3. Financial Statement Analysis

Question: The Herlitzka Company, a U.S. multinational firm, has a 100 percent stake in a Swiss subsidiary. The U.S. dollar (US

• A) $1,845 and $2,401 Correct
• B) $1,771 and $2,361
• C) $1,845 and $2,361

Page 1 | Status: ✅ Correct

Question: Each of the following items is considered a monetary asset or liability account under the temporal method for foreign currency translation EXCEPT:

• A) long-term debt
• B) inventory Correct
• C) accounts payable

Page 2 | Status: ✅ Correct

Question: Which of the following currency translation methods is most appropriate in a hyperinflationary economy under US GAAP? The:

• A) current rate method since the translation gain or loss is shown on the income statement
• B) current/non-current method since current assets and liabilities are translated at the current exchange rate Correct
• C) temporal method because all non-monetary accounts are translated at the historical rate

Page 2 | Status: ✅ Correct

Question: Assuming closing retained earnings for the year 20X8 was $110, the translation gain on the income statement would be:

• A) $17 Correct
• B) $0 Your Answer
• C) $27

Page 4 | Status: ❌ Incorrect

Question: The level of net fixed assets on the remeasured 20X8 balance sheet would be:

• A) $510 Correct
• B) $462 Your Answer
• C) $480

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Question: The level of retained earnings on the remeasured 20X8 balance sheet would be:

• A) $101 Correct
• B) $85 Your Answer
• C) $305

Page 4 | Status: ❌ Incorrect

Question: As compared to the local currency ratio, fixed asset turnover in the reporting currency would most likely be:

• A) higher Correct
• B) lower Your Answer
• C) the same

Page 4 | Status: ❌ Incorrect

Question: The first step in Jameson's analysis is to compute Kasamatsu's impact on WB's net income. What is Kasamatsu's impact on WB's net income (in thousands dollars)?

• A) $821 Correct
• B) $793
• C) $850

Page 6 | Status: ✅ Correct

Question: Jameson now computes the adjustment to WB's financial data due to Kasamatsu's payment of dividends. What is the U.S. dollar amount of this adjustment (in thousands)?

• A) $400 Correct
• B) $414
• C) $446

Page 6 | Status: ✅ Correct

Question: The carrying value of Kasamatsu's total assets on December 31, 2002, using the current rate method of accounting for translations is:

• A) $2,938 Correct
• B) $3,573
• C) $3,240

Page 7 | Status: ✅ Correct

Question: Having converted all of Kasamatsu's accounts using the current rate methods, Jameson is curious to compare the difference between the temporal and current rate methods on balance sheet accounts. The difference in translated fixed assets and long term debt respectively if Jameson were to use the temporal method rather than the current rate method is: Fixed Assets Long-Term Debt

• A) $0 $0 Correct
• B) $1620 $0
• C) $1620 $121

Page 7 | Status: ✅ Correct

Question: An important distinction between the temporal method and the current rate method is that:

• A) the current rate method results in an adjustment to the equity account on the balance sheet. The temporal method results in a gain or loss appearing on the income statement Correct
• B) depreciation and cost of goods sold (COGS) are a function of the current rate under translation (current rate method), but a function of the average rate under remeasurement (temporal method)
• C)

Page 7 | Status: ✅ Correct

Question: Which of the following statements is most accurate concerning foreign currency translation?

• A) The receivables turnover ratio is identical under both the temporal method and the current rate method Correct
• B) In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method
• C) In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency depreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method

Page 8 | Status: ✅ Correct

Question: The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005. Cash 134 Accounts receivable 270 Inventory 404 Net fixed assets 1347 Total assets 2155 The exchange rate per euro was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are:

• A) $1,923 Correct
• B) $2,133
• C) $2,178

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Question: Which of the following ratios is affected by translation under the current rate method?

• A) Fixed asset turnover ratio Correct
• B) Net profit margin Your Answer
• C) Debt/Assets ratio

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Question: Which of the following general statements is most accurate with respect to the current rate method? Revenues:

• A) and operating expenses are translated at the average rate Correct
• B) are translated at the average rate while operating expenses are translated at the current rate Your Answer
• C) and operating expenses are translated at the current rate

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Question: Under the temporal method, the inventory and cost of goods sold (COGS) accounts are both nonmonetary accounts. Which of the following statements is least accurate regarding these accounts?

• A) If the firm accounts for inventory using last in, first out (LIFO), then the beginning-of- period rate is used to remeasure COGS Correct
• B) The Inventory account is remeasured using the historical rate under both LIFO and FIFO Your Answer
• C) If the firm accounts for inventory using first in, first out (FIFO), then a more recent rate will be applied to the inventory account

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Question: To reflect the results of Grande, Inc., in its financial statements, it would be most appropriate for Giant Company to use the:

• A) current rate method followed by the temporal method Correct
• B) temporal method
• C) current rate method

Page 11 | Status: ✅ Correct

Question: The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31, 2012, is closest to:

• A) $250,000 Correct
• B) $550,000 Your Answer
• C) $500,000

Page 11 | Status: ❌ Incorrect

Question: The translation gain or loss from the activities of Grande, Inc., should be reported in the:

• A) income statement
• B) equity accounts Correct
• C) statement of cash flows

Page 11 | Status: ✅ Correct

Question: Compared to the current ratio before translation, the current ratio after translation is most likely to be:

• A) higher Correct
• B) lower
• C) the same. Dell Air Lines has recently acquired Australian Puddle Jumpers, Inc., a small airline located in Sydney. The Australian dollar has been chosen by Dell as the functional currency for APJ. The Balance Sheet of APJ is given below as of Dec. 31, 2004 in Australian dollars. Assets Liabilities and Equity Cash 200 A/P 180 A/R 240 Common Stock 720 Maintenance Supplies 180 Fixed Assets 280 Total Assets 900 Total Liab & Equity 900 APJ's income statement for the year ending Dec. 31, 2005 is expressed in Australian dollars as: Sales 3,500 Total Costs 2,900 Net Income 600 The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2004, the exchange rate was 2 Australian dollars = $1 but at Dec. 31, 2005, the exchange rate had deteriorated to 3 Australian dollars = $1. The Dec. 31, 2005 Balance Sheet for APJ is given in Australian dollars as follows: Assets Liabilities and Equity Cash 441 A/P 210 A/R 330 Common Stock 720

Page 12 | Status: ✅ Correct

Question: On APJ's 2005 income statement, the level of net income in U.S. dollars would be:

• A) $200.00 Correct
• B) $240.00 Your Answer
• C) $300.00

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Question: On APJ's 2005 balance sheet, the level of common stock (not including retained earnings) in U.S. dollars would be:

• A) $360 Correct
• B) $288 Your Answer
• C) $240

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Question: On APJ's 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars would be:

• A) −$220 Correct
• B) −$160 Your Answer
• C) −$280

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Question: Which one of the following statements correctly describes the effect on Dell's financial statements if the U.S. dollar had been chosen as the functional currency?

• A) The current rate method would apply Correct
• B) The translation adjustment would appear as a line item on Dell's income statement
• C) The translation adjustment would appear as a line item on Dell's balance sheet

Page 14 | Status: ✅ Correct

Question: Which of the following statements is least accurate regarding accounting for foreign currency translations? The:

• A) current rate method applies the current exchange rate to all balance sheet accounts Correct
• B) current rate method applies the average exchange rate to all income statement accounts
• C) temporal method uses the historical exchange rate to translate non-monetary assets and liabilities into the currency of the country of the parent company

Page 14 | Status: ✅ Correct

Question: Which of the following statements regarding the foreign currency translation under US GAAP is least accurate? The functional currency is the:

• A) subsidiary's local currency for self-contained, independent foreign subsidiaries Correct
• B) parent firm's home currency for self-contained independent foreign subsidiaries
• C) parent firm's home currency if the foreign subsidiary operates in a country with high inflation

Page 14 | Status: ✅ Correct

Question: Regarding the different methods of consolidating foreign subsidiaries' operating results, it would be most accurate to state that:

• A) under the temporal method, monetary assets and monetary liabilities are translated at a historical exchange rate Correct
• B) under the current rate method, revenues and expenses are translated at the exchange rate that existed when the underlying transaction occurred Your Answer
• C) under the current rate method, individual components of stockholder’s equity are translated at the current exchange rates. Navratov Corp. is a designer and manufacturer of high end sporting goods. The majority of the firm's business comes from Olympic athletes from Russia and the United States. On January 1, 2003, Navratov was purchased by a U.S. competitor, Evert Industries. Because Evert's business focuses on professional athletes in North America and Asia, Evert's management feels the acquisition of Navratov is a natural extension of their business and that buying the Russian firm should generate economies of scale. Peter Capriati is an analyst for Evert and has been assigned the task of integrating Navratov's financial statements into Evert's. Capriati knows that Evert's management pays a great deal of attention to making sure the firm's financial ratios are above the industry average. Because Navratov's sales are split evenly between the U.S. and Russia, management has given him the flexibility to designate the either the Ruble (Navratov's local currency) or the U.S. dollar (Evert's reporting currency) as Navratov's functional currency. As a result of choosing the functional currency, Capriati will use either the temporal or current

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Question: Which of the following statements about the temporal method and the current rate method is least accurate?

• A) Net income is generally more volatile under the temporal method than under the current rate method
• B) Subsidiaries that operate in highly inflationary environments will generally use the temporal method under U.S. GAAP
• C) Subsidiaries whose operations are well integrated with the parent will generally use the current rate method Correct

Page 17 | Status: ✅ Correct

Question: What is the difference in the translated receivables turnover ratio for Navratov Corp. between the temporal and current rate methods? The receivables turnover rate is:

• A) the same under both methods
• B) higher under the current rate method by 0.36x Correct
• C) lower under the current rate method by 0.30x

Page 18 | Status: ✅ Correct

Question: What is the difference in the total asset turnover ratio for Navratov Corp. between the temporal and current rate methods? The total asset turnover ratio is:

• A) higher under the current rate method Correct
• B) lower under the current rate method
• C) the same under both methods

Page 18 | Status: ✅ Correct

Question: Which of the following measures is unaffected by the choice between translation under the current rate method and remeasurement under the temporal method?

• A) Equity Correct
• B) Cost of goods sold
• C) Tax expense

Page 19 | Status: ✅ Correct

Question: Regarding the statements made at the meeting:

• A) Hirauye’s statement is incorrect; Wilkins’ statement is correct Correct
• B) Hirauye’s statement is incorrect; Wilkins’ statement is incorrect
• C) Hirauye’s statement is correct; Wilkins’ statement is correct

Page 21 | Status: ✅ Correct

Question: Ortiz had told the junior analysts to make sure they understand the different accounting rules under SFAS 52. When referring to foreign exchange rates, the difference between remeasurement and translation is that remeasurement:

• A) refers to the conversion of local currency into the functional currency; translation is the conversion of the functional currency into the reporting currency Correct
• B) and translation refer to the same process of translating the functional currency into the reporting currency
• C) is used to describe historical exchange rates while translation is used for current rates

Page 22 | Status: ✅ Correct

Question: Wilkins and Hirauye are working on constructing the consolidated statements for Neslarone. They know that after they convert from Swiss Francs (CHF) to U.S. dollars (USD), they will be left with a foreign currency adjustment that needs to be included on the financial statements. To convert from CHF to USD, the analysts should use the:

• A) current rate method and they should record the foreign currency adjustment on the balance sheet Correct
• B) current rate method and they should record the foreign currency adjustment on the income statement
• C) temporal method and they should record the foreign currency adjustment on the income statement

Page 22 | Status: ✅ Correct

Question: After remeasurement, depreciation will be closest to:

• A) $85 Correct
• B) $77
• C) $80

Page 24 | Status: ✅ Correct

Question: The value of common stock on the 2013 balance sheet should be closest to:

• A) $1,000 Correct
• B) $1,100
• C) $1,050

Page 24 | Status: ✅ Correct

Question: For Scud Co. under the temporal method, the monetary exposures and the foreign currency movements resulted in a:

• A) cumulative translation adjustment gain on the balance sheet
• B) remeasurement loss on the income statement Correct
• C) remeasurement gain on the income statement

Page 24 | Status: ✅ Correct

Question: Which example least accurately describes pure balance sheet and income statement ratios?

• A) All pure balance sheet ratios are affected by the all-current translation method Correct
• B) The current ratio is a pure balance sheet ratio
• C) When multiplying both the numerator and denominator by the current exchange rate, the current rate is cancelled. The Precision Screen Printers (PSP) Company has a foreign subsidiary, the Acer Tool & Die Company, located in the country of Rolivia. The currency of Rolivia is the Chad. The balance sheet and income statement of Acer Tool & Die Company for the year-ended December 31, 2005, is shown below. The balance sheet has been restated using the U.S. dollar as the functional currency. Acer Tool & Die Company Balance Sheet As of December 31, 2005 Chad (millions) Exchange Rate (Chad/US$) U.S. $ (millions) Cash 20 0.25 $80 Accounts receivable 30 0.25 120 Inventory 100 0.3125 320 Fixed assets (net) 500 0.3333 1,500 Total assets 650 $2,020 Accounts payable 50 0.25 $200

Page 25 | Status: ✅ Correct

Question: What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?

• A) $2,240.00 Correct
• B) $2,222.00 Your Answer
• C) $2,242.00

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Question: What is the remeasurement gain or loss for the period using the temporal method?

• A) $50 gain Correct
• B) $32 loss Your Answer
• C) $52 loss

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Question: Where does the currency translation gain or loss appear in the financial statements under the temporal method and the current rate method? Temporal method Current rate method

• A) Balance sheet Balance sheet Your Answer
• B) Income statement Balance sheet Correct
• C) Balance sheet Income statement

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Question: The U.S. Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary's 2001 income statement shows GBP500 of net income and a GBP50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under U.S. GAAP?

• A) $750 Correct
• B) $725 Your Answer
• C) $715

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Question: A German company (reporting currency = Euro) owns a foreign subsidiary in the U.S. If the results below are reported in local currency (USD), after translation what is the effect of the change in the exchange rate on revenues? Round to the nearest dollar and/or percent. Year Sales $ per 1 Euro avg. Exchange Rate 2001 $10,000 0.9 2002 $10,000 0.8

• A) The company shows a 12.5% growth in revenues in 2002 Correct
• B) The company shows a 0.1% decline in revenues in 2002
• C) There is no change is revenue growth between 2001 and 2002. Hise Home Supply is a large, profitable home improvement retailer located in the United Kingdom. Hise has recently been acquiring niche retailers with popular brand names in certain segments of the home improvement market. One of these retailers was Wilson Tile and Stone, a U.S. business that derived a large part of its sales from the UK. The management team for Hise now makes all operating, financing, and investment decisions. Brian Heltzel, a financial analyst for Hise, is responsible for translating Wilson's financial statements from U.S. dollars to the reporting currency. Hise conducts its business and issues financial statements in British pounds (£). Extracts from the financial statements of Wilson are shown below in Exhibit 1. Exhibit 1: Wilson Financial Statement Extracts Wilson Tile and Stone – December 31, 20X7 and 20X8 Balance Sheets 20X7 20X8 Cash $1,200 $1,400 Accounts receivable 6,500 9,900 Inventory 10,400 12,400

Page 28 | Status: ✅ Correct

Question: As Heltzel is translating the balance sheet and income statement, which of the following are closest to the values Heltzel determines for revenues and accounts payable for 20X8? Revenues Accounts Payable

• A) £41,667 £3,333
• B) £44,118 £3,529
• C) £44,118 £3,333

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Question: Which of the following treatments is most likely correct regarding the items outlined in Heltzel's concern?

• A) The balance should be translated at the historic rate as it is a monetary item Correct
• B) The balance should be translated at the closing rate as it is a monetary item
• C) The balance should be translated at the historic rate as it is a non-monetary item

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Question: Which of the following statements regarding the treatment of subsidiaries in a hyper- inflationary environment under U.S. GAAP is most likely correct?

• A) The subsidiary should be translated using the temporal method regardless of the level of autonomy, and then no further restatement is required
• B) The subsidiary should be translated using the temporal method regardless of the level of autonomy, and non-monetary items restated for the effect of local inflation
• C) The subsidiary should be translated using the current rate method regardless of the level of autonomy, and non-monetary items restated for the effect of local inflation

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Question: Before Jameson can perform any financial statement analysis she needs to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the following is the most appropriate method to use?

• A) The current rate method Correct
• B) The temporal method
• C) First the temporal method, followed by the current rate method

Page 34 | Status: ⏸️ Unattempted

Question: Jameson must also determine how the fluctuation in the yen vs. the dollar has affected Kasamatsu's earnings in the reporting currency. Which of the following best describes the effect of changes in the yen/dollar rate has had on earnings in the reporting currency? Earnings have:

• A) decreased because the yen is depreciating versus the USD
• B) increased because the yen is appreciating versus the USD
• C) increased because the yen is depreciating versus the USD

Page 34 | Status: ⏸️ Unattempted

Question: In a hyperinflationary economy, translation under the current rate method will most likely result in relatively:

• A) high balance sheet values for long term assets Correct
• B) high translation gains
• C) low balance sheet values for long term liabilities

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Question: Sycamore Systems sold $5 million worth of software on December 1, 20X1 to a Japanese company with payment denominated in Japanese yen to be received in two months. Sycamore's year end is 31st December. Payment was received on 31 Jan 20X2. Exchange rates (1 US

• A) gain of $280,000
• B) gain of $580,000
• C)

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Question: Which of the following statements regarding foreign currency translation are least accurate? Under the:

• A) temporal method, COGS and depreciation are remeasured using the historical rate
• B) current rate method, the foreign currency translation gain or loss appears on the parent firm's income statement
• C) temporal method, sales are remeasured using the average rate. Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company's reactors. Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc. Grande, Inc., began operations January 1, 2001. Common Stock and Fixed Assets were acquired January 1, 2000. Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, and was purchased evenly through the year. The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001. Exchange Rates were: January 1, 2000 $0.14/M peso January 1, 2001 $0.12/M peso June 30, 2001 $0.11/M peso (this is the 2001 average rate) December 31, 2001 $0.10/M peso Grande, Inc. Balance Sheet (in M Pesos) Jan. 1, 2001 Dec. 31, 2001 Cash 5,000,000 20,000,000

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Question: Giant Company should use the following method to reflect the results of Grande, Inc., in its financial statements:

• A) the temporal method followed by the current rate method Correct
• B) the current rate method
• C) the temporal method

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Question: Which of the following statements regarding the current rate method is the most accurate?

• A) This method is not typically used when the subsidiary is relatively independent of the parent
• B) Translation gains and losses are reported in equity Correct
• C) Income statements items are translated at the current exchange rate.

Page 37 | Status: ⏸️ Unattempted

Question: The translation gain or loss from the activities of Grande, Inc., should be reported in:

• A) the statement of shareholder’s equity Correct
• B) the statement of cash flows
• C) the income statement

Page 38 | Status: ⏸️ Unattempted

Question: Revenues for 2001 translated into U.S. dollars amount to:

• A) $6,000,000
• B) $7,800,000
• C) $6,600,000

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Question: Which of the following statements is NOT a characteristic of the current rate method of accounting for foreign currency translation?

• A) All asset accounts are translated at the current rate of exchange as of the balance sheet date
• B) The common stock account is translated at the rate of exchange that applied when the equity was issued
• C) Nonmonetary liabilities are translated at the historical rate of exchange. Della Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airline located in Sydney. The Australian dollar has been chosen by Della as the functional currency for APJ. The balance sheet of APJ is given below as of Dec. 31, 2011 in U.S. dollars

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Question: On APJ's 2012 income statement, the level of sales in U.S. dollars would be closest to:

• A) $1,985
• B) $1,272
• C) $1,377

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Question: On APJ's 2012 balance sheet, the level of accounts receivable is U.S. dollars would be closest to:

• A) $110
• B) $132
• C) $330

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Question: For APJ, the conversion to US$ is most likely to result in:

• A) remeasurement gain
• B) cumulative translation adjustment loss Correct
• C) cumulative translation adjustment gain

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Question: If the functional currency is the reporting currency, the exposure and the foreign currency movements are most likely to result in a:

• A) remeasurement loss
• B) cumulative translation adjustment loss
• C) remeasurement gain

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Question: Sopgate is a manufacturer of branded fast moving consumer goods having business operations in 28 countries (in each country, Sopgate has a wholly owned local subsidiary for production and/or distribution). Following information is available from Sopgate's annual report: Region Revenue Growth (USD)* Growth in pre-tax profits (USD)* Tax rate Latin America 5% 4% 25% North America 3% 3% 35% Europe 2% −1% 45% Asia pacific 4% 6% 20% *Growth rate indicates expected growth rate over the next five years. Sopgate's effective tax rate is most likely expected to:

• A) increase
• B) remain unchanged
• C) decrease

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Question: A company is exposed to foreign exchange risk due the impact of changes in currency values on a:

• A) company’s assets and liabilities only
• B) company’s assets, liabilities, and future sales Correct
• C) company’s assets only

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Question: Which of the following asset or liability values is likely to be the most understated in a hyperinflationary economy if translation occurs under the current rate method?

• A) A plant purchased several years ago
• B) Dividends payable Correct
• C) Accounts receivable

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Question: Edmonton Oilfield Supply has made an equipment sale in Venezuela in the amount of VEF 15,000,000. On the day of the sale, the exchange rate is 1.7519 VEF per 1 Canadian dollar. 90 days later, when the Venezuelan firm pays for the equipment, the exchange rate is 1.6326. As a result of the change in the exchange rate, Edmonton will recognize a:

• A) gain of $1,096,104
• B) loss of $1,789,500
• C)

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Question: (Assume U.S. GAAP for this question.) For a subsidiary in a hyperinflationary economy, the functional currency should be the:

• A) Parent's currency Correct
• B) Local currency
• C) Subsidiary's operating currency. A U.S. company has a subsidiary based in Malaysia, which has the following income statement for 20X6 and balance sheets for 20X5 and 20X6 (in million Ringgit). Sales 1,000 Cost of goods sold 600 Depreciation 80 Operating expenses 120 Earnings before taxes 200 Taxes 60 Net income 140 Dividends 20 20X5 20X6 Cash 50 60 Accounts receivables 100 110 Inventories 100 110 Other current assets 100 110 Gross PP&E 700 800

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Question: The value of December 31, 20X6, gross property, plant, and equipment reported in USD is:

• A) $313,000,000
• B) $400,000,000
• C) $304,000,000

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Question: The value of December 31, 20X6, inventory reported in USD is:

• A) $55,000,000
• B) $51,700,000
• C) $49,500,000

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Question: The value of all financing debt (notes payable, current portion of long-term debt, and long- term debt) on December 31, 20X6, reported in USD is:

• A) $225,000,000
• B) $171,000,000
• C) $202,500,000

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Question: A hyperinflationary economy is typically defined as one that has:

• A) cumulative inflation that exceeds 100% over a twelve-year period
• B) cumulative inflation that exceeds 100% over a three-year period Correct
• C) an inflation rate that exceeds 10% per year for three consecutive years

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Question: Which of the following general statements is CORRECT with respect to the temporal method? Monetary assets are:

• A) translated at the current rate Correct
• B) translated at the average rate
• C) not translated

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Question: A Canadian firm owns a foreign subsidiary in the U.S. In 2002, sales were USD1,000,000 and the USD/CAD exchange rate was 0.6329. In 2003, sales were also USD1,000,000 but the exchange rate was 0.7484. What is the impact of the change in the value of the CAD on the parent company's translated sales? Sales will:

• A) decline by 15%
• B) decrease by 18%
• C) increase by 18%

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Question: Which of the following statements is least accurate regarding the use of the temporal method for foreign exchange accounting?

• A) Under the temporal method, the foreign exchange gain or loss is placed on the balance sheet in the equity section
• B) All monetary assets are translated at the current rate of exchange
• C)

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Question: Under U.S. GAAP, the temporal method is preferred to the current rate method in hyperinflationary economies because the temporal method:

• A) is easier to perform under hyperinflation
• B) provides better conversions of subsidiary revenues Correct
• C) results in non-monetary asset values that are a better proxy for the economic values of those assets

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Question: Dave Iverson, CFA, is analyzing the recently released financial statement of Global Corp., a large multinational manufacturing company with production facilities across Europe and Southeast Asia. The company's choice of functional currency is not disclosed, but Iverson does notice that Global Corp. does not have any cumulative translation adjustments (CT

• A) The temporal method of foreign currency translation is used exclusively Correct
• B) The temporal method of foreign currency translation is used for at least some of its subsidiaries
• C) The current rate method of foreign currency translation is used exclusively

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Question: Which of the following general statements is most accurate with respect to the temporal method? Nonmonetary assets are translated at:

• A) the average rate during the year
• B) the current rate
• C)

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Question: Gortal Inc., a U.S. company has a wholly owned subsidiary, Fortina GmBh, based in Germany. The U.S. dollar has been appreciating relative to the Euro over the past year. The use of the temporal method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/F

• A) The ratio will be lower Correct
• B) There will be no effect on the ratio
• C) The ratio will be higher

Page 51 | Status: ⏸️ Unattempted

Question: At what exchange rate are revenues and accounts receivable translated under the current rate method? Revenues Accounts receivable

• A) Average rate Historical rate
• B) Average rate Current rate
• C) Current rate Current rate

Page 51 | Status: ⏸️ Unattempted

Question: What is the amount of income Seven Seas should report from its South Seas subsidiary?

• A) 34,500 USD
• B) 31,400 USD
• C) 27,600 USD

Page 53 | Status: ⏸️ Unattempted

Question: The currency translation adjustment that results from the translation of South Sea's data is closest to?

• A) Zero because there is no currency translation adjustment under the current rate method
• B) −3,300 USD
• C) 21,600 USD

Page 53 | Status: ⏸️ Unattempted

Question: If the temporal method is used, the retaining earnings is closest to:

• A) 21,600 USD
• B) 120,800 USD
• C) 90,000 USD

Page 54 | Status: ⏸️ Unattempted

Question: If the functional currency is the USD, then the net income before a translation gain/loss is closest to:

• A) 8,000 USD
• B) 4,700 USD
• C) 34,100 USD

Page 54 | Status: ⏸️ Unattempted

Question: Global International Corp. (GI

• A) The financial data for all three subsidiaries should be remeasured under the temporal method
• B) GIC Europe’s data should be remeasured under the temporal method; GIC China’s data should be remeasured under the temporal method into Hong Kong dollars, and then translated under the current rate method into U.S. dollars; and GIC Bahamas’ data should be translated under the current rate method into U.S. dollars
• C)

Page 54 | Status: ⏸️ Unattempted

Question: Jameson would like to examine WB's group accounts. What is the most appropriate exchange rate (yen/$) to use in translating Kasamatsu's reported dividends into U.S. dollars?

• A) 150
• B) 140
• C) 145

Page 57 | Status: ⏸️ Unattempted

Question: If Jameson wishes to convert any of the figures on Kasamatsu's Income Statement from yen to dollars, she should most appropriately use which of the following exchange rates (yen/$)?

• A) 140
• B) 145
• C) 150

Page 57 | Status: ⏸️ Unattempted

Question: Jameson has finally completed translating all the necessary figures into dollars and now wants to compute by how much WB's reported sales in dollars will change due to Kasamatsu's sales. Which of the following is closest to the amount of sales that WB will report as a result of Kasamatsu's operations (in thousands of dollars)?

• A) $4,828
• B) $5,000
• C) $4,667

Page 57 | Status: ⏸️ Unattempted

Question: Before Jameson can perform any financial statement analysis, she wants to determine which method WB uses to translate Kasamatsu's earnings into U.S. dollars (USD). Which of the following is the most accurate translation method and reasoning? WB should translate Kasamatsu's earnings using the:

• A) current rate method because the local currency is the USD Correct
• B) temporal method because the local currency differs from the functional currency
• C) current rate method because the functional currency is the yen

Page 58 | Status: ⏸️ Unattempted

Question: Which of the following subsidiary ratios will be affected by the translation adjustment under the current rate method?

• A) Net profit margin
• B) Gross margin
• C) Return on equity. Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris. The following information is relevant to Geocorp's subsidiaries: Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency. All domestic U.S. operations report their results in U.S. dollars (USD). Consolidated financial statements are reported in USD. Geocorp's Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency

Page 58 | Status: ⏸️ Unattempted

Question: With respect to the Japanese subsidiary, what method should be used to value its accounts receivable, what is the appropriate exchange rate, and what is the translated value (in USD)?

• A) Temporal method, current rate, USD 11.5 million
• B) Current method, current rate, USD 11.5 million Correct
• C) Current method, average rate, USD 12.3 million

Page 60 | Status: ⏸️ Unattempted

Question: With respect to the European HQ subsidiary, what method should be used to value its SG&A expenses, what is the appropriate exchange rate, and what is the translated value (USD)?

• A) Current method, current rate, USD 216.7 million Correct
• B) Temporal method, average rate, USD 206.4 million
• C) Current method, average rate, USD 206.4 million

Page 60 | Status: ⏸️ Unattempted

Question: With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)?

• A) Temporal method, historical rate, USD 547.7 million Correct
• B) Current method, historical rate, USD 547.7 million
• C) Current method, current rate, USD 599.7 million

Page 60 | Status: ⏸️ Unattempted

Question: Assuming the current rate method is used to translate Continental's financial statements, as compared to the local currency ratios, which of the following statements about translated operating profit margin and long-term debt to equity ratios is correct?

• A) Long-term debt-to-equity ratio will be higher
• B) Operating profit margin will be higher Correct
• C) Neither ratio will change

Page 61 | Status: ⏸️ Unattempted

Question: When stated in U.S. dollars, would Continental most likely report a higher fixed asset turnover ratio and a higher quick ratio under the temporal method, as compared to the current rate method?

• A) Both ratios will be higher under the temporal method
• B) Only fixed asset turnover will be higher under the temporal method Correct
• C) Only the quick ratio will be higher under the temporal method

Page 61 | Status: ⏸️ Unattempted

Question: As compared to local currency ratios, which of the following are the most likely impacts on gross profit margin and net profit margin, assuming the temporal method is used to remeasure Continental's financial statements?

• A) Both will be higher
• B) Higher net income, with a higher funded status Correct
• C) Only net profit margin will be higher

Page 62 | Status: ⏸️ Unattempted

Question: The U.S. dollar has been depreciating relative to the local currency over the past year. The use of the current rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on the operating profit margin (EBIT/S) relative to what the ratio would have been without the effects of translation?

• A) There will be no effect on the ratio Correct
• B) The ratio will rise
• C) The ratio will fall

Page 62 | Status: ⏸️ Unattempted

Question: The Herlitzka Company, a U.S. multinational firm, has a 100% stake in a Swiss subsidiary. The Swiss franc (SF) has been determined to be the functional currency. All the common stock of the subsidiary was issued at the beginning of the year and the subsidiary uses the FIFO inventory cost-flow assumption. In addition, the value of the SF is as follows: Beginning of year $0.5902 Average throughout the year $0.6002 End of year $0.6150 The SF-based balance sheet and income statement data for the Swiss subsidiary are as follows: Accounts receivable = 3,000 Inventory = 4,000 Fixed assets = 12,000 Accounts payable = 2,000 Long-term debt = 5,000 Common stock = 10,000 Retained earnings = 2,000 Net income = 2,000 The translated value of accounts receivable and inventory respectively are:

• A) $1,845 and $2,401
• B) $1,801 and $2,401
• C)

Page 63 | Status: ⏸️ Unattempted

Question: The local currency is:

• A) translated into the functional currency under the current rate method Correct
• B) the preferred functional currency for subsidiaries that are highly integrated with the parent
• C) the same as the functional currency under the current rate method

Page 64 | Status: ⏸️ Unattempted

Question: Which of the following ratios is unaffected by the choice between the current rate method and the temporal method?

• A) Inventory turnover
• B) Current ratio Correct
• C) Quick ratio

Page 64 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the effects of translation on financial statement items/ratios is most accurate?

• A) Fixed assets are relatively overstated under the temporal method compared to the local currency if the local currency has appreciated
• B) Leverage is higher under the current rate method as compared to under the local currency
• C) Depreciation in the reporting currency under the current rate method is higher than under the temporal method if the local currency has appreciated

Page 64 | Status: ⏸️ Unattempted

Question: Which translation method should be used under a hyperinflationary economy when using U.S. GAAP?

• A) Monetary/non-monetary, because all monetary accounts are translated at the historical rate
• B) All-current, because dividends are translated at the rate that applied when they were issued
• C) Temporal, because all non-monetary accounts are re-measured at the historical rate

Page 65 | Status: ⏸️ Unattempted

Question: Under the current rate method, common stock is translated by using the:

• A) rate that existed when the equity was issued
• B) exchange rate as of the balance sheet date
• C) present value of weighted average rate

Page 65 | Status: ⏸️ Unattempted

Question: Organic growth in sales is most accurately defined as growth in sales excluding the effects of:

• A) currency value fluctuations
• B) acquisitions/divestitures only Correct
• C) acquisitions/divestitures and currency value fluctuations

Page 65 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the functional currency under US GAAP is least accurate?

• A) The functional currency is defined as the primary currency of the economic environment in which the parent firm operates
• B) Self-contained, independent subsidiaries whose operations are primarily located in the local market will use the local currency as the functional currency
• C) If a firm operates in a country or environment which is subject to cumulative inflation of 100% or more over a three year period, that firm will use the parent's currency as the functional currency

Page 66 | Status: ⏸️ Unattempted

Question: Which of the following general statements is CORRECT with respect to the temporal method? Revenues and operating expenses (excluding COGS) are translated at the:

• A) historical rate
• B) average rate Correct
• C) current rate

Page 66 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the functional currency is least accurate? The functional currency:

• A) is remeasured into the reporting currency under the temporal method Correct
• B) is the currency of the primary economic environment in which the foreign subsidiary generates and expends cash
• C) is determined by management

Page 67 | Status: ⏸️ Unattempted

Question: Which of the following statements is least likely correct? Financial institutions differ from other companies:

• A) due to their activities giving rise to systemic risk Correct
• B) due to their balance sheet containing assets that are often measured at fair value
• C) due to their assets being predominantly tangible Your Answer

Page 1 | Status: ❌ Incorrect

Question: When using the fair value hierarchy as defined by IFRS and US GAAP, a financial asset valuation performed by discounting future cash-flows at a discount rate would most likely be classified as a:

• A) level 2 valuation Correct
• B) level 3 valuation
• C) level 1 valuation Your Answer

Page 1 | Status: ❌ Incorrect

Question: When assessing capital adequacy using risk-weighted assets, cash will most likely:

• A) not be included in risk-weighted assets Correct
• B) be weighted at 100%
• C) be weighted over 100% Your Answer

Page 1 | Status: ❌ Incorrect

Question: John Gittens is reviewing his firm's guidance for the application of the CAMELS framework and notices the following two statements: Statement 1: "The mission of a banking entity will affect the way its assets and liabilities are managed, and hence this qualitative impact is usually addressed within the management capabilities section of the CAMELS approach." Statement 2: "The corporate culture may lead to excessive risk taking, or even a high level of risk aversion, and this aspect is not covered in a typical CAMELS analysis." Regarding the two statements made by Gittens, statement 1 is most likely:

• A) correct and statement 2 is most likely correct Correct Your Answer
• B) incorrect, and statement 2 is most likely correct
• C) incorrect and statement 2 is most likely incorrect

Page 2 | Status: ❌ Incorrect

Question: Which of the following factors is least likely to be considered during a CAMELS analysis of a financial institution?

• A) Levels of government support
• B) Accuracy of accounting estimates Correct
• C) Estimation methods used for the fair value of assets

Page 3 | Status: ✅ Correct

Question: Compared to a life and health (L&H) insurance company, it is most likely that a property and casualty (P&

• A) claims will be more predictable
• B) policies’ final cost will typically be known within a year of an insured event Correct
• C) insurer's:

Page 3 | Status: ✅ Correct

Question: Which of the following statements regarding Property and Casualty insurance institutions is most likely correct?

• A) Due to the uncertainty of payout timings and levels, the institution will usually invest in high-risk, longer term assets Correct
• B) The suitability of assets held can be analyzed by observing the status of the assets in the fair value hierarchy. A majority of level 3 reported values indicates an appropriate asset base
• C) The priority in the selection of assets should be liquidity

Page 4 | Status: ✅ Correct

Question: When analyzing insurance companies, the combined ratio is most likely to:

• A) equal net premiums earned divided by total insurance expenses Correct
• B) indicate an underwriting loss when it is higher than 100%
• C) suggest a soft market when it is low

Page 4 | Status: ✅ Correct

Question: Systemic risk in financial services is least likely to:

• A) concern the co-movement of an institution’s asset values with the overall market
• B) have consequences for the economy as a whole Correct
• C) be caused by interdependencies in the financial system

Page 4 | Status: ✅ Correct

Question: Under the Basel III Regulatory Framework, the Net Stable Funding Ratio (NSFR) is most likely to be calculated as:

• A) highly liquid assets ÷ available stable funding
• B) available stable funding ÷ required stable funding Correct
• C) required stable funding ÷ expected cash outflows

Page 5 | Status: ✅ Correct

Question: Compared to manufacturing or merchandising companies, financial institutions are most likely to have higher direct exposures to:

• A) market risk, credit risk, liquidity risk, and interest rate risk Correct
• B) operational risk, process risk, political risk, and compliance risk
• C) inflationary risk, business risk, exchange rate risk, and legal risk

Page 5 | Status: ✅ Correct

Question: Which of the following is least likely a reason for the establishment of global and regional regulatory bodies?

• A) To increase harmonization or regulatory rules
• B) To increase global opportunities for regulatory arbitrage Correct
• C) To minimize systemic risk

Page 5 | Status: ✅ Correct

Question: When analyzing a bank, important attributes that the CAMELS approach to assessing bank soundness does not address are most likely to include:

• A) corporate culture, exposure to currencies, and segment information Correct
• B) capital adequacy, asset quality, management capabilities
• C)

Page 5 | Status: ✅ Correct

Question: Basel III regulation that aims to prevent banks from assuming so much leverage that they are unable to withstand loan losses is most correctly described as the:

• A) stable funding requirement Your Answer
• B) minimum liquidity requirement Correct
• C) minimum capital requirement

Page 6 | Status: ❌ Incorrect

Question: It would be least accurate to state that the Basel Committee:

• A) monitors adoption and implementation of standards in member jurisdictions Your Answer
• B) develops international regulatory framework for banks Correct
• C) has legal authority to enforce compliance with supervision and accountability standards

Page 6 | Status: ❌ Incorrect

Question: Which of the following statements comparing Property and Casualty insurers to Life and Health insurers is least likely correct?

• A) Life and Health insurers typically face more predictable claims than Property and Casualty insurers
• B) The calculation of Property and Casualty insurers minimum capital requirements is more likely to factor in exposure to interest rate risk Correct
• C) Property and Casualty insurers typically require a higher equity cushion and hence can have higher capital requirements Your Answer

Page 7 | Status: ❌ Incorrect

Question: Important attributes that the CAMELS approach to assessing bank soundness does not address are most likely to include:

• A) earnings, liquidity, and sensitivity to market risk
• B) competitive environment, mission, and support by government Correct
• C) management capabilities, asset quality, and capital adequacy

Page 8 | Status: ✅ Correct

Question: Which of the following is least likely an indicator of high-quality cash flow?

• A) OCF derived from sustainable sources
• B) Total cash flow that is positive and high Correct
• C) OCF adequate to cover capital expenditures, dividends and debt repayments

Page 1 | Status: ✅ Correct

Question: Alex Fisher, CFA, is examining the phenomenon of mean reversion on the earnings of several firms. Which of the following statements regarding mean reversion is least accurate?

• A) High earnings should not be expected to continue indefinitely Correct
• B) Low earnings should not be expected to continue indefinitely
• C) Normal earnings should not be expected to continue indefinitely

Page 1 | Status: ✅ Correct

Question: Errors that affect multiple financial statement elements are most likely to arise from:

• A) classification issues
• B) measurement and timing issues Correct
• C) compound issues

Page 1 | Status: ✅ Correct

Question: Which of the following is least likely an indicator of biased measurement in assessing balance sheet quality?

• A) Overly high assumed discount rate for pension obligations
• B) Understatement of impairment charges for property, plant, and equipment Correct Your Answer
• C) Company’s investment in debt securities of other companies, carried on the books at market value

Page 4 | Status: ❌ Incorrect

Question: A manufacturing firm purchases equipment for use in its operations. With regard to recording the purchase using the cash basis versus the accrual basis of accounting, which of the following statements is most appropriate?

• A) With the cash basis, revenues and expenses relating to the equipment are generally recognized in the same period Correct
• B) With the cash basis, revenues and expenses relating to the equipment are generally recognized in different periods Your Answer
• C) With the accrual basis, the cost of the equipment is allocated to the cash flow statements over the asset’s life

Page 8 | Status: ❌ Incorrect

Question: Brent Jones, CFA is analyzing the financial statements of Imperial Resorts Inc. Jones wants to use the Beneish model to evaluate the probability of earnings manipulation. Jones makes the following statements: 1. Depreciation index of less than 1 would indicate that the company is depreciating assets at a higher rate than its peers. 2. Increases in Asset quality index indicate that the revenue recognition policies are conservative. Regarding the statements by Jones:

• A) Only statement 1 is correct Correct Your Answer
• B) Only statement 2 is correct
• C) None of the statements is correct

Page 9 | Status: ❌ Incorrect

Question: De Freitas Inc. (De Freitas) is a conglomerate. Its computer division was very profitable in the current year because it launched a successful new lightweight laptop computer. Prices in the automobile division have been rising over the years but it is engaged in a LIFO liquidation in the current year. Which of the following best describes the effect on the long-run earnings of the computer division and the automobile division compared to the most recent year? Computer division earnings Automobile division earnings

• A) Increase Decrease Your Answer
• B) Decrease Increase
• C) Decrease Decrease

Page 9 | Status: ❌ Incorrect

Question: Mean reversion in earnings means that:

• A) Extreme high earnings will revert to the mean but extreme low earnings will not Correct
• B) Extreme high as well as low levels of earnings will revert to the mean
• C) Extreme low earnings will revert to the mean but extreme high earnings will not Your Answer

Page 10 | Status: ❌ Incorrect

Question: High-quality cash flow is least likely to be characterized by:

• A) No significant differences between operating cash flow and reported earnings
• B) Volatility of operating cash flow being lower than that of the firm’s peers Correct
• C) Financing cash flows sufficient to cover capital expenditures, dividends and debt repayments Your Answer

Page 10 | Status: ❌ Incorrect

Question: Asma Pharma has made several strategic investments in other pharmaceutical companies. In each instance, Asma has kept its stake just below 50% so it can account for the investment using the equity method of consolidation. Asma's balance sheet quality can be most accurately characterized as:

• A) High-quality due to compliance with local GAAP Correct
• B) Low-quality due to lack of completeness
• C) Low-quality due to bias in measurement Your Answer

Page 10 | Status: ❌ Incorrect

Question: Complete the following sentence. An analyst would apply _________ to the cash component of income compared to the accrual component when evaluating company performance.

• A) a higher weighting Correct
• B) the same weighting
• C) a lower weighting

Page 11 | Status: ✅ Correct

Question: The failure to recognize inventory obsolescence is an example of ___________.

• A) Understating expenses
• B) Delaying expenses Correct
• C) Misclassifying expenses

Page 11 | Status: ✅ Correct

Question: The least valuable source of information about a businesses' risk is:

• A) Management discussion and analysis section of the annual report Correct
• B) Auditor’s report
• C) Notes to financial statements

Page 15 | Status: ✅ Correct

Question: Andre Bursh, is analyzing large retailers and has collected the following information on three companies based on the most recent financial statements: Allied Stores Beta Mart Cash-N-Carry Total Earnings (per share) $2.80 $1.33 $0.75 Cash element $1.90 $0.78 $0.25 Accrual element $0.90 $0.55 $0.50 Bursh notes that all three companies have reported stellar earnings this past year. Bursh is concerned about sustainability of such high earnings. Which company's earnings will revert to its mean fastest?

• A) Allied Stores
• B) Cash-N-Carry Correct
• C) Beta Mart

Page 15 | Status: ✅ Correct

Question: Joe Carter, CFA, believes Triangle Equipment, a maker of large, specialized industrial equipment, has overstated the salvage value of its equipment. This would:

• A) overstate earnings Correct
• B) understate earnings
• C)

Page 15 | Status: ✅ Correct

Question: High results quality is most likely demonstrated by:

• A) an adequate level of return that is sustainable Correct
• B) high level of earnings determined conservatively Your Answer
• C) GAAP compliant financial reports that are decision useful

Page 19 | Status: ❌ Incorrect

Question: Which of the following statements about cash flow is (are) CORRECT? Statement #1: The cash effects of decreasing accounts payable turnover are unlimited. Statement #2: The tax benefits from employee stock options can result in a significant source of investing cash flow. Statement #1 Statement #2

• A) Correct Incorrect Correct
• B) Incorrect Correct Your Answer
• C) Incorrect Incorrect

Page 19 | Status: ❌ Incorrect

Question: Which one of the following choices is least likely to be an indicator of poor-quality earnings?

• A) An investigation by the market regulatory authority is initiated
• B) Reported earnings handily beat analyst estimates Correct
• C)

Page 19 | Status: ✅ Correct

Question: Which of the following statements about financial disclosures are correct or incorrect? Statement #1: Transitory earnings are usually more important to investors than permanent earnings. Statement #2: Pro-forma earnings are usually prepared in accordance with generally accepted accounting principles.

• A) Only statement #1 is incorrect Correct
• B) Both are incorrect
• C) Only statement #2 is incorrect Your Answer

Page 20 | Status: ❌ Incorrect

Question: 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 Correct
• B) Understated inventory obsolescence
• C) Classification of recurring revenue as nonrecurring revenue Your Answer

Page 23 | Status: ❌ Incorrect

Question: With regard to specific measures to analyze in detecting manipulation in the financial reporting process, which of the following statements is the least accurate?

• A) An increasing days’ inventory on hand (DOH) measure may be indicative of obsolete inventory Correct
• B) A decreasing days’ sales outstanding (DSO) measure may be an indication of lower quality revenue
• C) Negative nonrecurring or non-operating items may be indicative of misclassifying an operating expense Your Answer

Page 23 | Status: ❌ Incorrect

Question: Aggressive revenue recognition practices are least likely to increase:

• A) reported expenses
• B) reported ending inventory Correct Your Answer
• C) reported assets

Page 24 | Status: ❌ Incorrect

Question: Complete the following sentence. The cash component of income is ___________ than the accrual component.

• A) more persistent Correct
• B) less persistent Your Answer
• C) the same persistence

Page 24 | Status: ❌ Incorrect

Question: Which of the following items is least likely to involve the use of subjective measurement estimates by management?

• A) Use of straight-line depreciation method to depreciate tangible assets Correct
• B) Use of FIFO (first in-first out) to cost inventories Your Answer
• C) Use of criteria to determine treatment as an extraordinary item

Page 24 | Status: ❌ Incorrect

Question: Which of the following is least likely an indicator of biased measurement in assessing balance sheet quality?

• A) Understatement of valuation allowance for deferred tax assets
• B) Presence of substantial goodwill on balance sheet Correct Your Answer
• C)

Page 24 | Status: ❌ Incorrect

Question: Galaxy Company recognized a restructuring charge in its year-end income statement. Similar restructuring charges have occurred in the past. In addition, Galaxy recognized an extraordinary loss. Galaxy uses the term "operational earnings" when discussing its financial results. According to Galaxy, "operational earnings" excludes special nonrecurring transactions such as restructuring charges, discontinued operations, and extraordinary items. Should the restructuring charge and extraordinary loss be included or excluded from "operational earnings" for analytical purposes?

• A) Both are included Correct
• B) One is included Your Answer
• C) Both are excluded

Page 32 | Status: ❌ Incorrect

Question: Classification of non-operating income as operating would lead to stated earnings that are likely to be:

• A) compliant with GAAP and sustainable Correct
• B) compliant with GAAP but not sustainable
• C) non-compliant with GAAP Your Answer

Page 32 | Status: ❌ Incorrect

Question: Classification shifting is least likely to result in a higher:

• A) reported net income
• B) equity value derived when earnings forecasts are based on operating earnings Correct
• C) firm value derived when cash flow forecasts are based on core earnings Your Answer

Page 32 | Status: ❌ Incorrect

Question: Sustainable earnings are most likely to be driven by:

• A) Cash flow element of earnings Correct
• B) Conservative revenue recognition practices Your Answer
• C) Accruals element of earnings

Page 37 | Status: ❌ Incorrect

Question: Which of the following statements about operating income and operating cash flow are correct or incorrect? Statement #1: If operating income is growing faster than operating cash flow over the long-term, the firm may be recognizing revenue too soon or delaying the recognition of expense. Statement #2: Operating cash flow exceeding operating income is sustainable over the long-term.

• A) Both are incorrect
• B) Only one is correct Correct Your Answer
• C) Both are correct

Page 37 | Status: ❌ Incorrect

Question: Marcel Schulte is analyzing various retailing firms. Which of the following items is least indicative of a potential problem with revenue recognition and earnings quality?

• A) Implementing a “bill and hold” arrangement Correct
• B) Use of barter transactions Your Answer
• C) Disproportionate revenues in the last quarter of the calendar year

Page 37 | Status: ❌ Incorrect

Question: Samuel Maskin, CFA is evaluating the financial statements of Northern Energy Inc. The following is an extract from Northern's cash flow statement for the past three years: 20x6 20x5 20x4 Net Income $1,023 $988 $744 Depreciation $187 $145 $128 Restructuring Charges $(108) $(104) $212 Accounts receivable $(172) $(145) $(33) Inventories $(418) $(202) $(180) Accounts Payable $38 $37 $33 OCF $550 $719 $904 The restructuring charges for Northern has most likely:

• A) Increased reported earnings in 20x6 while reducing reported earnings in 20x4 and 20x5
• B) Increased reported earnings for 20x4 while reducing reported earnings in 20x5 and 20x6
• C) Reduced reported earnings in 20x4 while increasing reported earnings in 20x5 and 20x6 Correct

Page 38 | Status: ✅ Correct

Question: Consider the following statements: Statement 1: Compared to the cash basis of accounting, the accrual basis of accounting provides more timely information about future cash flows. Statement 2: Compared to the cash basis of accounting, the accrual basis requires more use of discretion than the cash basis. Are these statements CORRECT?

• A) No, because it is actually the cash basis of accounting that results in more difficulty in properly assigning revenues and expenses to the appropriate periods
• B) Yes Correct
• C) No, because it is actually the cash basis of accounting that provides more timely and relevant information to users about future cash flows

Page 42 | Status: ✅ Correct

Question: Charles Nicholls, chief investment officer of Gertmann Money Management, is reviewing the year-end financial statements of Zartner Canneries. In those statements he sees a sharp increase in inventories well above the sales-growth rate, and an increase in the discount rate for its pension liabilities. To determine whether or not Zartner Canneries is cooking the books, what should Nicholls do?

• A) Analyze trends in Zartner’s receivables and consider the changing characteristics of its work force
• B) Check Zartner’s cash-flow statement and review its footnotes Correct Your Answer
• C) Calculate Zartner’s turnover ratios and review the footnotes of its competitors

Page 46 | Status: ❌ Incorrect

Question: Pysha Heavy Metals Ltd. supplies specialized metals to the chip fabrication industry. Selected financial data for Pysha, as well as industry comparables, are shown below: Pysha selected financial data (GBP '000s): 20x7 20x8 20x9 Sales 1,169 1,312 1,414 Accounts receivable 58.45 72.16 98.98 Industry average: 20x7 20x8 20x9 DSO 22.6 22.8 22.4 Receivables turnover 16.2 16.0 16.3 Based on the trend in revenues and receivables, it can be most accurately concluded that:

• A) Pysha’s revenues are growing at a slower rate than its receivables Correct
• B) Pysha’s revenues are growing at a faster rate than its receivables
• C) The revenue growth rate divided by receivables growth rate is increasing over time

Page 47 | Status: ⏸️ Unattempted

Question: Which of the following statements about operating income and operating cash flow is most accurate?

• A) Operating income is confirmed by operating cash flow when the growth rates of the two measures are relatively stable over time Correct
• B) Operating cash flow usually increases faster than operating income when the firm is growing
• C) Operating income is more reliable than operating cash flow because of the judgments and estimates involved with accrual accounting

Page 48 | Status: ✅ Correct

Question: To assess the quality of financial reports, which question is least necessary for an analyst to answer?

• A) Are the financial reports decision useful and GAAP compliant? Correct
• B) Are reported earnings consistent with the firm’s budget?
• C) Do earnings represent an adequate level of return?

Page 48 | Status: ✅ Correct

Question: Which of the following choices is most likely a biased accounting choice to overstate profitability?

• A) Channeling gains through OCI and losses through income statement
• B) Lessor use of sales-type finance lease classification Correct
• C) Classifying non-operating expenses as operating

Page 48 | Status: ✅ Correct

Question: Complete the following sentence. When earnings are relatively free of accruals, mean reversion will occur __________.

• A) at the same rate as usual
• B) relatively faster than usual Correct
• C) relatively slower than usual

Page 49 | Status: ✅ Correct

Question: An analyst finds return-on-equity (ROE) (based on beginning of the year equity) a good measure of management performance and wants to compare two firms: Firm A and Firm

• A) 18.4 and 14.3 Correct
• B) 16.0 and 18.0 Your Answer
• C) 17.1 and 16.9

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Question: A firm has reported net income of $136 million, but the notes to financial statements includes a statement that the results "include a $27 million charge for non-insured earthquake damage" and a "gain on the sale of certain assets during restructuring of $16 million." If we assume that both of these items are given on a pre-tax basis and the effective tax rate is 36%, what would be the "normal income"?

• A) $143.04 million Correct
• B) $147.00 million Your Answer
• C) $94.08 million

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Question: An analyst is developing a framework for financial statement analysis for his firm. The primary goal of financial statement analysis is to:

• A) justify trading decisions for purposes of the Statement of Code and Standards Correct
• B) document portfolio changes for purposes of the Prudent Investor Rule
• C) facilitate an economic decision

Page 2 | Status: ✅ Correct

Question: Express Delivery Inc. (EDI) reported the following year-end data: Depreciation expense $30 million Net income $30 million Total assets $535 million Shareholder's equity $150 million Effective tax rate 35 percent Last year EDI purchased a fleet of delivery vehicles for $140 million. For the first year, straight-line depreciation was used assuming a depreciable life of 7 years with no salvage value. However, at year-end EDI's management determined that assumptions of a useful life of 5 years with a salvage value of 10 percent of the original value were more appropriate. How would the return on assets (RO

• A) ROA 5.0% and ROE 18.2% Correct
• B) ROA 5.7% and ROE 19.5%
• C)

Page 2 | Status: ✅ Correct

Question: Which of the following statements is CORRECT when inventory prices are falling?

• A) LIFO results in higher COGS, lower earnings, higher taxes, and higher cash flows
• B) LIFO results in lower COGS, higher earnings, higher taxes, and lower cash flows Correct
• C) LIFO results in lower COGS, lower earnings, lower taxes, and higher cash flows. SnapPrints and NetPhoto Case Scenario Josephine Howard, CFA, is an equity analyst for an investment bank. She is preparing financial reports for two publicly traded digital photography companies, SnapPrints and Net Photo. Howard just attended a CFA Institute-sponsored conference on detecting quality issues in financial statements and is eager to apply what she has learned. SnapPrints provides photo prints and various other photo-related products, including calendars, T-shirts, and coffee mugs. NetPhoto is SnapPrints' largest competitor. NetPhoto has been receiving increasing attention from the analyst community due to its high sales growth rate, although NetPhoto's sales are still less than 50% of SnapPrints' sales. During the conference, Howard learned about the importance of analyzing accruals to evaluate earnings quality. Therefore, Howard is going to analyze the accruals for each company as part of her review. Howard remembers a discussion from the conference about disaggregating income into its major components to improve earnings forecasts, but she cannot remember which component (cash or accruals) should receive a higher weighting in the forecast. Howard gathered the following data from the income statement and statement of cash flows for SnapPrints. Selected SnapPrints Income Statement Items (000s) Year Ended December 31, 2009 Sales 45,000 Cost of Good Sold (30,000)

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Question: The aggregate accruals (in $M's) for SnapPrints and the accrual ratio for NetPhoto are closest to:

• A) 3,700 and −0.51% Correct
• B) 2,500 and −2.04%
• C) −4,500 and −1.49%

Page 5 | Status: ✅ Correct

Question: Compared to aggregate accruals, the accrual ratio is especially useful when:

• A) comparing across companies
• B) comparing year-over-year accruals Correct
• C) the cash component is large

Page 5 | Status: ✅ Correct

Question: Based on her calculations of accruals, Howard believes that NetPhoto has a higher accruals ratio over the recent past compared with SnapPrints. If both companies have recently had extreme earnings, Howard would most likely conclude that:

• A) NetPhoto’s income will revert to its mean more quickly than SnapPrints’ Correct
• B) SnapPrints’ income will revert to its mean more quickly than NetPhoto’s
• C) SnapPrints’ income will revert to its mean, but NetPhoto’s income will not

Page 5 | Status: ✅ Correct

Question: Based on the revenue and cash collections data for SnapPrints and NetPhoto, Howard would most likely conclude that:

• A) NetPhoto is accelerating revenue Correct
• B) SnapPrints is misclassifying nonrecurring and nonoperating revenue Your Answer
• C) SnapPrints is accelerating revenue

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Question: In reviewing the footnotes to NetPhoto's financial statements, Howard discovers that the firm has engaged in a LIFO liquidation. The most likely effects on the financial statements (compared to no LIFO liquidation) are:

• A) a decrease in COGS and an increase in the net profit margin
• B) a decrease in inventory turnover and an increase in the gross profit margin Correct Your Answer
• C) an increase in the gross profit margin and an increase in days of inventory

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Question: An analyst is developing a framework for financial statement analysis for his firm. This framework is most likely to include:

• A) Define the purpose of the analysis, process input data, and follow up Correct
• B) Determine the allocation of firm fees, interpret processed data, and communicate conclusions Your Answer
• C) Maintain integrity of capital markets, perform duties to clients and employers, and avoid conflicts of interest

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Question: Coastal Drilling Corp (CD

• A) 60.0% Correct
• B) 55.6%
• C) 61.9%

Page 7 | Status: ✅ Correct

Question: If segmental cash flow data has not been reported, we can most appropriately approximate cash flow as:

• A) operating cash flow − cash interest − cash taxes
• B) EBIT + depreciation + amortization Correct
• C)

Page 7 | Status: ✅ Correct

Question: Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements, you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36%, what will be the adjusted value of retained earnings?

• A) $1,820,000.00 Correct
• B) $1,855,000.00 Your Answer
• C) $1,980,000.00

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Question: In order to compare companies using a common size statement, the various line items in a company's income statement are most likely to be divided by the company's:

• A) net earnings
• B) revenues Correct Your Answer
• C) total assets

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Question: An analyst is analyzing TRK Construction (TRK) for possible recommendation to his firm's clients. He wants to use TRK's financial statements to answer such questions as "Is TRK suitable for firm clients?", "Is TRK priced properly relative to peers?", "What is TRK's earnings quality?" The analyst is most likely to begin with:

• A) a review of his firm’s framework for analysis of financial statements Correct
• B) analysts adjustments to the financial statements
• C) a DuPont analysis

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Question: Cash generated from operations (CGO) is least appropriately calculated as:

• A) EBIT + non-cash charges − increase in working capital
• B) operating cash flow + cash interest paid + cash taxes paid
• C) net income − cash flow from operations − cash flow from investing Correct

Page 9 | Status: ✅ Correct

Question: An analyst is analyzing a discount manufacturer of parts and supplies. She has followed her firm's suggested financial analysis framework and has communicated with company suppliers, customers, and competitors. This is an input that occurs while:

• A) processing data Correct
• B) collecting data
• C) establishing the objective of the analysis

Page 12 | Status: ✅ Correct

Question: Star Chemical Inc. (SCI) reported the following year-end data: Depreciation expense $25 million Net income $35 million Dividends $10 million Total assets $250 million Shareholder's equity $195 million Effective tax rate 35 percent SCI also reported that it changed from an accelerated depreciation method to straight line depreciation. The change resulted in a decrease in depreciation expense of $5 million. Management felt that the change "would not have a material effect on financial performance measures." Ignoring deferred taxes, what are the return on assets (RO

• A) ROA is 12.96% and ROE is 16.56% Correct
• B) ROA is 13.30% and ROE is 17.05%
• C)

Page 12 | Status: ✅ Correct

Question: Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from 2 percent of sales to 1 percent of sales. Ignoring taxes, what are the immediate effects on Galaxy's operating income and operating cash flow? Operating income Operating cash flow

• A) Lower Lower Correct
• B) No effect Higher
• C) Higher No effect

Page 13 | Status: ✅ Correct

Question: Wanda Brunner, CFA, is analyzing Straight Elements, Inc., (SE). SE is a discount manufacturer of parts and supplies for the railroad industry. She has followed her firm's suggested financial analysis framework, and has assembled output from processing data. When applying the financial analysis framework, which of the following is the best example of output from processing data?

• A) Common-size financial statements Correct
• B) A written list of questions to be answered by the analysis
• C) Audited financial statements

Page 13 | Status: ✅ Correct

Question: ABC Tie Company reports income for the year 2009 as $450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been $62,000 greater for the year 2008 and $78,000 greater for the year 2009. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2009? Assume a tax rate of 36%. Net income would have been:

• A) $455,760 Correct
• B) $460,240 Your Answer
• C) $439,760

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Question: MKF Consolidated reports $500 million in goodwill on its balance sheet. The market consensus indicates that the value of MKF's intangible assets is $300 million. How should an analyst adjust MKF's balance sheet? Reduce goodwill and:

• A) increase liabilities by $200 million Correct
• B) equity by $200 million
• C) equity by $500 million while increasing liabilities by $300 million Your Answer

Page 14 | Status: ❌ Incorrect

Question: An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S&P 500 average P/E of 15.3. The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial statements included a statement that income for the year included a $31.5 million (after-tax) gain from the reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized P/E?

• A) 13 Correct
• B) 16
• C) 15

Page 15 | Status: ✅ Correct

Question: Ben Lorson is analyzing the revenue growth of Symphonica Inc., a retailer of audio visual equipment. Relevant data for the last two years is shown below: 2013 2012 $ millions $ millions Revenue 1,408 1,375 Total market size 17,606 17,450 $ billions $ billions Nominal GDP growth 16,451 16,400 He is looking at three methods of predicting revenue for 2014: 1. Assume that Symphonica retains its 2013 share of the market for 2014, and the total market grows at the same rate as it did last year. 2. Assume that revenue growth rate is equal to previous year's nominal GDP growth rate. 3. A bottom-up approach which assumes that the growth rate of Symphonica's revenue will be the same as last year Which of the following statements regarding Lorson's forecast is most accurate?

• A) Lorson’s bottom-up approach predicts the highest revenue for 2014 Correct
• B) Lorson’s growth relative to GDP growth model predicts a higher 2014 revenue figure for Symphonica than his market growth and market share model
• C) Lorson’s market growth and market share model predicts a higher 2014 revenue figure for Symphonica than his bottom-up approach

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Question: Kerry Winstone covers TVStream Inc., a U.S. based company offering streaming video. She has carried out an analysis using Porter's five forces model. The table below summarizes her main conclusions. Force Factors Threat of substitutes Broadcast TV and DVD media are cost-effective substitutes. Rivalry There are several companies in the industry and TVStream has a 25% market share. Bargaining power of suppliers The content must be purchased from the major networks and movie studios. Bargaining powers of buyers Customers are fragmented and the base consists largely of individual subscribers. Threat of new entrants Major TV networks are in position to launch their own streaming service using existing technologies. Winstone should most appropriately conclude that:

• A) TVStream is likely to have a high degree of pricing power derived largely from high barriers to entry
• B) TVStream is unlikely to have a large degree of pricing power and below average profitability due to threat of new entrants
• C) TVStream is likely to have a large degree of pricing power and above average profitability due to favorable bargaining power of suppliers

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Question: Garcia Mendoza is currently forecasting revenue for Remnicky Inc., a global provider of sports statistics to broadcasters. Mendoza is forecasting that Remnicky's revenue growth rate will be 100bps (1%) higher than global nominal GDP rate next year due to an increased interest in tracking statistics worldwide. In consultation with his economic research department, Mendoza has predicted that the real global GDP will grow at 1% next year, before flattening out and showing zero growth for the next 4 years. Inflation is predicted to remain steady at 1.5% for the next 5 years. Which of the following statements about Mendoza's forecast for next year is most accurate?

• A) Mendoza is forecasting growth of 3.5% using a hybrid approach Correct
• B) Mendoza is forecasting growth of using 2.5% a top-down approach
• C) Mendoza is forecasting growth of using a 3.5% top-down approach

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Question: Victor Mendoza is an equity analyst for LLT Partners, a private wealth management firm. Mendoza is currently valuing Testo Inc, a seller of smart phones. While reviewing the financials, Mendoza collects sales information of two of Testo's popular models as indicated below (figures in $ millions): Year 20x1 20X2 20X3 Alpinex 88.9 92.3 97.5 Bemax 0 54 433 Mendoza believes that in 20X4 the combined growth rate of Alpinex and Bemax will slow to 30%. Mendoza also believes that Bemax's share of revenue will grow to 90%. The estimated level of sales for Bemax based on Mendoza's assumptions is closest to:

• A) $563 million
• B) $621 million
• C) $507 million

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Question: Davide Andreu is concerned about the possible impact of inflation on two German retailers that he covers in his equity analyst role. Andreu has used last year's financials to produce common size income statements for the two retailers as shown below. Tooboola GmbH Portentona GmbH Sales 100% 100% Cost of Goods Sold 38% 48% Gross Margin 62% 52% Sales, General & Admin 40% 20% Depreciation 5% 15% Operating Margin 17% 17% Andreu is forecasting inflation of 10% in cost of goods sold for both companies due to large increases in commodity prices in the next period. Due to the fragile state of the economic recovery does not expect either company to be able to pass these costs on to consumers. Sales, general and admin costs are likely to rise by 5% and accounting depreciation will be unaffected. If Andreu's forecasts are correct, which of the following statements is least accurate?

• A) Tooboola has a larger forecasted gross margin than Portentona Correct
• B) Both companies will experience the same decrease in gross margin
• C) The forecasted operating margins will be equal for Tooboola and Portentona

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Question: For the purpose of forecasting proforma financial statements, which of the following statements is most accurate?

• A) Forecasted depreciation rates and capital expenditure are usually based on forecasted data
• B) Forecasted depreciation rates are usually based on historic information whereas forecasted capital expenditure is usually based on forecasted data
• C)

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Question: Deluxe Toys, Inc., produces electronic toys for 2–12-year-olds. The most recent income statement for Deluxe is given below: Revenues 1,500 Cost of goods sold 630 Selling expenses 120 Administrative expense 330 Operating profit 420 Ben Sharpe, analyst with AP Partners, is forecasting Deluxe's operating profit for the next fiscal year. Sharpe believes that a new sales tax of 10% is going to be imposed on electronic toys. Sharpe also believes that cost of goods sold will remain the same per unit sold. Selling expenses are a fixed percentage of gross sales, while administrative expenses are fixed. Deluxe is expected to pass on the entire cost of the sales tax to the consumer. The price elasticity of demand for Deluxe's toys is 0.75 (e.g., volume will decrease by 7.5% when the effective price increases by 10%.) Forecasted operating margin (as % of net sales) for the next year is closest to:

• A) 23%
• B) 26%
• C) 21%. Janet Smith has gathered the following information for the Power Tools Manufacturer market in the U.S. and this is part of the first phase of analyzing the businesses in the industry. The following issues are relevant: 1. Raw material and component purchases consist mainly of plastics (for casing) and motors (for power). Some hardened steel is required to make drills and bits. 2. Access to a reliable and efficient source of supply is critical, especially with regard to the electric motor

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Question: Which of the following is the most accurate statement with regard to the bargaining power of buyers?

• A) This force is strong due to comment (14) Correct
• B) This force is strong due to comment (16)
• C)

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Question: Which of the following is the most accurate statement with regard to the bargaining power of suppliers?

• A) This force is weak due to (2), (3), and (4)
• B) This force is strong due to comments (2), (3), and (4) Correct
• C) This force is average due to (2), (3), and (4)

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Question: Which of the following is the most accurate statement with regard to the threat of new entrants?

• A) This force is strong due to comments (10) and (11)
• B) This force is weak due to comments (10) and (11)
• C) This force is average due to comments (10), (11), and (13)

Page 7 | Status: ⏸️ Unattempted

Question: Which of the following is the most accurate statement with regard to the availability of substitute products?

• A) This force is weak due to comment (16)
• B) This force is strong due to comment (17)
• C) This force is weak due to comment (17)

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Question: Jared Mush is preparing a report on the Everystate corporation. The information below pertains to the year ending 31 December 2015 and 2016. Dec. 31, 2016 Dec. 31, 2015 Property-Liability 32,567 31,309 Everystate Financial 3,928 4,309 Corporate and Other 39 35 Consolidated revenues $ 36,534 $ 35,618 Mush's growth forecast for 2017 is 3% for property/liability, 0% for financial and 2% for corporate and other. Also, Mush estimates that EBIT margins for the three divisions are 17%, 18% and 23% respectively. Forecasted 2017 EBIT is closest to:

• A) $5,700
• B) $6,400
• C) $6,200

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Question: Yolanda Resham is currently developing a forecast horizon for several companies that she covers in her role as an equity analyst. The equities under consideration are part of a portfolio with an average annual turnover of 25%. Which of the following statements is least accurate regarding the choice of time horizon?

• A) Cyclicality should be considered when developing the timeframe
• B) A time horizon of 4 years would be consistent with the portfolio turnover Correct
• C) The time horizon should be independent of the average holding period for a stock

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Question: When comparing a large company with a much smaller company, which of the following statements regarding economies of scale is most accurate?

• A) An analyst will conclude that economies of scale are present in the industry if the larger company has higher revenues and a higher gross profit margin
• B) An analyst will conclude that economies of scale are present in the industry if the larger company has higher revenues and higher gross profit
• C) An analyst will conclude that economies of scale are present in the industry if the smaller company has a higher gross margin and lower revenues

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Question: Victor Mendoza is an equity analyst for LLT Partners, a private wealth management firm. Mendoza is currently valuing Testo Inc, a seller of smart phones. While reviewing the financials, Mendoza collects sales information of two of Testo's popular models as indicated below (figures in $ millions): Year 20x1 20X2 20X3 Alpinex 88.9 92.3 97.5 Bemax 0 54 433 What percentage of combined growth in 20X3 is due to Bemax?

• A) 79%
• B) 99%
• C) 54%

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Question: Rapid Tech Inc has mistakenly overestimated the useful lives of their PP&E: it has become apparent that due to rapid changes in technology, a significant part of Rapid's PP&E will need to be replaced sooner than anticipated. Rapid's CFO has indicated that the new depreciation schedules will take into account the shortened lives of the PP&E that will be acquired as replacement. The most likely impact on Rapid's future return on invested capital (ROI

• A) decrease
• B) increase Correct
• C) remain the same

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Question: Which of the following statements regarding pricing power is most accurate? A company is most likely to have a high level of pricing power, if it is operating in an industry that:

• A) has high fixed costs Correct
• B) has low barriers to exit
• C) is fragmented

Page 12 | Status: ⏸️ Unattempted

Question: Everystate Corporation reports Long-term debt of $3,398 and $3,658 respectively for the year ended Dec 31 2016 and 2015 respectively. Everystate reported an interest expense of $295 and $292 for the years ended 2016 and 2015 respectively. Everystate's interest rate on average gross debt is closest to:

• A) 8.53%
• B) 8.36%
• C) 8.68%

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Question: Victor Mendoza is an equity analyst for LLT Partners, a private wealth management firm. Mendoza is currently valuing Testo Inc, a seller of smart phones. While reviewing the financials, Mendoza collects sales information of two of Testo's popular models as indicated below (figures in $ millions): Year 20x1 20X2 20X3 Alpinex 88.9 92.3 97.5 Bemax 0 54 433 The annual growth rate for both models combined from 20x1 to 20x3 is closest to:

• A) 144%
• B) 496%
• C) 44%

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Question: Cynbo Industries Limited operates in two countries Mazat and Napat. The effective tax rates of Cynbo's operations in Mazat and Napat are 15% and 22% respectively. For the most recent fiscal year, Cynbo reported profit before tax of $350 and $200 for Mazat and Napat respectively. For the next year, it is expected that Cynbo's profit will grow at 5% and 8% for Mazat and Napat respectively. The effective tax rate for Cynbo for the next fiscal year is closest to:

• A) 19.4%
• B) 17.6%
• C) 18.5%

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Question: Which of the following statements regarding special purpose entities (SPEs) is least accurate?

• A) An SPE can be established as one of several legal forms, such as corporations, partnerships, or trusts, but must establish separate management from that of the sponsor Correct
• B) In general, the equity investors in an SPE can expect to receive a limited rate of return on their investment in exchange for limited risk exposure
• C) An SPE can be formed to isolate specific assets from the sponsor, thus lowering the cost of capital by protecting the assets of the SPE in the event the sponsor experiences financial distress Your Answer

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Question: According to US GAAP, if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions?

• A) The equity investors in the VIE must bear all of the SPE's risk up to a pre-determined level as outlined in the governing documents Correct
• B) The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm's percentage of voting control
• C) The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support Your Answer

Page 2 | Status: ❌ Incorrect

Question: As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions?

• A) Holds the majority voting control of the VIE and has separate management from the VIE Correct
• B) Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE
• C) Holds the majority voting control of the VIE and shares management with the VIE Your Answer

Page 2 | Status: ❌ Incorrect

Question: Assuming that QuickTime is considered a VIE in accordance with FIN 46(R), which of the following statements regarding the consolidation of QuickTime on Evergreen's financial statements is most accurate?

• A) The truck dealer is supplying the financing for the majority (75%) of QuickTime's debt, so Evergreen may not consolidate QuickTime on its financial statements
• B) Evergreen is exposed to the majority of QuickTime's risks and rewards, so Evergreen must consolidate QuickTime on its financial statements Correct
• C) Because the outside investor holds only nonvoting stock, Evergreen holds the majority controlling financial interest in QuickTime and must consolidate QuickTime on its financial statements

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Question: Under IFRS rules, which of the following accounting treatments is most preferred for joint ventures where there is shared control?

• A) Acquisition method Correct
• B) Proportionate consolidation method
• C) Equity method

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Question: Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1 classified as FVPL. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. The impact of the Marino holding on the Milburne income statement is:

• A) −$5,300 Correct
• B) −$4,700 Your Answer
• C) −$5,000

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Question: Harter Company recently acquired a 40% stake in Compton Corp. for $40 million in cash by borrowing at 10%. Harter will account for this acquisition using which of the following methods:

• A) Acquisition Method Correct Your Answer
• B) Held to maturity debt securities method
• C) Equity method

Page 4 | Status: ❌ Incorrect

Question: Barrett Inc. is advised by its banker to create a special purpose entity (SPE) to convert its existing $15 million loan off-balance sheet. Under the terms of the deal, SPE would obtain a loan for $15 million from the bank with Barrett providing loan guarantee. Barrett would then sell $15 million of accounts receivable to the SPE and use the proceeds to pay off the current loan. Barrett prepares its financial statements under U.S. GAAP. Which of the following statements is most accurate regarding the impact of such an arrangement on Barrett's ratios?

• A) Barrett’s leverage would decrease and receivable turnover would increase Your Answer
• B) Barrett’s leverage would remain the same while receivable turnover would increase
• C) Barrett’s leverage as well as receivables turnover would remain the same Correct

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Question: When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, return on asset measures for a firm using the acquisition method will appear:

• A) less favorable than those for a comparable firm using the equity method Correct
• B) more favorable than those for a comparable firm using the equity method
• C) same as for a comparable firm using the equity method

Page 5 | Status: ✅ Correct

Question: Under which of the following is a minority interest account most likely to appear on the consolidated balance sheet? I. The acquisition method. II. Equity method.

• A) II only Correct
• B) Both I and II
• C)

Page 5 | Status: ✅ Correct

Question: Which of the following methods of accounting for investments will reflect the highest net income on a company's income statement?

• A) Both methods report the same net income Correct
• B) Acquisition method
• C) Equity method

Page 6 | Status: ✅ Correct

Question: When comparing companies that hold equity investments in other corporations, which of the following statements is most accurate? All else being equal, leverage measures for a firm using consolidation will appear:

• A) less favorable than those for a comparable firm using the equity method Correct
• B) more favorable than those for a comparable firm using the equity method
• C) more or less favorable depending on the leverage of the investee company

Page 6 | Status: ✅ Correct

Question: Under U.S. GAAP rules, where an investor owns 41% of the voting shares of an investee and is able to control the investee, which of the following methods of accounting is most appropriate to use?

• A) Acquisition method Correct
• B) Equity method
• C) Proportionate consolidation method

Page 6 | Status: ✅ Correct

Question: The marketable securities balance amount shown on the balance sheet is:

• A) $3,000,000.00 Correct
• B) $3,100,000.00 Your Answer
• C) $3,200,000.00

Page 7 | Status: ❌ Incorrect

Question: In late 20X6, Company X decided to reclassify the investments in stock. What classification can the company classify the investment in stocks to?

• A) Fair value through profit or loss or amortized cost Correct
• B) Reclassification would not be allowed
• C) Fair value through profit or loss only Your Answer

Page 7 | Status: ❌ Incorrect

Question: The appropriate classification for the investment in government bonds would be:

• A) amortized cost, fair value through OCI, or fair value through profit or loss Correct
• B) amortized cost or fair value through OCI
• C) amortized cost or fair value through profit or loss Your Answer

Page 7 | Status: ❌ Incorrect

Question: Assuming that the investments were initially classified as fair value through profit or loss. The company can reclassify:

• A) debt security only if the business model has changed Correct
• B) equity security but only into fair value through OCI
• C) both debt and equity securities into fair value through OCI

Page 8 | Status: ✅ Correct

Question: Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne choose FVOCI classification for these shares. The impact of the Marino holding on the Milburne income statement is:

• A) $300 Correct
• B) -$4,700
• C) -$5,000. On January 9, 2006, Company X paid $2,000,000 for 100,000 shares of stock in Company S. Originally the company classified the shares as fair value through OCI. As of December 31, the stocks were valued at $2,200,000. In 2006, Company S had earnings per share of $0.90 and paid dividends per share of $0.20. In late December 2006 the company wonders what would be the change if the company had classified the shares as fair value through P&L

Page 8 | Status: ✅ Correct

Question: What is the impact if the company had originally classified the shares as fair value through P&L on the value of the assets of Company X?

• A) $200,000.00 Correct
• B) $0.00
• C) $70,000.00

Page 8 | Status: ✅ Correct

Question: If the shares were classified as fair value through P&L, what would have been the impact on the income and the stockholders' equity of Company X?

• A) Income and stockholder's equity will rise by $200,000 Correct
• B) Stockholders' equity will rise by $200,000, but income will not change
• C) Income will rise by $200,000, but stockholders' equity will not change

Page 9 | Status: ✅ Correct

Question: Sawbuck Corporation recently acquired a 60% stake in Rawboard Inc. for $70 million in newly issued common stock. Given this information, which of the following methods should be used to account for the acquisition of Rawboard?

• A) The pooling of interest method Correct
• B) Proportionate consolidation
• C) Acquisition

Page 9 | Status: ✅ Correct

Question: According to U.S. GAAP, goodwill is most likely to be considered impaired if the reporting unit's:

• A) implied value of goodwill is less than book value of goodwill
• B) carrying value (including goodwill) is greater than its fair value Correct
• C) tangible assets acquired in a business combination decrease in value

Page 9 | Status: ✅ Correct

Question: The consolidation method results in:

• A) same net income as the equity method but different shareholders' equity Correct
• B) same equity as the cost method
• C) same net income and shareholders' equity as the equity method

Page 10 | Status: ⏸️ Unattempted

Question: Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2008, is $48,000. In 2009, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is:

• A) $15,000 Correct
• B) $12,000 Your Answer
• C) $3,000

Page 10 | Status: ❌ Incorrect

Question: Accounting standards for intercorporate investments establish different categories of securities with distinct ways of treating them on the financial statements of the company. One category requires the securities to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement. This category of security classification is called debt:

• A) and equity securities classified as fair value through OCI Correct
• B) securities classified at amortized cost Your Answer
• C) and equity classified as fair value through P&L securities

Page 11 | Status: ❌ Incorrect

Question: A company reports an intercorporate investment using the acquisition method. Which of the following statements is most accurate?

• A) The use of the acquisition method by a company will generally report the more favorable results Correct
• B) The use of the acquisition method by a company will generally report the less favorable results Your Answer
• C) The use of the equity method by a company will generally report the same results

Page 11 | Status: ❌ Incorrect

Question: Which of the following statements about special purpose entities (SPE) are correct or incorrect? Statement #1: The sponsor usually maintains the decision-making power and voting control over the SPE. Statement #2: The equity owners of an SPE usually receive a rate of return that is tied to the performance of the SPE.

• A) Only one is correct Correct
• B) Both are correct Your Answer
• C)

Page 11 | Status: ❌ Incorrect

Question: Company A acquired a 50% stake in Company T on January 1, 2003 by paying T's shareholders $100,000 in cash. Pre-acquisition balance sheets for the two firms are presented below: Balance Sheet Company A Company T Current assets $400,000 $60,000 Fixed assets 600,000 100,000 Total $1,000,000 $160,000 Current liabilities $50,000 $ 30,000 Common stock 350,000 60,000 Retained earnings 600,000 70,000 Total $1,000,000 $160,000 The fair values of company T assets and liabilities was same as the book value. Company A reports under U.S. GAAP. What are the post-acquisition balance sheet values for total assets for Company A under the equity and acquisition methods of accounting respectively?

• A) $1,060,000 and $1,095,000
• B) $1,000,000 and $1,095,000 Your Answer
• C) $1,000,000 and $1,130,000. Omricon Capital Associates specializes in making investments in the small cap market sector. In some cases the firm operates as a supplier of private equity for restructurings. In this instance, the firm views itself as having a value investment focus. In others, it acts as a venture capital firm. Here, the investment focus is usually growth. Finally, in some cases it simply takes passive investment positions in publicly-traded firms. The positions in marketable securities are sometimes considered trading positions, and other times the view is to hold for a longer period until valuation parameters are met or exceeded Correct

Page 12 | Status: ❌ Incorrect

Question: Assuming no significant influence exists, which of the following statements concerning percentage ownership and accounting method is most accurate?

• A) When the ownership is less than 20%, US GAAP requires the investment in financial assets method, IFRS the equity method
• B) When the ownership is less than 20%, both US GAAP and IFRS require the equity method
• C) When the ownership is less than 20%, both US GAAP and IFRS require the investment in financial assets method Correct

Page 13 | Status: ✅ Correct

Question: Relative to consolidation, using the equity method of accounting for investments results in:

• A) ROA being lower and leverage being higher than under consolidation Correct
• B) ROA being higher than under consolidation
• C) ROA being higher and leverage being higher than under consolidation

Page 14 | Status: ✅ Correct

Question: Fiduciary Investors held two portfolios of marketable securities: $50 million in Portfolio A was accounted for as Fair value through profit or loss. $50 million in Portfolio B was accounted for as amortized cost securities. Assume that Fiduciary reclassified securities ($10 million carrying value, $8 million market value) from Portfolio B into Portfolio

• A) charge $2 million to its income statement Correct
• B) do nothing to its income statement or equity section of its balance sheet
• C) charge $2 million to the equity section of its balance sheet

Page 14 | Status: ✅ Correct

Question: Alpha Inc. owns 70% of the outstanding shares of Beta Inc. Compared to the debt-to-equity ratio under the partial goodwill method, Alpha's debt-to-equity ratio under the full goodwill method is most likely be:

• A) the same Correct
• B) lower Your Answer
• C) higher. Birch Corporation is a large conglomerate based in the U.S. that has grown primarily through acquisition. On the first day of this reporting year, January 1, 2012, Birch acquired 1,500,000 shares of the common stock of TRQ Inc. TRQ Inc. produces high quality fabrics for use in the fashion industry. Exhibit 1 shows key numbers from TRQ Inc.'s accounts. Exhibit 1 - TRQ Financial Statement Extracts TRQ Inc Income – year ending 31 Dec 12 $700,000 Dividend paid $210,000 Number of common shares in issue 6,000,000 Number preferred shares in issue 3,000,000 Total number of shares in issue 9,000,000 Both Birch and TRQ prepare their accounts using US GAAP. Dan Fitzroy is the CFO of Birch, and is currently preparing with a meeting with the auditors to discuss the correct treatment of the TRQ investment in Birch's group accounts. Fitzroy is of the opinion that the equity method of accounting should be used for the following reasons: 1. The proportion of TRQ's common shares owned by Birch suggests that Birch has significant influence over TRQ's operations 2. The lack of ownership of preferred shares suggests that Birch has no significant influence over TRQ's operations 3. The proportion of TRQ's total shares owned by Birch suggests that Birch has significant influence over TRQ's operations

Page 15 | Status: ❌ Incorrect

Question: Assuming the equity method of accounting is used, what will be the reported investment income for Birch?

• A) $60,000.00 Correct
• B) $175,000.00
• C) $115,000.00

Page 16 | Status: ✅ Correct

Question: Assuming the equity method of accounting is used, what will be the cash flow received by Birch, due to their investment in TRQ?

• A) $65,400 Correct
• B) $227,500
• C) $52,500

Page 16 | Status: ✅ Correct

Question: If the consolidation method is used, how much of TRQ's net income will Birch recognize in the group income statement?

• A) $122,500 Correct
• B) $175,000
• C) $700,000

Page 16 | Status: ✅ Correct

Question: Which of Fitzroy's reasons would most likely support the equity accounting method being appropriate for TRQ?

• A) Reason 2 Correct
• B) Reason 1
• C)

Page 16 | Status: ✅ Correct

Question: Mustang Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46(R) and is consolidation required by Mustang, respectively?

• A) Yes ; Yes Correct
• B) No ; No Your Answer
• C) Yes ; No

Page 17 | Status: ❌ Incorrect

Question: Regarding accounting for joint ventures using the equity method or using proportionate consolidation, it would be most accurate to state that:

• A) the equity method results in a single line item on the income statement, and a single line item on the balance sheet Correct
• B) both IFRS and US GAAP require the proportionate consolidation method be used to account for joint ventures Your Answer
• C) total net assets of the investor will differ between proportionate consolidation and the equity method. Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash. Pre-acquisition Balance Sheets December 31, 2001

Page 17 | Status: ❌ Incorrect

Question: What will be the post-acquisition current ratio, using both the acquisition method and the equity method, respectively, for TME? The choices below represent Acquisition and Equity, respectively.

• A) 1.01, 0.92 Correct
• B) 1.21, 1.02 Your Answer
• C) 1.04, 1.11

Page 18 | Status: ❌ Incorrect

Question: Using the acquisition method to account for the acquisition, what will be the post-acquisition current assets of TME?

• A) $93,000 Correct
• B) $118,000 Your Answer
• C) $105,000

Page 18 | Status: ❌ Incorrect

Question: Which of the following investments would most likely be reported under the equity method?

• A) An investment in 80% of the equity of an entity that gives the owner control over that entity Correct
• B) An investment in 40% of the equity of an entity that gives the owner control over that entity
• C) An investment in 5% of the equity of an entity that gives the owner significant influence over that entity

Page 20 | Status: ✅ Correct

Question: Luna has recorded its investment in Instate utilizing the equity method of accounting for intercorporate investments. According to FASB, which of the following statements most accurately reflects the impact on an investor's financial statements by using the equity method?

• A) The investing firm can include a proportionate share of the investee’s income in its earnings, regardless of whether or not there are actual cash flows (i.e. dividends) Correct
• B) Market values can be compared with the carrying amount for analysis purposes, but only market values may be used in the financial statements
• C)

Page 20 | Status: ✅ Correct

Question: If Anderson Company accounts for the Birschbach Company shares as classified as fair value through OCI, the carrying amount of these shares on Anderson's balance sheet at the end of 2012 is:

• A) $3.5 million Correct
• B) $2.5 million
• C) $2.6 million Your Answer

Page 21 | Status: ❌ Incorrect

Question: If Anderson Company accounts for the Birschbach Company shares using the equity method, the carrying amount of these shares on Anderson's balance sheet at the end of 2012 is closest to:

• A) $2.8 million Correct
• B) $2.6 million
• C) $3.5 million Your Answer

Page 21 | Status: ❌ Incorrect

Question: For the year 2012, the investment income that Anderson Company reports on its investment in Birschbach Company shares, if Anderson classifies the shares as fair value through OCI, is:

• A) $250,000 Correct
• B) $150,000
• C) $100,000

Page 22 | Status: ✅ Correct

Question: If Anderson Company accounts for the Birschbach Company shares using the equity method, the change in carrying value from 2012 to 2013 is closest to:

• A) +$2,650,000 Correct
• B) +$50,000
• C) +$225,000. Prior to 2007, Company X (reporting under U.S. GAAP) had never made any acquisitions of other companies. However, on January 2, 2007, it went on a buying spree, purchasing 10% of Company A for $10,000; 30% of Company B for $20,000; 40% of Company C for $80,000; and 70% of Company D for $168,000. Below are the balance sheets for the five companies (in thousands) just prior to the purchase. Company X A B C D Cash 400 10 20 30 40 Other assets 1,600 90 180 270 360 Total assets 2,000 100 200 300 400 Liabilities 300 40 80 120 160 Equity 1,700 60 120 180 240 Total 2,000 100 200 300 400 During 2007, the companies generated the following sales, income, and dividends:

Page 22 | Status: ✅ Correct

Question: After the acquisitions, the liabilities reported by Company X will be:

• A) $300,000
• B) $480,000
• C) $460,000

Page 23 | Status: ⏸️ Unattempted

Question: After the acquisitions, minority interest reported by Company X will be:

• A) $168,000
• B) $0
• C) $72,000

Page 23 | Status: ⏸️ Unattempted

Question: Company X will report revenue for 2007 of:

• A) $2,280,000
• B) $2,000,000
• C) $2,400,000

Page 23 | Status: ⏸️ Unattempted

Question: The change in the investment in the associates account (the account that reflects all non- consolidated investments in other companies) between January 3 and December 31 is:

• A) $11,400
• B) $10,800
• C) $27,600

Page 24 | Status: ⏸️ Unattempted

Question: GTH Corporation has just purchased 18% of the common stock of Pittor Corporation, one of their major suppliers, making GTH the largest single shareholder in Pittor. The primary motivation for the purchase is that managerial problems at Pittor have resulted in quality control difficulties, thereby affecting the reliability of several critical component parts for GTH products. At the time of the purchase, GTH management announced they plan to be an active investor and exercise significant influence on Pittor so the quality problems can be resolved. Given these circumstances, the accounting method used to record the intercorporate investment will most likely be the:

• A) equity method Correct
• B) acquisition method
• C) investment in financial assets method

Page 24 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding special purpose entities (SPEs) is least accurate?

• A) According to U.S. GAAP, if a SPE is considered a VIE, it must be only consolidated by the primary beneficiary
• B) According to U.S. GAAP, a special purpose entity is classified as a variable interest entity (VIE) if it has at-risk equity that is sufficient to finance its own activities without additional financial support
• C) Under IFRS, a special purpose entity must be consolidated by the entity which exercises control over that entity

Page 24 | Status: ⏸️ Unattempted

Question: Which of the following methods of accounting for investments will reflect the highest assets and liabilities on a company's balance sheet?

• A) Acquisition method
• B) Equity method Correct
• C) Both methods result in reporting the same balances for assets and liabilities

Page 25 | Status: ⏸️ Unattempted

Question: Acme Corporation purchases a 3% interest in Bandy Company to become the single largest shareholder of Bandy. Acme will hold a seat on the Board of Directors of Bandy. Acme will account for its investment in Bandy using the:

• A) equity method Correct
• B) lower of cost or market method
• C) acquisition method

Page 25 | Status: ⏸️ Unattempted

Question: Under IFRS, where an investor owns a significant number (39%) of the voting shares of an investee but has no involvement in policy making and no Board of Directors' representation, which of the following investment classifications is most appropriate to characterize the situation?

• A) Investment in financial assets Correct
• B) Significant influence
• C) Investment in associates

Page 25 | Status: ⏸️ Unattempted

Question: Firm A recently leased equipment used in its manufacturing plant. If the leased asset is worth less than $100,000 at the end of the lease, Firm A will pay the lessor the difference. Firm B provided debt financing to an unrelated entity. The debt has a provision whereby Firm B cannot be repaid until all other senior debt is satisfied. Do Firm A and Firm B have a variable interest?

• A) Both have a variable interest Correct
• B) Only one has a variable interest
• C) Neither have a variable interest. On December 15, 2009, the Zeisler Company faces a financial crisis. Zeisler's industry has gone into recession and net income has declined to nearly zero. Jeremiah Welch, the company's CFO, is extremely concerned that, when the final figures for 2009 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger a provision in the lending agreement allowing lenders to put Zeisler's debt back to the firm and likely force Zeisler into bankruptcy. With only two weeks before the close of the firm's fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm's controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler's reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2009

Page 26 | Status: ⏸️ Unattempted

Question: What is the investment income that Zeisler Company will report for the year 2009 on its investment in Market Square Corporation shares if it continues to account for the shares as an FVOCI investment?

• A) $150,000
• B) $200,000
• C) $250,000

Page 27 | Status: ⏸️ Unattempted

Question: If Zeisler were to account for the Market Square Corporation shares as FVPL, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be:

• A) $2.50 million
• B) $2.75 million
• C) $3.50 million

Page 27 | Status: ⏸️ Unattempted

Question: If Zeisler were to account for the Market Square Corporation shares using the equity method, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be:

• A) $2.75 million
• B) $2.60 million
• C) $3.50 million

Page 28 | Status: ⏸️ Unattempted

Question: Last year, Parent Company acquired Sub Company for $2,000,000. On the date of acquisition, the fair value of Sub's net assets was $1,700,000. At the end of the year, the fair value of Sub is $1,950,000, and the fair value of Sub's net assets is $1,775,000. If the carrying value of Sub is $1,980,000, the impairment loss under U.S. GAAP is closest to:

• A) $30,000
• B) $125,000
• C) $0. Global Life Insurance (GLI) holds a wide range of assets in a range of different portfolios across its various divisions. Some of these assets are held long term to meet future

Page 28 | Status: ⏸️ Unattempted

Question: What is the income from the equity portfolio if the securities are classified as FVPL?

• A) $19,900
• B) $20,900
• C) –$6,600

Page 30 | Status: ⏸️ Unattempted

Question: What is the balance sheet carrying value of the securities under each of the classifications at year-end? FVPL FVOCI

• A) $71,500 $71,500
• B) $90,000 $71,500
• C) $90,000 $90,000

Page 30 | Status: ⏸️ Unattempted

Question: If the fixed income portfolio outlined in Exhibit 2 is remains classified as amortized cost, which of the following is closest to the interest income reported in the income statement for the year ending 31st December 2013?

• A) $1,079,000
• B) $1,086,000
• C)

Page 30 | Status: ⏸️ Unattempted

Question: If the bonds are reclassified as suggested by the chief investment officer, which of the following statements is most likely correct?

• A) The difference between the amortized cost and fair value will be shown in other comprehensive income
• B) The difference between the amortized cost and fair value will be shown in net income
• C) The difference between the purchase price and fair value will be shown in other comprehensive income

Page 31 | Status: ⏸️ Unattempted

Question: Maverick Incorporated formed a special purpose entity (SPE) to purchase and lease a 50,000 acre ranch. The SPE financed 95% of the purchase price with debt. The remaining 5% was financed with equity capital received from two separate independent investors. The lender would not make the loan without Maverick's guarantee. How should Maverick treat the SPE in its financial statements if Maverick is the lessee?

• A) No firm must consolidate the SPE
• B) Maverick must consolidate the SPE Correct
• C) Each equity investor must proportionately consolidate the SPE

Page 31 | Status: ⏸️ Unattempted

Question: Mashburn Company acquired 25% of the 100,000 outstanding shares of Humm Co. on January 1 for $250,000 in cash. Humm Co. earned $1 per share and had a dividend payout ratio of 40%. As of December 31, Humm Co. shares were trading in the open market at $12 per share. Calculate the income statement treatment of the Humm Co. investment as of December 31.

• A) $10,000
• B) $75,000
• C) $25,000

Page 32 | Status: ⏸️ Unattempted

Question: Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is:

• A) $48,000
• B) $60,000
• C) $63,000

Page 32 | Status: ⏸️ Unattempted

Question: Carter Schmitz, Inc. (Schmitz) purchased 200 shares of Intelismart at $21 a share in June 2006 and classifies 80 shares as fair value through profit or loss securities and holds the remaining 120 shares as classified as fair value through OCI. Intelismart's closing price was $26 on December 31, 2006, and Schmitz did not sell any of its shares. What amount should Schmitz report on this investment under the income statement?

• A) $400
• B) $600
• C) $1,000. Rocky Mountain Air Cargo is a privately held commercial aviation company serving the western United States. It publishes financial statements in accordance with U.S. GAAP and uses a fiscal year that matches the calendar year. Rocky Mountain was in good financial shape heading into 2003, with assets of $50 million at the beginning of the fiscal year. That year, it earned $3 million in net income and was easily able to maintain its traditional 50% dividend payout ratio. However, Rocky Mountain had a very difficult year in 2004, reporting a loss of $800,000. It managed to pay $1 million in dividends, but the decision to pay dividends in such a weak financial year further undermined the company's fiscal stability. Flitenight Air Lines, a publicly-traded aviation firm serving the central and Midwestern United States, wanted to expand its range of service by coordinating its flight schedule with airlines serving different geographic regions of North America. One of these airlines was Rocky Mountain Air Cargo. To cement the relationship, Flitenight's CEO, John "Bulldog" Basten, decided to make a significant investment in Rocky Mountain Air Cargo. He was easily able to convince both boards of the wisdom of the deal, and, in his usual brash style, personally negotiated the terms with his counterpart at Rocky Mountain, Buck Matthews. Flitenight Air Lines acquired a 20% stake in Rocky Mountain Air Cargo (with an option to purchase 40% more) for $10 million cash. The deal closed on January 1, 2003 and Flitenight accounted for the investment using the equity method. Basten was not happy to find that he had invested right at the peak of Rocky Mountain's profitability and wound up with a money-losing airline. He had a difficult conversation with

Page 33 | Status: ⏸️ Unattempted

Question: In 2003, Flitenight would reflect its investment in Rocky Mountain on its income statement by recording:

• A) $300,000
• B) $600,000
• C) −$200,000

Page 34 | Status: ⏸️ Unattempted

Question: If Flitenight were to account for its Rocky Mountain investment as an investment in financial assets instead of the equity method, Flitenight's 2004 income statement would reflect its investment in Rocky Mountain by including which of the following?

• A) Nothing, since the cost of the acquisition is not adjusted until the asset is sold Correct
• B) Only income of $200,000
• C) Only a loss of $160,000

Page 34 | Status: ⏸️ Unattempted

Question: Regarding Basten's and Matthews' statements about the gain/loss that Flitenight had at the end of 2004 on its investment in Rocky Mountain, which is most accurate?

• A) Basten’s statement is correct and Matthews’ statement is incorrect Correct
• B) Basten’s statement is incorrect and Matthews’ statement is correct
• C) Basten’s statement is correct and Matthews’ statement is correct

Page 35 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding asset securitizations and special purpose entities (SPEs) is most accurate?

• A) When receivables are securitized, the sponsor reports the cash inflow as an investing activity in the cash flow statement
• B) The SPE usually issues debt to purchase receivables from the sponsor Correct
• C) If the sponsor has no recourse, then the transaction is nothing more than a collateralized borrowing. Joseph Haggs, CFA, is an analyst working for Garvess Jones, a large publicly traded investment-banking firm. Haggs covers the internet sector. Recently, one of the more successful companies Haggs covers, Simpson Corporation, made an aggressive move to acquire another internet company, Bailey Corporation (BC). BC is a company specializing in graphics and animation on the World Wide Web and has 1,000,000 shares outstanding. Simpson also holds minimal investments in other technology companies both public and private. In 1999 Simpson saw an opportunity to substantially increase its share in BC. Simpson feels that their sophisticated animation can greatly improve Simpson's market

Page 35 | Status: ⏸️ Unattempted

Question: Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1998. Which is the correct method?

• A) Investment in Financial Assets method Correct
• B) Equity method
• C) Acquisition method

Page 37 | Status: ⏸️ Unattempted

Question: Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 2000. Which is the correct method?

• A) Equity method
• B) Acquisition method
• C) Proportional consolidation method

Page 37 | Status: ⏸️ Unattempted

Question: Haggs wants to make sure that he assumes the proper accounting method when he does his analysis. The acquisition of BC stock will lead to Simpson's total net cash flow equaling which of the following for the year ending December 31, 1999?

• A) $360,000
• B) $−2,830,000
• C) $−3,190,000

Page 37 | Status: ⏸️ Unattempted

Question: Wonderful Manufacturing has implemented a change in its pension plan, that will increase the future benefits for all of its current employees. Which of the following is the most likely effect on the company's financial statements of this change in promised benefits under current U.S. GAAP standards?

• A) The net pension liability will increase immediately by the projected increase in pension benefits due to employees Correct
• B) The pension expense for the next reporting period will increase by the projected increase in pension benefits due to employees
• C) The firm’s prior financial statements will be adjusted to reflect the increase in benefits

Page 1 | Status: ✅ Correct

Question: A company is reporting a tax windfall arising from a share-based compensation plan. Which of the following is least accurate?

• A) The company would report a higher net income under U.S. GAAP
• B) The company would take the gain directly to equity under IFRS Correct
• C) The company would report a lower tax expense in the income statement under IFRS

Page 1 | Status: ✅ Correct

Question: Which of the following is NOT an advantage of share based compensation over cash compensation?

• A) Share based compensation does not require a cash outlay Correct
• B) Share based compensation serves to align employee interest with the interests of stockholders
• C)

Page 1 | Status: ✅ Correct

Question: Which of the following statements about the methods of valuing employee stock options is least accurate?

• A) Compensation expense is allocated in the income statement for the period between the grant date and the vesting date
• B) Once the options are in-the-money, compensation expense is recognized on the income statement Correct
• C) The offset to compensation expense recognized is an increase in share-based compensation reserve

Page 2 | Status: ✅ Correct

Question: Which of the following statements about share-based compensation is most accurate?

• A) The fair value of an option is expensed when the option is in-the-money Correct
• B) Only the intrinsic value of an option is shown as an expense in the income statement
• C) The compensation expense is amortized over the vesting period in the income statement

Page 2 | Status: ✅ Correct

Question: The actuarial present value of all future pension benefits earned to date, based on expected future salary increases, is called the:

• A) pension liability
• B) projected benefit obligation (PBO) Correct
• C) total projected pension cost

Page 2 | Status: ✅ Correct

Question: Federal Companies' reports under U.S. GAAP included the following information in the footnotes to its most recent financial statements: Beginning Projected Benefit Obligation (PBO) $65,000,000 Beginning FV of Plan Assets 60,000,000 Service Cost 27,000,000 Interest Cost 3,000,000 Unamortized Actuarial Losses (Start of the Year) 5,000,000 Actual Return on Plan Assets 7,500,000 Expected Return on Plan Assets 8,500,000 Given the information above, calculate Federal's total periodic pension cost for the year.

• A) $41,000,000.00 Correct
• B) $21,500,000.00
• C) $27,500,000.00

Page 3 | Status: ✅ Correct

Question: The number of potentially dilutive securities for the stock grant at the end of 20X1 is closest to:

• A) 25,000 Correct
• B) 16,667
• C) 21,078

Page 3 | Status: ✅ Correct

Question: For a stock grant, from the company's perspective, a tax windfall is most likely to result when the:

• A) stock price at settlement was higher than the stock price on the grant date Correct
• B) intrinsic value at settlement was lower than the fair value on the grant date Your Answer
• C) stock price at settlement was lower than the stock price on the grant date

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Question: In determining the fair value of employee stock options, which of the following statements is most appropriate?

• A) A higher than expected dividend yield will decrease the estimated fair value Correct
• B) Absent a market-based instrument, U.S. GAAP and IFRS prefer firms to use the Black-Scholes option-pricing model Your Answer
• C) Changes in fair value after the grant date is taken directly to equity

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Question: Which type of compensation is most likely to increase current liability for a company?

• A) Stock-option grants Correct Your Answer
• B) Stock grants
• C) Salary and wages. Prisma Inc. started an employee stock option and RSU grant plan. On Jan 1, 20X1, the company made a grant of 150,000 at-the-money options (maturing in five years) and 25,000 shares. The fair value of the options was $1.79 and the stock price on the date of the grant was $16. Both awards vest after 3 years. The average stock price during the year was $17 and it was $17.50 at the end of the year

Page 5 | Status: ❌ Incorrect

Question: The expense reported for 20X1 is closest to:

• A) $187,033 Correct
• B) $222,833 Your Answer
• C) $133,333

Page 5 | Status: ❌ Incorrect

Question: The cash outflow reported on account of share-based compensation is:

• A) $133,333 Correct
• B) $0
• C) $222,833

Page 6 | Status: ✅ Correct

Question: The change in stock-holder's equity at the end of 20X1 on account of the share-based compensation is closest to:

• A) $133,333 Correct
• B) $0
• C) $222,833

Page 6 | Status: ✅ Correct

Question: For this question only, assume that the stock price on the settlement date is $18.50. This will most likely result in a(n):

• A) tax shortfall Correct
• B) extraordinary loss
• C) tax windfall

Page 6 | Status: ✅ Correct

Question: For this question only, suppose that Prisma reports a net loss for 20X1. Which of the following statements is most accurate?

• A) Unvested options that are out-of-money are considered dilutive Correct
• B)
• C) Prisma’s basic EPS and fully diluted EPS would be the same.

Page 6 | Status: ⏸️ Unattempted

Question: For forecasting the dilution from future grants of share-based compensation and its effects on valuation, which of the following approaches is least appropriate?

• A) Add share-based compensation expense estimates to free cash flow estimates and increase the number of shares outstanding based on the same estimates Correct
• B) Deduct share-based compensation expense from estimates of free cash flows and ignore dilution Your Answer
• C) Discount the estimated value of equity by a dilution factor

Page 7 | Status: ❌ Incorrect

Question: Under U.S. GAAP, capitalized periodic pension costs included in the value of ending inventory is most likely:

• A) to be amortized over the service lives of employees Correct
• B) not allowed Your Answer
• C) to be expensed as part of cost of goods sold when the inventory is sold

Page 7 | Status: ❌ Incorrect

Question: In order to decrease the projected benefit obligation (PBO) of a pension plan, which of the following changes in pension assumptions can be made to yield the desired result?

• A) Increase the expected rate of return
• B) Decrease the discount rate Correct Your Answer
• C) Decrease the rate of compensation growth

Page 7 | Status: ❌ Incorrect

Question: Wes Livingston is the founder and CEO of Bigwell Corporation. Livingston is interested in Bigwell being acquired by a larger competitor and wants to have his company's financial statements appear as attractive as possible to a potential suitor. In order to decrease the projected benefit obligation (PBO) of the company's pension plan, which of the following changes in actuarial assumptions could be made?

• A) Decrease the discount rate
• B) Increase the rate of compensation growth Correct
• C) Increase the discount rate

Page 8 | Status: ✅ Correct

Question: Fly-By-Night Airlines is a U.S. company planning to change its pension plan so that it can reduce its costs. It is considering reducing its defined benefit percentage from 10% to 5% of ending salary, retroactive for 10 years. In addition, since the firm is anticipating substantially reduced salary increases in the future, it is planning to reduce its compensation growth rate assumption. From a pension accounting perspective, the change in the:

• A) Benefit percentage is a past service cost that will be amortized into and thus increase pension expense over the remaining service lives of its employees
• B) Benefit percentage is a change in actuarial assumption that will be recognized in full in current period pension expense
• C) Compensation growth rate assumption is a change in actuarial assumption that will reduce the defined benefit obligation and future pension expense Correct

Page 8 | Status: ✅ Correct

Question: A company reporting under U.S. GAAP reduced the discount rate for its pension obligation from 10% to 8%, reduced the expected long-term rate of return on the assets in its pension plan from 8% to 6%, and changed its compensation growth rate assumption from 4% to 5%. What is the most likely impact of these changes on the current year ending defined benefit obligation and pension expense?

• A) The reduction in the discount rate will decrease the defined benefit obligation and will increase reported pension expense Correct
• B) The decrease in the long-term rate of return on plan assets will decrease reported pension expense
• C) The decrease in the long-term rate of return will have no impact on the defined benefit obligation and will increase reported pension expense

Page 9 | Status: ✅ Correct

Question: The projected benefit obligation (PBO) is defined as the:

• A) actuarial present value of all future pension benefits earned to date based on expected future salary increases Correct
• B) actuarial present value of all future pension benefits earned to date and based on current salary levels
• C) actuarial future value of all post-retirement healthcare benefits earned to date

Page 9 | Status: ✅ Correct

Question: The period at the end of which the employee is unconditionally entitled to a compensation is called the:

• A) vesting date Correct
• B) settlement date
• C) entitlement date

Page 10 | Status: ✅ Correct

Question: The number of potentially dilutive securities for the option grant at the end of 20X1 is closest to:

• A) 50,000 Correct
• B) 3,559
• C) 100,000

Page 12 | Status: ✅ Correct

Question: Which of the following statements regarding the projected benefit obligation (PBO) and the value of the pension plan assets is most accurate?

• A) If the PBO and the plan assets are the same, then nothing needs to be reported on the balance sheet Correct
• B) Plan amendments during the year generally result in a decrease of the PBO at the end of the year
• C) The fair value of plan assets is increased by the amount of the expected return on assets

Page 12 | Status: ✅ Correct

Question: Current U.S. GAAP pension accounting standards require public companies to report which of the following in the balance sheet?

• A) The expected return on plan assets Correct
• B) The pension liability adjusted for unrecognized items
• C) The funded status of the plan Your Answer

Page 14 | Status: ❌ Incorrect

Question: As of December 31st, 2007, the fair value of plan assets was $21 million. For this question only, assume that the sum of the unrecognized prior service cost and the unrecognized actuarial losses equals $1.5 million. Calculate the amount attributable to Midwest's pension plan as of December 31st, 2007 that must be reported on the balance sheet under U.S. GAAP.

• A) $2.0 million Correct
• B) −$2.0 million
• C) −$500,000 Your Answer

Page 14 | Status: ❌ Incorrect