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Homework answers / question archive / ACC-670-O500 - Advanced Complete the Final Exam
ACC-670-O500 - Advanced
Complete the Final Exam. This is a timed exam, lasting one hour and 30 minutes.
Exam questions are provided from the publisher's test bank to accompany Financial Reporting, Financial Statement Analysis and Valuation, by Whalen, Baginski, and Bradshaw (2018), with permission from the publisher, Cengage Learning.
Attempt Start Date: 08-Oct-2020 at 12:00:00 AM
Due Date: 14-Oct-2020 at 11:59:59 PM
Duration: 01:30:00
Maximum Points: 120.0
Total Number of Questions: 40
Attempts: 1
Which of the following scenarios is consistent with an increasing cost of goods sold to sales percentage and increasing inventory turnover?
Firm raises prices to increase its gross margin but inventory sells more slowly.
Weak economic conditions lead to reduced demand for a firm’s products, necessitating price reductions to move goods.
Strong economic conditions lead to increased demand for a firm’s products, allowing price increases.
Firm shifts its product mix toward lower margin, faster moving products.
Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle?
Introduction
Growth
Maturity
Decline
Under which of the following scenarios would an entity not be classified as a variable interest entity?
The equity investing firms do not have the obligation to absorb the expected losses of the variable interest entity if they occur.
The investing firms do not have the right to receive the expected residual returns of the variable interest entity if they occur.
The total equity investment at risk is sufficient to permit the variable interest entity to finance its activities without additional subordinated financial support from other parties.
The equity investing firms do not have the direct or indirect ability to make decisions about the variable interest entity’s activities through voting rights or similar rights.
Changes in foreign exchange rates can affect a firm in all of the following ways except:
The prices a firm pays to acquire raw materials from suppliers abroad.
The amount of cash a firm receives when it collects an account receivable, a loan receivable, or another receivable denominated in a currency other than its own.
The value of domestic liabilities with fixed interest rates.
The prices a firm charges for products sold to customers abroad.
Orca Industries
Below are the two most recent balance sheets and most recent income statement for Orca Industries. The company has an effective tax rate of 35%.
|
Balance Sheet |
|
|
|
|
2011 |
2010 |
|
Assets: |
|
|
|
Cash |
$10,000 |
$ 6,000 |
|
Accounts Receivable (net) |
6,000 |
1,500 |
|
Inventory |
8,000 |
10,000 |
|
Long-lived assets |
12,000 |
11,000 |
|
Less: Accumulated depreciation |
(4,000) |
(2,000) |
|
Total assets |
$32,000 |
$26,500 |
|
|
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
Accounts payable |
$ 5,000 |
$ 6,000 |
|
Deferred revenues |
1,000 |
2,000 |
|
Long-term note payable |
10,000 |
10,000 |
|
Less: Discount on note payable |
(800) |
(1,000) |
|
Common stock |
12,000 |
6,000 |
|
Retained earnings |
4,800 |
3,500 |
|
Total liabilities and stockholders’ equity |
$32,000 |
$26,500 |
Income Statement
For the year ended December 31, 2011
|
Revenues |
$42,000 |
|
Cost of goods sold |
(24,000) |
|
Depreciation expense |
(2,000) |
|
Interest expense |
(3,000) |
|
Bad debt expense |
(2,000) |
|
Other expense (including income taxes) |
(9,000) |
|
Net income |
$ 2,000 |
Refer to the information for Orca Industries. The profit margin for computing ROA for Orca Industries is:
9.4%
13.5%
4.8%
12.3%
As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except:
The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash.
The existence of negative cash flows from operations can be eliminated by using this financial statement.
The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm’s reported earnings.
Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm’s industry, its strategy, and the stage in its life cycle.
Houston, Inc.
The following information pertains to Houston, Inc. a manufacturer of belt buckles:
|
(dollar amounts in thousands) |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Net Cash Flow from Operations |
564 |
628 |
854 |
1059 |
1345 |
1655 |
|
Interest Expense after tax |
122 |
134 |
148 |
145 |
155 |
148 |
|
Decrease (Increase) in Cash Required for Operations |
-75 |
-54 |
-48 |
-32 |
-61 |
-48 |
|
Net Cash Flow from Investing |
-287 |
-300 |
-310 |
-285 |
-294 |
-277 |
|
Net Cash from Debt Financing |
210 |
204 |
140 |
85 |
-40 |
-46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value Factors for 8.5% |
0.922 |
0.849 |
0.783 |
0.722 |
0.665 |
|
What is Houston’s free cash flow for all debt and equity holders for year 2012?
$564
$399
$324
$202
The existence of subjectivity in an asset valuation does not necessarily mean the valuation will not be reliable. All of the following are examples of this except:
where historical cost is used for accounts receivable, fixed assets, and other assets with values that remain relatively stable.
where market value is used for marketable equity securities, commodities, and financial assets are traded in liquid markets.
where historical cost is used for LIFO inventory layers where inventory has seen an inflationary increase in costs.
where historical cost is used for internally generated intangible asset valuations.
All of the following are considered by analysts when assessing the quality of accounting except:
Price variation and the speed at which inventory turns over
Any liquidation of FIFO inventory layers
Any physical deterioration or obsolescence of inventory
The inventory cost-flow assumption chosen by management
Residual income will be greater than zero when:
the firm's reported net income exactly equals the required level of earnings necessary to cover the cost of equity capital.
the firm's expected future income is greater than the required level of earnings necessary to cover the cost of equity capital.
the firm's expected future income exactly equals the required level of earnings necessary to cover the cost of equity capital.
the firm's expected future income is less than the required level of earnings necessary to cover the cost of equity capital.
If a firm has a market beta of 0.9, is subject to an income tax rate of 35 percent, has a risk-free rate of 6 percent, a market risk premium of 7 percent, and has a market value of debt to market value of equity ratio of 60 percent, what does the market expect the firm to generate in terms of equity returns using CAPM?
6%
7%
12.3%
13%
Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed “not recoverable” as specified by GAAP. GAAP defines a carrying amount as “not recoverable” if:
it is greater than the sum of the cash flows expected from the asset’s use and disposal.
it is greater than the sum of the undiscounted cash flows expected from the asset’s use and disposal.
it is less valuable than its current carrying value.
it is less valuable than its current fair value.
Financial reporting requires that firms recognize product financing arrangements as liabilities if which of the following conditions is met?
The arrangement requires the sponsoring firm to purchase the inventory, substantially identical inventory, or processed goods of which the inventory is a component at specified prices.
The selling or sponsoring firm physically controls the inventory.
The payments made to the other entity cover all acquisition, holding, and financing costs.
Both A and C are correct.
A company is expected to generate $175,000 in earnings next period and requires a 20% return on equity capital. Using the assumptions of the price-earnings ratio, what would be the company's value at the beginning of next period?
$781,250
$1,250,000
$2,000,000
$875,000
Which of the following ratios give a perspective on risk in the capital structure?
Book value per share
Price/earnings ratio
Degree of financial leverage
Dividend yield
All of the following are conditions for revenue recognition outlined by SAB 104 except:
There is pervasive evidence that an arrangement exists.
Delivery has occurred or services have been performed.
The seller’s price to the buyer can be variable.
Collectability is reasonably assured.
Gorilla, Corp. implemented a defined-benefit pension plan for its employees on January 2, 2012. The following data are provided for year 2012, as of December 31:
|
Accumulated benefit obligation |
$103,000 |
|
Plan assets at fair value |
78,000 |
|
Net period pension expense |
90,000 |
|
Employer's contribution |
70,000 |
What amount should Gorilla record as additional minimum pension liability at December 31, 2012?
$0
$5,000
$20,000
$45,000
Doran Corp. has a current ratio of 6. Under which of the following scenarios might this indicate a problem?
inventories are increasing due to the introduction of a new product
the company is holding cash in expectation of making a large investment in equipment
receivables are increasing due to increasing sales
inventories are increasing and the industry in which Doran Corp. operates is experiencing a recession
Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?
A firm in a capital intensive industry that is expected to operate near capacity for the near future.
A firm in a capital intensive industry in which excess capacity exists.
A firm operating in an industry that is expected to experience technological improvements in its production process.
A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.
Tinker Company reported sales revenue of $500,000 and total expenses of $450,000 (including depreciation) for the year ended December 31, 2010. During 2010, accounts receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for 2010 was:
$60,000
$67,000
$44,000
$51,000
Companies value-to-book and market-to-book ratios may differ due to accounting reasons. An example of an accounting reason that would create a difference is:
accelerated methods of depreciation.
investments in successful research and development programs that are expensed according to conservative accounting principles.
using LIFO versus FIFO for inventory.
high operating leverage.
Card Sharks, Inc.
Card Sharks, Inc. sells baseball cards and other memorabilia. The company tries to maintain a cash balance equivalent to approximately 30 days of sales. Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 30% and in 2013 of 35%.
Given the information provided about Card Sharks, what are the company’s 2013 projected annual sales?
$656,191
$493,377
$618,482
$542,333
Which of the following is not a problem with using a dividend-based valuation formula?
Dividends are arbitrarily established.
Dividends represent a transfer of wealth to shareholders.
Some firms do not pay a regular periodic dividend.
It is a challenge to forecast the final liquidating dividend.
Projected financial statements can be used to assess the sensitivity of all of the following except:
a firm’s liquidity.
a firm’s leverage to changes in assumptions.
conditions under which the firm’s debt covenants may become binding.
unusual patterns for projected total assets.
Sparky’s
Sparky’s sells auto parts. Provided below is selected financial information from the company’s 2012 annual report:
|
Sparky’s Selected Financial Statement data
|
|
|
|
For Fiscal year end |
2012 |
2011 |
|
(amounts in thousands of dollars) |
|
|
|
Net sales |
$125,410 |
$106,380 |
|
Cost of Goods Sold |
-104,090 |
-89,359 |
|
Gross profit |
$21,320 |
$17,021 |
|
|
|
|
|
Inventory |
$31,353 |
$30,850 |
|
|
|
|
|
Inventory Turnover |
3.35 |
|
|
|
$104,090/.5($31,353+$30,850) |
|
Sparky’s forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If these assumptions prove correct and Sparky’s inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
$31,353
$26,475
$40,000
$42,314
On a common size basis, which of the following assets is normally largest for an electric utility?
Accounts receivable
Inventory
Property, Plant and Equipment
Cash and Marketable Securities
Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment, which has a useful life of four years. Tax legislation requires the company to depreciate its equipment using the following schedule: year 1- 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2014 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000. What amount will Plaxo record as a deferred tax asset or liability in 2014?
Deferred tax asset of $25,000.
Deferred tax liability of $25,000.
Deferred tax asset of $8,750.
Deferred tax liability of $8,750.
Jarrett Corp.
At the end of 2010 Jarrett Corp. developed the following forecasts of net income:
|
|
Forecasted |
|
Year |
Net Income |
|
2011 |
$20,856 |
|
2012 |
$22,733 |
|
2013 |
$24,552 |
|
2014 |
$27,252 |
|
2015 |
$29,978 |
Management believes that after 2015 Jarrett will grow at a rate of 7% each year. Total common shareholders' equity was $112,768 on December 31, 2010. Jarrett has not established a dividend and does not plan to paying dividends during 2011 to 2015. Its cost of equity capital is 12%.
Compute the value of Jarrett Corp. on January 1, 2011, using the residual income valuation model. Use the half-year adjustment.
$112,768
$185,329
$195,540
$133,624
Financial ratio, percentage, and trend comparisons can be distorted by all of the following except
aggressive revenue recognition practices.
the timing of asset purchases.
accounting for similar economic fundamentals in similar fashion.
the presence of nonrecurring items among the firms being analyzed.
Many times a financial analyst may decide to make adjustments to the financial statements in order to make the statements more useful. Which of the following would not require an adjustment to the financial statement?
A company signs a new contract with a customer.
A delivery company incurs a loss from disposition of used delivery trucks.
A company changes the useful life of its equipment from 5 years to 8 years.
A company incurs a charge related restructuring its operations.
Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?
non-cash items, such as depreciation and amortization
changes in working capital accounts
gains and losses related to the sale of plant, property and equipment
sale or repurchase of capital stock
The assessment of earnings quality is best accomplished through the use of which one of the following?
Balance sheet and cash flow statement.
Single-step financial statements.
Single-step income statement, balance sheet, and cash flow statement.
Multi-step income statement, balance sheet, and cash flow statement.
One definition of earnings management is that it occurs when managers use:
judgment in financial reporting to alter financial reports to mislead stakeholders.
an accounting method that is inconsistent with other industry members.
more conservative accounting estimates than other companies.
pro forma accounting results as opposed to GAAP results.
Equity valuation models based on dividends, cash flows, and earnings have been the topic of many theoretical and empirical research studies in recent years. All of the following are true regarding these studies except:
Share prices in the capital markets generally correlate closely with share value.
Share prices do not always equal share values.
Temporary deviations of price from value occur.
Unexpected changes in earnings, dividends, and cash flows do not correlate closely with changes in stock prices
Under the cash-flow-based valuation approach, free cash flows can be used instead of dividends as the expected future payoffs to the investor in the numerator of the general valuation model because:
this approach focuses on earnings as a measure of the capital that a firm creates.
over the life of the firm, the free cash flows into the firm and cash flows paid out of the firm in dividends to shareholders will be equivalent.
over the life of the firm, the free cash flows out of the firm for investments and cash flows paid into the firm in dividends from these investments will be equivalent.
this approach focuses on wealth distribution to shareholders.
Which of the following is not one of the three explanatory variables that determine a firm's market beta?
Degree of investing leverage.
Degree of operating leverage.
Degree of financial leverage.
Variability of sales.
All of the following are the building blocks for financial statement analysis except:
Targeting growth opportunities that diversify exchange rates, risk exposure, and political uncertainty.
Describing strategies that a firm pursues to differentiate itself from competitors in order to evaluate competitive advantages, sustainability of the firm’s earnings, and its risks.
Evaluating the financial statements, including the accounting concepts and methods that underlie them and the quality of the information they provide.
Identification of the economic characteristics of the industries and the relation of those economic characteristics to the various financial statement ratios.
Free cash flows to all debt and common equity shareholders represents the excess of cash flows from:
operating activities over cash flows for financing activities
investing over cash flows for operating activities
investing over cash flows for financing activities
operating activities over cash flows for investing activities
Santa Corporation
NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world. The company owns property, plants, and equipment and also enters into operating leases for certain facilities. Assume that Santa’s incremental borrowing rate is 8%. The company's tax rate is 40%. Listed below are selected financial data for Santa and a portion of the company's operating lease footnote.
|
|
2012 |
2011 |
2010 |
|
Property, Plant, & Equipment (net) |
$ 882,468 |
$ 717,453 |
$ 658,214 |
|
Total Assets |
1,756,854 |
1,405,484 |
1,254,896 |
|
Common Shareholders’ Equity |
867,992 |
652,626 |
587,951 |
|
|
|
|
|
|
Sales |
$2,922,915 |
$2,415,632 |
|
|
Cost of Goods Sold |
2,016,811 |
1,642,630 |
|
|
Depreciation Expense |
78,584 |
67,542 |
|
|
Interest Expense |
106,663 |
90,343 |
|
|
Net Income |
248,448 |
217,407 |
|
|
|
Santa Corp. |
|
|
Operating Lease Disclosure |
|
|
(amounts in thousands) |
|
|
|
|
|
Operating Lease Commitments |
|
|
at the end of 2012 |
|
|
|
|
|
|
|
Year |
Reported Lease Commitments |
|
2013 |
$148,239 |
|
2014 |
$252,800 |
|
2015 |
$278,327 |
|
2016 |
$279,210 |
|
2017 |
$285,452 |
|
Beyond 2017 |
$2,471,600 |
Using the information provided by Santa Corporation, estimate the average life of the operating leases.
8.66 years
13.66 years
10 years
Not able to determine
U.S. GAAP, IFRS, and other major accounting standards are best characterized as:
historical accounting models.
current value accounting models.
acquisition cost accounting models.
mixed attribute accounting models.
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