FSA 3321 – Fall (2004)
Exam 1
Moore
First Examination – Finance 3321
Fall 2004 (Moore) – Version A
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1. Which of the following statements is correct?
a. The FASB has the legal authority to proscribe GAAP.
b. Transparent financial reporting allows users to get a true and fair picture of the firm.
c. Conservatism of financial reporting standards may increase valuation relevance.
d. Prospective analysis involves assessing the past performance of the firm.
e. The external auditor certifies the financial statements are correct.
2. Which of the following is not an element of the “Five-Forces” model?
a. Potential and Actual Competition
b. Maintaining Competitive Advantage(s)
c. Bargaining Power of Customers
d. Threat of New Entrants
e. Threat of Substitute Products
3. Which of the following combinations would lead to the lowest degree of industry price
competition?
a. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
b. Few Exit Barriers, Low First mover advantage, High Product Differentiation
c. High Industry Concentration, Low Distribution Access, High Switching Costs
d. High Industry Concentration, High Fixed-Variable Cost Ratio, Low Switching Costs
e. Supply > Demand, Low Supplier Switching Costs, Steep Industry Learning Curves
4. Which of the following strategies would not lead to a mixture of cost leadership and
product differentiation?
a. Economies of scale and scope, high R&D investment, tight cost control
b. Superior product variety, lower input costs, High investment in R&D
c. Lower input costs, flexible distribution, low investment in R&D
d. High investment in brand image, High investment in R&D, Focus on Creativity
e. Simpler product designs, Tight cost control, superior product quality
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FSA 3321 – Fall (2004)
Exam 1
Moore
5. Determining whether the firm currently has the resources and capabilities to deal with the
identified key success factors is an example of:
a. Competitive Strategy Analysis
b. Differentiation Analysis
c. Analysis of the Degree of Actual and Potential Competition
d. Analysis of the Threat of Substitute Products
e. Analysis of the Bargaining Power in Input and Output Markets
6. Which of the following companies (cited in class) is suspected of managing earnings
through the use of questionable accounting practices related to franchises?
a. QWEST
b. Enron.
c. Fannie Mae.
d. Regina Vacuum.
e. Krispy Kreme.
Use the following information for problems 7 and 8
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 8.114%. The annual lease
payments are $4,000,000. The present value of the future lease payments is $34,000,000
(rounded). ABC’s industry commonly uses straight-line depreciation for a 20 year useful life
on these types of assets. Assume the effective tax rate is 30%.
7. Adjust ABC’s books to reflect the lease as being capitalized. The straight-line depreciation
expense that should have been charged against income in the second year is:
a. $200,000
b. $4,000,000
c. $1,700,000
d. $3,000,000
e. $2,266,667
8. Adjust ABC’s books to reflect the lease as being capitalized. The appropriate charge for
interest expense in the second year would be:
a. $4,000,000
b. $1,700,000
c. $3,000,000
d. $2,758,760
e. $1,931,132
9. Which of the following will result in overstated asset balances?
a. Off-Balance Sheet financing with operating lease accounting.
b. Channel stuffing
c. Overstated amortization of goodwill
d. Overstating reserves
e. Delaying the write-down of obsolete factory equipment
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FSA 3321 – Fall (2004)
Exam 1
Moore
10. Which of the following ratios would be used in the diagnostic analysis of the quality of
financial statements as it relates to the detection of manipulated expenses?
a. (Net sales)/(Cash from sales)
b. (Net sales)/(Net accounts receivable)
c. (CFFO)/(Operating Income)
d. (Net sales)/(Unearned revenue)
e. (Net sales)/(Warranty Liabilities)
11. 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)
12. 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
13. During class, we have discussed many examples of companies that have employed
suspect applications of accounting methods. Which of the following is suspected of
earnings management for the purpose of smoothing their periodic income over time in
order to reduce the volatility of earnings?
a. Krispy Kreme
b. Qwest
c. Enron
d. Gateway Computers
e. Fannie Mae
14. Which of the following is not a factor that affects managers’ accounting choices?
a. Regulatory concerns
b. Compensation
c. Capital Market perceptions
d. Inaccurate estimates
e. Debt Covenants
15. What is the last step of the method for a structured accounting analysis (per text)
a. Identify potential “red flags”
b. Undo Accounting Distortions
c. Evaluate the actual accounting strategy
d. Evaluate the quality of disclosure
e. Identify key accounting policies
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FSA 3321 – Fall (2004)
Exam 1
Moore
Short Problem (Show all work to receive full credit) – 25 Points
In 2002, MyGene Inc., a Biotech Company, acquired a R&D firm in its industry at what would
be considered very high values. The justification was that the acquired company had
promising results in the area of cholesterol lowering medications. As a result of the
acquisitions, MyGene reported $400 million on the Balance Sheet of Goodwill (an asset which
reflects the difference between acquisition price and fair market value of tangible assets
acquired).
Footnotes in the 2002 financial report show that MyGene is amortizing
(depreciating) the goodwill asset on a straight-line basis over 20 years. In 2003, another
company obtained patent protection on a similar medicine using a similar process to that
being developed for MyGene. In the 2003 financial statements, MyGene continued to
amortize the original goodwill associated with the acquisition. In analyzing MyGene, you feel
that one-half of the remaining goodwill should have been written off in 2003. Make the
necessary adjustments to the financial statements and accounts to reflect writing down the
goodwill in the 2003 financial statements. Assume a 35% tax rate.
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