CIS March 2012 Exam Diet
Examination Paper 2.1:
Financial Accounting and Financial Statement
Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Financial Accounting and Financial Statement Analysis (1 – 18)
1.
How should positive goodwill arising upon consolidation be treated in the financial
statement of an entity in line with the provisions of IFRS?
A. It should be recognized immediately in the income statement after proper
reassessment.
B. It should be recognized directly in equity.
C. It should be disregarded in the financial statement.
D. It should be capitalized, and tested for impairment on a regular basis.
2.
Segment information is used for which of the following purposes:
I. Comparison of performance
II. Comparison of performance
III. Comparison of performance
geographical locations.
IV. Comparison of performance
A.
B.
C.
D.
3.
of various divisions.
of various products.
of various managers in charge of different
with companies in the same product line.
I and II only.
II and III only.
I, II and IV only.
All of the above.
You are given below the following information relating to three assets X, Y and Z:
Net book value
Net realizable value
Value in use
X
100
110
105
Y
150
100
140
Z
120
80
140
What is the impairment loss for each of the three assets?
X
Y
Z
A.
10
0
20
B.
5
10
20
C.
0
10
0
D.
5
40
60
4.
On 1 January 2011, Maya Co issued 60,000 additional ordinary shares. This brought
the total number of shares in issue to 660,000. In the year to 30 April 2011, the
profit before tax was N847,400 and the tax charge was N47,800.
What was the earnings per share for the year to 30 April 2011 (to the nearest kobo)?
A. 137 kobo.
B. 129 kobo.
C. 121 kobo.
D. 125 kobo.
5.
The draft financial statements of Romoke Limited for the year to 31 March 2011
report a profit of N385,793. The following issues have not yet been taken into
account:
I.
On 10 April 2011, the directors were informed that an insurance claim for a
robbery which had taken place on 22 March 2011 and for which they had
expected to receive N75,800 would be restricted to N21,500.
II. On 2 April 2011, an accident in the warehouse destroyed inventory valued at
N17,200.
What is the revised profit when these issues are taken into account?
A. N292,793
B. N368,593
C. N314,593
D. N331,493
6.
On 1 February 2011, Dreamline Plc acquired 480,000 of the 600,000 ordinary shares
of Sorino Limited at a price of N4·28 per share. At that date the book value of the
net assets of Sorino Limited was N2,356,920 and the fair value of land owned by
Sorino Limited exceeded the book value by N110,000.
Assuming that the full fair value method of valuation is used, what is the value of
goodwill on acquisition?
A. N168,864
B. N211,080
C. N101,080
D. N80,864
7.
Which of the following is not a principle qualitative characteristic of financial
information according to the IASB’s Framework for the preparation and presentation
of financial statements (‘the framework’)?
A. Going concern.
B. Relevance.
C. Comparability.
D. Understandability.
8.
As a result of completing a transaction, Deyo Limited will receive an economic benefit
in the future.
Which of the following should now be recognised?
A. Income.
B. Equity.
C. Asset.
D. Liability.
Use the following data to answer questions 9 to 12.
You are provided with the following ratios from the financial statements of Dodomaya Plc,
as well as the average ratios of the industry where the company operates.
Current
Year
Last
Year
Industry
Current ratio
1.9
2.1
1.5
Quick ratio
0.95
1.1
0.9
Receivables collection
period
18.25
18.9
18.0
Inventory turnover
10.0
10.7
12.0
Total asset turnover
2.0
2.3
2.4
Working capital turnover
13.3
14.5
11.8
Gross profit margin
25%
27.4%
29.3%
Net profit margin
5.0%
5.8%
6.5%
Return on total capital
19.4%
21.1%
22.4%
Return on equity
21.1%
24.1%
19.8%
Debt-to-equity
80.9%
99.4%
35.7%
Interest coverage
7.0
5.9
9.2
9.
In order to gauge the ability of Dodomaya Plc to meet its day-to-day obligations,
which of the following ratios is least likely to be relevant?
A. Quick ratio.
B. Current ratio.
C. Receivables collection period.
D. Return on capital employed.
10. Which of the following statements provides the most likely explanation for the
dwindling net profit margin of Dodomaya Plc?
A. Reduction in leverage.
B. Reduction in liquidity.
C. Increasing cost of sales.
D. Dwindling return on capital.
11. The company’s total asset turnover for the current year is lower than last year’s
figure, and the industry ratio. What is the most likely explanation for this? The
company is:
A. Making more sales compared to its peers.
B. Not optimizing the use of its assets to generate sales.
C. Not replacing its old assets fast enough.
D. Not making enough profit.
12. The return on equity was better than the industry average both in the current year
and last year. What is the possible explanation for this?
A. Greater use of leverage.
B. Higher liquidity.
C. Lower gross margin.
D. Lower asset turnover.
Use the following data to answer questions 13 to 15.
N
Profit after tax
45,000
Depreciation
75,000
Taxes paid
25,000
Interest paid
5,000
Dividends paid
10,000
Cash received from sale of company building
40,000
Sale of preference shares
35,000
Repurchase of ordinary shares
30,000
Purchase of machinery
20,000
Issuance of bonds
50,000
Debt retired through issuance of ordinary shares
45,000
Paid off long-term bank borrowings
15,000
Profit on sale of building
20,000
13. Cash flow from operating activities is:
A. N70,000
B. N100,000
C. N120,000
D. N150,000
14. Cash flow from investing activities is:
A. -N30,000
B. N20,000
C. N50,000
D. N60,000
15. Cash flow from financing activities is:
A. N30,000
B. N55,000
C. N75,000
D. N85,000
16. In accordance with IAS 37, if the reporting entity has a present obligation to transfer
economic benefit to another party, the probability of occurrence is very high, and the
amount can be measured with sufficient reliability, this should be treated in the
financial statements as:
A. Provision.
B. Contingent asset.
C. Contingent liability.
D. Contingent loss.
17. Which of the following statements regarding the accounting treatment of research
and development expenditure is correct?
A. Research expenditure may be capitalised.
B. Development expenditure must be written off as incurred.
C. Both research expenditure and development expenditure must be capitalised.
D. Development expenditure may be capitalised.
18. A customer of Panax Limited claims that, on 22 March 2011, a fault in a product sold
by Panax Limited caused damage to its production line. The customer is seeking
damages of N85,000. Panax has accepted liability and offered to pay N40,000 to
repair the damage. The customer has refused this offer. The matter will be settled in
a court case which is scheduled for July 2012. Panax’s legal representative has
indicated that the court is almost certain to accept the customer’s claim for N85,000.
How should this matter be dealt with in Panax’s financial statements for the year to
30 April 2011?
A. As a current liability of N40,000
B. As a non-current liability of N40,000
C. As a current liability of N85,000
D. As a non-current liability of N85,000
Economics and Financial Markets (19 – 31)
19. The change in total product divided by the change in resource input defines:
A. Total cost.
B. Average cost.
C. Average product.
D. Marginal product.
20. If a monopolist engages in price discrimination rather than charging all buyers the
same price, its:
A. Profits and its output are greater.
B. Profits and its output are smaller.
C. Profits are greater and its output is smaller.
D. Profits are smaller and its output is greater.
21. How do public goods differ from private goods? Public goods are:
A. Divisible.
B. Subject to the exclusion principle.
C. Divisible and subject to the exclusion principle.
D. Not divisible and not subject to the exclusion principle.
22. Which of the following would cause aggregate consumption spending to increase?
A. An increase in the price level.
B. An increase in disposable income.
C. An increase in the interest rate.
D. A decrease in the expected level of future income.
23. All of the following factors are generally thought to contribute to economic growth
except:
A. Growth in aggregate demand.
B. Growth in the capital stock.
C. Growth in the labour supply.
D. Increase in factor productivity.
24. “Crowding-out” refers to the possibility that:
A. Investment spending may decline as a result of increase in the interest rate
caused by an expansionary fiscal policy.
B. Devaluation of the Naira may “crowd out” exports.
C. Increases in marginal tax rates causing consumption to decline.
D. Increases in government purchases of goods, resulting in a decrease in purchase
of similar goods by households.
25. If the economy is stuck in a recession, an approximate policy for the Central bank
might be to:
A. Increase the reserve requirement ratio.
B. Reduce excess reserves.
C. Buy bonds.
D. Reduce the amount of currency in circulation.
26. Deficit spending by the government is best described as:
A. Expansionary fiscal policy.
B. Expansionary monetary policy.
C. Contractionary fiscal policy.
D. Contractionary monetary policy.
27. What is the main determinant of money demand?
A. The money supply.
B. The monetary base.
C. The interest rate.
D. Income.
28. Which of the following types of unemployment can actually benefit the economy?
A. Cyclical unemployment.
B. Frictional unemployment.
C. Structural unemployment.
D. None of the above.
29. The main source of economic instability in the original Keynesian theory of the
business cycle is the behaviour of:
A. Consumption spending.
B. Net exports.
C. Investment spending.
D. Government spending.
30. The policy of intervening in the exchange market to offset temporary fluctuations in
the exchange rate is referred to as:
A. Flexible exchange rate system.
B. Fixed exchange rate system.
C. Arbitrated float.
D. Managed or dirty float.
31. A payment made by the government which forms a wedge between the price
consumers pay and the costs incurred by producers, such that price is less than the
marginal cost is referred to as the:
A. Consumer’s surplus.
B. Producer’s surplus.
C. Transfer payment.
D. Subsidy.
Quantitative Analysis and Statistics (32 – 40)
32. Which of the following statements about covariance and correlation is least likely
correct?
A. A zero covariance implies there is no linear relationship between the returns on
two assets.
B. If two assets have perfect negative correlation, the variance of returns for a
portfolio that consists of these two assets will equal zero.
C. The covariance of a two-stock portfolio is equal to the correlation coefficient
times the standard deviation of one stock’s returns times the standard deviation
of the other stock’s returns.
D. None of the above.
33. A company’s dividend in 2002 was N0.88. Over the next eight years, the dividends
were N0.91; N0.99; N1.12; N0.95; N1.09; N1.25; N1.42; N1.26. Calculate the
annually compounded growth rate of the dividend over the whole period.
A. 4.589%
B. 1.234%
C. 2.335%
D. 5.821%
Use the following data to answer questions 34 and 35.
A company is considering entering into a joint venture that will require an investment
of N10 million. The project is expected to generate cash flows of N4 million, N3
million and N4 million in each of the next three years respectively.
(Assume a discount rate of 10%).
34. What is the project’s NPV?
A. –N879,000
B. -N309,000
C. +N243,000
D. +N133,800
35. What is the project’s approximate IRR?
A. 5%
B. 10%
C. 15%
D. 17%
36. Suppose that there is a 30% chance that the government will approve a new drug
and a 60% chance that Drug Co.'s shares will double in price as a result. What is the
probability that the drug will be approved and that Drug Co.'s shares will double in
price?
A. 18%
B. 30%
C. 40%
D. 70%
37. Which of the following test statistics should be used when conducting a hypothesis
test for the equality of the variances of two populations?
A. Z-distribution.
B. T-distribution.
C. Chi-square.
D. F-distribution.
38. The total revenue and total cost function of a particular product are respectively
expressed as follows:
R = 250q - 2q2
C = 10q + 500
What is the quantity that maximizes profit?
A. 60
B. 50
C. 40
D. 80
39. Regression analysis is being used to find the line of best fit (y = a + bx) from eleven
pairs of data. The calculations have produced the following information:
∑x = 440, ∑y = 330, ∑x2 = 17,986, ∑y2 = 10,366, ∑xy = 13,467 and b = 0.69171
What is the value of ‘a’ in the equation for the line of best fit (to 2 decimal places)?
A. 0.63
B. 0.69
C. 2.33
D. 5.33
40. The following graph relates to a linear programming problem:
The objective is to maximise contribution and the dotted line on the graph depicts
the contribution function. There are three constraints which are all of the “less than
or equal to” type which are depicted on the graph by the three solid lines labelled
(1), (2) and (3).
At which of the following intersections is contribution maximised?
A. Constraints (1) and (2).
B. Constraints (2) and (3).
C. Constraints (1) and (3).
D. Constraint (1) and the x-axis.
Total = 40 marks
Question 2 - Financial Accounting and Financial Statement Analysis
Explain how each of the items below would affect the statutory published earnings per
share figure for a manufacturing company:
Item
Impact
The impairment of an intangible
asset.
(1 mark)
A new issue of bonus shares to
shareholders.
(1 mark)
Profit on the sale of a property.
(1 mark)
Question 3 - Economics and Financial Markets
3(a) What is the difference between ‘economic profit’ and ‘accounting profit’?
(1 mark)
3(b) GDP in an economy is N3,452 billion, Consumer expenditures are N2,343 billion,
Government purchases are N865 billion, and Gross investment is N379 billion.
Compute Net exports.
(2 marks)
Question 4 - Quantitative Analysis and Statistics
Distinguish clearly between “data mining bias” and “survivorship bias” in sampling.
(4 marks)
Question 5 - Financial Accounting and Financial Statement Analysis
5(a) Global Greens Limited, a Nigerian company has a joint venture in the United States.
The operations of the US entity are controlled by Global Greens.
Given below are the balance sheet and income statements (in million USD) of the US
based operations for the year ended 31st of December 2011. You are required to
translate the financial statement of the joint venture into Naira in line with the
provisions of International Financial Reporting Standards (IFRS).
The balance sheet as at 31/12/2011
US Dollars
Rate
Naira
??
??
??
??
??
??
Assets
Property, plant and equipment
300
Inventories
80
Net monetary current assets
60
Total assets
??
440
40
??
??
Share capital
300
??
??
Retained profit
100
??
??
Long term loans
Equity
??
??
??
440
Income statement for the year
ended 31/12/ 2011
600
??
??
Cost of sales
-400
??
??
Gross profit
200
Depreciation
-50
??
??
Other expenses
-50
??
??
Sales
100
??
??
Question 5(a) continued:
You are given the following exchange rates:
Period
1 January, 2011
Average rate for the year
31st December, 2011
Rate
N155/US dollars
N150/US dollars
N160/US dollars
Required:
Fill in the spaces in the table above.
(12 marks)
5(b) In order to gain market share, Zimbre Limited has offered longer credit terms to
customers in 2011. Comparative figures for 2010 and 2011 are shown below:
Sales for the year.
Operating profit for the year.
Closing balance of trade
receivables.
2011
2010
N
N
60,000,000
50,000,000
5,600,000
4,000,000
9,000,000
5,000,000
5(b) i)
Calculate the receivables collection period for 2010 and 2011.
(2 marks)
5(b) ii)
Has this policy had any impact on the company’s performance?
(4 marks)
5(b) iii)
Explain the likely impact of relaxing credit terms on cash flow and the quality of
earnings.
(4 marks)
Question 6 – Economic and Financial Markets
In recent times, Nigeria has had to contend with the problems of rising inflation and
unemployment. In response, the Central Bank of Nigeria decides on credit squeeze while
the Federal Government attempts to embark on ‘deficit budget’. Assume that the Nigerian
economy is closed.
6(a) Explain the following: credit squeeze, deficit budget and closed economy. (3 marks)
6(b) What economic term best describes the two problems confronting Nigeria?
(2 marks)
6(c) Appraise the policy responses of the two authorities: The Central Bank and Federal
Government to the contending problems.
(6 marks)
6(d) Use the IS-LM Model to explain and predict the impact of the responses of the two
authorities on interest rates and the output of the economy over the short run.
(6 marks)
Question 7 - Quantitative Analysis and Statistics
As a mutual fund analyst, you are examining five-year total return of two Nigerian equities
mutual funds between 2006 and 2010. You have obtained the information in the table
below.
Total Returns for Two Mutual Funds, 2006- 2010
Year
Mutual Fund 1
Mutual Fund 2
2006
16.20%
9.20%
2007
20.30%
3.80%
2008
9.30%
13.10%
2009
-11.10%
1.60%
2010
-17.00%
-13.00%
7(a) Based on the available data, calculate the geometric mean return for both Mutual
Fund 1 and Mutual Fund 2.
(4 marks)
________________________________________________________________________
7(b) Calculate the range of annual returns for Mutual Fund 1 and Mutual Fund 2 and
assess which mutual fund appears to be riskier based on these ranges.
(3 marks)
7(c) Below are the projected returns of Mutual Fund 1 and Mutual Fund 2 for 2012.
Year
Mutual Fund 1
Mutual Fund 2
2012
2.0%
8.0%
Required:
Advise an investor who wishes to invest in both Mutual Fund 1 and Mutual Fund 2, what
proportion to invest in each mutual fund to achieve a return of 6.5% in 2012.
(4 marks)
FORMULAE
Regression Analysis:
Y = a+bx
b= n∑xy-∑x∑y
n∑x2-(∑x)2
a= ∑y _ b∑x
n
n