Uploaded by Đình Đình

FRA Test 1

advertisement
10
SchweserPro 2012 CFA Level I- Financial reporting and Analysis- TEST 1
Question 1 - 98151
Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of
Octabius to review all purchases that occurred between February 1 and February 8 to investigate an
error on the receiving dock. Singh will most likely look at the:
A) general journal.
B) initial trial balance.
C) general ledger.
Question 2 - 98205
Which of the following is an independent auditor least likely to do with respect to a company’s
financial statements?
A) Prepare and accept responsibility for them.
B) Provide an opinion concerning their fairness and reliability.
C) Confirm assets and liabilities contained in them.
Question 3 - 98094
Which of the following statements about financial reporting standards is least accurate? Reporting
standards:
A) are disclosed on Form 8K by publicly traded firms in the United States.
B) narrow the range within which management estimates can be seen as reasonable.
C) ensure that the information is “useful to a wide range of users.”
Question 4 - 98197
Which of the following best describes financial reporting and financial statement analysis?
Financial reports assess a company’s past performance in order to draw conclusions
about the company’s ability to generate cash and profits in the future.
Financial reporting refers to how companies show their financial performance and financial
B)
analysis refers to using the information to make economic decisions.
The objective of financial analysis is to provide information about the financial position of
C)
an entity that is useful to a wide range of users.
A)
Question 5 - 98193
The step in the financial statement analysis framework that includes making any appropriate
adjustments to the financial statements and calculating ratios is best described as:
A) analyzing and interpreting the data.
B) processing the data.
C) gathering the data.
Question 6 - 98165
According to the IFRS framework, timeliness is a characteristic that enhances:
A) faithful representation.
B) relevance.
C) both relevance and faithful representation.
Question 7 - 98155
A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These
transactions are most likely to affect which accounts?
Purchase
Sale
A) Assets only
Assets, revenue, expenses,
owners' equity
B) Assets only
Assets and revenues only
C) Assets and expenses
Assets, revenue, expenses,
owners' equity
Question 8 - 97863
Given the following income statement and balance sheet for a company:
Balance Sheet
Assets
Year 2003
Cash
500
Accounts Receivable
600
Inventory
500
Total CA
1300
Plant, prop. equip
1000
Total Assets
2600
Year 2004
450
660
550
1660
1250
2,910
Liabilities
Accounts Payable
Long term debt
Total liabilities
500
700
1200
550
1102
1652
Equity
Common Stock
400
538
Retained Earnings
Total Liabilities & Equity
1000
2600
Income Statement
Sales
Cost of Goods Sold
Gross Profit
SG&A
Interest Expense
EBT
Taxes (30%)
Net Income
720
2,910
3000
(1000)
2000
500
151
1349
405
944
What is the average receivables collection period?
A) 80.3 days.
B) 76.7 days.
C) 60.6 days.
Question 9 - 97413
An analyst has gathered the following information about a company:
Income Statement for the Year 2004
Sales
$1,500
Expenses
COGS
$1,300
Depreciation
30
Int. Expenses
40
Total expenses
1,370
Income from cont. op.
130
Gain on sale
30
Income before tax
160
Income tax
64
Net Income
$96
Additional Information:
Dividends paid
Common stock sold
Equipment purchased
Bonds issued
Fixed asset sold for (original cost of $100 with accumulated depreciation of $70)
Accounts receivable decreased by
Inventory decreased by
Accounts payable increased by
Wages payable decreased by
What is the cash flow from operations?
$30
20
50
80
60
30
20
20
10
A) $170.
B) $156.
C) $135.
Question 10 - 98022
On January 1, 2007, Sneed Corporation purchased machinery costing $8 million with a salvage value
of $1 million. For the year ended 2007, Sneed recognized depreciation expense of $3.2 million from
the machinery using the double-declining-balance method. Should the depreciation expense be
reported as an operating component in the income statement, and what is the estimated useful life of
the machinery?
Operating expense Useful life
A) No
5 years
B) Yes
4 years
C) Yes
5 years
Question 11 - 97808
Advantage Corp.'s capital structure was as follows:
December 31, 2005
December 31, 2004
Common
110,000
110,000
Convertible Preferred
10,000
10,000
8% Convertible Bonds
$1,000,000
$1,000,000
Outstanding shares of stock:
During 2005, Advantage paid dividends of $3 per share on its preferred stock. The preferred shares
are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000
shares of common stock. Net income for 2005 was $850,000. Assume the income tax rate is 30%.
Calculate Advantage's basic and diluted earnings per share (EPS) for 2005.
Basic EPS
Diluted EPS
A) $7.45
$5.66
B) $6.31
$5.66
C) $7.45
$6.26
Question 12 - 93593
Interest payments, either as part of a coupon payment or to creditors, are considered which type of
cash flow under U.S. GAAP?
A) Financing.
B) Operating.
C) Investing.
Question 13 - 97972
The following information pertains to Bender, Inc., for last year:




Net income of $25 million.
1 million shares of $10 par value preferred stock outstanding paying a 10% dividend.
50 million shares of common stock outstanding at the beginning of the year.
Issued an additional 5 million shares of common stock on 7/1.
What is Bender, Inc.’s basic earnings per share (EPS)?
A) $0.476.
B) $0.384.
C) $0.457.
Question 14 - 98091
Which revenue recognition method is used when the payment is assured and revenue is earned as
costs are incurred?
A) Installment sales method.
B) Percentage-of-completion method.
C) Cost recovery method.
Question 15 - 97932
Which of the following ratios would least likely measure liquidity?
A) Quick ratio.
B) Current ratio.
C) Return on assets (ROA).
Question 16 - 97910
An analyst has collected the following data about a firm:



Receivables turnover = 10 times.
Inventory turnover = 8 times.
Payables turnover = 12 times.
What is the average receivables collection period, the average inventory processing period, and the
average payables payment period? (assume 360 days in a year)
Receivables
Collection Period
A) 30 days
Inventory
Processing Period
30 days
Payables
Payment Period
60 days
B) 36 days
45 days
30 days
C) 45 days
36 days
30 days
Question 17 - 97278
Carpenter Corporation reported the following statement of shareholders’ equity as of December 31,
2006:
Common stock at par
Additional paid-in-capital
Treasury stock
Retained earnings
Accumulated other comprehensive income
$600,000
900,000
(200,000)
10,500,000
450,000
$12,250,000
During 2007, Carpenter:






earned net income of $1,700,000.
declared dividends of $300,000. $75,000 of the dividends remain unpaid.
purchased held-to-maturity securities for $100,000. The securities have a fair value of
$110,000 at year-end.
purchased available-for-sale securities for $250,000. The securities have a fair value of
$225,000 at year-end.
translated the financial statements of a foreign subsidiary and calculated a $90,000
unrealized gain.
purchased treasury stock for $75,000. The stock was valued at $60,000 when issued.
Calculate Carpenter’s retained earnings and accumulated other comprehensive income as of
December 31, 2007.
Retained earnings
Accumulated other
comprehensive income
A) $11,900,000
$515,000
B) $11,900,000
$65,000
C) $12,125,000
$515,000
Question 18 - 98037
At the beginning of 20X7, Bryan’s Bakery Company purchased a secret cookie recipe for $25,000. In
addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan expects to use both recipes
indefinitely; however, the useful (economic) life of similar recipes has been 10 years. Assuming
straight-line amortization, what amount of recipe expense should Bryan report for the year ended
20X7 and what amount should Bryan report as assets related to these recipes on its balance sheet at
the end of 20X7?
Recipe expense Balance sheet
A) $5,000
$25,000
B) $7,500
$22,500
C) $3,000
$30,000
Question 19 - 94938
What is the difference between the direct and the indirect method of calculating cash flow from
operations?
The indirect method starts with gross income and adjusts to cash flow from operations,
A) while the direct method starts with gross profit and flows through the income statement to
calculate cash flows from operations.
The direct method starts with sales and follows cash as it flows through the income
B) statement, while the indirect method starts with net income and adjusts for non-cash
charges and other items.
Balance sheet items are not included in the cash flow from operations for the direct
C)
method, while they are included for the indirect method.
Question 20 - 97414
The Beeline Company has the following balance sheet and income statement.
Beeline Company Balance Sheet
As of December 31, 2004
2003
$50
100
200
2004
Cash
$60 Accounts payable
Accounts receivable
110 Long-term debt
Inventory
180 Common stock
Retained earnings
Fixed assets (gross)
800
900 Total liabilities and equity
Less: Accumulated depreciation 200
250
Fixed assets (net)
600
650
Total assets
$950 $1,000
Beeline Company Income Statement
For year ended December 31, 2004
Sales
Less:
COGS
Depreciation
Selling, general, and administrative expenses
Interest expense
Income before taxes
Less tax
Net income
The cash flow from operations for 2004 is:
A) $260.
B) $210.
C) $150.
$1,000
600
50
160
23
$167
67
$100
2003 2004
$100 $150
400
300
50
50
400
500
$950 $1,000
Question 21 - 97930
Wells Incorporated reported the following common size data for the year ended December 31, 20X7:
Income Statement
Sales
Cost of goods sold
Operating expenses
Interest expense
Income tax
Net income
Balance sheet
Cash
Accounts receivable
Inventory
Net fixed assets
Total assets
%
100.0
58.2
30.2
0.7
5.7
5.2
%
4.8
14.9
49.4
30.9
100.00
Accounts payable
Accrued liabilities
Long-term debt
Common equity
Total liabilities & equity
%
15.0
13.8
23.2
48.0
100.0
For 20X6, Wells reported sales of $183,100,000 and for 20X7, sales of $215,600,000. At the end of
20X6, Wells’ total assets were $75,900,000 and common equity was $37,800,000. At the end of 20X7,
total assets were $95,300,000. Calculate Wells’ current ratio and return on equity ratio for 20X7.
Current ratio
Return on equity
A) 2.4
26.4%
B) 2.4
26.8%
C) 4.6
25.2%
Question 22 - 97968
On December 31, 2004, JME Corporation had 350,000 shares of common stock outstanding. On
September 1, 2005, an additional 150,000 shares of common stock were issued. In addition, JME had
$10 million of 8% convertible bonds outstanding at December 31, 2004, which are convertible into
200,000 shares of common stock. Net income for 2005 was $3 million. Assuming an income tax rate
of 40%, what amount should be reported as the diluted earnings per share for 2005?
A) $5.00.
B) $5.80.
C) $6.00.
Question 23 - 98081
The following data pertains to the Megatron company:




Net income equals $15,000.
5,000 shares of common stock issued on January 1.
10% stock dividend issued on June 1.
1000 shares of common stock were repurchased on July 1.

1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common
were outstanding the whole year.
How many common shares should be used in computing the company’s basic earnings per share
(EPS)?
A) 4,500.
B) 5,500.
C) 5,000.
Question 24 - 96768
Summit Co. has provided the following information for its most recent reporting period:
Beginning Figures Ending Figures Average Figures
Sales
$ 5,000,000
EBIT
$ 800,000
Interest Expense
$ 160,000
Taxes
$ 256,000
Assets
$ 3,500,000
$ 4,000,000
$ 3,750,000
Equity
$ 1,700,000
$ 2,000,000
$ 1,850,000
What is Summit Co.’s total asset turnover and return on equity?
Total Asset Turnover
Return on Equity
A) 1.25
20.8%
B) 1.33
15.8%
C) 1.33
20.8%
Question 25 - 97986
Ajax Company's capital structure was as follows:
December 31, 2004 December 31, 2003
Outstanding shares of stock:
Common
200,000
200,000
Convertible preferred
5,000
5,000
6% Convertible Bonds
$500,000
$500,000





During 2004, Ajax paid dividends of $2.00 per share on its preferred stock.
The preferred shares are convertible into 10,000 shares of common stock.
The 6% bonds are convertible into 15,000 shares of common stock.
Net income for 2004 was $400,000.
Assume that income tax rate is 40%.
Ajax’s basic and diluted earnings per share for 2004 are:
Basic EPS
Diluted EPS
A) $1.95
$1.95
B) $1.80
$1.86
C) $1.95
$1.86
Question 26 - 98061
Which of the following statements regarding making changes in accounting principles is least
accurate?
Changes in accounting estimates are now treated the same as changes in accounting
principles.
A change in accounting principle is a change from one generally accepted accounting
B) principle to another generally accepted principle. The firm making the change must justify
the change.
C) The general rule is retrospective application.
A)
Question 27 - 97939
Given the following information about a firm:





Net Sales = $1,000.
Cost of Goods Sold = $600.
Operating Expenses = $200.
Interest Expenses = $50.
Tax Rate = 34%.
What are the gross and operating profit margins?
Gross Operating Margin Operating Profit Margin
A) 40%
10%
B) 20%
15%
C) 40%
20%
Question 28 - 98006
The Gaffe Company had net income of $1,500,000. Gaffe paid preferred dividends of $5 on each of
the 100,000 preferred shares. Each preferred share is convertible into 20 common shares. There are
1 million Gaffe common shares outstanding. In addition to the common and preferred stock, Gaffe has
$25 million of 4% bonds outstanding. If Gaffe's tax rate is 40%, what is its diluted earnings per share?
A) $1.00.
B) $0.50.
C) $0.33.
Question 29 - 98043
On January 1, 20X7, Omega Corporation paid $45,000 to renew its property insurance for 3 years.
What amount of insurance expense should Omega report for the year-ended December 31, 20X7 and
what is the balance of Omega’s prepaid insurance account on December 31, 20X8?
Insurance expense Prepaid insurance
A) $15,000
$30,000
B) $15,000
$15,000
C) $45,000
$15,000
Question 30 - 96535
Ratio
20X3 20X4
Net profit margin
0.15 0.18
Total asset turnover
1.60 1.75
Financial leverage multiplier 1.00 1.50
Part 1)
The return on equity (ROE) for 20X3 and 20X4 respectively is:
A) 24% and 8%.
B) 24% and 47%.
C) 8% and 24%.
Part 2)
If the company’s net profit margin declines to 0.10 in 20X5, what total asset turnover would be needed
in order to maintain the same ROE as in 20X4, assuming there is no change in the financial leverage
multiplier?
A) 2.50.
B) 3.15.
C) 1.50.
Question 31 - 97822
How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per
share?
A) Increase EPS.
B) Either decrease or increase EPS depending upon if the security is dilutive or antidilutive.
C) Decrease EPS.
Question 32 - 97980
As of the beginning of the year HalfPass Productions, Inc., had the following complex capital structure:



3,000,000 common shares outstanding.
175,000 options with an exercise price of $22.
250,000 warrants with an exercise price of $18.
During the year:






On March 1, the company issued 100,000 new shares of common stock.
On July 1, the board of directors declared a 15% stock dividend.
On September 1, the company repurchased 125,000 shares.
Net income (after-tax) for the year was $7,500,000.
The company paid common dividends of $2,750,000 and preferred dividends of $1,300,000.
The average market price for the common stock was $25 per share.
Assume the fiscal year is January 1 through December 31. At year end, HalfPass’s basic EPS is
closest to:
A) $1.77.
B) $1.66.
C) $1.94.
Question 33 - 97873
An analyst has gathered the following data about a company:



Average receivables collection period of 37 days.
Average payables payment period of 30 days.
Average inventory processing period of 46 days.
What is their cash conversion cycle?
A) 113 days.
B) 45 days.
C) 53 days.
Question 34 - 97743
Which of the following securities would least likely be found in a simple capital structure?
A) 6%, $5000 par value putable bond.
B) 7%, $100 par value non convertible preferred.
C) 3%, $100 par value convertible preferred.
Question 35 - 97992
An analyst has gathered the following information about Zany Corp.





Net income of $200,000 for the year ended December 31, 2004.
During 2004, 50,000 common shares were outstanding.
Zany has 10,000 shares of 7%, $50 par convertible preferred stock outstanding, each
convertible into two shares of common.
5,000 warrants are outstanding with an exercise price of $24. Each warrant is convertible into
one common share.
The average market price per common share during 2004 was $20.
Calculate Zany's basic and diluted earnings per share (EPS) for 2004.
Basic EPS
Diluted EPS
A) $3.30
$2.00
B) $4.00
$2.86
C) $3.30
$2.86
Question 36 - 97391
John Stone, CFA, is an investment advisor specializing in the preparation of company and industry
reports for high net worth customers at Learmon Brothers. Currently, Stone is preparing a report on
Soft Corporation, a rapidly growing software company. The explosive growth of this company was
financed primarily by an initial public offering in which 3,000,000 shares were issued at a price of $20
per share on June 27, 2004. Soft Corporation received additional capital when employee stock
options for 1,000,000 shares at a price of $10 were exercised on January 1, 2005. Stone realizes the
importance of cash flow on a company's financial health and would like to include a projected
statement of cash flows for 2005. Soft Corporation financial statements are presented in Tables 1 and
2. Included are the actual statements for the year ending December 31, 2004.
Table 1
Soft Corporation Balance Sheets
as of December 31
(in millions)
Actual 2004 Projected 2005
Cash
$24.0
$26.0
Accounts Receivable
17.0
24.0
Inventory
100.0
150.0
PP&E
100.0
125.0
Accumulated depreciation
(30.0)
(35.0)
Total Assets
$211.0
$290.0
Accounts payable
$91.0
$101.0
Long-term debt
20.0
40.0
Common stock
80.0
90.0
Retained earnings
20.0
59.0
Total liabilities and equity
$211.0
$290.0
Table 2
Soft Corporation Income Statement
for Years Ended December 31
(in millions except per share data)
Actual 2004 Projected 2005
Sales
$80.0
$198.0
COGS
(38.0)
(90.0)
Gross profit
$42.0
$108.0
SG&A
Depreciation
Operating expenses
(13.0)
(3.0)
$(16.0)
(30.0)
(5.0)
$(35.0)
Interest expense
$(4.0)
$(5.0)
Pretax Income
Income tax expense
Net income
22.0
(7.0)
$15.0
68.0
(25.0)
$43.0
EPS
$2.0
$4.3
Average shares outstanding (millions)
Dividends per share
7.5
$0.1
10.0
$0.4
Under the indirect method, what will Stone find Soft Corporation's projected net change in cash to be
for the year ending December 31, 2005?
A) $9,000,000.
B) $2,000,000.
C) $4,000,000.
Question 37 - 95596
Bandhu Jayagopal and his wife, Padmini, are the founders and current owners of the Riverview
Restaurant and Lounge. They retired several years ago from the day-to-day management, however,
turning it over to a nephew, Mehmood Shah. Shah has run the restaurant very profitably, but recent
redevelopment of the downtown riverfront area has brought new competition to the Riverview.
Jayagopal’s 25 year old grandson, Jeff Patel, thinks the restaurant can leap ahead of the competition
and attract a hipper crowd by turning the lounge into a nightclub.
Patel wants to incorporate a new business and lease the restaurant lounge for his nightclub, the Red
Monkey. Patel has consulted a contractor who says he can do the renovations for $25,352,000. Patel
estimates that the new sound system and décor would be usable for five years before fashions
changed enough that it would have to be replaced, at which point it would have no salvage value.
Patel assures his grandfather and uncle that he could generate $14,384,000 in revenue every year
once the renovations are complete. For their parts, Jayagopal and Shah are understandably leery of
turning over the financial future of the family business to a 25 year old who wants to open a club.
Since the new club would face the same 41% tax rate that the restaurant faces, Jayagopal and Shah
are not sure that the cash flow from the club would be sufficient to cover the rapid depreciation of the
fashionable décor. The fact that Patel also expects them to fund the new company for him doesn’t
help. They say no.
Patel returns to his uncle and grandfather armed with financial projections. Patel shows his hoped-for
business partners that, if they use the straight-line method in reporting the club’s results, the Red
Monkey will report $5,495,024 in after-tax income (ignoring expenses other than depreciation) in the
first year.
Jayagopal counters that straight-line depreciation is irrelevant because for tax purposes the
depreciation schedule will be accelerated to 35% per year in each of the first two years and 30% in
the third year. Jayagopal points out that after-tax income for the club in the first year will be only
$3,251,372 on a tax basis (again ignoring expenses other than depreciation).
Shah joins Jayagopal in his objections, adding that the accelerated depreciation schedule used for tax
purposes will result in a substantial deferred tax liability, reaching approximately $4,158,000 by the
end of year three. Patel replies that the deferred tax liability is merely an accounting entry and the
Red Monkey will never have to pay any of it since the club will reinvest in up-to-date décor in five
years when the current renovations are out of fashion.
Patel adds that a change in the tax law to cut tax rates from 41% to 31% is likely in year three, and if
that happens the deferred tax liability at the end of the third year will decline to $2.948 million.
Jayagopal agrees about the likelihood of a tax cut, saying that such a cut in tax rates would add
$1.014 million to the Red Monkey’s reported net income in year three.
Jayagopal and Shah agree to fund the nightclub if the tax cut passes.
Part 1)
What would be the Red Monkey’s projected tax payable (in millions) in year one?
A) $2.259.
B) $1.909.
C) $0.779.
Part 2)
Regarding Patel’s and Jayagopal’s statements about the Red Monkey’s after-tax income in the first
year, which is CORRECT?
Patel
Jayagopal
A) Incorrect
Correct
B) Correct
Incorrect
C) Correct
Correct
Part 3)
Which statement about an analyst’s treatment of deferred tax assets and liabilities is most accurate?
A) Deferred tax assets that are unlikely to be reversed should be added to equity.
Deferred tax liabilities are unlikely to reverse should be discounted to present value and
B)
treated as liabilities.
Deferred tax liabilities that are unlikely to reverse should be treated as equity, without
C)
discounting.
Part 4)
Regarding Patel’s and Shah’s statements about the Red Monkey’s deferred tax liability, which is
CORRECT?
Patel
Shah
A) Correct
Correct
B) Incorrect
Correct
C) Incorrect
Incorrect
Part 5)
Regarding Patel’s and Jayagopal’s statements about the effect of a tax cut from 41% to 31% in year
three on Red Monkey, which is CORRECT?
Patel
Jayagopal
A) Incorrect
Incorrect
B) Correct
Correct
C) Incorrect
Correct
Part 6)
When analyzing a firm’s reconciliation between its effective tax rate and the statutory tax rate, which
of the following is least likely a potential cause for the difference between the effective rate and the
statutory rate?
A) Differential tax treatment between capital gains and operating income.
B) Deferred taxes provided on the reinvested earnings of unconsolidated domestic affiliates.
Use of accelerated depreciation for tax purposes and straight-line depreciation for
C)
reporting purposes.
Question 38 - 95991
This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a
cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on
accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or
asset? A deferred tax:
A) liability of $21,760.
B) liability of $16,320.
C) asset of $21,760.
Question 39 - 94520
Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least
accurate?
A) Title is transferred at the end of the lease period.
B) A bargain purchase option exists.
The present value of the lease payments is at least 80% of the fair market value of the
C)
asset.
Question 40 - 95524
For a firm financed with common stock and long-term fixed-rate debt, an analyst should most
appropriately adjust which of the following items for a change in market interest rates?
A) Interest expense.
B) Debt-to-equity ratio.
C) Cash flow from financing.
Question 41 - 95873
Compared to a finance lease, an operating lease is most likely to be favored when:
A) the lessee has bond covenants relating to financial policies.
B) management compensation is not based on returns on invested capital.
C) at the end of the lease, the lessee may be better able to sell the asset than the lessor.
Question 42 - 96241
Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran
will depreciate the asset using the straight-line method over a 10-year period with no salvage value.
For tax purposes the asset will be depreciated straight line for five years and Corcoran’s effective tax
rate is 30%. Corcoran’s deferred tax liability for 2004 will:
A) decrease by $50,000.
B) decrease by $15,000.
C) increase by $15,000.
Question 43 - 94777
An analyst gathered the following data for Alice Company.




Alice Company reported a pretax income of $400,000 in its income statement for the period
ended December 31, 2002.
Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000
and (2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002).
Alice follows cash basis for tax reporting.
Assume a tax rate of 40%.
Part 1)
What is the income tax expense that Alice should report on its income statement for the year ended
December 31, 2002?
A) $160,000.
B) $132,000.
C) $140,000.
Part 2)
Based on the information provided, which of the following is most accurate with respect to deferred
tax during 2002? Deferred tax:
A) liability will increase by $4,000.
B) will remain unchanged.
C) asset will increase by $4,000.
Part 3)
All else equal, when a company issues bonds at a premium, the debt/equity ratio will show:
A) an increasing trend over the life of the bond.
B) stable trend over the life of the bond.
C) a decreasing trend over the life of the bond.
Question 44 - 104166
Judah Inc. prepares its financial statements under IFRS. On December 31, 20X8, Judah has
inventory of manufactured goods with a cost of $720,000. The estimated selling cost of that inventory
is $50,000 and its market value is $740,000. By January 31, 20X9, none of the inventory has been
sold but its market value has increased to $810,000. Selling costs remain the same. Which of the
following entries is most likely permissible under IFRS?
Write down inventory by $30,000 on December 31, 20X8 and write up inventory by
$70,000 on January 31, 20X9.
B) Make no adjustments to the valuation of inventory on either date.
Write down inventory by $30,000 on December 31, 20X8 and write up inventory by
C)
$30,000 on January 31, 20X9.
A)
Question 45 - 96475
Given the following data and assuming a periodic inventory system, what is the ending inventory
value using the FIFO method?
Purchases
Sales
50 units at $50/unit
25 units at $55/unit
60 units at $45/unit
30 units at $50/unit
70 units at $40/unit
A) $3,200.
B) $3,600.
C) $3,250.
45 units at $45/unit
Question 46 - 94518
Assume a city issues a $5 million bond to build a new arena. The bond pays 8 percent semiannual
interest and will mature in 10 years. Current interest rates are 9%. Interest expense in the second
semiannual period is closest to:
A) $106,550.
B) $210,830.
C) $80,000.
Question 47 - 95988
A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%.
Assuming semiannual compounding periods, the total interest on this bond is:
A) $1,346,549.
B) $1,200,000.
C) $1,600,000.
Question 48 - 94734
The lessee has an incentive to classify a lease as an operating lease, rather than as a finance lease,
because an operating lease:
A) does not appear on the balance sheet.
B) has no risk involved because the lessor assumes all risk.
C) has payments that are less than a capital lease's payments.
Question 49 - 94703
Enduring Corp. operates in a country where net income from sales of goods are taxed at 40%, net
gains from sales of investments are taxed at 20%, and net gains from sales of used equipment are
exempt from tax. Installment sale revenues are taxed upon receipt.
For the year ended December 31, 2004, Enduring recorded the following before taxes were
considered:



Net income from the sale of goods was $2,000,000, half was received in 2004 and half will be
received in 2005.
Net gains from the sale of investments were $4,000,000, of which 25% was received in 2004
and the balance will be received in the 3 following years.
Net gains from the sale of equipment were $1,000,000, of which 50% was received in 2004
and 50% in 2005.
On its financial statements for the year ended December 31, 2004, Enduring should apply an effective
tax rate of:
A) 22.86% and increase its deferred tax asset by $1,000,000.
B) 22.86% and increase its deferred tax liability by $1,000,000.
C) 26.67% and increase its deferred tax liability by $1,000,000.
Question 50 - 97800
Three years ago, Ranchero Corporation purchased a patent for a process used in production, for ₤3
million. At the end of last year, Ranchero determined the fair value of the patent was greater than its
book value. No impairment losses have been recognized on the patent. Assuming Ranchero follows
International Financial Reporting Standards, what is the impact on its total asset turnover ratio and
return on equity of reporting the value of the patent on the balance sheet at fair value?
A) Only one will increase.
B) Both will decrease.
C) Both will increase.
Question 51 - 94898
A bond is issued with an 8 percent semiannual coupon rate, 5 years to maturity, and a par value of
$1000. What is the liability at the beginning of the third period if market interest rates are 10%?
A) 935.
B) 929.
C) 923.
Question 52 - 93664
Given the following data and assuming a periodic inventory system, what is the ending inventory
using the average cost method?
Purchases
Sales
40 units at $60/unit
25 units at $65/unit
50 units at $55/unit
30 units at $60/unit
60 units at $45/unit
A) $2,933.
B) $2,878.
C) $3,141.
40 units at $50/unit
Question 53 - 93555
Which inventory method will provide the largest net income during periods of falling prices?
A) Weighted average cost.
B) FIFO.
C) LIFO.
Question 54 - 95850
Which of the following statements regarding finance and operating leases is least accurate?
A) During the life of an operating lease, the rent expense equals the lease payment.
B) Asset turnover is higher for the lessee with an operating lease than a finance lease.
For financial reporting of finance and operating leases, no entry is required on the lessee's
C)
balance sheet at the inception of the lease.
Question 55 - 94147
An analyst determined the following information concerning Franklin, Inc.’s stamping machine:




Acquired seven years ago for $22 million
Straight line method used for depreciation
Useful life estimated to be 12 years
Salvage value originally estimated to be $4 million
The stamping machine is expected to generate $1,500,000 per year for five more years and will then
be sold for $1,000,000. Under U.S. GAAP, the stamping machine is:
A) not impaired.
B) impaired because expected salvage value has declined.
C) impaired because its carrying value exceeds expected future cash flows.
Question 56 - 93786
If timing differences that give rise to a deferred tax liability are not expected to reverse then the
deferred tax:
A) must be reduced by a valuation allowance.
B) should be considered an increase in equity.
C) should be considered an asset or liability.
Question 57 - 96448
Given the following inventory data about a firm:





Beginning inventory 20 units at $50/unit
Purchased 10 units at $45/unit
Purchased 35 units at $55/unit
Purchased 20 units at $65/unit
Sold 60 units at $80/unit
What is the inventory value at the end of the period using first in, first out (FIFO)?
A) $3,475.
B) $1,575.
C) $3,100.
Question 58 - 95442
An analyst is considering a bond with the following characteristics:




Face value = $10.0 million
Annual coupon = 5.6%
Market yield at issuance = 6.5%
5 year maturity
Part 1)
At issuance the bond will:
A) increase total assets by $9.626 million.
B) provide cash flow from investing of approximately $9.626 million.
C) increase total liabilities by $10.0 million.
Part 2)
Using the effective interest method, the interest expense in year 3 and the total interest paid over the
bond life are approximately:
Year 3 Interest Expense Total Interest
A) $560,000
$2.80 million
B) $634,506
$3.17 million
C) $560,000
$3.17 million
Question 59 - 87573
Katharine Walls, CFA, works as an auditor for Pindale Accounting. She is concerned about Smith
Fabrics, a company she audits. During her last visit to Smith Fabrics, the accounting director, Bob Fox,
rudely ushered her into a tiny conference room with no telephone or computer, and gave her no key
to the main accounting office. She was given only three days to finish what is normally a five-day job.
Before he left Walls, Fox gave her a 150-page manual of Smith’s accounting policies for its various
overseas divisions. After she finished her audit, Walls prepared a report for Pindale’s executive
director, recommending that the firm drop Smith Fabrics as a client because she saw evidence of
attitudes that could lead to fraudulent accounting. Walls cited three of Fox’s actions in her report, most
likely leaving out:
A) her rude welcome.
B) the policy manual.
C) her isolation from the accounting department.
Question 60 - 97429
Falcon Financial Group is considering the purchase of Company A or Company B based on a low
price-to-book investment strategy that also considers differences in solvency. Selected financial data
for both firms, as of December 31, 20X7, follows:
in millions, except per-share data
Current assets
Fixed assets
Total debt
Common equity
Outstanding shares
Market price per share
Company A
$3,000
$5,700
$2,700
$6,000
500
$26.00
Company B
$5,500
$5,500
$3,500
$7,500
750
$22.50
The firms’ financial statement footnotes contain the following:




Company A values its inventory using the first in, first out (FIFO) method.
Company B’s inventory is based on the last in, first out (LIFO) method. Had Company B used
FIFO, its inventory would have been $700 million higher.
Company A leases its manufacturing plant. The remaining operating lease payments total
$1,600 million. Discounted at 10%, the present value of the remaining payments is $1,000
million.
Company B owns its manufacturing plant.
To make the firms financials ratios comparable, calculate the adjusted price-to-book ratios for
Company A and Company B.
Company A
Company B
A) $2.17
$2.06
B) $2.17
$2.81
C) $1.63
$2.06
Question 61 - 87614
Samantha Cameron, CFA, is part of a team reviewing the finances of Redd Networks, a computerservices company known for its complex accounting. Her task is to analyze the company’s operational
results, including a recent decline in profits and cash flows. She must also determine how the
company is responding to strict debt covenants. Lastly, Cameron is to investigate executives’ holdings
of stock and options in the firm, which are believed to be quite high. Which portion of the fraud triangle
is Cameron investigating?
A) Incentives.
B) Opportunity.
C) Policies.
Question 62 - 87627
Karl Decker, CFA, is analyzing Keystone Semiconductor to determine if the stock would be a good
investment. He has determined the following:




Management owns 15 percent of the outstanding shares.
Internal growth targets are aggressive.
In recent quarters, profit growth has been exceptionally high.
The company’s debt covenants are quite lax.
All of these characteristics are positives from the perspective of an investor looking for profit growth.
But Decker is concerned about pressure on management to manipulate results. Which of the
following should least concern Decker?
A) Debt covenants.
B) Recent operating results.
C) Management’s share holdings.
Question 63 - 87621
Jane Kilgore, a stock analyst, is concerned about Maxwell Research’s organizational structure. To
investigate the stability of that structure, Kilgore would be best served by looking at:
A) management turnover.
B) the amount of judgment calls used in company accounting.
C) accounting-department turnover.
Question 64 - 97680
At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost
of goods sold (COGS) of $64 million, and inventory purchases of $58 million. If the LIFO reserve was
$6 million at the end of 2006 and $16 million at the end of 2007, compute first-in, first-out (FIFO)
inventory at the end of 2007 and FIFO COGS for the year ended 2007.
FIFO Inventory FIFO COGS
A) $26 million
$54 million
B) $36 million
$54 million
C) $36 million
$74 million
Question 65 - 97705
Sterling Company is a start-up technology firm that has been experiencing super-normal growth over
the past two years. Selected common-size financial information follows:
2007 Actual
% of Sales
2008 Forecast
% of Sales
Sales
Cost of goods sold
Selling and administration expenses
Depreciation expense
Net income
100%
60%
25%
10%
5%
100%
55%
20%
10%
15%
Non-cash operating working capital a
20%
25%
a Non-cash
operating working capital = Receivables + Inventory – Payables
For the year ended 2007, Sterling reported sales of $20 million. Sterling expects that sales will
increase 50% in 2008. Ignoring income taxes, what is Sterling’s forecast operating cash flow for the
year ended 2008, and is this forecast likely to be as reliable as a forecast for a large, well diversified,
firm operating in mature industries?
Operating cash flow
Reliable forecast
A) $4.5 million
No
B) $4.0 million
No
C) $4.0 million
Yes
Question 66 - 87623
Based on her analysis of Maxwell Research’s internal operations and business climate, analyst Jane
Kilgore is concerned about management’s opportunities to commit fraud. Which of the following
characteristics should worry Kilgore least?
A) More than half of Maxwell’s revenue is generated in emerging markets.
B) More than a third of Maxwell’s total sales go to its own consolidated subsidiaries.
C) Maxwell’s market penetration gives it the ability to dictate terms to vendors.
Question 67 - 97686
Selected financial information gathered from Alpha Company and Omega Corporation follows:
Revenue
Earnings before interest, taxes,
depreciation, and amortization
Quick assets
Average fixed assets
Current liabilities
Interest expense
Alpha
Omega
$1,650,000
69,400
$1,452,000
79,300
216,700
300,000
361,000
44,000
211,300
323,000
404,400
58,100
Which of the following statements is most accurate?
A) Omega uses its fixed assets more efficiently than Alpha.
B) Omega has less tolerance for leverage than Alpha.
C) Alpha is more operationally efficient than Omega.
Question 68 - 87622
Analyst Jane Kilgore is worried that some of Maxwell Research’s accrual accounting practices will
lead to excessive operating earnings recognition in the near-term. Examples of Kilgore's concerns
include the following:



Accelerated revenue recognition of service agreements.
Classification of recurring revenue as nonrecurring revenue.
Understated inventory obsolescence.
Which of Kilgore’s concerns is least likely to overstate current operating earnings?
A) Accelerated revenue recognition of service agreements.
B) Classification of recurring revenue as nonrecurring revenue.
C) Understated inventory obsolescence.
Question 69 - 96453
Units
Unit Price
Beginning Inventory
699
$5.00
Purchases
710
$8.00
Sales
806
$15.00
SGA Expenses
$3,141 per annum
Part 1)
Determine the cost of goods sold using the weighted average method and also using the first in, first
out (FIFO) method.
Weighted Average FIFO
A) $5,248.44
$4,351.00
B) $4,986.02
$4,133.45
C) $4,351.00
$5,248.44
Part 2)
What is the ending inventory level in dollars using the FIFO method?
A) $4,824.00.
B) $6,160.00.
C) $4,582.80.
Question 70 - 95658
Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher?
A) Debt/equity.
B) Asset turnover.
C) Return on equity.
Question 71 - 94611
Which of the following statements regarding capitalizing versus expensing costs is least accurate?
A) Capitalization results in higher profitability initially.
B) Total cash flow is higher with capitalization than expensing.
C) Cash flow from investing is higher with expensing than with capitalization.
Question 72 - 97981
Washington, Inc.’s stock transactions during the year 20X4 were as follows:
January 1
May 1
720,000 shares issued and outstanding
2 for 1 stock split occurred
What was Washington’s weighted average number of shares outstanding during 20X4, for earnings
per share (EPS) computation purposes?
A) 1,500,000.
B) 1,666,667.
C) 1,440,000.
Question 73 - 97398
An analyst has gathered the following information about a company:
Assets
Cash
Accts. Rec.
Inventories
Fixed Assets
Accum. Depr.
Total
Income Statement 2005
Sales
$650
Expenses
COGS
$445
Depreciation
10
Selling, General & Admin.
112
Interest
10
Total expenses
577
Pre-tax income
$73
Taxes
29
Net income
$44
Balance Sheet
2004
2005
Liabilities
50
35
Accts. Payable
120
140
Wages Payable
75
70
Bonds
215
190
Common Stock
(95)
(105)
Retained Earnings
365
330
2004
115
55
100
50
45
365
2005
90
50
90
20
80
330
Note: the dividend payout ratio equals 20%.
What is the net increase or decrease in cash?
A) -$15.
B) +$15.
C) +$43.
Question 74 - 98003
All the following items are reported net of taxes below net income from continuing operations on the
income statement EXCEPT:
A) extraordinary items.
B) unusual or infrequent items.
C) expropriations by foreign governments.
Question 75 - 95144
Holden Company’s fixed asset footnote included the following:



During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an original
cost of $500,000 and its accumulated depreciation was $240,000.
At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden paid
$400,000 cash. The balance was financed by the seller at 8% interest.
Depreciation expense was $2,080,000 for the year ended 20X7.
Calculate Holden’s cash flow from investing activities for the year ended 20X7.
A) $40,000 outflow.
B) $360,000 inflow.
C) $300,000 outflow.
Question 76 - 98033
When a firm recognizes revenue in excess of expenses on a product not covered by a warranty
before cash is collected, what is the impact on the firm’s assets and liabilities, ignoring taxes?
Assets
Liabilities
A) Increase
No effect
B) Increase
Increase
C) No effect
Increase
Question 77 - 97345
Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense
of $90 million. The trial balance did not include the following:


Because of the holidays, no salary accrual was made for the last week of the year. Salaries
for the last week totaled $3.5 million and were paid on January 4, 2008.
Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.
Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007
and what impact will the adjustment have on Coleman’s 2007 current ratio?
Compensation expense Current ratio
A) $94.5 million
Decrease
B) $98.5 million
Decrease
C) $98.5 million
No effect
Question 78 - 97921
Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4
times, and payables turnover of 8 times. What is Goldstar’s cash conversion cycle?
A) 80.38 days.
B) 6.50 days.
C) 171.64 days.
Question 79 - 97906
Which of the following is least likely a routinely used operating profitability ratio?
A) Net income/net sales.
B) Gross profit/net sales.
C) Sales/Total Assets
Question 80 - 97690
A firm’s financial statements reflect the following:
EBIT
$2,000,000
Sales
$16,000,000
Interest expense
$900,000
Total assets
$12,300,000
Equity
$7,000,000
Effective tax rate
35%
Dividend payout rate 28%
Based on this information, what is the firm’s sustainable growth rate?
A) 8.82%.
B) 7.35%.
C) 10.63%.
Question 81 - 119453
How would the collection of accounts receivable most likely affect the current and cash ratios?
Current ratio
Cash ratio
A) No effect
Increase
B) Increase
Increase
C) No effect
No effect
Question 82 - 94329
Proceeds from issuing a bond are recorded on the statement of cash flows as an inflow from:
A) investing (CFI).
B) operations (CFO).
C) financing (CFF).
Question 83 - 96240
A company issued an annual-pay bond with a face value of $135,662, maturity of 4 years, and 7%
coupon, while the market interest rates are 8%.
Part 1)
What is the unamortized discount on the date when the bonds are issued?
A) $499.
B) $4,493.
C) $1,748.
Part 2)
What is the unamortized discount at the end of the first year?
A) $3,495.
B) $1,209.
C) $538.
Question 84 - 97842
According to International Financial Reporting Standards, how do cash dividends received from
trading securities and available-for-sale securities affect net income?
Trading securities
Available-for-sale securities
A) Increase
Increase
B) No effect
Increase
C) Increase
No effect
Question 85 - 94835
Which of the following statements regarding the effect of a finance lease on the lessee's statement of
cash flows is least accurate?
A) The change in the finance lease liability on the balance sheet is a cash flow from financing.
B) The interest expense portion of the lease payments reduces cash flow from operations.
The rental expense serves to reduce the cash flow for financing because it is an
C)
investment expense.
Question 86 - 94489
When analyzing profitability ratios, which inventory accounting method is preferred?
A) Last in, first out (LIFO).
B) Weighted average.
C) First in, first out (FIFO).
Question 87 - 97940
Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s
net working capital was $350,000. The following transactions occurred during 20X7:
Performed services on credit
Purchased office equipment for cash
Recognized salaries expense
Purchased paint supplies on on credit
Consumed paint supplies
Paid salaries
Collected accounts receivable
Recognized straight-line depreciation expense
Paid accounts payable
$150,000
10,000
54,000
25,000
20,000
50,000
157,000
2,000
15,000
Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.
Working capital
Change in cash
A) $414,000
$82,000
B) $416,000
$80,000
C) $416,000
$82,000
Question 88 - 98041
Stanley Corp. had 100,000 shares of common stock outstanding throughout 2004. It also had 20,000
stock options with an exercise price of $20 and another 20,000 options with an exercise price of $28.
The average market price for the company's stock was $25 throughout the year. The stock closed at
$30 on December 31, 2004. What are the number of shares used to calculate diluted earnings per
share for the year?
A) 105,000.
B) 110,000.
C) 104,000.
Question 89 - 94746
A bond is issued with the following data:




$10 million face value.
9% coupon rate.
8% market rate.
3-year bond with semiannual payments.
Assuming market rates do not change, what will the bond's market value be one year from now and
what is the total interest expense over the life of the bond?
Value in 1-Year
A) 10,181,495
Total Interest Expense
2,962,107
B) 11,099,495
2,437,893
C) 10,181,495
2,437,893
Question 90 - 97760
Selected information from Feder Corp.’s financial activities for the year is as follows:







Net income was $7,650,000.
1,100,000 shares of common stock were outstanding on January 1.
The average market price per share was $62.
Dividends were paid during the year.
The tax rate was 40%.
10,000 shares of 6% $1,000 par value preferred shares convertible into common shares at a
rate of 20 common shares for each preferred share were outstanding for the entire year.
70,000 options, which allow the holder to purchase 10 shares of common stock at an exercise
price of $50 per common share, were outstanding the entire year.
Feder Corp.’s diluted earnings per share (EPS) was closest to:
A) $5.32.
B) $5.87.
C) $4.91.
Question 91 - 97419
An analyst has gathered the following information about a company:
Income Statement for the Year 2005
Sales
$1,500
Expenses
COGS
$1,300
Depreciation
20
Goodwill
10
Int. Expenses
40
Total expenses
1,370
Income from cont. op.
130
Gain on sale
30
Income before tax
160
Income tax
64
Net Income
$96
Additional Information:
Dividends paid
Common stock sold
Equipment purchased
Bonds issued
Fixed asset sold for
(original cost of $100 with accumulated
depreciation of $70)
30
20
50
80
60
Accounts receivable decreased by
Inventory decreased by
Accounts payable increased by
Wages payable decreased by
30
20
20
10
What is the cash flow from investing?
A) $130.
B) $20.
C) $10.
Question 92 - 94146
Units
Unit Price
Beginning Inventory
709
$2.00
Purchases
556
$6.00
Sales
959
$13.00
Sales Expenses
$2,649 per annum
What is gross profit using the FIFO method and LIFO method?
FIFO
LIFO
A) $6,900
$5,506
B) $6,900
$5,676
C) $6,213
$5,676
Question 93 - 97302
On January 1, 2008, Tenant Company leased office space from Landlord Inc. for 5 years at $75,000
per month. On that same date, Tenant made the following payments to Landlord:
First month’s rent
Last month’s rent
Security deposit
Lease improvements
$75,000
75,000
100,000
1,500,000
The leasehold improvements include build-out costs to install office walls, restrooms, and a kitchen.
Tenant allocates the cost of the leasehold improvements over the lease term using the straight-line
method. What amount of total lease expense should Tenant report for the year ended 2008 and what
is the balance of all of the lease related assets on December 31, 2008, assuming the lease payments
are made on the first day of each month?
Lease expense
Lease related
assets
A) $1,200,000
$1,200,000
B) $375,000
$1,375,000
C) $1,200,000
$1,375,000
Question 94 - 97923
XYZ, Inc., latest Income Statement, Balance Sheet and Statement of Cash Flows are below. Use this
information to answer the following questions:
Income Statement
Sales Revenue
19,580
Cost of Goods Sold
7,319
Gross Margin
12,261
Wage Expense
900
SG&A
4,336
Depreciation Expense
662
5,898
Income from Operations
6,363
Other Income/Expenses
Interest Expense
(750)
Gain on Sale of Land
119
(631)
Pretax Income
5,732
Income tax
1,605
Net Income
4,127
Balance Sheet
12/31/04
12/31/03
Cash
2,098
410
Accounts receivable
4,570
4,900
Inventory
4,752
4,500
877
908
Total
12,297
10,718
Land
0
4,000
Property, Plant & Equipment
11,000
11,000
Accumulated Depreciation
(5,862)
(5,200)
Total Assets
17,435
20,518
Assets
Current Assets
Prepaid SGA
Cash Flow from Operations
Net Income
Increase in Accounts Receivable
4,127
330
Increase in Accounts Payable
(489)
Increase in Inventory
(252)
Increase in Wages Payable
94
Increase in Prepaid SGA
31
Depreciation
662
Gain on Sale of Land
(119)
Net cash from Operations
4,384
Cash Flow from Investments
Sale of Land
4,119
Net Cash from Investments
4,119
Cash Flow from Financing
Retirement of LT Debt
(6,042)
Dividends Paid
(773)
Net Cash from Financing
(6,815)
Net Increase in Cash
1,688
Beginning Cash
410
Ending Cash
2,098
Liabilities and Equity
12/31/04
12/31/03
Accounts Payable
4,651
5,140
Wages Payable
2,984
2,890
100
100
Total
7,735
8,130
Long term Debt
1,346
7,388
Common Stock
4,000
4,000
Retained Earnings
4,354
1,000
17,435
20,518
Current Liabilities
Dividends Payable
Equity
Total Liabilities and Equity
Part 1)
At the end of 2004, what were XYZ’s current, quick and cash ratios?
Current Ratio
Quick Ratio
Cash Ratio
A) 1.59
0.86
0.27
B) 1.59
1.59
0.27
C) 1.48
0.86
0.27
Part 2)
What was the return on equity (ROE) based on year-end equity?
A) 0.67.
B) 0.49.
C) 0.58.
Question 95 - 95095
Which of the following statements about leases is least accurate?
In the first years of a finance lease, the lessee's debt to equity ratio is greater than it would
have been if the firm had used an operating lease.
B) In the first years of a finance lease, the lessee's current ratio is greater than it would have
A)
been had the firm used an operating lease.
All else equal, when a lease is capitalized the lessee's income will rise over the term of the
C)
lease.
Question 96 - 94334
Which accounting methods are preferable for income statements and balance sheets?
Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance
sheet.
Last in, first out (LIFO) for the balance sheet and first in, first out (FIFO) for the income
B)
statement.
C) First in, first out (FIFO) for both income statements and balance sheets.
A)
Question 97 - 98034
Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to
eliminate insect infestation. Customers are required to prepay for the service at the beginning of each
year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost
of performing the service, what is the most likely effect on the firm’s liabilities and equity compared to
the correct treatment?
Liabilities
Equity
A) Overstated
Overstated
B) Overstated
Understated
C) Understated
Overstated
Question 98 - 95965
Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship.
She is trying to educate the owner on the importance of monitoring cash flows. Operating information
as of the end of the most recent month appears below:








Cash from sale of truck of $7,000.
Cash salaries paid of $17,000.
Cash from customers of $45,000.
Depreciation expense of $5,500.
Interest on bank line of credit of $1,000.
Cash paid to suppliers of $22,000.
Other cash expenses, including rent, of $6,300.
No taxes due.
Using this information, what is the cash flow from operations for the month?
A) -$1,300.
B) $11,200.
C) -$300.
Question 99 - 98048
To be classified as an extraordinary item on the income statement under U.S. GAAP, the item must
be:
A) probable and infrequent in nature.
B) unusual in nature and infrequent in occurrence.
C) estimated and probable.
Question 100 - 95445
If a firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial
reporting, which of the following results is least likely?
A) A permanent difference will result between tax and financial reporting.
B) Income tax expense will be greater than taxes payable.
C) A temporary difference will result between tax and financial reporting.
Question 101 - 97841
On January 1, 2004, Cayman Corporation bought manufacturing equipment for $30 million. On
December 31, 2006, Cayman determined the equipment was impaired and recognized a $5 million
impairment loss in its income statement. As of December 31, 2007, the fair value of the equipment
exceeded the book value by $7 million. What amount of the recovery in value can Cayman recognize
in its 2007 income statement under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and
under International Financial Reporting Standards (IFRS)?
U.S. GAAP
IFRS
A) $0
$7 million
B) $0
$5 million
C) $5 million
$7 million
Question 102 - 97797
Which of the following statements regarding basic and diluted EPS is least accurate?
A) A simple capital structure contains no potentially dilutive securities.
B) Dilutive securities decrease EPS if they are exercised or converted to common stock.
C) Antidilutive securities decrease EPS if they are exercised or converted.
Question 103 - 96591
Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate
Longhorn Supply Company’s cash needs. Harris began by calculating Longhorn’s turnover ratios for
2007. After a discussion with Longhorn’s management, Harris decides to adjust the turnover ratios for
2008 as follows:
2007 Actual
Expected
Accounts receivable
Fixed asset
Accounts payable
Inventory
Equity
Total asset
Turnover
5.0
3.0
6.0
4.0
5.5
2.3
Increase / (Decrease)
10%
7%
(20%)
(5%)
—
8%
Longhorn’s expected cash conversion cycle for 2008, based on the expected changes in turnover and
assuming a 365 day year, is closest to:
A) 82 days.
B) 46 days.
C) 86 days.
Question 104 - 97975
The following data pertains to the McGuire Company:





Net income equals $15,000.
5,000 shares of common stock issued on January 1.
10% stock dividend issued on June 1.
1000 shares of common stock were repurchased on July 1.
1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common
were outstanding the whole year.
What is the company’s basic earnings per share (EPS)?
A) $1.00.
B) $2.50.
C) $1.20.
Question 105 - 95963
Which of the following statements is least accurate? When a bond is issued at a discount:
the interest expense will be equal to the coupon payment plus the amortization of the
discount.
B) cash flows from financing will be increased by the par value of the bond issue.
C) the interest expense will increase over time.
A)
Question 106 - 95962
A zero coupon bond, compared to a bond issued at par, will result in higher:
A) cash flows from operations (CFO).
B) interest expense.
C) cash flows from financing (CFF).
Question 107 - 97360
In converting a statement of cash flows from the indirect to the direct method, which of the following
adjustments should be made for a decrease in unearned revenue when calculating cash collected
from customers, and for an inventory writedown (when market value is less than cost) when
calculating cash payments to suppliers?
Cash collections from customers:
Cash payments to suppliers:
A)
Subtract decrease in unearned
revenue
Subtract an inventory writedown
B)
Subtract decrease in unearned
revenue
Add an inventory writedown
C) Add decrease in unearned revenue
Subtract an inventory writedown
Question 108 - 94055
Which of the following statements regarding the capitalization of an expense is least accurate?
A) Capitalizing an expense lowers current period net income.
B) Capitalizing an expense creates an asset.
C) Capitalized expenses increases equity.
© 2012 Schweser