CIS September 2013 Exam Diet
Examination Paper 2.1:
Financial Accounting and Financial
Statement Analysis
Economics and Financial Markets
Quantitative Analysis and Statistics
Level 2
SECTION A: MULTI CHOICE QUESTIONS
Financial Accounting and Financial Statement Analysis (1 – 18)
1.
On 1 January 2012, a company buys N50,000 of 7% loan stock for N47,865.
Interest is received on 31 December each year and the stock will be redeemed at
a premium of 10% on 31 December 2015. The effective interest rate is 10.5%
per annum.
What is the amortised cost of the loan stock at 31 December 2012?
A. N50,000
B. N49,391
C. N51,526
D. N51,750
2.
The following are financial events and their effects on profit and cash:
I.
II.
III.
IV.
Repayment of loan
Buying stock for cash
Making a rights share issue
Depreciating a non-current asset
Effect
Profit
Decrease
None
Increase
Decrease
Cash
Decrease.
Decrease.
Increase.
None.
Which of the following items are correct?
A. I and II only.
B. I and IV only.
C. II and III only
D. II and IV only.
3.
IAS 20 deals with the treatment of government grants. Which of the following
statements correctly describes the treatment of capital grants?
A. The grant should be recognized in full when it is applied for.
B. The grant can only be treated in the profit & loss account.
C. The amount of grant should be recognized in the income statement and
spread over a period of 3 years.
D. None of the above.
4.
Which of the following is a condition which must be satisfied before revenue
arising from the rendering of services may be recognized?
A. The amount of revenue can be measured reliably.
B. It is certain that the economic benefits associated with the transaction will
flow to the seller.
C. The sales transaction is 100% complete at the end of the reporting report.
D. The cost incurred in respect of the transaction can be measured with
certainty.
5.
Niger Limited reports 2012 revenue of N14.3 million. During 2012, its account
receivable rose by N0.7million, accounts payable increased by N1.1 million, and
unearned revenue increased by N0.5 million. Its cash collections from customers
in 2012 were closest to ___________
A. N14.8 million.
B. N13.8 million.
C. N14.1 million.
D. N14.2 million.
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6.
How should negative goodwill be treated in the financial statement of an entity?
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.
7.
The carrying amount of a Cash Generating Unit (CGU) is N900,000. This consists
of goodwill N250,000 and property, plant and equipment N650,000. The CGU has
a recoverable amount of only N520,000. How is the impairment loss allocated
between the assets of the CGU?
A. Goodwill N130,000, PPE N250,000
B. Goodwill N190,000, PPE N190,000
C. Goodwill N0, PPE N380,000
D. Goodwill N250,000, PPE N130,000
8.
In accordance with IAS 37, if the reporting entity has a present obligation to
transfer economic benefit to another party, and probability of occurrence is very
high, but the amount cannot 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.
9.
Which of the following statements correctly describes the effect of a transaction
on the balance sheet?
A. The purchase of a motor van for cash N10,000 will increase the assets (motor
van) by N10,000 and decrease capital by N10,000
B. Goods purchased on credit N2,000 will increase stocks by N2,000 and
increase claims (trade creditors) by N2,000
C. The payment of a creditor N3,000 will decrease the claims (creditor) by
N3,000 and decrease capital N3,000
D. A trade debtor who pays an amount owed N1,000, will result in an increase in
sales by N1,000 and an increase in cash by N10,000
10. On 1 May 2010, Ash Limited paid N430,000 to acquire the entire share capital of
Beech Limited. The equity of Beech Limited on that date consisted of ordinary
share capital N200,000 and retained earnings of N90,000. All of its assets and
liabilities were carried at fair value.
On 30 April 2012, the retained earnings of Ash Limited and Beech Limited are
N970,000 and N115,000 respectively. Goodwill arising on consolidation has
suffered an impairment loss of 25% since 1 May 2010.
What is the group retained earnings at 30 April 2012?
A. N960,000
B. N1,085,000
C. N1,050,000
D. N980,000
11. Oregun Limited reported net earnings of N250,000 for the year ending 2011. The
company had 125,000 shares of N1 per value ordinary stock and 30,000 shares
of N40 per value convertible preference shares outstanding during the year. The
dividend rate on the preference shares is N2 per share. Each share of the
convertible preference shares can be converted into two shares of Oregun Limited
ordinary shares. During the year no convertible preference shares were
converted.
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What is Oregun Limited's basic earnings per share?
A. N0.89 per share.
B. N1.52 per share.
C. N1.76 per share.
D. N2.00 per share.
12. An item of property, plant and equipment is shown in a company’s statement of
financial position at its written down value of N420,000. For tax purposes, the
item’s written down value is N610,000. The residual value of the item at the end
of its useful life is expected to be N0.
Assuming that the company pays tax at 26%, the resulting deferred tax asset or
liability is _________
A. Deferred tax asset of N190,000
B. Deferred tax asset of N49,400
C. N0
D. Deferred tax liability of N49,400
13. AYZ Limited purchased inventory on January 1, 2012, for N600,000. On
December 31, 2012, the inventory had a net realizable value (NRV) of N550,000.
During 2013, AYZ sold the inventory for N620,000. Based on the above, which of
the following statement is correct?
A. The December 31, 2012, balance sheet should report the inventory at
N600,000
B. The December 31, 2012, balance sheet should report the inventory at
N620,000
C. When the inventory was sold in 2013, AYZ Limited reported a N20,000 gain
on its income statement.
D. For the year ending December 31, 2012, AYZ Limited recognized a N50,000
loss on its income statement.
14. Solar Plc is a Stock Exchange listed business. Today the business’s share price
rose. What effect will this have on its price/earnings ratio (P/E) and its dividend
yield ratio (DY)?
P/E
DY
A. Increase
Increase.
B. Increase
Decrease.
C. Decrease
Increase.
D. Decrease
Decrease.
15. The following information relates to a retail business for last year:
N'000
Net profit after interest, before taxation
130
Corporation tax payable and paid during the year
40
dividends paid during the year
20
Stock held at start of year
70
Trade creditors at start of year
55
Stock held at end of year
60
Trade creditors at end of year
75
Interest paid during the year
15
Interest expense for the year
12
Depreciation expense for the year
25
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What is the cash flows from operating activities?
A. N167,000
B. N257,000
C. N197,000
D. N122,000
16. A company’s total external revenue for an accounting period is N15 million. There
is no inter-segment revenue. The company’s total assets are N43 million. The
total profit of all profitable segments for the period is N2.6 million and the total
losses of all loss-making segments are N1.9 million.
Operating segment X has external revenue of N1.3 million, total assets of N3.7
million and a loss of N220,000. Which of the following statements is true?
A. Segment X is a reportable segment because it has revenue of N1.3 million.
B. Segment X is a reportable segment because it has assets of N3.7 million.
C. Segment X is a reportable segment because it has a loss of N220,000 million.
D. Segment X is not a reportable segment.
17. How do you assess the following two statements?
I.
With finance leasing, the risks of operating the asset stay with the provider of
the finance.
II. Finance leasing is a way of borrowing without this fact being shown in the
business’s balance sheet.
A.
B.
C.
D.
Statement I
True
True
False
False
Statement II
True
False
True
False
18. ABC Limited incurs research costs, during year 2012, amounting to N155,000,
and development costs of N800,000. The accountant informs you that the
recognition criteria (as prescribed by IAS 38) have been met. How should the
transaction be treated in the financial statements in line with the IFRS?
A.
B.
C.
D.
Expense
N955,000
Nil
N155,000
N800,000
Capitalize
Nil
N955,000
N800,000
N155,000
Economics and Financial Markets (19 – 31)
19. Assume that the commercial banks are holding excess reserves because business
firms and consumers are not willing to borrow money. A decrease in the discount
rate is likely to ____________
A. Not change the money supply because banks already have excess reserves
they cannot lend.
B. Decrease the money supply because it will now more expensive for business
firms and consumers to borrow money.
C. Decrease the money supply because it is now cheaper for banks to borrow
from the central bank instead of buying government securities.
D. Increase the money supply because it is now cheaper for banks to borrow
from the central bank.
20. Assume a system of floating exchange rates. Due to a high savings rate, suppose
the level of savings in Nigeria is in excess of domestic investment needs. If
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Nigerian residents invest abroad, the naira’s exchange value will __________ and
the Nigerian trade balance will move toward ___________
A. Appreciate, deficit.
B. Appreciate, surplus.
C. Depreciate, deficit.
D. Depreciate, surplus.
21. Which of the following will cause the short-run aggregate supply curve to shift to
the right?
A. An increase in the price level.
B. An increase in the government budget deficit.
C. A decrease in the price level.
D. A decrease in wages.
22. The price of an ice cream cone is N1.50 and you buy three ice cream cones per
week. If the price of an ice cream cone falls to N1.25 and you still buy three ice
cream cones per week, which of the following is true?
A. This violates the law of demand because as price falls quantity demanded
must increase.
B. Both the total and marginal utility of the fourth ice cream cone per week
must be worth less than N1.25 to you.
C. The total utility of the fourth ice cream cone per week must be worth less
than N1.25 to you.
D. The marginal utility of the fourth ice cream cone per week must be worth less
than N1.25 to you.
23. The natural rate of unemployment is generally thought of as the ____________
A. Ratio of the frictional unemployment rate to the cyclical unemployment.
B. Sum of frictional unemployment and cyclical unemployment.
C. Sum of frictional unemployment and structural unemployment.
D. Sum of structural unemployment and cyclic unemployment.
24. Relative to a competitive organized industry, a monopoly ____________
A. Procedures more output, charges higher prices and earns economic profits.
B. Produces less output, charges lower prices and earns economic profits.
C. Produces less output, charges lower prices and earns only a normal profit.
D. Produces less output, charges higher prices and earns economic profits.
25. The government is considering placing a tax on cigarettes to raise revenue to
finance health-care benefits. The demand for cigarettes is price inelastic. Which of
the following statements is true?
A. This tax will not raise much revenue either in the short term or the long term
since demand is price inelastic.
B. No tax revenue can be raised in this way because sellers of cigarettes will just
lower their price by the amount of the tax and, therefore, the price of
cigarettes to consumers will not change.
C. The tax on cigarettes may not raise as much revenue as anticipated in the
years to come because the demand for cigarettes is likely to become more
elastic over time.
D. This is a very good way to raise revenue, both in the short term and in the
long term, because there are no substitutes for cigarettes.
26. By
A.
B.
C.
D.
“financial crowding out” economists mean ___________
Government borrowing drives up interest rates.
Credit rationing.
Central Bank of Nigeria controls on commercial bank lending.
What the government borrows cannot be used for private investment.
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27. If the Central Bank of Nigeria reduces the money supply to reduce inflation, a
floating exchange rate aids the Central Bank of Nigeria in fighting inflation
because ____________
A. As the money supply is decreased, the interest rate will increase, and the
price of Nigerian exports will rise and the price of Nigerian imports will fall.
B. As the money supply is decreased, the interest rate will increase, and the
price of Nigerian exports will fall and the price of Nigerian imports will rise.
C. As the money supply is decreased, the interest rate will increase, and the
price of both Nigerian exports and Nigerian imports will rise.
D. As the money supply is decreased, the interest rate will increase, and the
price of both Nigerian exports and Nigerian imports will fall.
28. If over time prices and output both have risen, then ____________
A. Long-run supply must have decreased more than AD increased.
B. AD must have increased more than long-run supply increased.
C. AD must have increased as much as long-run supply increased.
D. AD must have increased less than long-run supply increased.
29. If the Central Bank of Nigeria wished to pursue an expansionary monetary policy
it would ___________
A. Sell government securities on the open market.
B. Buy government securities on the open market.
C. Increase the minimum reserve asset ratio.
D. Raise interest rates.
30. The Phillips curve is a graph showing the relationship between _____________
A. The price level and the unemployment rate.
B. The inflation rate and the level of aggregate demand.
C. The level of aggregate output and the price level.
D. The inflation rate and unemployment rate.
31. An
A.
B.
C.
D.
increase in the money supply will _____________
Shift the IS curve to the left.
Shift IS curve to the right.
Shift the LM curve to the left.
Shift the LM curve to the right.
Quantitative Analysis and Statistics (32 – 40)
32. Given the following trend equation, Y = 5.47 + 0.98X. Where time unit = 1 year.
Origin = 1990. Unit of Y = '000 tonnes. What is the expected sales volume for the
year 2004?
A. 18,190 tonnes.
B. 17,190 tonnes.
C. 16,190 tonnes.
D. 19,190 tonnes.
33. You are given the following estimates about a new, 5-year investment being
appraised by your company:
Cost
Present value of cash inflows
Present value of project scrap
(not included in the cash inflow above)
N250 million
N240 million
Cost of capital
IRR
12%
11%
N20 million
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Which of the following are the correct decision using NPV and IRR decision
criteria?
NPV
IRR
A. Reject
Reject.
B. Accept
Accept.
C. Accept
Reject.
D. Reject
Accept.
34. This is the 1st of January 2012, and Pa James has just retired from PQR
Investments Limited. He has an insurance policy which entitles him to receive the
sum of N200,000 annually forever, beginning from the end of this year. If the
applicable interest rate is 15%, what is the present value of the future cash flows
receivable by Pa James?
A. N1,333,333
B. N3,000,000
C. N7,500,000
D. N75,000,000
35. The demand function for a product is given as: 2/q + 3q 2, where q is the
quantity. If q = 20, what is the marginal revenue?
A. 1800
B. 3000
C. 1200
D. 3600
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. A mutual fund company's selection of funds today includes only those that have
been successful in the past. All closed funds are excluded in order to hide
performance. Such data collection is likely to be affected by ___________
A. Survivorship bias.
B. Data mining bias.
C. Sample selection bias.
D. Survey bias.
38. Given the number of trials (n) and probability of success (P) for a normal
distribution are respectively 200 and 0.6. What is the standard deviation?
A. 10.95
B. 48.0
C. 120.0
D. 6.93
39. The annual consumption of rice (y) kg of a certain family in the period 2000 to
2007 was calculated as: x = 56, y = 40, x2 = 524, xy = 364. What is the
gradient of the trend line of the consumption of rice?
A. 0.425
B. 4.25
C. 0.579
D. 1.45
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40. A portfolio manager allocates 60% of his portfolio to Nigerian Stocks and 40% to
Nigerian bonds. The table below presents total returns for these asset classes for
1998 to 2002:
Year
1998
1999
2000
2001
2002
Equities
-1.6%
31.7%
7.4%
-12.6%
-12.4%
Bonds
9.1%
-1.1%
10.3%
8.0%
8.7%
What are the mean returns for the two asset classes and the weighted average
return on the portfolio for 1998?
A.
B.
C.
D.
Mean Equities Mean Bond
1.5%
9.0%
2.5%
7.0%
1.5%
9.0%
2.5%
7.0%
Weighted Average (1998)
1.78%
2.68%
1.78%
2.98%
Total = 40 marks
SECTION B: SHORT ANSWER QUESTIONS
Question 2 - Financial Accounting and Financial Statement Analysis
Honey Group consists of four companies. The relationship between them in terms of
shareholding of one company in another, is illustrated in the chart below:
Honey Limited
80%
100%
Berry Limited
Flames Limited
60%
Cherry Limited
Analyze the relationship between the members of the group and the implication
for preparing the consolidated account.
(3 marks)
Question 3 - Economics and Financial Markets
What is real interest rate?
(3marks)
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Question 4 - Quantitative Analysis and Statistics
The Training Manager of a Stockbroking firm conducted a selection test for stock
broking agents. He was determined to recruit applicants that scored a mean score of
69%. A random sample of 36 candidates selected after the test was found to score an
average of 78% with a standard deviation of 18%. Determine at 1% significance level
whether there is a change in the scores of the candidates.
(4 marks)
SECTION C: ESSAY TYPE, CALCULATION AND/OR CASE STUDY QUESTIONS
Question 5 - Financial Accounting and Financial Statement Analysis
The following information relates to three companies listed on the Nigerian Stock
Exchange in the food and beverage sector.
The key ratios for the company are given below:
Nestle
Unilever
PZ
ROA
9.89%
13.40%
6.45%
ROE
16.03%
45.04%
15.22%
Profit margin
11.85%
13.39%
18.13%
Asset turnover
0.88
1.01
0.49
Inventory turnover
4.99
5.18
1.29
No of inventory days
73 days
70 days
282 days
Current ratio
1.16
0.7
1.29
Acid test ratio
0.93
0.43
0.66
Debt/Equity
1.01
3.46
1.67
Debt/(Equity + Debt)
0.51
0.77
0.62
Long term debt/Equity
0.31
1.75
1.04
Equity/(Debt + Equity)
0.49
0.23
0.38
Required:
5(a) Appraise the leverage and liquidity positions of the three companies.(10 marks)
5(b) Briefly explain how depreciation is an example of the accruals or matching
convention. How should a company determine the estimated time over which to
depreciate a fixed asset?
(3 marks)
5(c) IFRS has introduced the use of fair value accounting for financial assets and
liabilities.
Define the meaning of “fair value”. How might fair value be determined?
(5 marks)
5(d) An executive is given 10,000 share options on 1st May 2012, with immediate
vesting, as a reward for past services. The shares are currently priced at N2.50
and the option strike price is N3.00. An appropriate valuation technique gives a
value of N1.25 for each of the options. Assuming that the executive has yet to
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exercise the option by the year end date, how should this transaction be included
in the company’s accounts?
(4 marks)
Question 6 - Economics and Financial Markets
6(a) In the last few years, the Nigerian economy has been experiencing sound
economic expansion, with an average GDP growth rate of 6.77% from 2005 to
2013. Moreover, consumers’ and firms’ confidence is high. Consider, for the sake
of simplicity, Nigeria as a closed economy. Use the IS-LM model to describe the
increase in demand for goods and services it has experienced in the last few
years. Comment briefly.
(5 marks)
6(b) Recently the CBN increased the cash reserve ratio (CRR) on public sector deposits
to 50% from 12%. Use again the IS-LM model to analyze the impact of this
monetary policy, and briefly explain the possible reasons for such a policy
measure. (5 marks)
6(c) What do you understand by the Foreign Exchange Market?
(2 marks)
6(d) The foreign exchange management policy of the CBN allows the exchange rate of
the Naira to be determined by the interaction of the forces of demand and supply,
but with a smoothing out of exchange rate fluctuations resulting from CBN
intervention. What type of policy is this, and what are the advantages?
(6 marks)
Question 7 - Quantitative Analysis and Statistics
KG Ltd makes two products, the Purse and the Handbag. Each purse earns N5
contribution and each handbag earns N6. The inputs are as follows:
Leather
Skilled labour
Purse
1½ m2
45 min
Handbag
2m2
30 min
There are six skilled labourers each working a 35 hour week and delivery contracts limit
the amount of leather available to 600m2 each week. KG Ltd has a quota restriction
whereby it has to produce at least as many handbags as it does purses.
Leather costs N8 per m2, wages are paid at N4.20 per hour.
After correctly solving the above problem using Linear Programming to determine the
optimal production plan for KG Ltd, and the contribution that can be achieved, an
analyst gives the following summary:
Model
Maximise Z = 5P + 6H
Subject to:
(Leather) 1.5P + 2H ≤ 600
(Labour) 0.75P + 0.5H ≤ 210
(Quota) P ≤ H
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(Non-negativity) P, H ≥ 0
Where:
P = number of purses made and sold per week
H = number of handbags made and sold per week
S1 = leather constraint
S2 = labour constraint
S3 =quota constraint
Result
Objective function value: 1,880.00
Variable
P
H
Constraint
S1
S2
S3
Value
160.00
180.00
Slack/Surplus
0.000
0.000
20.000
Shadow price/worth
2.667
1.333
0.000
Required:
Interpret the result of the Linear Programming model:
7(a) The Objective function.
(2 marks)
7(b) The constraints.
(2 marks)
7(c)
Shadow prices.
(4 marks)
7(d)
Slack variables.
(3 marks)
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