Foreign Currency Translation
a. Gruber PLC operates in England and is a subsidiary of Szudy International. The
functional currency of Gruber is the British pound. Gruber reported net income in 2006
of 350 million and paid a 75 million dividend on July 1, 2006 when the exchange rate
was $1.55 per pound. The current rate is $1.65 per pound and the average rate for 2006
was 1.60. Compute the change in retained earnings for the period in US dollars.
b. Windsor PLC operates in England and is a subsidiary of Buckingham International.
The U.S. dollar is the reporting currency for Buckingham international. The functional
currency of Windsor is the British pound, and it prepares financial information in
British pounds for internal use.
Windsor’s 2005 and 2006 net assets were 10,000 and 11,500, respectively. The 12/31/06
exchange rate was 1.56, the 12/31/05 exchange rate was 1.50 and the average rate for
the year was 1.53.
What was the translation gain or loss for the year for Buckingham when it converted
Windsor’s financial statements into the reporting currency?
What is net cash flow from investing?
A. $10,000
B. $5,000
C. ($5,000)
D. ($15,000)
Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction
worth $10 million. On 12/31/06, XYZ financial statements reported the following:
At the time of acquisition, the fair value of XYZ’s assets equals its book values, except
for property, plant and equipment which has a fair value $2 million higher than its book
value. Goodwill is expected to be amortized over 10 years, and the average life of
depreciable assets is 10 years. If ABC uses purchase accounting to record the
acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06
with respect to the acquisition of XYZ will be:
A. $0.
B. $2 million.
C. $4 million.
D. $6 million.
Which of the following ratios does not relate to market price of a company under
analysis?
A. Price-to-earnings
B. Earnings yield
C. Price-to-book
D. Return on common equity
Operating Leases
Retail Inc. has both operating and capital leases. Below is a portion of its lease footnote
taken from its 2006 financial statements.
a. Obtain a crude estimate of the remaining length of the operating and capital leases.
b. Estimate the interest rate implicit in the capital leases.
c. Compute the present value of the operating leases.
Which of the following is the most useful in assessing short-term liquidity of a
company?
A. Taxes payable
B. Retained earnings
C. Next period’s sales
D. Prospective cash flows
Which of the following would be least likely to affect the quality of receivables?
A. Credit policy
B. Right of return policy
C. Collection procedures
D. Sales commissions
Exoil recorded an expense and corresponding liability to recognize potential losses
relating to an oil spill in 2006 of $10 million. Its net income for the year was $200
million. It was not able to take a deduction for tax purposes until later years when it
actually paid cash out in relation to this event. In 2006, with respect to this, Exoil would
have:
A. recognized a deferred tax liability.
B. recognized a tax loss carryforward.
C. recognized a deferred tax asset.
D. recognized a deferred equity loss.
During fiscal 2006, Huy sold fully depreciated assets that originally cost $20,000 for
$4,000. In 2006, they purchased assets that cost:
A. $5,000.
B. $6,000.
C. $10,000.
D. $30,000.
When assessing earnings persistence, it is important to analyze discretionary
expenditures. Which of the following is correct?
I. Research and development is generally considered a discretionary expenditure.
II. Decreased discretionary expenditures should always be taken as a positive indicator
that the company is getting costs under control.
III. Advertising expenditures can be considered discretionary expenditures, which often
have implications for future sales.
IV. Absolute levels of discretionary expenditures are more important than the level of
expenditures relative to sales.
A. I, II, and III
B. I, III, and IV
C. II, III, and IV
D. I and III
Which of the following could cause return on net operating assets to increase, all other
things equal?
A. A decrease in interest rate on debt
B. Increase in days accounts receivable are outstanding
C. Increase in inventory turnover
D. Decrease in gross margin
Hert Corporation acquired a capital lease that is carried on its books at a present value
of $100,000 (discounted at 12%). Its annual rental payment is $15,000. What is the
amount of interest expense from this lease?
A. Option A
B. Option B
C. Option C
D. Option D
All other things being equal, which of the following actions will achieve a company’s
wish to increase its financial leverage?
I. Repurchase stock
II. Issue more dividends
III. Sell accounts receivable at face value
IV. Split stock 2 for 1
A. I, II, and III
B. I and II
C. I and IV
D. I, II, and IV
Which of the following is not an analysis issue arising with impairment?
A. Evaluating the appropriateness of the amount of the impairment
B. Evaluating the appropriateness of the timing of the impairment
C. Analyzing the effect of the impairment on asset
D. Analyzing the effect of the impairment on income
When calculating Acme’s return on net operating assets in Year 2, which of the
following adjustments to the asset base is most appropriate to consider?
A. Accumulated depreciation adjustment
B. Tangible asset adjustment
C. Non-operating asset adjustment
D. No asset adjustment
Which of the following is not a source of industry information?
A. Cash budget
B. Standard and Poor’s
C. Trade journals
D. Value line
Wal-Mart
Refer to the financial statements for Wal-Mart, below
a. Calculate for X7 the ratios listed below. X6 numbers are provided for comparative
purposes.
b. Working capital management is an important consideration for many companies.
Which component of Wal-Mart’s working capital do you think it spends most time
managing? That is, which component is likely to be the most important? Why? What
has happened to this component from X6 to X7?
Note: Use ending inventory, ending accounts receivable, and ending accounts payable
in the calculation of days’ inventory outstanding, days’ receivable outstanding, and days’
payables outstanding respectively. Use average inventory, average accounts receivable,
and average accounts payable in the calculation of inventory turnover, accounts
receivable turnover, and payables turnover respectively.
Which of the following is an effect of the reclassification of trading securities as
available-for-sale?
A. The balance sheet would need to be adjusted to report the securities at fair market
value and there would be no effect on the income statement.
B. There would be no effect on either the balance sheet or the income statement.
C. The balance sheet would need to be adjusted to report the securities at fair market
value and unrealized gains or losses on the date of the transfer would be included in net
income.
D. There would be no effect on the balance sheet and unrealized gains or losses on the
date of the transfer would be included in net income.
Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales
for the period total $384,000, of which $40,000 was directly for cash. How much cash
was collected from making sales and collecting accounts receivable?
A. $344,000
B. $418,000
C. $378,000
D. $376,000
Which of the following would require an adjustment in the computation of cash flow
from operations using the indirect method?
I. Sale of machinery for $50,000 with a net book value of $35,000
II. Purchase of supplies for cash
III. Remittance by customer in payment of goods purchased this accounting period
IV. Acquisition of land with simultaneous issuance of long-term note
A. I
B. I and II
C. I and III
D. IV
Which of the following is incorrect? An analyst should be aware of the following when
analyzing a company that has significant investments recorded using the equity method.
A. Cash flow received from investee may be substantially different from investment
income recorded.
B. As investee’s liabilities are not recorded on the company’s balance sheet, there may
be significant off-balance-sheet financing.
C. They must mark investment in investee to market even though there may be no ready
market in which they can sell their investment.
D. Company must record pro rata share of investee’s earnings, which may not be well
correlated with changes in market value of investee.
Which of the following is likely to be used to measure a company’s solvency?
A. Net operating profit margin
B. Current ratio
C. Financial leverage
D. Cash to current liabilities ratio
Equity Valuation
In the table below is selected information for Sprigue Company.
All figures are in thousands and represent expectations of the future.
a. Calculate the expected free cash flow to equity for the years 2005 to 2009.
b. Explain the expected changes in debt levels over the five years.
All other things being equal, if a company increased its dividend payments, what would
happen to the following ratios?
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following factors is least likely to affect earnings persistence?
A. Changing price levels
B. Extraordinary items
C. Usual operating costs
D. Accounting methods used
Which of the following ratios would be considered useful in assessing operating
profitability?
A. Total debt to equity ratio
B. Acid-test ratio
C. Gross profit margin
D. Profit to equity ratio
Recording a long-term lease as an operating lease, as opposed to a capital lease, for a
lessee will cause the following ratios to be:
A. Option A
B. Option B
C. Option C
D. Option D
Which of the following is incorrect with respect to recognized goodwill on the balance
sheet?
A. It should not be amortized.
B. It arises when another company is purchased or when internally generated.
C. It should be written-down if the future benefits no longer exist.
D. It may be negative.
Which of the following is not a criterion for defining a lease as a capital lease?
A. Ownership is transferred at the end of the lease agreement.
B. The lease contains an option to purchase the asset at a bargain price.
C. The present value of the lease payments at the beginning of the lease is 75% or more
than the value of the asset.
D. The lease term is at least 75% of the economic life of the asset.
Given the following information, calculate the inventory turnover for ABC Co. for 2006
(pick closest number).
A. 8.96
B. 7.22
C. 6.93
D. 5.96
Which of the following statements concerning the current ratio is true?
I. It is always larger than the acid-test (quick) ratio.
II. Companies can window-dress their current ratios.
III. In isolation the current ratio has little meaning.
IV. It is a good indicator of solvency of a company.
A. I, II, III, and IV
B. I, II, and III
C. II, III, and IV
D. I, II, and IV
A company issues 12%, 10-year $1,000 bonds paying interest semiannually. Required
return for bonds of this risk is 15%. At what price will the bond be sold (pick closest
answer)?
A. $663
B. $849
C. $847
D. $894