FAC Module 3
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. A qualified opinion is issued if the statements have been presented fairly, but do contain exceptions to the accounting principles. The auditor issues an unqualified opinion if the statements have been presented fairly.
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. If the auditor believes that the financial statements materially depart from accounting standards and are not presented fairly, she will issue an adverse opinion.
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
Which of the following is least likely another name for the income statement?
Statement of financial position
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. Only realized gains and losses associated with available-for-sale securities are reported on the income statement. Unrealized gains and losses associated with these securities are reported in the statement of changes in shareholders' equity.
Which of the following is most likely a general requirement for the preparation of financial statements?
Accrual basis Verifiability and timeliness are qualitative characteristics that enhance the value of financial information.
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. Accrued revenue is recognized when a firm has already delivered a good or a service for which cash will be received in future. Accrued revenue is an asset for the firm.
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. Revenue reported on the income statement before cash is received results in accrued revenue or accounts receivable, which is an asset.
Owners' equity is best described as:
Owners' residual interest in the assets of an entity after deducting its liabilities.
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 ($) A--> 4.65 & 4.50 B--> 4.55 & 4.40 C--> 4.62 & 4.42
Row B 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 = $4.55 In calculating diluted EPS, it is assumed that convertible preferred shares are converted into common shares. We also need to add the preferred convertible dividend to the numerator of the formula. Number of converted shares = 500 × 50 = 25,000 Diluted EPS = (2,360,000 - 50,000)/(500,000 + 25,000) = $4.40
Which of the following classifications of ratios is least likely to be used to evaluate a firm's operating efficiency?
Solvency ratios They do not play a major role in evaluating the operating efficiency of a business.
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
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. CFO = Net income + Depreciation expense CFO = 102 + 2.4 = $104.4 million
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 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
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 Depreciation expense = (Cost - Residual Value) / Useful Life Depreciation expense = (875,000 - 60,000)/8 = $101,875
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
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
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 = $27,700
In the year 2009 (its first year of operations), Indigo Computers made the following purchases: Units purchased; Cost per unit ($); Total cost ($) First quarter: 5,200; 28; 145,600 Second quarter: 6,700; 23; 154,100 Third quarter: 7,300; 19; 138,700 Fourth quarter: 4,200; 25; 105,000 Total: 23,400; - ; 543,400 It sold 15,100 units during the year at a price of $30 per unit. Indigo's ending inventory under the first in, first out (FIFO) method is closest to?
$182,900 Number of units in ending inventory = 23,400 - 15,100 = 8,300 units Ending inventory consists of: 4,200 units @ 25 = $105,000 4,100 units @ 19 = $77,900 Therefore, ending inventory = 105,000 + 77,900 = $182,900
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
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 Cash received from customers = Revenue - Increase in accounts receivable Cash received from customers = 35 - 5 = $30 million
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 Purchases = Ending inventory + COGS - Opening inventory Purchases = 28,000 + 54,000 - 47,000 = $35,000
In the year 2009 (its first year of operations), Indigo Computers made the following purchases: Units purchased; Cost per unit ($); Total cost ($) First quarter: 5,200; 28; 145,600 Second quarter: 6,700; 23; 154,100 Third quarter: 7,300; 19; 138,700 Fourth quarter: 4,200; 25; 105,000 Total: 23,400; - ; 543,400 It sold 15,100 units during the year at a price of $30 per unit. Indigo's cost of goods sold under the weighted average cost method for 2009 is closest to:
$350,656 Cost of goods sold = (543,400/23,400) × 15,100 = $350,655.56
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 = $36 million
In the year 2009 (its first year of operations), Indigo Computers made the following purchases: Units purchased; Cost per unit ($); Total cost ($) First quarter: 5,200; 28; 145,600 Second quarter: 6,700; 23; 154,100 Third quarter: 7,300; 19; 138,700 Fourth quarter: 4,200; 25; 105,000 Total: 23,400; - ; 543,400 It sold 15,100 units during the year at a price of $30 per unit. Indigo's cost of goods sold under FIFO for 2009 is closest to:
$360,500 Number of units sold during the year = 15,100 Sold units consist of: 5,200 units @ 28 = $145,600 6,700 units @ 23 = $154,100 3,200 units @ 19 = $60,800 Therefore, cost of goods sold = 145,600 + 154,100 + 60,800 = $360,500
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
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
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 FCFF = 2,050 + 345 + (150 × (1 − 0.3)) - 1,500 - 325 = $675
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 received from customers is closest to:
$90 Million Cash received from customers = Revenue + Decrease in accounts receivable Cash received by the company = 85 + 5 = $90 million
In the year 2009 (its first year of operations), Indigo Computers made the following purchases: Units purchased; Cost per unit ($); Total cost ($) First quarter: 5,200; 28; 145,600 Second quarter: 6,700; 23; 154,100 Third quarter: 7,300; 19; 138,700 Fourth quarter: 4,200; 25; 105,000 Total: 23,400; - ; 543,400 It sold 15,100 units during the year at a price of $30 per unit. Indigo's gross profit for 2009 if it uses FIFO is closest to:
$92,500 Total revenues = 15,100 × 30 = $453,000 Gross profit = 453,000 - 360,500 = $92,500
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
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's debt-to-assets ratio for 2008 is closest to:
0.25 Debt-to-assets ratio = Total debt / Total assets Debt-to-assets ratio = 72,000 / 286,500 = 0.251
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's debt-to-equity ratio for 2009 is closest to:
0.62 Debt-to-equity = Total debt / Shareholders' equity Debt-to-equity = 134,700 / 217,500 = 0.619
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's cash ratio for 2009 is closest to:
1.09 Cash ratio = (Cash + Short-term marketable securities) / Current liabilities Cash ratio = (5,100 + 8,300) / 12,300 = 1.089
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's total asset turnover for 2009 is closest to:
1.13 Total asset turnover = Revenue / Average total assets Total asset turnover = 367,700 / [(286,500 + 364,500)/2] = 1.13
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
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's financial leverage ratio for 2009 is closest to:
1.54 Financial leverage = Average total assets / Average total equity Financial leverage = [(286,500 + 364,500)/2] / [(206,000 + 217,500)/2] = 1.537
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's number of days of inventory on hand for 2009 is closest to:
10.26 days Days of inventory on hand = 365 / Inventory turnover Days of inventory on hand = 365 / 35.586 = 10.257
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 The account format presents assets on the left, and liabilities and equity on the right-hand side of the balance sheet.
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's net profit margin for 2009 is closest to:
14.66% Net profit margin = Net profit / Revenue Net profit margin = (53,900 / 367,700) × 100 = 14.659%
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's return on assets for 2009 is closest to:
16.56% Return on assets = Net income / Average total assets Return on assets = 53,900 / [(286,500 + 364,500)/2] = 16.559%
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's return on total capital for 2008 is closest to:
19.46% Return on total capital = EBIT / (Short-term debt + Long-term debt + Equity) Return on total capital = 54,100 / (72,000 + 206,000) = 19.46% Magma Corporation does not have any short-term debt outstanding.
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's working capital turnover for 2009 is closest to:
19.66 Working capital turnover = Revenue / Average working capital Working capital for 2008 = 26,600 - 8,500 = 18,100 Working capital for 2009 = 31,600 - 12,300 = 19,300 Average working capital = (18,100 + 19,300) / 2 = 18,700 Working capital turnover = 367,700 / 18,700 = 19.663
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's quick ratio for 2008 is closest to:
2.00 Quick ratio = (Cash + Short-term marketable securities + Receivables) / Current liabilities Quick ratio = (5,500 + 6,200 + 5,300) / 8,500 = 2
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:
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
Which of the following is an analyst most likely to examine in order to learn more about a firm's operating activities?
Accounts receivable
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's current ratio for 2008 is closest to:
3.13 Current ratio = Current assets / Current liabilities Current ratio = 26,600 / 8,500 = 3.129
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's payables turnover for 2009 is closest to:
34.88 Payables turnover = Purchases / Average trade payables Purchases = Ending inventory + Cost of goods sold - Opening inventory Purchases = 6,200 + 197,500 - 4,900 = 198,800 Payables turnover = 198,800 / [(4,700 + 6,700)/2] = 34.877
Using the above information and assuming a tax rate of 40%, answer Question Magma Corporation's inventory turnover for 2009 is closest to:
35.59 Inventory turnover = Cost of goods sold / Average inventory Inventory turnover = 197,500 / [(4,900 + 6,200)/2] = 35.586
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%
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%
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's receivables turnover for 2009 is closest to:
57.45 Receivables turnover = Revenue / Average receivables Receivables turnover = 367,700 / [(5,300 + 7,500)/2] = 57.453
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's cash conversion cycle for 2009 is closest to:
6.15 days. Cash conversion cycle = Days of sales outstanding + Days of inventory on hand - Number of days of payables Cash conversion cycle = 6.353 + 10.257 - 10.465 = 6.145
Which of the following statements is least accurate?
A change in accounting principle is applied prospectively. A change in accounting principle is applied retrospectively.
Which of the following is most likely a source of cash flow (outflow) for a company?
A decrease in accounts payable
Which of the following is least likely an investing activity under IFRS?
A manufacturing firm investing in held-for-trading securities Under IFRS: 1. Investment in securities classified as held-for-trading is represented as an operating activity. 2. Receipt of interest on a loan may either be classified as an operating or an investing activity. 3. Investment in property, plant, and equipment is classified as an investing activity.
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 operating in a labor-intensive business environment will likely have a low investment in fixed assets and consequently, a higher fixed-asset turnover ratio.
Which of the following is most likely to indicate that a company has too many resources tied up in inventory?
A relatively high number of days of inventory on hand
Held-to-maturity investments are most likely measured at:
Amortized Cost
An accrued expense liability is most likely recognized when:
An expense is recognized before cash payment.
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. 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 is most likely a use of cash for a company?
An increase in inventory
Which of the following financial assets/liabilities is most likely to be measured at amortized cost?
Bonds payable Derivative instruments and nonderivative instruments with face value exposures hedged by derivatives are measured at fair value.
An audit is most likely described as:
An independent review of an entity's financial statements.
An audit can most likely be described as:
An independent review of the company's financial statements.
Which of the following elements of financial statements is least likely related to the measurement of performance?
Assets Income and expenses are related to the measurement of financial performance, while assets, liabilities, and equity are related to the measurement of financial position.
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?
Bank borrowings Bank borrowings are a liability for a company and not included in equity.
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.
Under U.S. GAAP, interest and dividends received may be classified as:
CFO only
Under IFRS, interest paid may be classified as:
CFO or CFF
Under IFRS, dividends received may be classified as:
CFO or CFI.
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
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?
Collecting data
Which of the following is least likely an example of the measurement bases used to value items listed on the balance sheet?
Economic cost The measurement bases of assets and liabilities include fair value, historical cost, current cost, and present value.
Which of the following is least likely a general requirement for the preparation of financial statements?
Completeness Completeness contributes toward faithful representation of financial statements. General requirements for the preparation of financial statements include fair presentation, going concern, accrual basis, materiality and aggregation, no offsetting, frequency of reporting, comparative information, and consistency.
Which of the following is least likely a characteristic of an effective financial reporting framework?
Completeness The characteristics of a coherent financial reporting framework are transparency, comprehensiveness, and consistency. Completeness contributes to faithful representation of financial information.
Which of the following is least likely a desirable qualitative characteristic of financial statements?
Conciseness Two fundamental qualitative characteristics of financial statements are relevance and faithful representation. Other qualitative characteristics that enhance the value of financial information are comparability, verifiability, timeliness, and understandability.
Which of the following is least likely an example of grouping an expense by nature?
Cost of goods sold Cost of goods sold is an example of grouping an expense by function and may include salaries, material costs, depreciation, and other direct sales-related expenses.
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).
Assuming U.S. GAAP, which of the following is most likely classified as a financing activity by a trading company?
Dividends paid Under U.S. GAAP, dividends paid are classified as financing activity, while dividends and interest received are classified as operating activities.
Goodwill based on a company's performance and its future prospects is most likely known as:
Economic goodwill. Accounting goodwill is based on accounting standards and is only reported for acquisitions when the purchase price exceeds the fair value of the acquired company's net assets. Economic goodwill is not reflected on the balance sheet and is based on a company's performance and its future prospects.
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. Equity includes owners' contributed capital as well as ending retained earnings. It can also be described as the owners' residual interest in the assets of a company after deducting all liabilities.
Which of the following decisions least likely requires the analysis of financial statements?
Estimating the useful life of a noncurrent asset
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. Companies are required to disclose their revenue recognition policies in the financial statement footnotes.
An increase in which of the following ratios most likely suggests an improvement in a company's solvency position?
Fixed charge coverage ratio An increase in the D-E and the financial leverage ratio indicates a worsening solvency position. An increase in the fixed charge coverage ratio suggests that the company can service its debt obligations more comfortably with operating earnings.
Which of the following is least likely a step in the financial statement analysis framework?
Forecasting data
If a user requires information regarding material corporate events, she is most likely to refer to:
Form 8-K. Form 8-K is used to report material corporate events on a more current basis. Form 144 is filed with the SEC for disclosing the proposed sale of restricted securities. Form 6-K is used by non-U.S. companies to submit certain financial information semiannually.
A higher working capital turnover most likely indicates:
Higher operating efficiency.
Which of the following is most likely to be used to conduct trend analysis?
Horizontal common-size financial statements
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?
Impairments, write-offs, write-downs, and restructuring costs Impairments, write-offs, write-downs, and restructuring costs are most likely to be considered unusual or infrequent, but not both, and material items are disclosed separately as part of a company's ordinary activities. The first and third answer choices are examples of items that are likely to be classified as unusual and infrequent.
Using the above information and assuming a tax rate of 40%, answer the following question Over 2009, Magma Corporation's ability to service its debt obligations (as measured by its interest coverage ratio) has most likely:
Improved Interest coverage ratio in 2009 = 76,200 / 2,400 = 31.75 times A higher ratio implies that the company can service its debt from operating earnings more comfortably.
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. Expense recognition should be based on the matching principle, which requires that expenses incurred to generate revenue should be recognized in the same period as the related sales.
Which of the following is least likely included in the statement of changes in shareholders' equity?
Interest received Interest received is typically listed on the income statement, not on the statement of changes in shareholders' equity.
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 likely classified as a(n):
Investing activity. Investments in securities classified as held-to-maturity are represented as an 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 Under U.S. GAAP, investing in securities classified as held for trading is classified as an operating activity.
Which of the following statements regarding a vertical common-size balance sheet is least accurate?
It expresses each balance sheet item as a percentage of noncurrent assets. A vertical common-size balance sheet expresses each balance sheet item as a percentage of total assets.
Which of the following statements regarding the IASB is least accurate?
It has legal authority to enforce financial reporting requirements. The IASB is responsible for the creation of accounting standards; it is not a regulatory authority.
Which of the following most accurately describes "realizable value" as a measurement base for assets?
It is the amount of cash that can currently be obtained by selling the asset in an orderly disposal. Statement A describes "historical cost" as a measurement base for assets. Statement B describes "fair value" as a measurement base for assets.
Which of the following is the most accurate explanation of "realizable value" as a measurement base for liabilities?
It is the undiscounted amount of cash expected to be paid to satisfy the liability in the normal course of business. Statement A describes "present value" as a measurement base for liabilities. Statement C describes "current cost" as a measurement base for liabilities.
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 decrease cash flow from operating activities by $12,000. Investments in held-for-trading securities are classified as an operating activity, while investments in held-to-maturity securities are classified as an investing activity.
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?
Last in, first out (LIFO)
Accounting standard boards should least likely:
Let the decision-setting process be compromised due to pressure from external forces. Accounting standard boards should not let the decision-setting process be compromised due to pressure from external forces.
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. Telecard reports its assets at fair value and therefore reflects the current higher prices on its balance sheet.
Information regarding material events and uncertainties is most likely found in:
Management Discussion & Analysis. Information regarding inflation, future goals, material events, and uncertainties is found in the Management Discussion & Analysis section.
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?
Most companies around the world subscribe to the same set of accounting standards. Despite the growing convergence between IFRS and U.S. GAAP, significant differences remain across the two sets of standards, which makes comparison across firms difficult.
Which of the following is least likely a format for the balance sheet?
Multi-step format A balance sheet may either be presented in an account format or a report format. The multi-step format may be used to prepare an income statement.
When an income statement explicitly shows gross profit as a subtotal, it most likely uses a:
Multi-step format.
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 Cash conversion cycle = DSO + DOH − Days of payables
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 2 is correct. Companies should ideally have operating cash flows that exceed net income.
Which of the following is least likely an example of a potentially dilutive security?
Preference shares Preference shares are not potentially dilutive securities as they cannot be converted into ordinary shares of the company. Options, warrants, convertible preference shares, and convertible bonds may be converted into ordinary shares and are, therefore, potentially dilutive.
If a company pays cash before it recognizes the associated expense it results in a(n):
Prepaid expense asset.
Which of the following approaches is adopted by the IASB?
Principles-based
The converged standards most likely follow which of the following approaches to revenue recognition?
Principles-based approach The converged standards provide a principles-based approach to revenue recognition.
The following information relates to Global Manufacturers for the year ended 2009: Net income = $2,440,000 12% preferred stock = $850,000 Dividends paid to common shareholders = $50,000 Weighted average number of common shares outstanding = 2,000,000 The company also has $100,000 par of 8% convertible bonds outstanding, which are convertible into 20,000 shares of common stock. Given that Global Manufacturers pays taxes at the rate of 35%, its basic and diluted earnings per share are closest to: Basic EPS ($) & Diluted EPS ($) A--> 1.22 & 1.21 B--> 1.17 & 1.16 C--> 1.14 & 1.14
Row B Preferred dividend = 850,000 × 0.12 = $102,000 Basic EPS = (2,440,000 - 102,000)/2,000,000 = $1.169 To determine diluted EPS, we will add the after-tax interest on convertible debt in the numerator and the number of converted shares in the denominator. After-tax interest on convertible debt = 8,000 × (1 - 0.35) = $5,200 Diluted EPS = (2,440,000 - 102,000 + 5,200)/(2,000,000 + 20,000) = 1.16
Capital One Bank provided $2.5 million to Pharma One Pvt. Ltd. (a pharmaceutical company) as a loan to be repaid in 5 years. Which of the following is the most accurate classification of this transaction by both the parties? Capital One & Pharma One A. Financing activity & Financing activity B. Financing activity & Investing activity C. Operating activity & Financing activity
Row C Lending is a normal business activity for a bank and is therefore classified as an operating activity. Pharma One classifies the loan as a financing activity.
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.
Which of the following is least likely a financial sector ratio?
Same store sales "Same store sales" is a ratio that is used for analysis by retailers.
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. Different accounting practices can distort comparisons.
Which of the following statements is most accurate?
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 FASB framework does not discuss the term "probable" in its recognition criteria. The FASB framework includes gains, losses, and comprehensive income as financial statement elements.
Which of the following is the most accurate description of the going concern assumption?
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?
The framework requires the presentation of all financial information irrespective of how long it takes to gather that information.
Which of the following is least likely a condition for recognizing financial statement elements?
The item is tangible. An item need not be tangible in order to be recognized as a financial statement element.
Which of the following is the most accurate definition of assets?
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.
Which of the following is most likely a qualitative characteristic that enhances the value of relevant and faithfully represented financial information?
Timeliness Faithful representation (a fundamental qualitative characteristic of financial reports) requires financial information to be neutral, complete, and free from errors. The four supplementary qualitative characteristics of financial statements are: Comparability Verifiability Timeliness Understandability
Form DEF-14A is most likely for which of the following purposes?
To provide information regarding proposals that require a shareholder vote Proposals that require a shareholder vote are included in the proxies, which are filed with the SEC as form DEF-14A.
Which of the following is least likely an objective of the International Organization of Securities Commission (IOSCO)?
To reduce unsystematic risk One of the objectives of IOSCO is to reduce systematic risk.
In order to evaluate a company's ability to meet its long-term obligations, an analyst will most likely examine its:
Total debt ratio. The total debt ratio (total debt divided by total assets) is a solvency ratio used to evaluate a company's ability to settle its long-term obligations.
Which of the following is most likely classified as an identifiable intangible asset?
Trademarks
Which of the following statements regarding a company's internal controls is most accurate?
Under U.S. GAAP, an auditor is also required to express an opinion on the company's internal controls system. The effectiveness of a company's internal controls system is the responsibility of management. The internal controls system seeks to ensure the reliability of the company's processes of preparing financial statements.
A company's other comprehensive income most likely includes:
Unrealized gains and losses from cash flow hedging derivatives. Unrealized gains and losses from cash flow hedging derivatives are included in other comprehensive income. Net income is included in comprehensive income, but not in other comprehensive income.
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. In order to classify securities as held to maturity, a company should have the intent as well as the ability to hold the investment until maturity. Realized gains and losses are recognized on the income statement.
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's solvency position over 2009 (as measured by its debt-to-assets ratio) has most likely:
Weakened Debt-to-assets ratio in 2009 = 134,700 / 364,500 = 0.37 The company's debt-to-assets ratio has increased from 0.251, which indicates that the company's solvency position has weakened.
Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's liquidity position over 2009 (as measured by its current ratio) has most likely:
Worsened Current ratio = Current assets / Current liabilities Current ratio in 2009 = 31,600 / 12,300 = 2.569 The company's liquidity position has worsened over 2009.
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. To solve this problem we can use the formula, 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. The second choice incorrectly ignored the cash dividend and the third choice incorrectly added the cash dividend.
