SS7 &8 With Answers

5/19/2018 SS7 &8 With Answers

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Schweser Printable Answers - SS7 & 8

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Question 1 - #98153

Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, andreceives a $20,000 cash down payment from the buyer. How will the transaction most likelyaffectWashburns assets and liabilities?

Assets Liabilities

A) Unchanged Unchanged

B) Increase Unchanged

C) Increase Increase

Your answer: A was incorrect. The correct answer was C)

Increase Increase

The down payment will increase cash (an asset) and unearned revenue (a liability). Revenues (and thusretained earnings and owners equity) will not increase because the car has not been delivered.

This question tested from Session 7, Reading 23, LOS c.

Question 2 - #98151

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius toreview all purchases that occurred between February 1 and February 8 to investigate an error on thereceiving dock. Singh will most likely look at the:

A) initial trial balance.

B) general ledger.

C) general journal.

Your answer: A was incorrect. The correct answer was C) general journal.

Journal entries record every transaction, showing which accounts are changed by what amounts. A listingof all thejournal entries in order by date is called the general journal.

This question tested from Session 7, Reading 23, LOS f.

Question 3 - #98135

An accounting entry that updates the historical cost of an asset to current market levels is bestdescribedas:

A) a contra account.


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B) accumulated depreciation.

C) a valuation adjustment.

Your answer: A was incorrect. The correct answer was C) a valuation adjustment.

In some cases, accounting standards require balance sheet values of certain assets to reflect theircurrent market values. Accounting entries that update these assets values from their historical cost arecalled valuation adjustments. To keep the accounting equation in balance, changes in asset values arealso changes in owners equity, through gains or losses on the income statement or in othercomprehensive income.

This question tested from Session 7, Reading 23, LOS d.

Question 4 - #98121

Which of the following is a company leastlikely required to present according to International AccountingStandard (IAS) No. 1?

A) A summary of accounting policies.B) Disclosures of material events.

C) Statement of changes in owners equity.

Your answer: A was incorrect. The correct answer was B) Disclosures of material events.International Accounting Standard (IAS) No. 1 defines which financial statements are required and howthey must be presented. The required financial statements are: Balance sheet. Statement of comprehensive income. Cash flow statement. Statement ofchanges in equity. Explanatory notes, including a summary of accounting policies.

Disclosures of material events that affect the company are required by the Securities and Exchange

Commission (Form 8-K) for firms that are publicly traded in the United States.

This question tested from Session 7, Reading 24, LOS e.

Question 5 - #98154

Which of the following is least likelya qualitative characteristic accounting information must possess inorder to provide useful information to an analyst, according to the IASB Conceptual Framework?

A) Conservatism.

B) Faithful representation.

C) Relevance.

Your answer: A was correct!

Qualitative characteristics that accounting information must possess according to the IASB ConceptualFramework are relevance and faithful representation, which are enhanced by the characteristics oftimeliness, verifiability, understandability, and comparability. Conservatism may be a desirablecharacteristic, but is not one of the qualitative characteristics specified in the IASB ConceptualFramework.


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Question 6 - #147136

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are:

A) historical cost and going concern.

B) going concern and accrual accounting.

C) accrual accounting and historical cost.

Your answer: A was incorrect. The correct answer was B) going concern and accrual accounting.

The two underlying assumptions of financial statements according to the conceptual framework areaccrual accounting and the going concern assumption. Historical cost is one of several measurementbases that may be used for financial reporting.


Question 7 - #98098

Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to hisnew assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes to a firmsfinancial statement and the Management Discussion and Analysis (MD&A) before making an investmentdecision. Which rationale is Martinenko least likelyto provide to Stevenson regarding the importance ofanalyzing the footnotes and MD&A?

A) Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.

B) The footnotes disclose whether or not the company is adhering to GAAP.

C)Evaluating the footnotes helps the analyst assess whether management is manipulating

earnings.Your answer: A was incorrect. The correct answer was B) The footnotes disclose whether or not thecompany is adhering to GAAP.

Various accruals, adjustments, and management assumptions that went into the financial statements areoften explained in the footnotes to the statements and in Managements Discussion and Analysis.Because adjustments and assumptions within the financial statements are to some extent at thediscretion of management, the possibility exists that management can try to manipulate or misrepresentthe companys financial performance. With this information, the analyst can better judge how well thefinancial statements reflect the companys true performance, and in what ways he needs to adjust thedata for his own analysis. Whether or not the company is adhering to GAAP is addressed in the auditorsopinion, not the footnotes.

This question tested from Session 7, Reading 23, LOS g.

Question 8 - #98166

The following amounts were drawn from the records of JME Company: total assets = $1,200; totalliabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must beequal to:


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A) $150.

B) $150.

C) $450.


(1,200 750 600) = 150

This question tested from Session 7, Reading 23, LOS b.

Question 9 - #98190

Which of the following statements represents information at a specific point in time?

A) The balance sheet.

B) The income statement and the balance sheet.

C) The income statement.


The balance sheet represents information at a specific point in time. The income statement representsinformation over a period of time.



Which of the following statements concerning the notes to the audited financial statements of a companyis leastaccurate? Financial statement notes:

A)include management's assessment of the company's operating performance and financialresults.

B) are audited.

C) contain information about contingent losses that may occur.


Management's perspective on the company's results is provided in the Management's Discussion andAnalysis supplement to the financial statements. Financial statement notes (footnotes) provideinformation about matters such as the company's accounting methods and assumptions, contingencies,and acquisitions and disposals. Footnotes to the financial statements are audited.



Which description of the objective of financial statements is mostaccurate? The objective of financialstatements is:

A) to provide economic decision makers with useful information about a firms financial


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performance and changes in financial position.

B) to provide securities analysts with objective data about a firms financial prospects.

C) to provide a wide range of users with information about a firms financial prospects.


The objective of financial statements is to provide economic decision makers with useful informationabout a firms financial performance and changes in financial position.Assessing its prospects is theresponsibility of analysts. Financial statements fall under the purview of the FASB in the US, not theIASB. 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.


Which of the following is mostlikely to be considered a barrier to developing one universally recognizedset of reporting standards?

A) Different standard-setting bodies of different countries disagree on the best treatment of aparticular issue.

B) Reluctance of firms to adhere to a single set of reporting standards.

C) GATT already requires sufficient agreement.


A principal obstacle to agreement on a single set of reporting standards is that various standard-settingbodies and regulatory authorities disagree on what the standards should be. Firms generally support theidea because it would reduce the cost of reporting. GATT is the General Agreement on Tariffs and Tradeand does not relate to financial reporting.



The step in the financial statement analysis framework of processing the data is least likelyto includewhich activity?

A)Acquiring the companys financial statements.

B) Making appropriate adjustments to the financial statements.

C) Preparing exhibits such as graphs.


The financial statement analysis framework consists of six steps. Step 2: Gather data includes acquiringthe companys financial statements and other relevant data on its industry and the economy. Step 3.Process the data includes activities such as making any appropriate adjustments to the financialstatements and preparing exhibits such as graphs and common-size balance sheets.




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A listing of all the firms journal entries by date is called the:

A) general journal.

B) general ledger.

C) adjusted trial balance.


A listing of all the journal entries in order by date is called the general journal. The general ledgersortsthe entries in the general journal by account. At the end of the accounting period, an initial trial balanceisprepared that shows the balances in each account. If any adjusting entries are needed, they will berecorded and reflected in an adjusted trial balance. The account balances from the adjusted trial balanceare presented in the financial statements.


Question 15 - #140443

Under which framework for financial reporting systems are the financial statement elements related toperformance defined as revenues, expenses, gains, losses, and comprehensive income?

A) IASB framework.

B) FASB framework.

C) Both IASB and FASB frameworks.

Your answer: A was incorrect. The correct answer was B) FASB framework.

The FASB framework lists revenues, expenses, gains, losses, and comprehensive income as elementsrelated to performance. In the IASB framework, elements related to performance are income andexpenses.


Question 16 - #138387

Desirable attributes of accounting standard-setting bodies least likelyinclude:

A) having clear and consistent standard-setting processes.

B) making decisions that are in the public interest.

C) operating independently of interested stakeholders.

Your answer: A was incorrect. The correct answer was C) operating independently of interestedstakeholders.

Although standard-setting bodies should not be compromised by special interests, seeking input fromstakeholders is considered a desirable attribute.




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Accruals are bestdescribed as requiring an accounting entry:

A) when an expense has been incurred.

B) only when a good or service has been provided.

C) when the earliest event in a transaction occurs.

Your answer: A was incorrect. The correct answer was C) when the earliest event in a transaction occurs.

Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providinga good or service, or incurring an expense) and one or more offsetting entries as the exchange iscompleted.



Allowance for bad debts and investment in affiliates are most likelyto be shown as what types ofaccounts?

Allowance for bad debts Investment in affiliates

A) Contra-asset Liabilities

B) Contra-asset Asset

C) Liabilities Asset

Your answer: A was incorrect. The correct answer was B)

Contra-asset Asset

Allowance for bad debts is a contra-asset account to accounts receivable. Investments in affiliates areconsidered assets.


Question 19 - #122495

Required financial statements, according to International Accounting Standard (IAS) No. 1, include a(n):

A) income statement and working capital summary.

B) cash flow statement and auditors report.

C) balance sheet and explanatory notes.

Your answer: A was incorrect. The correct answer was C) balance sheet and explanatory notes.

Financial statements that are required by IAS No. 1 include a balance sheet, a statement ofcomprehensive income, a cash flow statement, a statement of changes in owners equity, andexplanatory notes that include a summary of the companys accounting policies. IAS No. 1 does notrequire an auditors report or a working capital summary.



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Which of the following leastaccurately describes a correct use of double-entry accounting?

A) A transaction may be recorded in more than two accounts.

B)An increase in an asset account may be balanced by an increase in an owners equityaccount.

C) A decrease in a liability account may be balanced by a decrease in another liability account.

Your answer: A was incorrect. The correct answer was C) A decrease in a liability account may bebalanced by a decrease in another liability account.

Keeping the accounting equation in balance requires double-entry accounting, in which a transaction hasto be recorded in at least two accounts. An increase in an asset account, for example, must be balancedby a decrease in another asset account or by an increase in a liability or owners equity account. Adecrease in a liability account may be balanced by an increase in another liability account, not adecrease. If two liabilities decrease without a balancing entry, the balance sheet will be out of balance.



Alpha Company reported the following financial statement information:

December 31, 2006:

Assets $70,000

Liabilities 45,000

December 31, 2007:

Assets 82,000

Liabilities 55,000During 2007:

Stockholder investments 3,000

Net income ?

Dividends 6,000

Calculate Alphas net income for the year ended December 31, 2007 and the changein stockholdersequity for the year ended December 31, 2007.

Net income Change in stockholders' equity

A) ($3,000) $2,000 increase

B) $5,000$2,000decrease

C) $5,000 $2,000 increase


$5,000 $2,000 increase


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Stockholders equity, as of December 31, 2006, was $25,000 ($70,000 assets $45,000 liabilities) andstockholders equity, as of December 31, 2007, was $27,000 ($82,000 assets $55,000 liabilities).Stockholders equity increased $2,000 during 2007. Net income for 2007 was $5,000 ( $27,000 endingequity + $6,000 dividends$3,000 stockholder investments$25,000 beginning equity).



A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactionsare most likelyto affect which accounts?

Purchase Sale

A) Assets onlyAssets, revenue, expenses,owners' equity

B) Assets only Assets and revenues only

C) Assets and expenses Assets, revenue, expenses,owners' equity


The purchase will be a decrease in cash and an increase in inventory, both asset accounts. The expenseis 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 increasein retained earnings (owners equity) for the $250 profit.



Accumulated depreciation and treasury stock are most likelyto be shown as what types of accounts?

Accumulateddepreciation

Treasury stock

A) Contra-asset Equity

B) Liability Equity

C) Contra-asset Contra-equity


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.




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Reading the footnotes to a companys financial statements and the Management Discussion & Analysis isleast likelyto help an analyst determine:

A) the detailed information that underlies the companys accounting system.

B) the various accruals, adjustments and assumptions that went into the financial statements.

C) how well the financial statements reflect the companys true performance.


An analyst doesnt have access to the detailed information that flows through a companys accountingsystem, but only sees its end product, the financial statements. The analyst needs to understand thevarious accruals, adjustments, and management assumptions that went into the financial statements.Much of this is often explained in the footnotes to the statements and in Managements Discussion andAnalysis, which is why it is crucial for an analyst to review these parts of the presentation. With thisinformation, the analyst can better judge how well the financial statements reflect the companys trueperformance, and in what ways he needs to adjust the data for his own analysis.



An analyst can find a companys significant accounting methods and estimates in:

A) only the footnotes.

B) both the footnotes and in the auditors opinion.

C) both the footnotes to the financial statements and Managements Discussion and Analysis.

Your answer: A was incorrect. The correct answer was C) both the footnotes to the financial statementsand Managements Discussion and Analysis.

Companies that prepare financial statements under IFRS or U.S. GAAP must disclose their accounting

policies and estimates in the footnotes and address those policies and estimates where significantjudgment was required in Managements Discussion and Analysis. The auditors opinion discusseswhether policies have been applied appropriately, but does not include the estimates and policiesthemselves.

This question tested from Session 7, Reading 24, LOS i.


According to the IASB, which of the following leastaccurately describes financial reporting? Financialreporting:

A) provides information about changes in financial position of an entity.

B) is useful to a wide range of users.

C) uses the information in a companys financial statements to make economic decisions.

Your answer: A was incorrect. The correct answer was C) uses the information in a companys financialstatements to make economic decisions.

The role of financial reporting is described by the International Accounting Standards Board (IASB) in itsFramework for the Preparation and Presentation of Financial Statements:


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The objective of financial statements is to provide information about the financial position, performanceand changes in financial position of an entity that is useful to a wide range of users in making economicdecisions.

Using the information in a companys financial statements to make economic decisions is financialanalysis, not financial reporting.



Which of the following statements about financial statements and reporting standards is leastaccurate?

A) Financial statements could potentially take any form if reporting standards didnt exist.

B)The objective of financial statements is to provide economic decision makers with usefulinformation.

C)

Reporting standards focus mostly on format and presentation and allow management wide

latitude in assumptions.Your answer: A was incorrect. The correct answer was C) Reporting standards focus mostly on formatand presentation and allow management wide latitude in assumptions.

Given the variety and complexity of possible transactions, and the estimates and assumptions a firm mustmake when presenting its performance, financial statements could potentially take any form if reportingstandards didnt exist. Reporting standards ensure that the information is useful to a wide range ofusers, including security analysts, by making financial statements comparable to one another andnarrowing the range within which managements estimates can be seen as reasonable. Reportingstandards limit the range of assumptions management can make.



Disagreements that inhibit development of a coherent financial reporting framework are leastlikely toinvolve which of the following?

A) Valuation.

B) Standard setting.

C) Transparency.

Your answer: A was incorrect. The correct answer was C) Transparency.

There is widespread agreement that transparency is desirable in financial reporting. Disagreements thatinhibit development of a single framework often arise around issues of measurement, valuation, andstandard setting.




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Wichita Corporation reported the following balances as of December 31, 2007:

Cash $?

Accounts payable 16,000

Accounts receivable 58,000

Additional paid-in capital 42,000Common stock 19,600

Inventory 12,000

Plant and equipment 26,800

Notes payable 20,000

Retained earnings 32,000

Calculate Wichitas cash and total assets as of December 31, 2007 based only on these entries.

Cash Total assets

A) $16,000 $129,600

B) $32,800 $129,600

C) $32,800 $113,600


$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 assetsmust equal liabilities plus equity, cash must equal $32,800 ($129,600 total assets$58,000 accountsreceivable$12,000 inventory$26,800 plant and equipment).



The purchase of equipment for $25,000 cash is most likelyto be recorded as:

A) an increase in an asset account and an increase in a liability account.

B) an increase in two asset accounts.

C) an increase in one asset account and a decrease in another asset account.

Your answer: A was incorrect. The correct answer was C) an increase in one asset account and adecrease in another asset account.

The purchase of equipment for cash is an increase in property, plant and equipment (an asset) and adecrease in cash (another asset).




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Lightfoot Shoe Company reported sales of $100 million for the year ended 20X7. Lightfoot expects salesto increase 10% in 20X8. Cost of goods sold is expected to remain constant at 40% of sales and Lightfootwould like to have an average of 73 days of inventory on hand in 20X8. Forecast Lightfoots averageinventory for 20X8 assuming a 365 day year.

A) $8.8 million.

B) $8.0 million.

C) $22.0 million.


20X8 sales are expected to be $110 million [$100 million 1.1] and COGS is expected to be $44 million[$110 million sales 40%]. With 73 days of inventory on hand, average inventory is $8.8 million [($44million COGS / 365) 73 days].



The Beeline Company has the following balance sheet and income statement.

Beeline Company Balance Sheet

As of December 31, 20X4

2003 2004 2003 2004

Cash $50 $60 Accounts payable $100 $150

Accounts receivable 100 110 Long-term debt 400 300

Inventory 200 180 Common stock 50 50

Retained earnings 400 500

Fixed assets (gross) 800 900 Total liabilities and equity $950 $1,000

Less: Accumulated depreciation 200 250

Fixed assets (net) 600 650

Total assets $950 $1,000

Beeline Company Income Statement

For year ended December 31, 20X4

Sales $1,000

Less:

COGS 600

Depreciation 50

Selling, general, and administrative expenses 160

Interest expense 23

Income before taxes $167

Less tax 67

Net income $100

The cash flow from operations for 2004 is:

A) $260.


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B) $210.

C) $150.

Your answer: A was incorrect. The correct answer was B) $210.

Cash flow from operations (CFO) calculated using the indirect method is: net income (100) + depreciation(50)increase in accounts receivable (10) + decrease in inventory (20) + increase in accounts payable(50) = $210.



Are changes in accounting principles and extraordinary items treated similarly in accordance with U.S.Generally Accepted Accounting Principles and International Financial Reporting Standards?

Accounting principles Extraordinary items

A) No NoB) Yes No

C) Yes Yes


Yes No

Treatment of a change in an accounting principle is similar under U.S. GAAP and IFRS. Under bothstandards, a change in accounting principle is made retrospectively. The treatment of extraordinary itemsdiffers between U.S. GAAP and IFRS. Under U.S. GAAP, extraordinary items are reported net of taxbelow income from continuing operations. IFRS does not permit firms to treat transactions asextraordinary in the income statement.



With other variables remaining constant, if profit margin rises, ROE will:

A) fall.

B) increase.

C) remain the same.

Your answer: A was incorrect. The correct answer was B) increase.

The DuPont equation shows clearly that ROE will increase as profit margin increases, as long as assetturn and leverage do not fall.




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The traditional DuPont equation shows ROE equal to:

A) net income/sales sales/assets assets/equity.

B) EBIT/sales sales/assets assets/equity (1 tax rate).

C) net income/assets sales/equity assets/sales.


Profit margin asset turnover financial leverage. Although net income/assets sales/equity assets/sales also yields ROE, it is not the DuPont equation.



How would a stock split be reported on the statement of cash flows? A stock split would:

A) not be reported on the statement of cash flows because it is a non-cash event.

B) be reported as a source of cash in the cash flows from financing.

C) be reported as a use of cash in the cash flows from financing.


No cash is involved in a stock split--shares are exchanged for shares.



Kendall Companys net income for 20X4 is $830,000 with 200,000 shares outstanding. Kendall has 1,0006% convertible bonds (each bond $1,000 face value and convertible into 20 common shares) outstandingfor the entire year. Kendalls tax rate is 40%. What is Kendall Companys diluted earnings per share for20X4?

A) $4.15.

B) $3.94.

C) $3.77.

Your answer: A was incorrect. The correct answer was B) $3.94.

Kendalls basic EPS is $830,000 / 200,000 = $4.15. To compute diluted EPS, bond interest paid net oftaxes is added to net income, and the number of shares that would be issued in the conversion is added

to the denominator. Kendalls diluted EPS = [$830,000 + (1,000 $1,000 0.06) (1 0.4)] / (200,000 +20,000) = $3.94. Since diluted EPS is less than basic EPS, we know that the bonds are dilutive andshould be considered in calculating diluted EPS.

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



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Nichols Companys net income for 20X6 was $978,000 with 1,250,000 shares outstanding. The averageshare price in 20X6 was $8.50. Nichols issued 2,000 warrants to purchase 100 shares each for $10 pershare in 20X5. Nichols Companys diluted earnings per share (diluted EPS) for 20X6 is closestto:

A) $0.777.

B) $0.793.

C) $0.782.

Your answer: A was incorrect. The correct answer was C) $0.782.

Nichols basic EPS (net income / weighted average common shares outstanding) was:

$978,000 / 1,250,000 = $0.782.

Because the exercise price of the warrants is higher than the average share price, the warrants areantidilutive and are excluded from diluted EPS. Because there were no other potentially dilutivesecurities, Nichols' diluted EPS in 20X6 is the same as basic EPS.



Oregon Corp.s stock transactions during the year were as follows:

January 1: 320,000 shares outstanding. April 1: 1-for-2 reverse stock split occurred. July 1: Acquisition of Smith, Inc. in exchange for issuance of 60,000 shares. October 1: 30,000 shares issued for cash.

What is Oregons weighted average number of shares outstanding?

A) 167,500.

B) 197,500.

C) 250,000.

Your answer: A was incorrect. The correct answer was B) 197,500.

The January 1 balance is adjusted retroactively for the reverse stock split and 320,000 / 2 = 160,000shares are treated as outstanding from January 1. Issuance of stock is included from the date ofissuance. The weighted average shares are computed by multiplying the share amounts by the number ofmonths the shares were outstanding, then adding these amounts and dividing the sum by 12.

January 1: initial shares 160,000 12 = 1,920,000July 1: Smith acquisition 60,000 6 = 360,000

October 1: cash issuance 30,000 3 = 90,000

Total: 2,370,000

Oregons weighted average shares = 2,370,000 / 12 = 197,500.



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Given the following income statement and balance sheet for a company:

Balance Sheet

Assets Year 2003 Year 2004Cash 500 450

Accounts Receivable 600 660

Inventory 500 550

Total CA 1300 1660

Plant, prop. equip 1000 1250

Total Assets 2600 2,910

Liabilities

Accounts Payable 500 550

Long term debt 700 1102

Total liabilities 1200 1652

Equity

Common Stock 400 538

Retained Earnings 1000 720

Total Liabilities & Equity 2600 2,910

Income Statement

Sales 3000

Cost of Goods Sold (1000)Gross Profit 2000

SG&A 500

Interest Expense 151

EBT 1349

Taxes (30%) 405

Net Income 944

What is the average receivables collection period?

A) 80.3 days.

B) 76.7 days.C) 60.6 days.

Your answer: A was incorrect. The correct answer was B) 76.7 days.

Average collection period = 365 / receivables turnoverReceivables turnover = sales / average receivables = 3,000 / 630 = 4.76Average receivables collection period = 365 / 4.76 = 76.65



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Which, if any, of the following statements about the installment sales method and cost recovery method iscorrect?

Statement 1: The cost recovery method recognizes revenue and associated costs of goods sold onlywhen cash is received, based on gross profit margin.

Statement 2: The installment sales method recognizes sales when cash is received, but no gross profit isrecognized until all of the cost of goods sold is collected.

A) Neither statement is correct.

B) Only one of these statements is correct.

C) Both statements are correct.


Neither statement is correct because the definitions are reversed.




Balance Sheet

Assets Year 2003 Year 2004

Cash 500 450


Inventory 500 550

Total CA 1600 1660


Total Assets 2600 2910

Liabilities




EquityCommon Stock 400 538


Total Liabilities & Equity 2600 2910

Income Statement

Sales 3000


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Cost of Goods Sold (1000)

Gross Profit 2000

SG&A (500)

Interest Expense (151)

EBT 1349

Taxes (30%) (405)

Net Income 944

What is the current ratio for 2004?

A) 3.018.

B) 0.331.

C) 2.018.


Current ratio = (CA / CL) = (1,660 / 550) = 3.018

This question tested from Session 8, Reading 26, LOS i.

Question 43 - #122496

Under accrual accounting, revenues are recognized in the same period in which the associated:

A) expenses are incurred.

B) cash is collected.

C) invoices are billed.


Accrual accounting is based on the matching principle, under which revenues are recognized in the sameperiod that the expenses are incurred to generate those revenues.



An analyst has gathered the following information about Barnstabur, Inc., for the year:

Reported net income of $30,000. 5,000 shares of common stock and 2,000 shares of 8%, $90 par preferred stock outstanding

during the whole year. During the year, Barnstabur issued at par, $60,000 of 6.0% convertible bonds, with each of the 60

bonds convertible into 110 shares of the Barnstabur common stock.

If Barnstaburs effective tax rate is 40%, what will Barnstabur report for diluted earnings per share (EPS)?

A) $2.36.

B) $1.66.


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C) $1.53.


Diluted EPS = adjusted earnings after conversion (EAC) / weighted average plus potential commonshares outstanding.

Step 1: Calculate Adjusted EAC

adjusted EAC: net income - preferred dividends

+ after-tax interest on convertible debt

= adjusted earnings available for common shares

preferred dividends= (0.08)(90)(2,000) = 14,400

convertible debt interest = (60,000)(0.06)(10.40) = 2,160

adjusted EAC= (30,00014,400 + 2,160) = $17,760

Step 2:Calculate Weighted average plus potential common shares outstanding.

weighted average common shares = 5,000

shares from conversion of convertible bonds = (60 110) = 6,600

weighted ave. plus potential common shares outst. = 11,600

Step 3: Calculate Diluted EPS

Diluted EPS= 17,760 / 11,600 = $1.53.


Question 45 - #119453

How would the collection of accounts receivable most likelyaffect the current and cash ratios?

Current ratio Cash ratio

A) Increase Increase

B) No effect No effect

C) No effect Increase


No effect Increase

Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do notchange and the current ratio is unaffected. Because the numerator of the cash ratio only includes cashand marketable securities, collecting accounts receivable increases the cash ratio.



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Consider the following:

Argument #1: The indirect method presents a firms operating cash receipts and payments and is thus more

consistent with the objectives of the cash flow statement.Argument #2: The indirect method provides more information than the direct method and is more useful to

analysts in estimating future operating cash flows.

Which of these arguments support the use of the indirect method for presenting cash flow from operatingactivities in the cash flow statement?

A) Argument #2 only.

B) Argument #1 only.

C) Neither argument.

Your answer: A was incorrect. The correct answer was C) Neither argument.

It is the directmethod, not the indirect method, that presents operating cash receipts and payments and isthus more consistent with the objectives of the cash flow statement. The directmethod provides moreinformation than the indirect method and is preferred by analysts who are estimating future cash flows.



All of the following are considered a potentially dilutive securities EXCEPT:

A) stock options.

B) preferred stock.C) warrants.

Your answer: A was incorrect. The correct answer was B) preferred stock.

Not all preferred stock is dilutive. Only convertiblepreferred stock is potentially dilutive.




Balance Sheet

Assets Year 2003 Year 2004

Cash 500 450


Inventory 500 550

Total CA 1300 1660



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Total Assets 2600 2910

Liabilities




Equity

Common Stock 400 538


Total Liabilities & Equity 2600 2,910

Income Statement

Sales 3000

Cost of Goods Sold (1000)

Gross Profit 2000

SG&A 500

Interest Expense 151

EBT 1349

Taxes (30%) 405

Net Income 944

What is the gross profit margin?

A) 0.666.

B) 0.333.

C) 0.472.


Gross profit margin = (gross profit / net sales) = (2,000 / 3,000) = 0.666



Given the following information about a firm what is its return on equity (ROE)?

An asset turnover of 1.2. An after tax profit margin of 10%. A financial leverage multiplier of 1.5.

A) 0.09.

B) 0.18.

C) 0.12.

Your answer: A was incorrect. The correct answer was B) 0.18.


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ROE = (EAT / S)(S / A)(A / EQ)ROE = (0.1)(1.2)(1.5) = 0.18



The correct set of cash flow treatments as they relate to interest paid according to U.S. generallyaccepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is:

U.S. GAAP IAS GAAP

A) CFF CFF

B) CFO CFO or CFF

C) CFO or CFF CFO


CFO CFO or CFF

U.S. GAAP treats interest paid as CFO whereas IAS GAAP treats interest paid as either CFO or CFF.


Question 51 - #100934

Under the general principles of accrual accounting, revenue is recognized when:

A) earned, and expenses are recognized when incurred.

B) cash is received, and expenses are recognized when cash is paid.C) the good or service is delivered or cash is received, whichever is earlier.


The principle of accrual accounting is that revenue is recognized when earned, and expenses arerecognized when incurred.



Selected information from Gerrard, Inc.s financial activities in the most recent year was as follows:

Net income was $330,000. The tax rate was 40%. 700,000 shares of common stock were outstanding on January 1. The average market price per share for the year was $6. Dividends were paid during the year. 2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of

200 common shares for each preferred share, were outstanding for the entire year. 200,000 shares of common stock were issued on March 1.


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Gerrard, Inc.s diluted earnings per share (diluted EPS) was closestto:

A) $0.289.

B) $0.261.

C) $0.197.

Your answer: A was incorrect. The correct answer was B) $0.261.

To compute Gerrards basic earnings per share (EPS) ((net income preferred dividends) / weightedaverage common shares outstanding), the weighted average common shares outstanding must becomputed. 700,000 shares were outstanding from January 1, and 200,000 shares were issued on March1, so the weighted average is 700,000 + (200,000 10 / 12) = 866,6 67. Basic EPS was $330,000 (2,000 $500 0.08)) / 866,667 = $0.289.

If the convertible preferred shares were converted to common stock, 2,000 200 = 400,000 additionalcommon shares would have been issued and dividends on the preferred stock would not have been paid.Diluted EPS was $330,000 / (866,667 + 400,000) = $0.261.



Extraordinary items are:

A) unusual or infrequent.

B) unusual and infrequent.

C) reported above the line.

Your answer: A was incorrect. The correct answer was B) unusual and infrequent.

Extraordinary items are unusual andinfrequent, reported belowthe line separate from income fromcontinuing operations on the income statement, and would include such items as: foreign governmentconfiscation, earthquake damages, losses from volcanic eruptions, etc.



Washington, Inc.s stock transactions during the year 20X4 were as follows:

January 1 720,000 shares issued and outstanding

May 1 2 for 1 stock split occurred

What was Washingtons weighted average number of shares outstanding during 20X4, for earnings pershare (EPS) computation purposes?

A) 1,440,000.

B) 1,500,000.

C) 1,666,667.


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The January 1 balance is adjusted retroactively for the stock split and (720,000 2 =) 1,440,000 sharesare treated as outstanding from January.



At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following datarelates to the project:

Contract price $100 million

Costs incurred in 2007 $50 million

Progress billings $40 million

Collection of progress billings $37 million

Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However,Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue shouldThunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles(U.S. GAAP) and International Financial Reporting Standards (IFRS)?

U.S. GAAP IFRS

A) $0 $0

B) $0 $50 million

C) $37 million $40 million


$0 $50 million

The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliablyestimate the projects cost. Under the completed-contract method, no revenue is recognized until theproject is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized tothe extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in2007, $50 million of revenue is recognized.



When the market value of an investment in a debt security is less than its carrying value, how should theinvestor report the investment on the balance sheet if the security is classified as held-to-maturity andwhat amount should be reported if the security is classified as available-for-sale?

Held-to-maturityAvailable-for-sale

A) Amortized cost Fair value


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B) Amortized cost Amortized cost

C) Fair value Fair value


Held-to-maturity securities are reported on the balance sheet at amortized cost while available-for-sale

securities are reported at fair value. Amortized cost includes the amortization of a premium or discountthat was created when the security was purchased.



An analyst gathered the following information about a company:

01/01/06 - 20,000 shares issued and outstanding 04/01/06 - 5.0% stock dividend

07/01/06 - 5,000 shares repurchased 10/01/06 - 2:1 stock split

What is the companys weighted average number of shares outstanding at the end of 2006?

A) 47,000.

B) 39,500.

C) 37,000.

Your answer: A was incorrect. The correct answer was C) 37,000.

The end-of-period weighted average number of common shares outstanding is the number of sharesoutstanding during the year weighted by the portion of the year they were outstanding. Dividends and

splits are applied to all shares issued or repurchased and all original or adjusted shares outstandingpriorto the split or dividend.

Step 1) Apply the 04/01/06 dividend to the beginning of year shares:

Adjusted shares = 1.05 20,000 = 21,000

Step 2) Apply the 10/01/06 split to the adjusted beginning-of-year shares and the repurchase.

Adjusted beginning-of-year shares = 42,000 (= 2 21,000)Adjusted repurchase = 10,000 (= 2 5,000)

Step 3) Compute the weighted average number of shares.

42,000(12/12) - 10,000(6/12) = 37,000 shares




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Which of the following securities would least likelybe found in a simple capital structure?

A) 3%, $100 par value convertible preferred.

B) 6%, $5000 par value putable bond.

C) 7%, $100 par value non convertible preferred.


A simple capital structure contains no potentially dilutive securities such as stock options, warrants, orconvertible preferred stock.



Determine the cash flow from investing given the following table:

Item Amount

Cash payment ofdividends

$30

Sale of equipment $25Net income $25Purchase of land $15Increase in accountspayable

$20

Sale of preferredstock

$25

Increase in deferredtaxes

$5

A) -$5.

B) $10.

C)-$10.

Your answer: A was incorrect. The correct answer was B) $10.Item AmountCash payment of dividends CFF -$30Sale of equipment CFI +$25Net income CFO +$25Purchase of land CFI -$15Increase in accountspayable

CFO +$20

Sale of preferred stock CFF +$25Increase in deferred taxes CFO +$5

CFI = Sale of Equipment (+25) + Purchase of Land (15) = $10.



The following data pertains to the Sapphire Company:


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Net income equals $15,000. 5,000 shares of common stock issued on January 1

st. 10% stock dividend issued on June 1

st. 1,000 shares of common stock were repurchased on July 1

st. 1,000 shares of 10%, $100 par preferred stock each convertible into 8 shares of common were

outstanding the whole year.

What is the companys diluted earnings per share (EPS)?

A) $2.50.

B) $1.15.

C) $1.00.


Number of average common shares:

1/1 5,500 shares issued (includes 10% stock dividend on 6/1) 12 = 66,000

7/1 1,000 shares repurchased 6 months = -6,000

= 60,000

60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)(1,000) = $10,000

Number of shares from the conversion of the preferred shares = (1,000 preferred shares)(8 shares ofcommon/share of preferred) = 8,000 common

Diluted EPS = [$15,000(NI) $10,000(pfd) + $10,000(pfd)] / 5000(common shares) + 8000(shares fromthe conv. pfd. shares) = $15,000 / 13,000 shares = $1.15/share

This number needs to be compared to basic EPS to see if the preferred shares are antidilutive.

Basic EPS = [$15,000(NI) $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares =$1/share

Since the EPS after the conversion of the preferred shares is greater than before the conversion thepreferred shares are antidilutive and they should not be treated as common in computing diluted EPS.Therefore diluted EPS is the same as basic EPS or $1/share.


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