FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
Second Examination – Finance 3321
Summer 2010 (Moore) – Version 1
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Clearly Circle the BEST response for each of the following questions:
1. Which of the following strategies would lead to a mixture of cost leadership and product
differentiation?
a. Economies of scale and scope, simpler product design, Lower input costs
b. Superior product variety, more flexible delivery, High Brand Advertising
c. Lower input costs, Low-cost Distribution, Low investment in R&D
d. High investment in brand image, High investment in R&D, Low Cost Distribution
e. Complex product designs, Superior Product Quality, Superior customer service
2. Which of the following strategies would lead to pure cost leadership or pure product
differentiation strategies?
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. Low investment in brand image, Low investment in R&D, Focus on Cost Control
e. Simpler product designs, Tight cost control, superior product quality
3. Which of the following strategies would lead to pure product differentiation?
a. Economies of scale and scope, simpler product design, tight cost control
b. Superior product variety, more flexible delivery, Low investment in R&D
c. Lower input costs, low-cost distribution, high 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, Lower Input Cost
4. Which of the following adjustments to the accounts must always be made when it is
found (suspected) a company has taken the “Big Bath” approach to managing earnings?
a. Increase the right-hand side of the balance sheet
b. Decrease liabilities
c. Increase retained earnings
d. Increase total assets
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FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
5. Which of the following must result in overstated asset balances?
a. Delays in the write-down (expensing) of current assets such as inventory.
b. Understating the growth rate in future post-retirement benefit costs
c. Overstated amortization of goodwill
d. Overstating the growth rate in future post-retirement benefit costs
e. Understating the discount rate used in discounting future defined benefit payments.
6. 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
7. What is the first step of the method for a structured accounting analysis (per text)
a. Identify potential “red flags”
b. Assess the degree of potential accounting flexibility
c. Evaluate the actual accounting strategy
d. Undo accounting distortions
e. Identify key accounting policies
f. Evaluate the quality of disclosure
8. What is the fourth step of the method for a structured accounting analysis (per text)
a. Identify potential “red flags”
b. Assess the degree of potential accounting flexibility
c. Evaluate the actual accounting strategy
d. Undo accounting distortions
e. Identify key accounting policies
f. Evaluate the quality of disclosure
9. Assume a company has been classified as belonging in a purely differentiated (specialty
good) industry. Which one of the following disclosures would be considered a Type 1 key
accounting policy?
a. Discount rates on defined benefit plans
b. Inventory is measured on a Lifo basis at lower of cost or market
c. Disclosure regarding the amount of Goodwill impaired during the year
d. Disclosure new customer service programs
e. Disclosure regarding the strategic placement of new distribution centers
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FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
10. Assume a company has been classified as belonging in a purely commodity product (cost
leadership) industry. Which one of the following disclosures would be considered a Type
1 key accounting policy?
a. Disclosure regarding product returns and warranties
b. Disclosure regarding R&D outcomes leading to new patents
c. Disclosure regarding cost cutting activities
d. Disclosure regarding new investment in marketing programs
e. Disclosure regarding new products introduced to the market
Use the following information for questions 11-12
Net Sales/Cash from sales
Changes in CFFO/OI
Total Accruals/Change in Sales
Net Sales/Net Accounts Receivable
Net Sales/Warranty Liabilities
Total Accruals/Change in Sales
2001
2002
2003
2004
0.99
0.88
0.50
12.0
104
0.50
0.98
0.81
.049
10.0
106
.049
1.01
0.82
0.62
11.0
107
0.62
1.00
0.65
0.58
16.0
108
0.58
11. Which of the expense diagnostic ratios would provide a “red flag” raising concerns that
expenses may have been understated for the purpose of overstating net income in 2004?
a. Net Sales/Cash from sales
b. Net Sales/Warranty Liabilities
c. Changes in CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
d. Changes in CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
e. Total Accruals/Change in Sales
12. Which of the revenue diagnostic ratios would provide a “red flag” raising concerns that
revenues may have been overstated for the purpose of overstating net income in 2004?
a. Net Sales/Cash from sales
b. Net Sales/Net Accounts Receivable
c. Net Sales/Warranty Liabilities
d. Changes in CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
e. Changes in CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
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FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
Questions 13-16 (Operating and Capital Lease Adjustments)
Use the following information for questions 13-16
ABC Company is a startup company in an industry that exclusively uses capital leases for it’s
expensive medical testing 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 8.00%. The annual lease payments are $3,500,000.
ABC’s industry commonly uses straight-line depreciation and the effective tax rate is 30%.
13. Adjust ABC’s books to reflect the lease as being capitalized. Assume the appropriate
interest expense in the second year would be $2,308,386. What amount should have
been recognized as the adjusted capital lease liability in the contract signing year?
a. $52,500,000
b. $30,000,000
c. $29,958,175
d. $28,854,829
e. $27,663,216
14. Now, assume the present value of the lease payments over the entire life of the contract
was $30,000,000. Adjust ABC’s books to reflect the lease as being capitalized. The
depreciation expense that should be charged against income in the 8th year is:
a. $3,500,000
b. $2,871,700
c. $2,000,000
d. $1,758,804
e. $1,410,000
15. Adjust ABC’s books to reflect the lease as being capitalized. Maintain the $30,000,000
assumption. Compute the appropriate charge for interest expense in the third year.
a. $2,400,000
b. $2,312,000
c. $2,308,386
d. $2,216,960
e. $2,114,317
16. Compute 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, net of tax). Keep the
$30,000,000 assumption.
a. $900,000 Lower
b. $812,000 Lower
c. $630,000 Lower
d. $568,400 Lower
e. $243,600 Lower
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FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
Use the following information for problems 17 through 20
You are performing an accounting analysis on ABC Company and noted excessive goodwill
balances relative to reported PPE. The following table was constructed from ABC’s 10-K
information. Assume all new goodwill is recognized at the end of the year for the purpose of
restatement. Further, assume a tax rate of 30%. Finally, you are starting the restatement
process from 2005’s financial statements. ABC has a December 31 fiscal year end. Assume
goodwill has a 5-year useful life and that you are adjusting the account.
Beginning Balance
New Goodwill
Goodwill Impaired
Ending Goodwill
2006
15,000,000
5,000,000
0
20,000,000
2007
20,000,000
10,000,000
2,000,000
28,000,000
2008
28,000,000
8,000,000
1,000,000
35,000,000
2009
35,000,000
2,000,000
20,000,000
17,000,000
17. How much goodwill should be impaired in 2007?
a. nothing
b. $2,000,000
c. $3,000,000
d. $4,000,000
e. $5,000,000
18. How much additional impairment of ABC’s goodwill would be needed in 2008?
a. $7,600,000
b. $6,000,000
c. $5,000,000
d. $4,000,000
e. $3,000,000
19.The adjusted Goodwill balance at the end of 2009 should be:
a. $19,400,000
b. $25,000,000
c. $26,000,000
d. $29,400,000
e. $30,000,000
20. The overall decrease to Owners’ Equity in 2006 for ABC after adjustment would be?
a. $900,000
b. $2,100,000
c. $1,200,000
d. $2,800,000
e. $3,000,000
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FSA 3321 – Summer (2010)
Exam 2 – Version 1
Moore
Problem 1 – Overs and Unders (20 Points)
Analyze the following transactions (omissions or incorrect accounting treatments) and assess
whether the accounts are Overstated, Understated, or No Effect. Fill in the appropriate
boxes as (O), (U), (N)
Assets
1
2
3
4
5
6
Equity
Revenues
Expenses
Net Income
The company used an unrealistically
low bad debt expense ratio
The company used too small a growth
rate to estimate the present value of
future medical benefit costs on a
defined benefit pension healthcare
plan
The company took a "big bath" when
recording restructuring expenses
The company recognized revenues on
customer deposits before they were
earned
The company , a car dealer, recorded
the trade-in value of used cars at
twice appraised value
The company capitalized all research
and development expenses for the
year
8
The company failed to include the
results of a lawsuit verdict rendered
against them on December 29 since
they planned and appeal the next year
The company failed to recognize that
a line of inventory had become
obsolete and impaired
9
The company used the allowance
method to account for bad accounts
receivables instead of the specific
identification method
10
The company used too large a
discount rate for determining its
defined pension benefit liabilities
7
Liabilities
Question 5 should read:
A Del Monte booked all newspaper grocery store coupons in 2009 as deferred advertising
expense and made no adjusting entry at the end of the year.
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