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financial reporting financial statement analysis and valuation
International Financial Statement Analysis CFA Institute Investment Series 1st Edition Thomas R. Robinson, Hennie Van Greuning CFA, Elaine Henry, Michael A. Broihahn, Sir David Tweedie - Solutions
To compute tangible book value, an analyst would A. add goodwill to stockholders’ equity.B. add all intangible assets to stockholders’ equity.C. subtract all intangible assets from stockholders’ equity.
Which of the following is an off -balance-sheet financing technique? The use of A. capital leasesB. operating leases.C. the last in, first out inventory method.
To better evaluate the solvency of a company, an analyst would most likely add to total liabilities A. the present value of future capital lease payments.B. the total amount of future operating lease payments.C. the present value of future operating lease payments.
A company’s current financial position would best be evaluated using the:A. balance sheet.B. income statement.C. statement of cash flows.
A company’s profitability for a period would best be evaluated using the:A. balance sheet.B. income statement.C. statement of cash flows.
Accounting policies, methods, and estimates used in preparing financial statements are most likely found in the:A. auditor’s report.B. management commentary.C. notes to the financial statements.
Information about management and director compensation would least likely be found in the:A. auditor’s report.B. proxy statement.C. notes to the fi nancial statements.
Information about a company’s objectives, strategies, and signifi cant risks would most likely be found in the:A. auditor’s report.B. management commentary.C. notes to the fi nancial statements.
What type of audit opinion is preferred when analyzing financial statements?A. Qualified.B. Adverse.C. Unqualified.
Ratios are an input into which step in the financial statement analysis framework?A. Process data.B. Collect input data.C. Analyze/interpret the processed data.
Sennett Designs (SD) sells furniture on a retail basis. SD began operations during December 2009 and sold furniture for €250,000 in cash. Th e furniture sold by SD was purchased on credit for €150,000 and delivered by the supplier during December. Th e credit terms granted by the supplier
Which of the following items would most likely be classified as an operating activity?A. Issuance of debt.B. Acquisition of a competitor.C. Sale of automobiles by an automobile dealer.
Which of the following items would most likely be classified as a financing activity?A. Issuance of debt.B. Payment of income taxes.C. Investments in the stock of a supplier.
Which of the following elements represents an economic resource?A. Asset.B. Liability.C. Owners’ equity.
Which of the following elements represents a residual claim?A. Asset.B. Liability.C. Owners’ equity.
An analyst has projected that a company will have assets of €2,000 at year-end and liabilities of €1,200. The analyst’s projection of total owners’ equity should be closest to:A. €800.B. €2,000.C. €3,200.
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions):The analyst’s estimate of ending retained earnings (in millions) should be closest to:A. $1,300.B. $1,500.C. $1,700. 69 Estimated net income Beginning retained
An analyst has compiled the following information regarding Rubsam, Inc.There have been no distributions to owners. The analyst’s most likely estimate of total assets at year-end should be closest to:A. €2,100.B. €2,300.C. €2,800. Liabilities at year-end Contributed capital at year-end
A group of individuals formed a new company with an investment of $500,000. The most likely effect of this transaction on the company’s accounting equation at the time of the formation is an increase in cash and:A. an increase in revenue.B. an increase in liabilities.C. an increase in contributed
HVG, LLC paid $12,000 of cash to a real estate company upon signing a lease on 31 December 2005. Th e payment represents a $4,000 security deposit and $4,000 of rent for each of January 2006 and February 2006. Assuming that the correct accounting is to refl ect both January and February rent as
TRR Enterprises sold products to customers on 30 June 2006 for a total price of €10,000.The terms of the sale are that payment is due in 30 days. Th e cost of the products was €8,000. The most likely net change in TRR’s total assets on 30 June 2006 related to this transaction is:A. €0.B.
On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on production of a custom machine to be delivered in August 2006. Th is transaction would most likely result in which of the following on 30 April 2006?A. No effect on liabilities.B. A decrease in assets of $30,000.C.
Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in December 2005.The most likely effect on the company’s accounting equation is:A. no effect on assets.B. a decrease in assets of €250,000.C. an increase in liabilities of €250,000.
An analyst who is interested in assessing a company’s financial position is most likely to focus on which financial statement?A. Balance sheet.B. Income statement.C. Statement of cash flows.
The statement of cash flows presents the flows into which three groups of business activities?A. Operating, Nonoperating, and Financing.B. Operating, Investing, and Financing.C. Operating, Nonoperating, and Investing.
Which of the following statements about cash received prior to the recognition of revenue in the financial statements is most accurate? The cash is recorded as:A. deferred revenue, an asset.B. accrued revenue, a liability.C. deferred revenue, a liability.
When, at the end of an accounting period, a revenue has been recognized in the financial statements but no billing has occurred and no cash has been received, the accrual is to:A. unbilled (accrued) revenue, an asset.B. deferred revenue, an asset.C. unbilled (accrued) revenue, a liability.
When, at the end of an accounting period, cash has been paid with respect to an expense, the business should then record:A. an accrued expense, an asset.B. a prepaid expense, an asset.C. an accrued expense, a liability.
When, at the end of an accounting period, cash has not been paid with respect to an expense that has been incurred, the business should then record:A. an accrued expense, an asset.B. a prepaid expense, an asset.C. an accrued expense, a liability.
The collection of all business transactions sorted by account in an accounting system is referred to as:A. a trial balance.B. a general ledger.C. a general journal.
If a company reported fictitious revenue, it could try to cover up its fraud by:A. decreasing assets.B. increasing liabilities.C. creating a fictitious asset.
Canon is a manufacturer of copy machines and other electronic equipment. Abbreviated balance sheets as of 31 December 2004 and 2005 are presented below.Using Equation 1a , address the following:1. Determine the amount of stockholders’ equity as of 31 December 2005.2. A. Calculate and contrast
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (amounts in millions):The analyst’s estimate of ending retained earnings (in millions) should be closest to:A. $2,000.B. $2,100.C. $2,150.D. $2,200. Estimated net income
An analyst has compiled the following information regarding RDZ, Inc.There have been no distributions to owners. The analyst’s estimate of total assets at yearend should be closest to:A. €2,000.B. €2,300.C. €2,500.D. €2,700. Liabilities at year-end Contributed capital at year-end
To facilitate comparisons across companies (cross sectional analysis) and over time for a single company (time series analysis), it is important that accounting methods are comparable and consistently applied. However, accounting standards must be flexible enough to recognize that differences exist
In certain cases, multiple regulatory bodies affect a company’s financial reporting requirements. For example, in almost all jurisdictions around the world, banking-specific regulatory bodies establish requirements related to risk-based capital measurement, minimum capital adequacy, provisions
In 2004, Google filed a Form S-1 registration statement with the US SEC to register its initial public offering of securities (Class A Common Stock). In addition to a large amount of financial and business information, the registration statement provided a 20-page discussion of risks related to
A tradeoff between enhancing qualitative characteristics often occurs. For example, when a company records sales revenue, it is required to simultaneously estimate and record an expense for potential bad debts (uncollectible accounts). Including this estimated expense is considered to represent the
Prime Retailers (PR), a US-based distributor of men’s shirts, has a policy of marking its merchandise up by $5 per unit. At the beginning of 2009, PR had 10,000 units of inventory on hand, which cost $15 per unit. During 2009, PR purchased 100,000 units of inventory at a cost of $22 per unit.
Which of the following is most likely not an objective of financial statements?A. To provide information about the performance of an entity.B. To provide information about the financial position of an entity.C. To provide information about the users of an entity’s financial statements.
International financial reporting standards are currently developed by which entity?A. The IFRS Foundation.B. The International Accounting Standards Board.C. The International Organization of Securities Commissions.
US generally accepted accounting principles are currently developed by which entity?A. The Securities and Exchange Commission.B. The Financial Accounting Standards Board.C. The Public Company Accounting Oversight Board.
Which of the following statements about desirable attributes of accounting standards boards is most accurate? Accounting standards boards should:A. concede to political pressures.B. be guided by a well articulated framework.C. be adequately funded by companies to which the standards apply.
A core objective of the International Organization of Securities Commissions is to:A. eliminate systematic risk.B. protect users of financial statements.C. ensure that markets are fair, efficient, and transparent.
According to the Conceptual Framework for Financial Reporting (2010) , which of the following is not an enhancing qualitative characteristic of information in financial statements?A. Accuracy.B. Timeliness.C. Comparability.
Which of the following is not a constraint on the financial statements according to the Conceptual Framework ( 2010 )?A. Understandability.B. Benefit versus cost.C. Balancing of qualitative characteristics.
The assumption that an entity will continue to operate for the foreseeable future is called:A. accrual basis.B. comparability.C. going concern.
The assumption that the effects of transactions and other events are recognized when they occur, not when the cash flows occur, is called:A. relevance.B. accrual basis.C. going concern.
Neutrality of information in the financial statements most closely contributes to which qualitative characteristic?A. Relevance.B. Understandability.C. Faithful representation.
Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements?A. Current cost.B. Historical cost.C. Realizable value.
The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is:A. current cost.B. present value.C. realizable value.
Which of the following is not a required financial statement according to IAS No. 1?A. Statement of financial position.B. Statement of changes in income.C. Statement of comprehensive income.
Which of the following elements of financial statements is most closely related to measurement of performance?A. Assets.B. Expenses.C. Liabilities.
Which of the following elements of financial statements is most closely related to measurement of financial position?A. Equity.B. Income.C. Expenses.
Which of the following is not a characteristic of a coherent financial reporting framework?A. Timeliness.B. Consistency.C. Transparency.
Which of the following is not a recognized approach to standard-setting?A. A rules-based approach.B. An asset/liability approach.C. A principles-based approach.
Which of the following disclosures regarding new accounting standards provides the most meaningful information to an analyst?A. The impact of adoption is discussed.B. The standard will have no material impact.C. Management is still evaluating the impact.
Expenses on the income statement may be grouped by:A. nature, but not by function.B. function, but not by nature.C. either function or nature.
An example of an expense classification by function is:A. tax expense.B. interest expense.C. cost of goods sold.
Denali Limited, a manufacturing company, had the following income statement information:Denali’s gross profit is equal to A. $280,000.B. $500,000.C. $1,000,000. Revenue Cost of goods sold Other operating expenses Interest expense Tax expense $4,000,000 $3,000,000 $ 500,000 $ 100,000 $ 120,000
Under IFRS, income includes increases in economic benefits from:A. increases in liabilities not related to owners’ contributions.B. enhancements of assets not related to owners’ contributions.C. increases in owners’ equity related to owners’ contributions.
Fairplay had the following information related to the sale of its products during 2009, which was its first year of business:Under the accrual basis of accounting, how much net revenue would be reported on Fairplay’s 2009 income statement?A. $200,000.B. $900,000.C. $1,000,000. Revenue Returns of
If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is:A. the cost recovery method.B. the completed contract method.C. the percentage-of-completion method.
At the beginning of 2009, Florida Road Construction entered into a contract to build a road for the government. Construction will take four years. The following information as of 31 December 2009 is available for the contract:Assume that the company estimates percentage complete based on costs
During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how
Using the same information as in Question 8, how much profit will Argo report for 2009 using the cost recovery method?A. None.B. $600,000.C. $1,000,000.
Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from:A. similar barter transactions with unrelated parties.B. similar non-barter transactions with related parties.C. similar non-barter transactions with unrelated parties.
Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after
During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. Th e toy sold well in October.In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per
Using the same information as in Question 12, what would Accent’s cost of goods sold be under the weighted average cost method?A. ₤120,000.B. ₤122,000.C. ₤124,000.
Which inventory method is least likely to be used under IFRS?A. First in, first out (FIFO).B. Last in, first out (LIFO).C. Weighted average.
At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. Th e machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for
Using the same information as in Question 15, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method?A. $60,000.B. $110,000.C. $120,000.
Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired?A. Straight-line depreciation with a short useful life.B. Declining balance depreciation with a long useful life.C. Declining balance depreciation with a short useful life.
Under IFRS, a loss from the destruction of property in a fire would most likely be classified as:A. an extraordinary item.B. continuing operations.C. discontinued operations.
For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. Th e company paid $200,000 in dividends to common shareholders.What is Flamingo’s basic earnings per share
Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each.The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would
New Era Network Associates has a five-year license to provide networking support services to a customer. The total amount of the license fee to be received by New Era is $1 million. New Era recognizes license revenue on a prorated basis regardless of the time at which cash is received. How much
Stelle Technology has a contract to build a network for a customer for a total sales price of €10 million. Th e network will take an estimated three years to build, and total building costs are estimated to be €6 million. Stelle recognizes long-term contract revenue using the
Kolenda Technology Group has a contract to build a network for a customer for a total sales price of $10 million. Th is network will take an estimated three years to build, but considerable uncertainty surrounds total building costs because new technologies are involved. In other words, the outcome
Assume the total sales price and cost of a property are $2,000,000 and $1,100,000, respectively, so that the total profit to be recognized is $900,000. Th e amount of cash received by the seller as a down payment is $300,000, with the remainder of the sales price to be received over a 10-year
Flyalot has agreements with several major airlines to obtain airline tickets at reduced rates. The company pays only for tickets it sells to customers. In the most recent period, Flyalot sold airline tickets to customers over the internet for a total of $1.1 million. The cost of these tickets to
As disclosed in the excerpt from notes to the consolidated financial statements shown below (emphasis added), Apple Inc. (NasdaqGS: AAPL) uses different revenue recognition policies depending on the type of revenue producing activity, including product sales, service and support contracts, and
Kahn Distribution Limited (KDL) purchases inventory items for resale. At the beginning of 2009, Kahn had no inventory on hand. During 2009, Kahn had the following transactions:KDL sold 5,600 units of inventory during the year at $50 per unit, and received cash.KDL determines that there were 2,000
Apple’s amended 10-K for the year ended 26 September 2009 explains how a change in accounting standards (the company refers to these as accounting principles) affects its financial statements. The following excerpt (emphasis added) is from the explanatory note included in the amendment.Under the
For the year ended 31 December 2009, Shopalot Company had net income of $1,950,000. The company had 1,500,000 shares of common stock outstanding, no preferred stock, and no convertible financial instruments. What is Shopalot’s basic EPS?
For the year ended 31 December 2009, Angler Products had net income of $2,500,000. The company declared and paid $200,000 of dividends on preferred stock. Th e company also had the following common stock share information:1 . What is the company’s weighted average number of shares outstanding?2 .
Assume the same facts as in Example 13 except that on 1 December 2009, a previously declared 2 for 1 stock split took effect. Each shareholder of record receives two shares in exchange for each current share that he or she owns. What is the company’s basic EPS?
For the year ended 31 December 2009, Bright-Warm Utility Company had net income of $1,750,000. The company had an average of 500,000 shares of common stock outstanding, 20,000 shares of convertible preferred, and no other potentially dilutive securities. Each share of preferred pays a dividend of
Oppnox Company reported net income of $750,000 for the year ended 31 December 2009. The company had a weighted average of 690,000 shares of common stock outstanding. In addition, the company has only one potentially dilutive security: $50,000 of 6 percent convertible bonds, convertible into a total
Hihotech Company reported net income of $2.3 million for the year ended 30 June 2009 and had a weighted average of 800,000 common shares outstanding. At the beginning of the fiscal year, the company has outstanding 30,000 options with an exercise price of $35. No other potentially dilutive
Assuming the same facts as in Example 17 , calculate the weighted average number of shares outstanding for diluted EPS under IFRS.Data from Example 17Hihotech Company reported net income of $2.3 million for the year ended 30 June 2009 and had a weighted average of 800,000 common shares outstanding.
For the year ended 31 December 2009, Dim-Cool Utility Company had net income of $1,750,000. The company had an average of 500,000 shares of common stock outstanding, 20,000 shares of convertible preferred, and no other potentially dilutive securities.Each share of preferred pays a dividend of $10
Assume a company’s beginning shareholders’ equity is €200 million, its net income for the year is €20 million, its cash dividends for the year are €3 million, and there was no issuance or repurchase of common stock. Th e company’s actual ending shareholders’equity is €227 million.1.
An analyst is looking at two comparable companies. Company A has a lower price/earnings (P/E) ratio than Company B, and the conclusion that has been suggested is that Company A is undervalued. As part of examining this conclusion, the analyst decides to explore the question: What would the
1. Based on the balance sheet excerpt for Apple Inc. in Exhibit 5 , what percentage of its total accounts receivable in 2009 and 2008 does Apple estimate will be uncollectible?2. In general, how does the amount of allowance for doubtful accounts relate to bad debt expense?3. In general, what are
Cisco Systems is a global provider of networking equipment. In its third quarter 2001 Form 10-Q filed with the US Securities and Exchange Commission (US SEC) on 1 June 2001, the company made the following disclosure:We recorded a provision for inventory, including purchase commitments, totaling
In the notes to its 2009 financial statements, SAP Group describes its deferred income as follows:Deferred income consists mainly of prepayments made by our customers for support services and professional services, fees for multiple element arrangements allocated to undelivered elements, and
Alpha Inc., a motor vehicle manufacturer, has a research division that worked on the following projects during the year:Project 1 Research aimed at finding a steering mechanism that does not operate like a conventional steering wheel but reacts to the impulses from a driver’s fingers.Project 2
Safeway, Inc. (NYSE:SWY), is a North American food and drug retailer. On 25 February 2010, Safeway issued a press release that included the following information:Safeway Inc. today reported a net loss of $1,609.1 million ($4.06 per diluted share) for the 16-week fourth quarter of 2009. Excluding a
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