CIS March 2011 Exam Diet
Examination Paper 2.1:
Financial Accounting and Financial Statement
Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Level 2
Financial Accounting and Financial Statement Analysis (1 – 18)
1. Which of the following is not a limitation of accounting information?
A.
In times of inflation, historical cost information understates the value of nonmonetary items.
B. The income statement does not measure the actual value added by the efforts of
employees.
C. It encourages comparison between companies using different accounting
policies.
D. The value of human asset is not quantified.
2. A retail business has the following two items of inventory at its year end.
Item
Cost (N)
X
Y
3,200
2,800
Net Realisable Value
(N)
3,320
2,500
Applying prudence concept, what should be the valuation of this inventory in the
balance sheet of the business?
A. N5,700
B. N6,000
C. N6,120
D. N5,820
3. A financial asset connotes the following, except:
A.
A contractual obligation to exchange financial instruments with another
enterprise under conditions which are potentially unfavourable.
B. Cash.
C. A contractual right to exchange financial instruments with another company
under conditions that are potentially favourable.
D. A contractual right to receive cash or another financial instrument from another
enterprise.
4. According to IFRS, which of the following statements is correct about the treatment
of research and development costs?
A. All research and development costs must be recognized as expenses when
incurred.
B. Costs incurred in the research phase which meet the recognition criteria for an
intangible asset, should be capitalized.
C. Costs incurred in the development phase which meet the recognition criteria for
an intangible asset, should be capitalized.
D. None of the above statements is correct.
5. Which of the following conditions is not necessarily true for an item to qualify as an
asset?
A. There should be probable future benefits from it.
B. It represents the claim of other entities.
C. Its ownership or control should be with the firm.
D. It should have been bought or created by past events or transactions.
6. The ex-right price of an issue is defined as:
A.
The new market price of the equity shares immediately after the right issue is
made.
B. The latest market price of the equity share before the right issue is made.
C. The latest market price of the equity share before a bonus issue is made.
D. The new market price of the equity share immediately after a bonus issue is
made.
7. Which of the following definitions is/are incorrect?
A.
Secured creditors are creditors whose debts are secured on a particular asset of
the business.
B. Insolvency relates to the inability of a company to meet its financial obligations
to various stakeholders as and when due.
C. Creditors with floating charge are those whose debts are secured on all assets of
a company but not on particular assets.
D. Winding up is an act of bringing to a temporary end, the life of a company.
8. Which of the following is/are true?
I.
II.
III.
IV.
Depreciation charges increase profit.
Reduction in provision for bad debt increases profit.
Undervaluation of stock increases profit.
Increase in provision for bad debt increases profit.
A.
B.
C.
D.
II only
II and III only
IV only
III only
9. Which accounting concept supports the assertion that economic reality takes
precedence over legal issues?
A. Realization concept
B. Conservatism.
C. Substance over form.
D. Measurement concept.
10. On conversion of a partnership to a company, a purchase consideration of N7.2m
was paid. If 30% of the amount was in cash and the rest by 50k shares, how many
shares were issued?
A. 2,160,000 shares.
B. 4,320,000 shares.
C. 7,200,000 shares.
D. 10,080,000 shares.
11. Identify which of the following is not a financing activity in a cash flow statement:
A.
B.
C.
D.
Cash
Cash
Cash
Cash
proceeds from issuing shares or other equity instruments.
repayments of amount borrowed.
receipts from royalties and fees.
payment to owner of equity.
12. Which of the following is not applicable to qualify a lease as a finance lease?
A.
B.
The lease is non-cancelable.
Lease term covers substantially (80% or more) the useful life of the asset, or the
net present value of the lease at its inception, using minimum lease payments
and the implicit interest rate, is equal to or greater than the fair value of the
leased asset.
C. The lease has a purchase option, which is likely to be exercised.
D. The lessor, while giving the lessee the use of the leased property, retains
practically all the risks, obligations and rewards of ownership (e.g. early
obsolescence and appreciation).
13. Which of the factors below is not likely to prompt a company to carry out a capital
reconstruction?
I.
II.
III.
IV.
Undercapitalisation.
Overtrading.
Unhealthy working capital ratio.
Increase in overhead costs.
A.
B.
C.
D.
I only
II only
I and III only
IV only
14. One of the following is not an example of extra-ordinary item in the balance sheet of
a public liability company:
A. Redundancy payment in a discontinued entity.
B. Reorganisation cost.
C. Profit on sale of shares in a subsidiary company.
D. Terminal gain or losses.
15. Which of the following methods of accounting for inventory will result in higher
estimates for the cost of goods sold during an inflationary period?
A. Average cost method.
B. Specific identification method.
C. LIFO.
D. FIFO
16. For the period that just ended, ABC Corporation reported a profit after tax of
N13,000,000. At the end of the previous period, ABC had 750,000 shares
outstanding; it issued an additional 100,000 shares at the end of the ninth month of
this year. In addition, ABC has 5% preferred shares outstanding with a total par
value of N5,000,000. What is ABC's basic earnings per share?
A. N16.25
B. N16.45
C. N16.77
D. N15.94
17. According to IFRS, which of the following statements regarding the translation of
foreign currency transactions is false?
A. In the income statement, cost of goods sold, depreciation and amortization are
converted at the rate used for corresponding assets.
B. All non-monetary items in the balance sheet which are carried at historical cost
are reported using the exchange rate at the date of transaction.
C. All non-monetary items in the balance sheet which are carried at fair value are
translated using the exchange rate which existed when the value was
determined.
D. All monetary items in the balance sheet are reported at closing rates.
18. At the beginning of the year, ABJ International Limited reported a book value for
equity in the amount of N23.5 million. If during the year PAT was N2.7 million and
the company paid a dividend of N0.5 million, what would be the best estimate of
return on equity for the year?
A. 9.36%
B. 10.76%
C. 11.49%
D. 10.98%
Economics and Financial Markets (19 – 31)
19. A “cyclical peak” occurs:
A.
B.
C.
D.
When inflation is at its low point.
When the budget deficit reaches its legal maximum.
During a period of recession, when the inflation rate is high.
At the maximum output level of an expansion .
20. Assuming that Consumption = N4,500, Investment = N1,000,
Government expenditure = N1,200, Exports = N450, Imports = N550,
Depreciation = N600 and Indirect Taxes = N500 (all in billions of Naira). What is
the national income?
A. N5,500 billion.
B. N6,000 billion.
C. N6,400 billion.
D. N5,000 billion.
21. Given that a bank has N20 million in demand deposits, total reserves of N60 million,
a reserve requirement ratio of 20%. How much can this bank safely lend?
A. N16 million.
B. N44 million.
C. N60 million.
D. N80 million.
22. Of the different types of unemployment, which one can actually benefit the
economy?
A. Frictional unemployment.
B. Structural unemployment.
C. Cyclical unemployment.
D. None of the above.
23. “Purchasing–power parity” exists between the currencies of two countries if:
A.
B.
C.
D.
One U.S. dollar buys one British pound, or one Nigerian Naira, and so forth.
Income is the same in both countries.
Two countries have the same supply of money.
A specific amount of currency purchases the same quantity of tradable goods in
both countries.
24. The ease with which capital flows from one country to another in response to a
change in real interest rates is called:
A. The interest elasticity of money.
B. Capital mobility.
C. The interest rate equalization index.
D. The capital flexibility index.
25. The phenomenon whereby low per capital incomes make it difficult for nations to
save and invest, a condition which perpetuates low productivity and low incomes is
generally referred to as:
A. Underdevelopment.
B. Vicious circle of poverty.
C. Immesering growth process.
D. Economic backwardness.
26. Productive efficiency is not realized in monopolistic competition because production
occurs where:
A. MR is greater than MC.
B. MR is less than MC.
C. ATC is greater than minimum ATC.
D. ATC is less than MR and greater than MC.
27. A study shows that the coefficient of the cross price elasticity of goods X and Y is
negative. This information indicates that X and Y are:
A. Normal goods.
B. Complementary goods.
C. Substitute goods.
D. Independent goods.
28. When government sets the price of a good below the equilibrium price, the result will
be:
A.
B.
C.
D.
A surplus of the good.
A shortage of the good.
An increase in the demand for the good.
A decrease in the supply of the good.
29. Real wages would decline if the:
A.
B.
C.
D.
Price of goods and services rose more rapidly than nominal - wage rates.
Prices of goods and services rose less rapidly than nominal – wage rates.
Prices of goods and services and wages rates both rose.
Prices of goods and services and wage rates both fell.
30. If exchange rates float freely, the exchange rate for any currency is determined by
the:
A. Demand for and the supply of it.
B. Demand for it.
C. Supply of it.
D. Official reserves that back it.
31. Net Domestic Product (NDP) is:
A.
B.
C.
D.
Indirect business taxes + depreciation.
Indirect business taxes – depreciation.
Always larger than GDP and is therefore preferred measure of living standard.
GDP less depreciation.
Quantitative Analysis and Statistics (32 – 40)
32. A soft drink firm rents its warehouse and the rental agreement provides for a regular
annual increment of N36,500. Given that the first year rent is N95,000, obtain the
expected rent in the tenth year.
A. N543,000
B. N423,500
C. N325,000
D. N623,500
33. One of the following is not a composite factor of time series:
A.
B.
C.
D.
Cyclical variation.
Secular Trend.
Regular variation.
Random Variation.
34. The Board of Directors of a company consists of 3 accountants, 3 managers and 2
engineers. A sub-committee of 3 is to be constituted at random from the Board. Find
the probability that all the members of the committee are accountants.
A. 3/56
B. 5/56
C. 7/56
D. 1/56
35. One of the followings is not an area of application of simulation:
A.
B.
C.
D.
Investment appraisal.
Central tendency.
Network analysis.
Queuing system.
36. A firm’s total cost in Naira is given by TC = 70Q2 + 20Q + 500. What is the marginal
cost when 100 units of the firm’s product are produced?
A. N18,000
B. N24,000
C. N14,020
D. N13,500
37. You expect Stock A to have the following potential returns over the next year:
Scenario
Return
Probability
Recovery
22%
40%
Status quo
11%
35%
Recession
-7%
25%
Which of the following would best estimate the expected standard deviation for
stock A?
A. 11.38%
B. 10.84%
C. 3.79%
D. 9.24%
38. Which of the following statements is incorrect with respect to probability
distributions?
A. With discrete random variables, the number of possible outcomes is known and
finite. Thus, there are no uncertainties associated with the outcomes.
B. With continuous random variables, the number of possible outcomes is infinite
and can therefore never be counted.
C. Probability distribution illustrates the various outcomes that are possible and the
probability associated with that outcome taking place.
D. As the number of possible outcomes increases to very large numbers, the
frequency distribution of a discrete random variable will start to resemble that of
a continuous random variable.
39. One of the following is not a characteristic of stratified and quota sampling
techniques:
A. Stratified and quota sampling techniques involve classification of items according
to groups or characteristics.
B. Stratified and quota sampling techniques are suitable for homogeneous
population.
C. Stratified sampling is a form of probability sampling while quota is a nonprobability sampling method.
D. Stratified sampling requires a sampling frame while quota sampling does not.
40. Which of the following test statistics should be used when conducting a hypothesis
test for the mean of a population whose variance is known and the sample size is
large?
A. Chi-square.
B. F-distribution.
C. T-distribution.
D. Z-distribution.
Total = 40 marks
Question 2 - Financial Accounting and Financial Statement Analysis
2(a) Define borrowing cost in line with the provisions of IAS 23.
(2 marks)
2(b) List two conditions that must be satisfied for borrowing costs to qualify for
capitalization.
(2 mark)
Question 3 - Economics and Financial Markets
Explain “price discrimination” and list any two enabling conditions for its practice.
(3 marks)
Question 4 - Quantitative Analysis and Statistics
Mention two practical uses of annuity in business.
(3 marks)
Question 5 - Financial Accounting and Financial Statement Analysis
5(a) The Finance Director of your company has recently examined the company’s financial
statements from 2008 to 2010, and concluded that the present level of sales cannot
be sustained without an increase in borrowing.
He has mandated you to give your own opinion on this, and prepare a report to be
presented to the Board of Directors on the recent performance of the company.
You have been presented with the following ratios for the company for the last three
years (2008 to 2010), as well as the industrial average over the period:
Ratios
Industrial
Average
2008
2009
2010
Quick ratio
1.0
2.1
1.0
0.6
Current ratio
2.7
4.2
2.6
1.8
Stock turnover
7.0X
6.9X
4.3X
1.8X
Average collection period
32 days
34 days
37 days
50 days
Fixed asset turnover
13.0
11.6
10.7
12.4
Total asset turnover
2.6X
3.2X
2.6X
1.9X
Return on total assets
19%
24.3%
13%
5.6%
Return on net worth
36%
31.4%
19.3%
10.8%
Debt ratio
50%
22.8%
33.1%
48.2%
Profit margin on sales
7.0%
7.7%
5%
2.9%
Required:
Analyse the performance of the company. What is your opinion about the conclusion
of the Finance Director?
(14 marks)
5(b) Hammer Ltd acquired 80% of the share capital of Nails Ltd. for N10,000,000 on the
1st of January 2010. On this date, Nails Ltd had book value of assets of
N6,000,000. However, the fair value of the assets of Nails Ltd exceeded the book
value by N500,000 on the date of acquisition.
5(b1) Calculate the goodwill arising from the acquisition of Nails Ltd.
(4 marks)
5(b2) Explain how the goodwill computed in 5(b1) would be treated in general over
its lifetime, in line with the provisions of IFRS 3.
(4 marks)
Question 6 - Economics and Financial Markets
Suppose you were a member of the Board of Directors of the Central Bank of Nigeria. The
Nigerian economy is experiencing a sharp and prolonged inflationary trend.
6(a) In the context of the quantity theory of money, identify and explain the likely
(2 marks)
underlying cause of the inflationary trend.
6(b) What changes in the reserve ratio, discount rate and open market operations would
you recommend?
(3 marks)
6(c) Explain in each case how the change you advocate in 6(b) would affect the money
supply and interest rates.
(12 marks)
Question 7 - Quantitative Analysis and Statistics
You are a portfolio manager who wishes to construct a new portfolio consisting of the
stocks of three companies Alpha, Cappa and Gamma. You have obtained the information
detailed below on the three stocks:
Alpha plc
Cappa plc
Gamma plc
Mean annual return
16.0%
16.1%
17.6%
Standard deviation
29.0%
24.7%
27.3%
Correlations
Alpha Plc and Cappa Plc
Alpha Plc and Gamma Plc
Cappa Plc and Gamma Plc
0.361
0.317
0.548
Required:
7(a) Compute the risk, in terms of standard deviation, of a portfolio containing 32% of
Alpha, 51% of Cappa and 17% of Gamma.
(6 marks)
7(b) Interpret your result by comparing the risk of the portfolio in 7(a) with that of the
individual securities.
(5 marks)
FORMULAE
1)
Standard deviation of a three-asset portfolio: