FSA 3321 – Summer II (2004)
Exam 2
Moore
Second Examination – Finance 3321
Summer II (Moore)
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Where indicated, use the financial statement for Dell-U-Dead, Inc. (a large computer
manufacturer and distributor that sells in both the wholesale and retail markets).
Clearly Circle the BEST response for each of the following questions:
1. Which of the following will not result in overstated asset balances?
a. Delays in writing down current assets.
b. Channel stuffing
c. Overstated amortization of goodwill
d. Overstating reserves
e. Delaying the write-down of obsolete factory equipment
2. Which of the following accounting adjustments would have to be made in the case of
improperly accelerating the recognition of revenues?
a. Sales would be increased
b. Accounts Receivable would be increased
c. Cost of Sales would be increased
d. Inventory would be increased
e. Deferred tax liabilities would have to be increased
3. Which of the following ratios would not be used in the diagnostic analysis of the quality of
financial statements as it relates to the detection of manipulated sales?
a. (Net sales)/(Cash from sales)
b. (Net sales)/(Net accounts receivable)
c. (Bad debt expense)/(Net sales)
d. (Net sales)/(Unearned revenue)
e. (Net sales)/(Warranty Liabilities)
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FSA 3321 – Summer II (2004)
Exam 2
Moore
Use the following information for problems 4 through 6
ABC Company is a startup company in an industry that exclusively uses capital leases for it’s
expensive medical testing and diagnostic equipment. ABC, however, used operating lease
accounting in its first year of operations. Assume the average lifespan of ABC’s leased
equipment is 15 years and that their annual cost of debt is 12%. The annual lease payments
are $3,000,000. The present value of the future lease payments is $20,432,600 (rounded).
ABC’s industry commonly uses straight-line depreciation and the effective tax rate is 35%.
4. Adjust ABC’s books to reflect the lease as being capitalized. The depreciation expense
that should have been charged against income in the first year is:
a. $200,000
b. $3,000,000
c. $1,362,173
d. $885,413
e. $1,950,000
5. Adjust ABC’s books to reflect the lease as being capitalized. The appropriate charge for
interest expense in the second year would be:
a. $2,451,912
b. $2,386,141
c. $3,000,000
d. $1,593,743
e. $1,550,992
6. The overall effect on Net Income in the first year for ABC (had the lease been capitalized)
would be (relative to the reported Net Income):
a. $3,814,085 decrease
b. $2,479,155 decrease
c. $814,085
decrease
d. $529,155
decrease
e. $548,088
increase
7. Which of the following would be indicative of manipulated core expenses for the purpose
of overstating income?
a. Unexpected (unexplained) increases in asset turnover
b. Unexpected (unexplained) declines in (Depreciation expense)/(Capital Expenditures)
c. Unexpected (unexplained) increases in (Pension expense)/(SG&A expense)
d. Unexpected (unexplained) declines in (Net sales)/(Warranty liabilities)
e. Unexpected (unexplained) increases in (Operating Cash Flow)/(Operating Income)
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FSA 3321 – Summer II (2004)
Exam 2
Moore
8. Aggressive use of which of the following accounting choices can lead to the problem of
“off-balance sheet financing”?
a. Operating leases
b. Failure to write down obsolete inventory
c. Reporting all related party transactions
d. Overstating depreciation for long-term assets
e. Using the intrinsic method to account for executive stock options
9. The suspect accounting practice for Lucent Technologies involved:
a. Operating leases
b. Overstating accounts receivable
c. Executive stock options
d. Overstating inventory
e. Understating pension liabilities
10. Which of the following adjustments to the accounts would have to be made when it is
found (suspected) a company overstates the balance of it’s long-term assets?
a. Increase depreciation expense
b. Decrease retained earnings
c. Increase income tax expense
d. Decrease deferred tax liability
e. Increase the asset account
Use the attached financial statements for Dell-U-Dead Corp. to answer questions 11-13
11. Dell-U-Dead’s return on equity for the year ended February 1, 2002 was
a. 377%
b. 9.2%
c. 26.5%
d. 17.9%
e. 4.0%
12. Dell-U-Dead’s debt service margin for the year ended February 1, 2001 was
a. 9.32
b. 12.66
c. 7.30
d. 8.24
e. 0.52
13. What would Dell-U-Dead’s Sustainable Growth Rate have been for the year ended
February 1, 2002 if it had maintained the same net profit margin as the previous year?
(Assume no dividends are paid. Use the previous year’s ending equity to compute ROE.)
a. 22.2%
b. 15.5%
c. 37.7%
d. 38.7%
e. 45.8%
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FSA 3321 – Summer II (2004)
Exam 2
Moore
14. Which of the following is not a driver of growth and profitability that is associated with
product market strategies?
a. Investment Management
b. Managing Working Capital
c. Acquiring the appropriate Fixed Assets
d. Finding the most efficient method of financing Fixed Assets
e. Developing effective marketing strategies
15. The firm’s spread and net financial leverage:
a. Move in the same direction
b. Move in opposite directions
c. Are independent of one another
d. Are two terms that mean the same thing
e. Are controlled by the investment management function
16. When comparing the firm’s performance with that of its competitors:
a. The analyst should perform time-series analysis
b. The analyst should use all the average of all members of the industry as a benchmark
c. The analyst should randomly select a member of the industry as a benchmark
d. The analyst should compare the firm with direct competitors or from segments of the
industry that are direct competitors (in terms of product market strategies).
e. The analyst should compare the firm’s ROA with the return on the S&P 500
17. Assume that Dell-U-Dead’s interest expense for the year ended February 2, 2001 was
$67,000,000. Compute the basic (not diluted) EBITDA per share for that year.
a. $ 0.78
b. $ 0.76
c. $ 0.69
d. $ 0.48
e. $ 1.46
18. Which of the following actions would increase Dell-U-Dead’s SGR?
a. Decreasing Inventory turnover
b. Purchasing Fixed Assets
c. Common Share Repurchases
d. Increasing Accounts Payable Turnover
e. Issuing more executive stock options
19. Which is not a measure of that is typically used for measuring Financial Leverage?
a. Current ratio
b. Cash ratio
c. Operating cash flow ratio
d. Debt-to-capital ratio
e. Cash Flow per share ratio
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FSA 3321 – Summer II (2004)
Exam 2
Moore
20. Where did Professor Moore purchase his glass sun-tea maker?
a. K-Mart
b. Nordstroms
c. Sears
d. Target
e. Wal-Mart
Short Problem # 1 (Show all work to receive full credit) – 10 Points
Compute all of the relevant liquidity and operating efficiency ratios for Dell-U-Dead for both
years. (same ratios as for Vann Inc. homework assignment). Assess the overall changes
and overall liquidity/operating efficiency from 2001 to 2002. Comment on major economic
factors could explain some of the changes (if any).
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FSA 3321 – Summer II (2004)
Exam 2
Moore
Short Problem # 2 (Show all work to receive full credit) – 10 Points
In performing background research on Dell-U-Dead, you find that:
a. Unearned Revenues increased from $192 million to $444 million (slightly more than
double). However, their sales of 3-year service contracts were reported to have
increased by more than 6 times. This would bring the Unearned Revenues balance to
$1,152 million. Your concern is that all contracts were booked as earned in 2002.
b. You are not convinced that production achieved increased efficiency in a down
economy during the year ended February 1, 2002. In particular, you doubt the
legitimacy of the ending inventory number and are concerned that sales may have
been “created” to make profits look better. Consequently, you need to adjust the
related items to the previous year’s levels in terms of efficiencies.
Required:
Assume a 35% tax rate. Make all of the adjustments to the relevant income statement
and balance sheet accounts that relate to the problems identified in (a) and (b).
Comment on these results.
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FSA 3321 – Summer II (2004)
Exam 2
Moore
Dell-U-Dead Computer Corporation
Balance Sheet (in Millions) (1 February 20XX)
ASSETS
Current Assets:
Cash and equivalents
Short-term Investments
Accounts Receivable (net)
Inventories
Other
2002
2001
$ 3,641
273
2,269
278
1,419
$ 4,910
525
2,424
400
1,467
Total Current Assets
$ 7,877
$ 9,726
826
4,373
359
100
996
2,418
290
240
Total non-current assets
$ 5,658
$ 3,499
Total Assets
$13,535
$13,670
$ 5,075
1,600
444
300
100
$ 4,286
1,550
192
450
300
$ 7,519
$ 6,778
520
302
150
120
230
509
261
120
100
280
Total Non-Current Liabilities
$ 1,322
$ 1,270
Total Liabilities
$ 8,841
$ 8,048
$ 5,605
(2,249)
1,364
( 26)
$ 4,795
--839
(12)
Total Stockholders’ Equity
$ 4,694
$ 5,622
Total Liabilities & Stockholders’ Equity
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$13,535
$13,670
Non-Current Assets:
Property, plant and equipment (net)
Investments
Goodwill
Other non-current assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable
Accrued Liabilities
Unearned Revenues
Notes Payable – Current
Other
Total Current Liabilities
Non-Current Liabilities:
Long-Term Debt
Pension Liabilities
Other Post-Retirement Benefit Liabilities
Deferred Tax Liability
Other Liabilities
Stockholders’ Equity:
Common Stock Issued and Outstanding
Treasury Stock
Retained Earnings
Other Comprehensive Income
FSA 3321 – Summer II (2004)
Exam 2
Moore
Dell-U-Dead Computer Corporation
Income Statement (in Millions**)
For the Year Ending February 1, 20XX)=
Net Revenue
Less: Cost of Goods Sold
Gross Profit
Operating Expenses
Selling, General and Administrative
Lease Expenses
Research, Development and Engineering
Special charges
Total operating expenses
Operating Income
Investment and other income (loss), net of tax
2002
2001
$31,168
25,661
$31,888
25,445
$ 5,507
$ 6,433
$ 1,900
884
452
482
$ 2,400
793
482
105
$ 3,718
$ 3,780
$ 1,789
(58)
$ 2,663
581
Income before taxes and cumulative effect
of change in accounting principle
$ 1,731
Provision for income taxes
485
$ 3,194
958
Income before cumulative effect of change
in accounting principle
$ 1,246
Cumulative effect of change in accounting principle
---
$ 2,236
59
Net Income
Earnings Per Common Share:
Basic EPS
Diluted EPS
Weighted Average Shares Outstanding:
Basic
Diluted
**
$ 1,246
$ 2,177
$ 0.48
$ 0.26
$ 0.87
$ 0.79
2,602
4,543
2,582
2,746
All items in millions of dollars except Earnings per Share data
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FSA 3321 – Summer II (2004)
Exam 2
Moore
Dell-U-Dead Computer Corporation
Statement of Cash Flows (in Millions)
For the Year Ending February 1, 20XX
Cash Flows from Operating Activities:
Net Income
Adjustment to reconcile income to cash
provided by operating activities:
Depreciation and amortization
Tax benefits of employee stock plans
Special charges
Gains/Losses in investments
Other
Changes in:
Operating working capital
Non-current assets and liabilities
2002
2001
$ 1,246
$ 2,177
239
487
742
17
178
240
929
105
(307)
135
826
62
642
274
Net cash provided by operating activities $ 3,797
$ 4,195
Cash Flows from investing activities:
Investments in securities:
Purchases
Maturities and sales
Capital expenditures
$(5,382)
3,425
(303)
$(2,606)
2,331
(482)
$(2,260)
$ (757)
Cash flows from financing activities:
Purchase of common stock
$(3,000)
Issuance of common stock under employee plans
295
Other
3
$(2,700)
404
(9)
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange rates on cash
Net increase (decrease) in cash
$(2,702)
$(2,305)
(104)
(32)
$(1,269)
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$ 1,101