Financial analysis and valuation MCQ

Which of the following statement(s) apply when consolidating statements of financial position a) All inter-company balances should be cancelled b) The group share of the whole of subsidiary's profit is included within group profit c) Inter company profit should be eliminated unless it is realised by sale to an outsider d) Subsidiary's asset values need to be updated at the end of each accounting period a & d a & b a & c b & c

A & C

When preparing a consolidated statement of financial position any profit made by one member of the group against another should be eliminated unless it has been realised by disposal to some one outside the group. Which of the following is / are the reason(s) for this? a) Because an entity cannot make a profit against its own self b) Because it is fashionable to do so c) Because subsidiary's assets needs to be reported at the amount each cost the group d) Because the unsold goods may have to be returned to the party purchased from a, b & c a & c c & d b, c & d

a & c

Any amount owed by one member of a group to another need to be cancelled when preparing the consolidated statement of financial posiition. As at the year-end the parent's receivable includes £90 due from the subsidiary; whereas the subsidiary reports that it owes only £60 to the parent. The difference has arisen because of cash in transit. Which is the correct way of dealing with the situation when preparing the consolidated statement of financial position. a) Cancel £60 from both receivable and payable b) Cancel £90 from receivable and £60 from payable c) Cancel £90 from parents receivable, £60 from subsidiary's d) payable and include £30 with cash Cancel £90 from both receivable and payable

A is correct

All assets that will not be converted to cash or used up within the business's operating cycle or one year, whichever is greater, are called ________ A) long-term assets B) fully depreciated assets C) current assets D) current liabilities

A) long-term assets

Liquidity is a measure of how ________. A) quickly an asset may be converted into cash B) long an asset can be used C) easily an asset can be exchanged for another asset D) short an operating cycle is

A) quickly an asset may be converted into cash

A parent owns two third of the subsidiary's equity. As at a year end the subsidiary's inventory includes goods sent to it by the parent invoiced at £360,000. Parent has purchased these goods for £300,000. Which of the following are the correct entries for eliminating unrealised profit? a) Debit the parent's retained earnings and credit the subsidiary's inventory with £60,000 b) Debit the subsidiary's retained earnings and credit the subsidiary's inventory with £45,000 c) Debit the parents retained earnings and credit subsidiary's inventory with £45,000 d) Debit the subsidiary's retained earnings and credit the subsidiary's inventory with £60,000

As the parent company has sold the inventory to the subsidiary, the whole of the £60,000 should be removed from the consolidated financial statement. The entries would be to debit the parent's retained earnings (as the parent company has not yet made the profit on sale) and credit the subsidiary's inventory (as this is where the inventory is held) - So, answer (b) is correct [60,000 x 75%]

With regard to preparing consolidated statements of financial position which of the following statements is / are correct? a) the consolidated statement of financial position reports only parent's goodwill b) Any unrealized profit made by a subsidiary should be eliminated from its profit c) An amount owed to each other within the group needs to be cancelled d) Only the group portion of any unrealised profit need be eliminated. c a a & b b & c

B & C

Which of the following companies would qualify to be regarded as subsidiaries of Alpha? a) Beta in which Alpha has 15% votes and a place on the board of directors b) Delta in which Alpha has 52% votes but no place on the board of directors c) Gamma in which Alpha has 25% shares and two places on the board of directors d) Theta in which Alpha holds 100% votes and all places on the board of directors b & c b & d a & c a & b

B & D

The time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash, is called the ________. A) production time B) operating cycle C) accounting cycle D) sales time

B) operating cycle

Property, plant, and equipment are categorized as ________. A) current assets B) plant assets C) long-term investments D) short-term investments

B) plant assets

Which of the following would qualify a company to be regarded as a parent of another? A) A parent and the subsidiary should both have the same persons as their directors B) A parent it and its subsidiary must both be in the same line of business C) A parent should control the majority of the votes at subsidiary's shareholders' meetings D) A parent should own majority shares in the subsidiary

C

When preparing a consolidated statement of financial position the identifiable non monetary assets of the subsidiary need to be fair valued for which of the following reason / reasons? a) To inform the acquired company what its assets are worth in the market b) To comply with the practice followed over the years c) To report each of the subsidiary's assets at what it cost the group to acquire d) To identify the amount paid for goodwill as the residual not attributed to other assets a, c & d b, c & d c & d a, b & c

C & D

Subsidiary's inventory at the year end included £180,000 purchased from its parent. Further goods invoiced by the parent at £45,000 were in transit. The parent invoices the subsidiary at cost plus 20%. The amount of unrealised profit that needs to be eliminated from the parent's retained earnings would be: £36,000 £38,333 £30,000 £37,500

Cost of goods at £180,000 selling price = £180,000/1.2 = £150,000 Cost of goods at £45,000 selling price = £45,000/1.2 = £37,500 Profit on £180,000 goods = £180,000 - £150,000 = £30,000 Profit on £45,000 goods = £45,000 - £37,500 = £7,500 Total profit in stock = £30,000 + £7,500 = £37,500

Under which of the following categories would Accounts Payable appear? A) Long-term assets B) Current assets C) Long-term liabilities D) Current liabilities

D) Current liabilities

Assets that are expected to be converted to cash, sold, or used up during the next 12 months, or within the business's normal operating cycle if the cycle is longer than a year, are called ________ assets. A) intangible B) plant C) long-term D) current

D) current

Which of the following statement(s) is / are correct with regard to preparation of consolidated financial Statement? a) To be a subsidiary a parent should hold 100% of its equity shares b) Consolidation merely addition together of two Statements of financial position c) In consolidation a subsidiary and an associate are treated identically d) Consolidated balance sheet excludes assets not owned by the group a & b None a & d b & c

None

What is the amount of the unrealised profit to be eliminated if the parent's year-end inventory includes at £540,000 goods invoiced to it by its 60% owned subsidiary at cost plus 25%. £81,000 £135,000 £64,800 £108,000

The cost of the goods is £540,000/1.25 = £432,000, Profit on the sale is £432,000 x 25% = £108,000. This should be credited to inventory. Non-controlling interest (NCI) would be debited with 40% (43,200) and consolidated reserves would be debited with 60% (64,800).

When preparing a consolidated statement of financial position, pre-acquisition portion of subsidiary's retained earnings need to be frozen by off setting it from the cost of investments. Which of the following is / are the reason for this? a) That portion of profit has been paid for by the parent as part of its investment b) It is not ethical for the parent to claim profits made before a company became a subsidiary c) To establish the true cost to the parent of acquiring the subsidiary' s goodwill d) Otherwise group profits are inflated by acquiring subsidiary's with high retained earnings. a & c b & d b & c c & d

a & c

When preparing a consolidated Statement of financial position the identifiable non monetary assets of the subsidiary need to be fair valued. Which of the following assets of the subsidiary need to be fair valued? a) Land and building appearing in the books of the subsidiary b) Trade receivables reported on the subsidiary's balance sheet c) Brand name the cost relating to which the subsidiary has already fully written off d) Inventory reported on the subsidiary's statement of financial position a, b & c a, c & d c & d b, c & d

a, c & d

Which of the following statements are incorrect with regard to preparation of a consolidated statement of financial position? a) Gain on fair valuation of a subsidiary's asset is a pre-acquisition profit b) Non controlling interest does not deserve any portion of fair valuation gain c) If an asset is not reported in the subsidiary's ledger it need not be fair valued d) Gain on fair valuation of subsidiary's asset inflates the cost of goodwill c & d b, c & d a, c & d a, b & c

b, c & d