Schweser Printable Answers - FSATest ID#: 10Top of Form

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Question 1 - #98154 Your answer: A was incorrect. The correct answer was C) Conservatism. Qualitative characteristics that accounting information must possess according to the IASB Conceptual Framework are relevance and faithful representation, which are enhanced by the characteristics of timeliness, verifiability, understandability, and comparability. Conservatism may be a desirable characteristic, but is not one of the qualitative characteristics specified in the IASB Conceptual Framework. This question tested from Session 7, Reading 24, LOS d.

Question 2 - #98163 Your answer: A was incorrect. The correct answer was C) $32,800 $129,600

Liabilities plus equity are equal to $129,600 ($16,000 accounts payable + $20,000 notes payable + $19,600 common stock + $42,000 additional paid-in capital + $32,000 retained earnings). Since assets must equal liabilities plus equity, cash must equal $32,800 ($129,600 total assets $58,000 accounts receivable $12,000 inventory $26,800 plant and equipment). This question tested from Session 7, Reading 23, LOS e.

Question 3 - #147135 Your answer: A was incorrect. The correct answer was B) timeliness and verifiability. The four characteristics that enhance relevance and faithful representation are comparability, verifiability, timeliness, and understandability. This question tested from Session 7, Reading 24, LOS d.

Question 4 - #98156 Your answer: A was incorrect. The correct answer was C) general journal. A listing of all the journal entries in order by date is called the general journal. The general ledger sorts the entries in the general journal by account. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. The account balances from the adjusted trial balance are presented in the financial statements. This question tested from Session 7, Reading 23, LOS f.

Question 5 - #98097 Your answer: A was correct! Because adjustments and assumptions within the financial statements are to some extent at the discretion of management, the possibility exists that management can try to manipulate or misrepresent the companys financial performance. A clean auditors report does not ensure that management is unable to manipulate earnings, and a qualified opinion expresses reservations about the appropriateness of accounting policies. An analyst doesnt have access to the detailed information that flows through a companys accounting system, but only sees its end product, the financial statements. This question tested from Session 7, Reading 23, LOS g.

Question 6 - #98085 Your answer: A was correct!

Form DEF-14A: When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form DEF-14A.Form 8-K: Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, financial statements, or the markets on which its securities trade.Form 144: A company can issue securities to certain qualified buyers without registering the securities with the SEC, but must notify the SEC that it intends to do so. This question tested from Session 7, Reading 24, LOS b.

Question 7 - #98167 Your answer: A was incorrect. The correct answer was B) Assets = Liabilities + Stockholders' Equity (A = L + E). The fundamental balance sheet equation is Assets = Liabilities + Stockholders Equity (A = L + E). This is the fundamental accounting relationship that sets the basis for recording all financial transactions. This question tested from Session 7, Reading 23, LOS b.

Question 8 - #98155 Your answer: A was incorrect. The correct answer was B) Assets only Assets, revenue, expenses, owners' equity

The purchase will be a decrease in cash and an increase in inventory, both asset accounts. The expense is not recorded until the chairs are sold. The sale will be a decrease in inventory and an increase in cash (assets), an increase in sales (revenues), an increase in cost of goods sold (expenses), and an increase in retained earnings (owners equity) for the $250 profit. This question tested from Session 7, Reading 23, LOS c.

Question 9 - #98086 Your answer: A was incorrect. The correct answer was B) Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions. Given the variety and complexity of possible transactions, and the estimates and assumptions a firm must make when presenting its performance, financial statements could potentially take any form if reporting standards didnt exist. Reporting standards ensure that the information is useful to a wide range of users, including security analysts, by making financial statements comparable to one another and narrowing the range within which managements estimates can be seen as reasonable. Reporting standards limit the range of assumptions management can make. This question tested from Session 7, Reading 24, LOS a.

Question 10 - #98208 Your answer: A was correct! The standard auditor's report contains three parts:1. The financial statements are prepared by management and are their responsibility and the auditor has performed an independent review. 2. The audit was conducted using generally accepted auditing standards, which provides reasonable assurance that there are no material errors in the financial statements. 3. The auditor is satisfied the statements were prepared in accordance with accepted accounting principles, and the principles chosen and estimates are reasonable. Under U.S. GAAP, the auditor is required to state an opinion on the company's internal controls. The auditor may add this opinion as a fourth element of the auditor's report or provide it separately.This question tested from Session 7, Reading 22, LOS d.

Question 11 - #98087 Your answer: A was correct! The objective of financial statements is to provide economic decision makers with useful information about a firms financial performance and changes in financial position. Assessing its prospects is the responsibility of analysts. Financial statements fall under the purview of the FASB in the US, not the IASB. The SEC does not set the objectives of financial statements, it is a regulatory authority. This question tested from Session 7, Reading 24, LOS a.

Question 12 - #98179 Your answer: A was incorrect. The correct answer was B) the process of developing one universally accepted set of accounting standards. Moving towards agreement on a single set of accounting standards is referred to as convergence. This question tested from Session 7, Reading 24, LOS c.

Question 13 - #98205 Your answer: A was incorrect. The correct answer was C) Prepare and accept responsibility for them. Auditors make an independent review of financial statements, which are prepared by company management and are managements responsibility. It is the responsibility of auditors to confirm the assets, liabilities, and other items included in the statements and then issue an opinion concerning their fairness and reliability. This question tested from Session 7, Reading 22, LOS d.

Question 14 - #98079 Your answer: A was incorrect. The correct answer was B) Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest.

The IASB has four stated goals:1. Develop global accounting standards requiring transparency, comparability, and high quality in financial statements.2. Promote the use of global accounting standards.3. Account for the needs of emerging markets and small firms when implementing global accounting standards.4. Achieve convergence between various national accounting standards and global accounting standards. This question tested from Session 7, Reading 24, LOS b.

Question 15 - #98190 Your answer: A was incorrect. The correct answer was C) The balance sheet. The balance sheet represents information at a specific point in time. The income statement represents information over a period of time.This question tested from Session 7, Reading 22, LOS b.

Question 16 - #140443 Your answer: A was incorrect. The correct answer was C) FASB framework. The FASB framework lists revenues, expenses, gains, losses, and comprehensive income as elements related to performance. In the IASB framework, elements related to performance are income and expenses. This question tested from Session 7, Reading 24, LOS f.

Question 17 - #98183 Your answer: A was incorrect. The correct answer was B) Contra-asset Contra-equity

Accumulated depreciation is a contra-asset account to the asset account property, plant & equipment. Treasury stock is a contra-equity account to common stock or additional paid-in capital. This question tested from Session 7, Reading 23, LOS a.

Question 18 - #98166 Your answer: A was correct! (1,200 750 600) = 150 This question tested from Session 7, Reading 23, LOS b.

Question 19 - #98135 Your answer: A was incorrect. The correct answer was B) a valuation adjustment. In some cases, accounting standards require balance sheet values of certain assets to reflect their current market values. Accounting entries that update these assets values from their historical cost are called valuation adjustments. To keep the accounting equation in balance, changes in asset values are also changes in owners equity, through gains or losses on the income statement or in other comprehensive income. This question tested from Session 7, Reading 23, LOS d.

Question 20 - #98235 Your answer: A was correct! The MD&A provides an assessment of the financial performance and condition of the company from the perspective of the company and is required by the SEC. It includes many areas including such items as discontinued operations, extraordinary items, and other unusual or infrequent events. The MD&A is typically not audited. This question tested from Session 7, Reading 22, LOS c.

Question 21 - #98195 Your answer: A was correct! The role of financial statement analysis is to use the information in a companys financial statements, along with other relevant information, to make economic decisions. Examples of such decisions include whether to invest in the companys securities or recommend them to other investors, or whether to extend trade or bank credit to the company. Although the financial statements might provide indirect evidence about the management skill of the companys executives, that is not generally considered the role of financial statement analysis. This question tested from Session 7, Reading 22, LOS a.

Question 22 - #98175 Your answer: A was incorrect. The correct answer was C) Different standard-setting bodies of different countries disagree on the best treatment of a particular issue. A principal obstacle to agreement on a single set of reporting standards is that various standard-setting bodies and regulatory authorities disagree on what the standards should be. Firms generally support the idea because it would reduce the cost of reporting. GATT is the General Agreement on Tariffs and Trade and does not relate to financial reporting. This question tested from Session 7, Reading 24, LOS c.

Question 23 - #98152 Your answer: A was correct! Information flows through an accounting system in four steps:1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the general journal.2. The general ledger sorts the entries in the general journal by account.3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.4. The account balances from the adjusted trial balance are presented in the financial statements. This question tested from Session 7, Reading 23, LOS f.

Question 24 - #140444 Your answer: A was incorrect. The correct answer was B) management has not explained its business purpose. New types of transactions may emerge that are not covered by existing accounting standards or regulations. Analysts should obtain information from a firms management about the economic substance of such transactions to ensure that they serve a business purpose and have not been created primarily to manipulate the firms financial statements. This question tested from Session 7, Reading 24, LOS h.

Question 25 - #98207 Your answer: A was correct! The statements that the financial information was prepared according to GAAP should be included in the regular part of the auditors' report and not as an explanatory paragraph. The other information would be contained in explanatory paragraphs added to the auditors report. This question tested from Session 7, Reading 22, LOS d.

Question 26 - #98126 Your answer: A was incorrect. The correct answer was C) Transparency. There is widespread agreement that transparency is desirable in financial reporting. Disagreements that inhibit development of a single framework often arise around issues of measurement, valuation, and standard setting. This question tested from Session 7, Reading 24, LOS g.

Question 27 - #96971 Your answer: A was incorrect. The correct answer was C) Some supplementary schedules are audited whereas footnotes are not audited. Some supplementary schedules are not audited whereas footnotes are audited. The financial statements and footnotes in the annual report and the SEC 10-k filings are all audited. This question tested from Session 7, Reading 22, LOS c.

Question 28 - #98157 Your answer: A was incorrect. The correct answer was B) sorts the entries in the general journal by account. Information flows through an accounting system in four steps:1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the general journal.2. The general ledger sorts the entries in the general journal by account.3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.4. The account balances from the adjusted trial balance are presented in the financial statements. This question tested from Session 7, Reading 23, LOS f.

Question 29 - #98203 Your answer: A was correct! Corporate reports and press releases are written by management and are often viewed as public relations or sales materials. An analyst should review information on the economy and the companys industry and compare the company to its competitors. This information can be acquired from sources such as trade journals, statistical reporting services, and government agencies. Securities and Exchange Commission (SEC) filings include Form 8-K, which a company must file to report events such as acquisitions and disposals of major assets or changes in its management or corporate governance and proxy statements, which are a good source of information about the election of (and qualifications of) board members, compensation, management qualifications, and the issuance of stock options. This question tested from Session 7, Reading 22, LOS e.

Question 30 - #98094 Your answer: A was incorrect. The correct answer was C) are disclosed on Form 8K by publicly traded firms in the United States. Reporting standards ensure that the information is useful to a wide range of users, including security analysts, by making financial statements comparable to one another and narrowing the range within which managements estimates can be seen as reasonable. Securities & Exchange Commission Form 8K addresses acquisitions, divestitures, etc. and not reporting standards. This question tested from Session 7, Reading 24, LOS a.

Question 31 - #98091 Your answer: A was incorrect. The correct answer was C) Percentage-of-completion method. The installment sales method is used when the assurance of payment and estimated bad debts does not exist before cash is collected. Sales revenue and COGS are recognized only when cash is received.The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.This question tested from Session 8, Reading 25, LOS b.

Question 32 - #97069 Your answer: A was correct! E Companys interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5.G Companys interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G Company.This question tested from Session 8, Reading 28, LOS c.

Question 33 - #97896 Your answer: A was incorrect. The correct answer was C) 4 days. Cash conversion cycle = average receivables collection period + average inventory processing period payables payment period= 95 + 183 274 = 4 days This question tested from Session 8, Reading 28, LOS b.

Question 34 - #97899 Your answer: A was correct! Receivables turnover = $1,000,000 / $260,000 = 3.840Average collection period = 365 / 3.840 = 95.05 or 95 daysInventory turnover = $800,000 / $400,000 = 2Average inventory processing period = 365 / 2 = 183 daysPayables turnover ratio = $800,000 / $600,000 = 1.333Payables payment period = 365 / 1.333 = 273.82 or 274 daysThis question tested from Session 8, Reading 28, LOS b.

Question 35 - #97761 Your answer: A was correct! U.S. GAAP treats interest and dividends received as CFO whereas under IFRS interest and dividends received may be treated as either CFO or CFI. This question tested from Session 8, Reading 27, LOS c.

Question 36 - #97670 Your answer: A was incorrect. The correct answer was C) 30%. Operating profit margin = (EBIT / net sales) = ($150,000 / $500,000) = 30%This question tested from Session 8, Reading 28, LOS b.

Question 37 - #97791 Your answer: A was incorrect. The correct answer was B) 4.650.93

Current ratio = [100(cash) + 750(accounts receivable)+ 300(marketable securities) + 850(inventory)] / [300(AP) + 130(short term debt)] = (2000 / 430) = 4.65Cash ratio = [100(cash) + 300(marketable securities)] / [300(AP) + 130(short term debt)] = (400 / 430) = 0.93This question tested from Session 8, Reading 28, LOS b.

Question 38 - #97070 Your answer: A was incorrect. The correct answer was C) 25%. Net Income / Equity = ROE

2 / 8 = 25%This question tested from Session 8, Reading 28, LOS d.

Question 39 - #100934 Your answer: A was incorrect. The correct answer was C) earned, and expenses are recognized when incurred. The principle of accrual accounting is that revenue is recognized when earned, and expenses are recognized when incurred. This question tested from Session 8, Reading 25, LOS b.

Question 40 - #97684 Your answer: A was correct! Initial shares: 90,000 1.20 =108,000

Reacquired treasury shares: 10,000 3/12 =2,500

105,500

This question tested from Session 8, Reading 25, LOS g.

Question 41 - #98050 Your answer: A was incorrect. The correct answer was B) in proportion to the cash collection. The installment sales method recognizes sales and COGS in proportion to cash collections. This question tested from Session 8, Reading 25, LOS b.

Question 42 - #97895 Your answer: A was incorrect. The correct answer was C) Yes No

The quick ratio is a liquidity ratio. Liquidity ratios are used to measure a firms ability to meet its short-term obligations. The debt-to-capital ratio is a solvency ratio. Solvency ratios are used to measure a firms ability to meet its longer-term obligations. This question tested from Session 8, Reading 28, LOS b.

Question 43 - #97967 Your answer: A was incorrect. The correct answer was B) 3%, $100 par value convertible bond. If convertible bonds exist, the firm has a complex capital structure. This question tested from Session 8, Reading 25, LOS g.

Question 44 - #97981 Your answer: A was correct! The January 1 balance is adjusted retroactively for the stock split and (720,000 2 =) 1,440,000 shares are treated as outstanding from January. This question tested from Session 8, Reading 25, LOS g.

Question 45 - #147137 Your answer: A was correct! The three elements of a balance sheet are assets, liabilities, and equity. This question tested from Session 8, Reading 26, LOS a.

Question 46 - #97999 Your answer: A was incorrect. The correct answer was C) 306. (816)(5) = $4,080. $4,080 / $8 = 510 shares. 816 510 = 306 new shares or [(8 5) / 8]816 = 306. This question tested from Session 8, Reading 25, LOS h.

Question 47 - #97691 Your answer: A was correct! Return on equity (ROE) = net profit margin asset turnover leverage = (0.15)(0.67)(1.364) = 0.137.The sustainable growth = (1 dividend rate)(ROE) = (0.65)(0.137) = 8.9%. This question tested from Session 8, Reading 28, LOS e.

Question 48 - #97972 Your answer: A was incorrect. The correct answer was C) $0.457. 50,000,000 common shares 12 months = 600,000,0005,000,000 common shares 6 months = 30,000,000 = 630,000,000630,000,000 / 12 = 52,500,000 average shares[$25,000,000(NI) $1,000,000(preferred dividends)] / 52,500,000 shares = $24,000,000 / 52,5000,000 = $0.457This question tested from Session 8, Reading 25, LOS g.

Question 49 - #98007 Your answer: A was incorrect. The correct answer was C) Interest expense. Interest expense would be considered an expense that is incurred from continuing operations and, therefore, is listed prior to subtracting the income tax expense on the income statement. Income from discontinued operations and extraordinary items are included on the income statement after the net income from continuing operations is reported and after the income tax expense from continuing operations is reported. Therefore, these latter accounts are reported net of tax. This question tested from Session 8, Reading 25, LOS e.

Question 50 - #147138 Your answer: A was incorrect. The correct answer was C) Declaring a dividend on common shares. Declaring a dividend decreases shareholders equity and is reflected on the statement of changes in shareholders equity. Buying a machine is unlikely to change shareholders equity at the time of purchase. Investing cash in a security is an exchange of one asset for another and is also unlikely to change shareholders equity at the time of the investment. This question tested from Session 8, Reading 26, LOS g.

Question 51 - #97404 Your answer: A was correct! Decreasing accounts payable turnover saves cash by delaying payments to suppliers. The result is an operating source of cash, not a financing source. Decreasing accounts payable turnover is not a sustainable source of cash flow because suppliers will refuse to extend credit, at some point, if payment is slower and slower. This question tested from Session 8, Reading 27, LOS h.

Question 52 - #97784 Your answer: A was correct! Antidilutive securities are securities that would increase EPS if exercised or converted to common stock. This question tested from Session 8, Reading 25, LOS h.

Question 53 - #97412 Your answer: A was incorrect. The correct answer was C) Does not considerConsiders

The indirect method must add back depreciation expense because the starting point is net income. Since the direct method does not begin with net income it does not need to consider non-cash expenses such as depreciation. This question tested from Session 8, Reading 27, LOS f.

Question 54 - #95629 Your answer: A was incorrect. The correct answer was C) Change in retained earnings. Changes in retained earnings are not included in the calculation of financing cash flows. This question tested from Session 8, Reading 27, LOS a.

Question 55 - #97944 Your answer: A was correct! Manhattans quick assets were equal to $9 million ($15 million current assets $6 million inventory). Given a quick ratio of 2.0, quick assets were twice the current liabilities. Thus, the current liabilities must have been $4.5 million ($9 million quick assets / 2.0 quick ratio). This question tested from Session 8, Reading 28, LOS b.

Question 56 - #96768 Your answer: A was incorrect. The correct answer was B) 1.3320.8%

Total asset turnover = sales / average assets = 5,000,000 / 3,750,000 = 1.33Return on equity = net income / average equityNet income = EBIT interest taxes = 800,000 160,000 256,000 = 384,000ROE = 384,000 / 1,850,000 = 20.8%This question tested from Session 8, Reading 28, LOS d.

Question 57 - #97032 Your answer: A was correct! One of the many ways to express ROE = net profit margin asset turnover leverage ratioROE = (0.05)(1.465)(1.66) = 0.1216This question tested from Session 8, Reading 28, LOS d.

Question 58 - #98138 Your answer: A was incorrect. The correct answer was C) Yes No

An asset is recognized on the balance sheet only if it is probable that it will provide future economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired without cost, but will be reported to the extent that they will provide future economic benefit, and thus have value. This question tested from Session 8, Reading 26, LOS a.

Question 59 - #97300 Your answer: A was correct! Cash paid for insurance = insurance expense + change in prepaid insurance, so insurance expense = cash paid for insurance change in prepaid insurance. Insurance expense for 2007 is equal to $925,000 [($750,000 cash paid for insurance ($175,000)]. Interest expense for 2007 is equal to $950,000 ($900,000 cash interest paid + $50,000 increase in interest payable). This question tested from Session 8, Reading 27, LOS f.

Question 60 - #97044 Your answer: A was correct! ROE = profit margin total asset turnover financial leverageROE = (0.1)(1.2)(1.5) = 0.18 or 18.0% This question tested from Session 8, Reading 28, LOS d.

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