bonus paid out to ABC if it is able to complete the project in another 1.5 years (2.5 years from initiation). The changes will result in an increase in ABC's costs amounting to $300,000. ABC believes that it does meet the criteria for being able to recognize the bonus as revenue. The amount that ABC will recognize as a cumulative catch-up adjustment on the date of contract modification is closest to:

$416,216 ABC's expected total revenue from the project is now $5 million (= $4.4m + 600,000). Its completion status is now at 64.32% ($2,380,000 costs incurred/total expected costs of $3,400,000 + $300,000). Based on the updated completion status and expected total revenue, ABC must recognize a total amount of $3,216,216 (calculated as 64.32% of $5 million) in revenue. Based on the percentage of costs method of recognizing revenue, ABC will recognize $2,800,000 [($2,380,000 / $3,400,000) × $4mm] in year 1. On the date of the contract modification, ABC must recognize an additional $416,216 ($3,216,216 − $2,800,000) as a cumulative catch-up adjustment to revenue.

The following information relates to Gamma Corporation: -Payables turnover = 8 -Average trade payables = $11,000 -Sales = $95,000 -Cost of goods sold = $74,000 -Opening inventory = $32,000 The company's ending inventory is closest to:

$46,000 Ending inventory = Opening inventory + Purchases - Cost of goods sold Purchases = Payables turnover × Average trade payables Purchases = 8 × 11,000 = 88,000 Therefore, ending inventory = 32,000 + 88,000 - 74,000 = $46,000

ABC Company uses the straight-line method of depreciation on its financial statements to write off a piece of equipment that it purchased for $10,000. The asset has an estimated salvage value of zero and a useful life of 4 years. On the tax return it writes off the asset over 2 years with zero salvage value. The company is taxed at 30%. The carrying value of the asset on the balance sheet for Year 2 is closest to:

$5,000 Historical cost of the asset - Accumulated depreciation charged on the income statement = 10,000 - 5,000 = $5,000

The following information relates to Royal Manufacturers: Cost of inventory = $54,000 Estimated selling price = $72,000 Estimated selling costs = $15,000 Replacement cost = $52,000 Normal profit margin = $7,000 Assuming that the company follows U.S. GAAP, and uses the LIFO method, the value of inventory that it should record on its balance sheet is closest to:

$52,000

Which of the following is most likely a general requirement for the preparation of financial statements? -Verifiability -Timeliness -Accrual basis

Accrual basis

Star Manufacturers uses the LIFO method for inventory valuation. For the year ended 2009, it reported the following information in its financial statements: Beginning inventory = $57,000 Ending inventory = $78,000 2008 cost of goods sold = $62,000 2009 cost of goods sold = $87,000 Ending LIFO reserve = $7,300 Beginning LIFO reserve = $5,200 Star Manufacturers' ending inventory if it used the FIFO method for inventory valuation would be closest to:

$85,300 Ending inventory under FIFO = Ending inventory under LIFO + LIFO reserve Ending inventory under FIFO = 78,000 + 7,300 = $85,300

Alpha Mining Co. purchased a machine for crushing rocks for $80,000. The machine has a useful life of 8 years and an estimated salvage value of $8,000. In order to maintain the machine, the company will need to replace one of its component parts every 3 years. This part costs $6,000 and is considered to be a significant component. The amount of depreciation expense the company should recognize in Year 1 if it does not use the component method is closest to:

$9,000 Depreciation expense = (80,000 - 8,000) / 8 = $9,000

$90 million. Cash received from customers = Revenue + Decrease in accounts receivable Cash received by the company = 85 + 5 = $90 million

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

The following information relates to Fly High Corporation: Revenue = $17 million Cost of goods sold = $5.5 million Other expenses = $4.2 million Interest expense = $2.4 million Tax expense = $3.3 million Asset turnover = 1.24 Total shareholders' equity at the beginning of the period = $30 million Assuming that shareholders' equity remains the same during the period, Fly High's ROE for the period is closest to:

5.33% Average total assets = Revenue / Asset turnover Average total assets = 17,000,000 / 1.24 = $13,709,677.42 Therefore, financial leverage = 13,709,677.42 / 30,000,000 = 0.45699 Net income = 17 - 5.5 - 4.2 - 2.4 - 3.3 = $1.6 million ROE = (1,600,000 / 17,000,000) × 1.24 × 0.45699 = 5.33%

Here are the transactions for Forrest Company for the year 2011: Received dividends of $100 from investments in held‐for‐trading securities Recorded an unrealized loss from foreign currency transaction of $300 Received dividends of $200 from investments in AFS securities Purchased treasury stocks for $500 Paid dividends to shareholders of $450 Recorded a gain of $800 on sale of equipment Arrived at a net income figure of $10,000 What is the total comprehensive income?

9,700 10,000(-+) foreign currency gain/loss 10,000-300 = 9700

A $750 decrease. 2,500 × 0.3 = $750.

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

A change in accounting principle is applied prospectively.

Use of the effective interest method to account for financing liabilities most likely results in:

A constant rate of interest over the bond's term.

Which of the following is most likely a source of cash flow (outflow) for a company? -A decrease in accounts receivable -A decrease in accounts payable -An increase in wages payable

A decrease in accounts payable

A company received cash in Year 1 for rent revenue that will be recognized on its financial statements in Year 2. However, authorities tax the revenue upon receipt of cash. This will most likely result in:

A deferred tax asset.

Shares that are currently owned by common shareholders are most likely referred to as:

Outstanding shares.

Which of the following statements regarding pension plans is most accurate? -Under a defined‐benefit plan, a company contributes an agreed‐upon amount into the plan in each period. -Under a defined‐contribution plan, the amount of cash paid by the company into the plan is treated as a financing cash outflow on the cash flow statement. -A defined‐contribution plan may give rise to a liability on the balance sheet.

A defined‐contribution plan may give rise to a liability on the balance sheet.

Which of the following is most likely to suggest that a company's low receivables turnover is due to credit management issues? -A lower sales growth than competitors -A higher sales growth than competitors -A history of higher bad debts than competitors

A history of higher bad debts than competitors

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

Which of the following companies is least likely to report a low fixed-asset turnover ratio? -A mature company operating in a labor-intensive business environment -A company that is just starting out -A company that is struggling to make sales due to high prices

A mature company operating in a labor-intensive business environment

Which of the following is most likely to indicate that a company has too many resources tied up in inventory? -A relatively high inventory turnover ratio -A relatively high number of days of inventory on hand -A relatively low net operating cycle

A relatively high number of days of inventory on hand

An analyst wanting to use cross‐sectional analysis to analyze R&G Industrials' will most likely prepare which of the following documents? -A vertical common‐size balance sheet that compares R&G to another company. -A vertical income statement that covers multiple years of R&G income statement data. -A horizontal common‐size balance sheet using multiple years of R&G account balances.

A vertical common‐size balance sheet that compares R&G to another company.

ABC Company receives $10 million for bonds carrying a coupon rate of 9%. XYZ Company receives $10 million for bonds carrying a coupon rate of 11%. Given that market interest rates at issuance for both the bonds stood at 10.5% and that both have a 10-year term to maturity, which of the following is least likely? -In Year 2, the book value of the bonds is higher on ABC's financial statements compared to XYZ's financial statements. -ABC records a higher outflow from operating activities each year. -The par value of ABC's bonds is greater than that of XYZ's bonds.

ABC records a higher outflow from operating activities each year.

Which of the following will least likely result in a deferred tax asset? -Taxable income is higher than pre-tax profit. -Taxes payable are greater than income tax expense. -An asset's tax base is lower than its carrying value.

An asset's tax base is lower than its carrying value.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held-for-trading and $8,000 in securities classified as held-to-maturity. Transaction 4: Paid dividends amounting to $130,000. Which of the following is the least likely effect on Aquamarine's financial statements due to Transaction 2? -An increase in cash flow from operating activities of $990,000. -An increase in receivables of $38,000. -An increase in cash flow from operating activities of $952,000.

An increase in cash flow from operating activities of $990,000. The company made cash sales of $952,000 (990,000 - 38,000). Sales made on credit will increase the company's receivables by $38,000.

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

Bonds payable

Consider the following statements: Statement 1: If inventory is subsequently classified as investment property and valued using the fair value model, the difference in value between the carrying amount and fair value at the time of transfer is recognized as profit or loss. Statement 2: If investment property is valued using the cost model, a move to owner-occupied property will not lead to a change in the carrying amount of the property transferred. Which of the following is most likely? -Only Statement 1 is incorrect. -Only Statement 2 is incorrect. -Both statements are correct.

Both statements are correct.

Consider the following statements: Statement 1: The number of days of sales outstanding is always inversely related to revenue. Statement 2: The number of days of inventory is directly related to average inventory. Which of the following is most likely? -Both statements are correct. -Both statement are incorrect. -One of the statements is incorrect.

Both statements are correct.

Consider the following statements: Statement 1: Higher financial reporting quality typically leads to a higher cost of capital. Statement 2: Typically, it is the responsibility of the auditor to ensure that a company has not engaged in fraud in the preparation of its financial statements. Which of the following is most likely? -Only Statement 1 is correct. -Only Statement 2 is correct. -Both statements are incorrect.

Both statements are incorrect.

Under IFRS, interest paid may be classified as:

CFO or CFF.

Under IFRS, dividends received may be classified as:

CFO or CFI.

An analyst obtains the following information about the assets of two companies, both of which follow U.S. GAAP for financial reporting purposes. Alpha Inc. owns a piece of equipment that has a carrying value of $5,200. The company estimates that the total expected future cash flows from this piece of equipment would amount to $4,200 (present value equals $3,800). The company estimates that the fair value of the asset is $5,000 and selling costs would amount to $500. Beta Inc. owns a piece of equipment that has a carrying value of $6,600. The company estimates that the total expected future cash flows from this piece of equipment would amount to $6,700 (present value equals $6,400). The company estimates that the fair value of the asset is $6,300 and selling costs would amount to $400. The impairment loss will most likely reduce Alpha Inc.'s:

Carrying value of the equipment to $5,000.

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

Which of the following is least likely to be classified as other comprehensive income under U.S. GAAP? -Changes in the value of long-lived assets that are measured using the revaluation model -Unrealized holding gains and losses on available-for-sale securities -Minimum pension liability adjustments

Changes in the value of long-lived assets that are measured using the revaluation model

Financial data tables are an output of which of the following steps in the financial statement analysis framework?

Collecting data

Ratio analysis is most likely to be performed after which of the following steps in the financial statement analysis framework? Processing data Collecting data Interpreting data

Collecting data

Which of the following is least likely evaluated to analyze credit risk of a company? -Character -Commitments -Covenants

Commitments

Which of the following is least likely a general requirement for the preparation of financial statements? -Completeness -Going concern -Materiality

Completeness

A financial reporting framework has principles universal enough to guide preparers dealing with new and existing transactions. This framework is most likely exhibiting which characteristic commonly found in a coherent framework?

Comprehensiveness.

Which of the following is least likely a desirable qualitative characteristic of financial statements? -Faithful representation -Relevance -Conciseness

Conciseness

Which of the following is least likely a benefit of conservative accounting? -Given asymmetrical information, conservatism can protect contracting parties with less information and higher risk. -Conservatism reduces the possibility of litigation. -Conservatism results in higher financial reporting quality.

Conservatism results in higher financial reporting quality.

Which of the following is least likely an example of grouping an expense by nature? -Depreciation -Cost of goods sold -Interest expense

Cost of goods sold

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 $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).

Goodwill based on a company's performance and its future prospects is most likely known as:

Economic goodwill.

Which of the following statements is least accurate? Capitalization: -Decreases cash flow from operating activities in the year of recognition. -Increases noncurrent assets. -Decreases cash flow from investing activities in the year of recognition.

Decreases cash flow from operating activities in the year of recognition.

Deferred tax liability of $30,000. Taxes payable is $30,000 less than income tax expense. Therefore, the company will recognize a deferred tax liability of $30,000.

ABC Company uses the straight-line method of depreciation on its financial statements to write off a piece of equipment that it purchased for $10,000. The asset has an estimated salvage value of zero and a useful life of 4 years. On the tax return it writes off the asset over 2 years with zero salvage value. The company is taxed at 30%. The difference between the amount of depreciation recognized on the income statement and on the tax return will result in a:

Deferred tax liability.

Under IFRS lease accounting rules, a company leasing an asset to use (a lessee) will show on the statement of profit or loss:

Depreciation and interest expense.

Under US GAAP lease accounting rules, a company leasing an asset to use (a lessee) under a finance lease will show on the income statement:

Depreciation and interest expense.

Which of the following is least likely to be important to an analyst when using financial reports? -Detail. -Relevance. -Materiality.

Detail.

Star Traders issues an 8% annual coupon bond with a par value of $100,000 which will be redeemed after 4 years. Market interest rates at the time of issuance are 9%. Star Traders most likely issued the bond at:

Discount.

In order to estimate the average life of assets on the balance sheet:

Divide gross PPE by the depreciation expense.

Assuming U.S. GAAP, which of the following is most likely classified as a financing activity by a trading company? -Dividends paid -Dividends received -Interest received

Dividends paid

Noncontrolling interests are typically presented under which balance sheet element?

Equity

Which of the following statements regarding elements of the financial statements is least likely? The IFRS framework describes: -Equity as being equal to capital contributed by the owner. -Assets as the resources the entity controls from which it expects to derive future economic benefits. -Liabilities as obligations that will result in an outflow of economic benefits in the future.

Equity as being equal to capital contributed by the owner.

Excessive use of which of the following accounting treatments is most likely an accounting warning sign for improper accounting practices? -FIFO method for inventory valuation. -Finance leases by lessees. -Equity method of accounting of intercorporate investments.

Equity method of accounting of intercorporate investments.

Which of the following decisions least likely requires the analysis of financial statements? Estimating the useful life of a noncurrent asset Assigning a debt rating to a company or bond issue Extending credit to a customer

Estimating the useful life of a noncurrent asset

Under U.S. GAAP, an increase in which of the following least likely increases pension expense under a defined-benefit plan? -Interest expense -Expected return on plan assets -Service costs

Expected return on plan assets

Mystical Wishes Inc. (MWI) made the following purchases during the year: January 6: 160 units at €35.10; April 26: 225 units at €37.75; July 12: 175 units at €38.50 and October 22: 250 units at €40.25. MWI began the year with no inventory on hand. At the end of the year, 50 units remained in inventory. Which of the following methods would result in the lowest cost of goods sold? -First in, first out (FIFO). -Last in, first out (LIFO). -Weighted average method.

First in, first out (FIFO).

If a user requires information regarding material corporate events, she is most likely to refer to: -Form 144. -Form 6-K. -Form 8-K.

Form 8-K.

Under IFRS, a lessor company recognising a finance lease as opposed to an operating lease is most likely to show:

Higher interest revenue over the life of the lease.

A higher working capital turnover most likely indicates:

Higher operating efficiency.

A company that expenses a cost least likely reports:

Higher return on equity in the first year compared to a company that capitalizes the cost.

Assuming U.S. GAAP applies, which of the following intangible assets acquired in a business combination is least likely recognized separately from goodwill?

High‐caliber work force

Which of the following is most likely to be used to conduct trend analysis? -Horizontal common-size financial statements -Vertical common-size financial statements -Pie charts

Horizontal common-size financial statements

Which of the following statements about reversals of impairment losses is least accurate? -IFRS allows reversals of impairment losses only for assets held-for-sale. -U.S. GAAP does not allow reversals of impairment losses for assets held-for-use. -U.S. GAAP allows reversals of impairment losses for assets held-for-sale.

IFRS allows reversals of impairment losses only for assets held-for-sale.

Which of the following statements is correct? -Permanent differences increase the firm's effective tax rate relative to the statutory rate. -Permanent differences are income and expense items that affect both tax return income and financial income. -If the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain, deferred taxes should not be included in equity or liabilities.

If the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain, deferred taxes should not be included in equity or liabilities.

Barnes, an analyst, will check the financial statements of King Company. Which of the following items is likely to be classified as unusual or infrequent, but not both? -Gains or losses from debt forgiveness -Impairments, write-offs, write-downs, and restructuring costs -Losses from an expropriation of assets

Impairments, write-offs, write-downs, and restructuring costs

ABC Company uses the straight-line method of depreciation on its financial statements to write off a piece of equipment that it purchased for $10,000. The asset has an estimated salvage value of zero and a useful life of 4 years. On the tax return it writes off the asset over 2 years with zero salvage value. The company is taxed at 30%. For Year 3, which of the following statements is most likely?

Income tax expense will be lower than taxes payable by $750. 2,500 × 0.3 = $750.

A company runs down its inventory toward the end of the financial year. In an inflationary environment, if the company uses LIFO, this is likely to result in an:

Increase in net income.

A decrease in the valuation allowance most likely results in a(n):

Increase in total assets.

A U.S. consultancy company discovers that a transaction that took place last year was incorrectly recorded and in fact a client paid an additional $10,000 of fees over that recorded as a bonus based on the benefits he received from the consultancy provided in that period. The company should: -Increase the income received in the current year's accounts. -Adjust the retained earnings in the previous year's balance sheet. -Recognize the $10,000 as an extraordinary profit in the current year.

Increase the income received in the current year's accounts.

Which of the following statements is most likely regarding accounting for discount bonds? -The book value of the liability decreases each year over the term of the bonds. -Interest expense recognized exceeds the coupon payment each year over the term of the bonds. -The excess of interest expense over the coupon payment serves to reduce the liability balance each year.

Interest expense recognized exceeds the coupon payment each year over the term of the bonds.

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

Interest received

Which of the following is least likely to be capitalized under U.S. GAAP? -Internally generated goodwill -Intangible assets purchased in situations other than business combinations -Costs related directly to the development of software for internal use

Internally generated goodwill

Which of the following is mandated to develop international standards for auditing? -International Auditing and Attestation Standards Board -International Auditing and Assurance Standards Board -Public Company Auditing Oversight Board

International Auditing and Assurance Standards Board

Sparta Inc. is a manufacturer of heavy machinery, but frequently invests in securities that it classifies as held-to-maturity. The outflow of cash for these investments is most likelyclassified as a(n):

Investing activity.

Gamma Corporation is involved in the manufacture of parts for the aerospace industry. Assuming U.S. GAAP applies, which of the following is least likely classified as an investing activity by the firm? -Investing in securities classified as held for trading -Acquisition of a subsidiary -Cash paid to purchase intangible assets

Investing in securities classified as held for trading

Which of the following statements regarding a vertical common-size balance sheet is least accurate? -It allows an analyst to perform cross-sectional analysis across firms within the same industry. -It allows an analyst to perform time-series analysis. -It expresses each balance sheet item as a percentage of noncurrent assets.

It expresses each balance sheet item as a percentage of noncurrent assets.

Which of the following most accurately describes "realizable value" as a measurement base for assets? -It is the amount of cash paid to purchase an asset, including costs of acquisition and installation. -It is the amount for which the asset could be exchanged between knowledgeable, willing parties in an arm's length transaction, which may involve either market measures or present value measures. -It is the amount of cash that can currently be obtained by selling the asset in an orderly disposal.

It is the amount of cash that can currently be obtained by selling the asset in an orderly disposal.

Which of the following is the most accurate explanation of "realizable value" as a measurement base for liabilities? -It is the present discounted value of the expected future net cash outflows that are required to settle the liability in the normal course of business. -It is the undiscounted amount of cash expected to be paid to satisfy the liability in the normal course of business. -It is the undiscounted amount of cash required to settle the obligation today.

It is the undiscounted amount of cash expected to be paid to satisfy the liability in the normal course of business.

Bizcom International uses historical cost as a measurement base for its assets, while Telecard Inc. uses fair value. Given that over the past few years, prices of noncurrent assets have significantly increased, Bizcom is most likely to report:

Lower assets than Telecard.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held-for-trading and $8,000 in securities classified as held to-maturity. Transaction 4: Paid dividends amounting to $130,000. Which of the following statements is most accurate regarding Transaction 3? -It will increase cash flow from investing activities by $8,000. -It will decrease cash flow from operating activities by $12,000. -It will decrease cash flow from investing activities by $20,000.

It will decrease cash flow from operating activities by $12,000.

Accounting standard boards should least likely:

Let the decision-setting process be compromised due to pressure from external forces.

Royal Manufacturers acquires an asset for $280,000. The asset has a useful life of 4 years and an estimated salvage value of $20,000. It is expected to generate $150,000 of cash flow each year over its useful life. Royal will depreciate the asset using the double-declining balance method for tax purposes, but for financial reporting purposes, it will depreciate the asset on a straight-line basis. The company's tax rate is 40%. Which of the following statements is most accurate? The company will report: -Higher depreciation expense on the tax return than on the financial statements over the 4 years. -Lower taxes payable on the tax return than on the financial statements over the 4 years. -Lower profit after tax on the tax return than on the financial statements in the early years.

Lower profit after tax on the tax return than on the financial statements in the early years.

Information regarding material events and uncertainties is most likely found in:

Management Discussion & Analysis.

Which of the following is least likely required by debt covenants? -Mandatory dividend payments -Maximum levels of leverage -Maintenance of pledged collateral

Mandatory dividend payments

A company's solvency most likely refers to its ability to:

Meet its long-term obligations.

Liquidity most likely refers to a company's ability to:

Meet its short-term obligations.

Which of the following is least likely a limitation of ratio analysis? -Companies may have several divisions that operate in different industries. -Most companies around the world subscribe to the same set of accounting standards. -There are no specified ranges within which particular ratios for companies must lie.

Most companies around the world subscribe to the same set of accounting standards.

Which of the following is least likely a format for the balance sheet? -Report format -Multi-step format -Account format

Multi-step format

When an income statement explicitly shows gross profit as a subtotal, it most likely uses a:

Multi-step format.

Under US GAAP, from the lessee's perspective, which of the following is least likely to be higher under an operating lease compared to a finance lease? -Operating expenses -Nonoperating expenses -Net income in the early years

Nonoperating expenses

The method by which a company calculates depreciation is usually described in its:

Notes to the financial statements.

An increase in which of the following will most likely result in a decrease in a company's cash conversion cycle? -Number of days of payables -Number of days of inventory -Number of days of receivables

Number of days of payables

An analyst obtains the following information about the assets of two companies, both of which follow U.S. GAAP for financial reporting purposes. Alpha Inc. owns a piece of equipment that has a carrying value of $5,200. The company estimates that the total expected future cash flows from this piece of equipment would amount to $4,200 (present value equals $3,800). The company estimates that the fair value of the asset is $5,000 and selling costs would amount to $500. Beta Inc. owns a piece of equipment that has a carrying value of $6,600. The company estimates that the total expected future cash flows from this piece of equipment would amount to $6,700 (present value equals $6,400). The company estimates that the fair value of the asset is $6,300 and selling costs would amount to $400. Which of the following statements is most accurate? -Only Alpha Inc.'s asset has been impaired. -Only Beta Inc.'s asset has been impaired. -Both the companies' assets have been impaired.

Only Alpha Inc.'s asset has been impaired.

Consider the following statements: Statement 1: Motivations relating to trade effects tend to be stronger than those related to equity market effects. Statement 2: Motivations relating to trade effects tend to be more important for smaller companies. Which of the following is most likely? -Only Statement 1 is correct. -Only Statement 2 is correct. -Both statements are incorrect.

Only Statement 2 is correct.

Consider the following two statements: Statement 1: Companies should ideally have net income that exceeds operating cash flows. Statement 2: The variability of operating cash flow and net income is an important determinant of the overall risk inherent in the company. Which of the following is most likely? -Only Statement 1 is correct. -Only Statement 2 is correct. -Both statements are correct.

Only Statement 2 is correct.

Consider the following statements: Statement 1: Screening is the process of filtering potential investments into a smaller grouping by applying a set of criteria. Statement 2: Analysts evaluate how a portfolio based on particular screens would have performed historically through ratio analysis. Which of the following is most likely? -Only Statement 1 is incorrect. -Only Statement 2 is incorrect. -Both statements are correct.

Only Statement 2 is incorrect.

Income that is independent of a firm's capital structure is:

Operating income.

Which of the following is least likely a motivation to issue low-quality financial reports? -Poor corporate internal controls. -Management seeking to increase incentive pay. -Management looking to remove doubts over the company's ability to raise funds in the future.

Poor corporate internal controls.

If a company pays cash before it recognizes the associated expense it results in a(n):

Prepaid expense asset.

The converged standards most likely follow which of the following approaches to revenue recognition?

Principles-based approach

Magnus Corp is planning to expand the company's overseas operations. It starts construction of a factory in Elantica and obtains a loan of $25 million at an interest rate of 7.5%. The company's directors estimate that the factory will be completed in 5 years. During the construction period, the company invests the borrowed funds in money market instruments and earns $135,000. The amount of interest cost that would be capitalized under U.S. GAAP and IFRS is closest to: U.S. GAAP($) IFRS ($) A 937,500 924,000 B 1,875,000 1,740,000 C 9,375,000 9,240,000

Row C

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

Sale of securities classified as available for sale.

Which of the following items is most likely an inventory-related cost that is expensed as incurred? -Cost of raw materials -Normal costs of material wastage -Selling and marketing expenses

Selling and marketing expenses

IFRS requires companies to make all of the following disclosures relating to inventory except: -The carrying amount of inventories pledged as collateral for liabilities. -Significant estimates applicable to inventories. -Amount of inventory-related expenses for the period.

Significant estimates applicable to inventories.

Which of the following is a suitable method for computing free cash flow to the firm? -Sum of operating cash flows and capital expenditures minus after‐tax interest payments. -Net operating cash flows after deducting after‐tax interest payments and capital expenditures. -Sum of operating cash flow and after tax interest payments minus capital expenditures.

Sum of operating cash flow and after tax interest payments minus capital expenditures.

Which of the following statements is most accurate? -The IASB framework does not discuss the term "probable" in its recognition criteria. -The IASB framework includes three more elements relating to financial performance, namely, gains, losses, and comprehensive income. -The IASB framework defines an asset as "a resource controlled by the entity from which future economic benefits are expected to flow to the entity."

The IASB framework defines an asset as "a resource controlled by the entity from which future economic benefits are expected to flow to the entity."

In a period of falling prices and stable inventory quantities, which of the following is least likely? -The current ratio is higher under LIFO. -The debt-to-equity ratio is higher under LIFO. -The inventory turnover ratio is lower under LIFO.

The debt-to-equity ratio is higher under LIFO.

Which of the following is least likely a condition for recognizing financial statement elements? -The item is tangible. -The cost of the item can be measured reliably. -It is probable that any future economic benefits associated with the item will flow to or from the enterprise.

The item is tangible.

Which one of the following is least likely an incentive to overstate earnings? -To negotiate concessions from unions. -To meet analysts' earnings expectations. -To improve managements, incentive compensation.

To negotiate concessions from unions.

Form DEF-14A is most likely for which of the following purposes? -To file Management Discussion & Analysis -To provide information regarding proposals that require a shareholder vote -To file unaudited financial statements

To provide information regarding proposals that require a shareholder vote

Which of the following is least likely an objective of the International Organization of Securities Commission (IOSCO)? -To reduce unsystematic risk -To protect the investors -To ensure that markets are fair, efficient, and transparent

To reduce unsystematic risk

A company issued bonds when market interest rates stood at 8%. Today, market interest rates are 10%. Given that these bonds offer a coupon of 9%, the bonds were most likely issued at:

a premium to par

Paul Parker, CFA, is analyzing the financial statements of five companies. Four of the five companies prepare their financial statements based on IFRS. However, one company uses U.S. GAAP to prepare its accounts, and Paul made the necessary adjustments to make its financial statements consistent with IFRS. As per the IFRS Conceptual Framework, this adjustment will mostly enhance the qualitative characteristic of:

comparability

High earnings quality is most likely to:

improve the ability to predict future earnings.

An analyst has calculated a company's turnover ratios for the last two years: -Inventory turnover: 20X3=16.5 | 20X2=19.8 -Receivables turnover: 20X3=12.0 | 20X2=10.5 -Payables turnover: 20X3=10.5 | 20X2=12.3

improved in 20X3 as compared to 20X2. 23.43 X2 -> 17.76 X3 lower # = IMPROVED

Which is the following is least likely an example of a potentially dilutive security? -preference shares -stock options -convertible bonds

preference shares

When screening for potential equity investments based on the debt‐to‐assets ratio as a means to control risk, an analyst would most likely include a criterion that requires a debt/assets ratio to be:

less than 0.5

When an income statement explicitly shows growth profit as a subtotal, it most likely uses a: -multi-step format -common size format -single-step format

multi-step format

Arnold Jones, CFA, notices in his review of Jamit Enterprises' income statement that the company reports various subtotals including gross profit. From his studies, he remembers this format is called: Group of answer choices

multi‐step format.

Which accurately describes the matching principle? -overhead expenses recorded in same period as revenues -ordinary expenses recorded in same period as revenues -expenses recorded up to level of revenues for period

ordinary expenses recorded in same period as revenues

XYZ Corp is a mining company. During the year 2008, it wrote down its inventory by $20,500 to $400,000. In 2009, the fair value of its inventory rose to $450,000. The value of inventory recognized by XYZ at the end of 2009 under IFRS and U.S. GAAP is closest to: IFRS | U.S. GAAP A.$420,500 | $400,000 B.$450,000 | $450,000 C.$450,000 | $420,500

row b

The following information relates to Esther Corporation: Cost of inventory = $212,212 Estimated selling price = $221,221 Estimated selling costs = $9,100 Replacement cost = $212,200 Normal profit margin = $200 Esther Corporation's inventory under IFRS and U.S. GAAP is closest to: IFRS ($) U.S. GAAP ($) A 211,921 212,200 B 212,121 212,121 C 212,212 211,921

row b Net realizable value = 221,221 - 9100 = $212,121 NRV is lower than the original cost of $212,212, so under IFRS, inventory would be reported at $212,121. NRV - Normal profit margin = 212,121 - 200 = $211,921 Replacement cost of $212,200 does not lie within the range of $211,921 and $212,121. Therefore, it must be brought down to $212,121. Replacement cost of $212,121 is lower than the original cost of $212,212, so under U.S. GAAP inventory would be reported at $212,121.

A company purchased an asset at the end of 2008. Its purchase price and the fair values at the end of 2009 and 2010 are given below: Asset | Purchase Price | Fair value at the end of 2009 | Fair Value at the End of 2010 ($) A | 37,500 | 41,100 | 35,400 Given that the company follows the revaluation model to report the asset, answer the following questions: The revaluation-related entry on the company's income statement and revaluation surplus at the end of 2009 is closest to: Income Statement ($) | Revaluation Surplus ($) A 0 | 41,100 B −5,700 | 3,600 C 0 | 3,600

row c Revaluation gain in 2009 = 41,100 - 37,500 = $3,600 The increase in value will be recorded directly in shareholders' equity as revaluation surplus.

Which of the following statements regarding the IASB is least accurate? -It is a private organization consisting of experienced accountants, auditors, users of financial statements, and academics. -It has legal authority to enforce financial reporting requirements. -It is advised by the Standards Advisory Council.

t has legal authority to enforce financial reporting requirements.

A permanent difference between tax and financial reporting of expenses is least likely to be caused by:

the tax base being equal to the carrying amount.

When analysts are developing forecasts of future performance they should most likely:

use judgment in the process, as it allows analysts to provide more of their own insight.

Management has discretion over:

valuation allowances.

Beta Inc. is an exporter of refined sugar. During 2009, it earned net income of $104,000, purchased inventory worth $13,000, and invested in new machinery worth $28,000. The company had previously invested in available-for-sale securities which were sold during the year for $8,000. The company's cash flow from investing activities is closest to:

−$20,000 CFI = Sale of available-for-sale securities - Investment in new machinery CFI = 8,000 - 28,000 = −$20,000

Using the following information and assuming that U.S. GAAP applies, the company's CFI is closest to: Proceeds from sale of equipment=$32,000 Loss on equipment sale=$9,000 Dividends paid=$12,500 Purchase of office premises=$100,000 Common stock repurchases=$45,000 Dividends received=$8,500 Interest received=$1,200 Supplier accounts paid=$3,700 Cash collections from customers=$14,200 Ending cash balance=$98,000

−$68,000 CFI = 32,000 - 100,000 = −$68,000

For 2012 Chyme Enterprises' beginning and ending shareholders' equity was €225 million and €250 million, respectively. In that year, Chyme reported revenue of €130 million and net income of €42 million, the company paid €5.5 million in cash dividends, and there were no other issuances or repurchase of common stock. Calculate the amount of other comprehensive income Chyme reported in 2012.

−€11.5 million. other comprehensive income = [ending shareholders' equity − (beginning shareholders' equity + net income − less cash dividends)]; therefore, other comprehensive income = [€250 − (225 + 42 − 5.5)] = −€11.5.

CFA Financial Statement Analysis

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