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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
Applying common-size analysis to the excerpts of SAP Group’s balance sheets presented in Exhibits 4 , 6 , 8 , and 12 , answer the following: In 2009 relative to 2008, which two of the following line items increased as a percentage of assets?A. Cash and cash equivalents.B. Other financial
For the following ratio questions, refer to the balance sheet information for the SAP Group presented in Exhibits 1 , 4 , 6 , 8 , and 12 .1. The current ratio for SAP Group at 31 December 2009 is closest to A. 1.54.B. 1.86.C. 2.33.2. Which two of the following ratios decreased in 2009 relative to
Resources controlled by a company as a result of past events are:A. equity.B. assets.C. liabilities.
Equity equals:A. Assets – Liabilities.B. Liabilities – Assets.C. Assets + Liabilities.
Distinguishing between current and non-current items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as:A. a classified balance sheet.B. an unclassified balance sheet.C. a liquidity-based balance sheet.
All of the following are current assets except :A. cash.B. goodwill.C. inventories.
Debt due within one year is considered:A. current.B. preferred.C. convertible.
Money received from customers for products to be delivered in the future is recorded as:A. revenue and an asset.B. an asset and a liability.C. revenue and a liability.
The carrying value of inventories reflects:A. their historical cost.B. their current value.C. the lower of historical cost or net realizable value.
When a company pays its rent in advance, its balance sheet will reflect a reduction in:A. assets and liabilities.B. assets and shareholders’ equity.C. one category of assets and an increase in another.
Accrued expenses (accrued liabilities) are:A. expenses that have been paid.B. created when another liability is reduced.C. expenses that have been reported on the income statement but not yet paid.
The initial measurement of goodwill is most likely affected by:A. an acquisition’s purchase price.B. the acquired company’s book value.C. the fair value of the acquirer’s assets and liabilities.
Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in:A. the debt-to-equity ratio but not the total asset turnover.B. the total asset
For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders’ equity?A. They are not recognized.B. They flow through income into retained earnings.C. They are a component of accumulated other comprehensive income.
For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity?A. They are not recognized.B. They flow through retained earnings.C. They are a component of accumulated other comprehensive income.
For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders’ equity?A. They are not recognized.B. They flow through retained earnings.C. They are a component of accumulated other comprehensive income.
The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet:A. as a long-term liability.B. separately, but as a part of shareholders’ equity.C. as a mezzanine item between liabilities and shareholders’ equity.
The item “retained earnings” is a component of:A. assets.B. liabilities.C. shareholders’ equity.
When a company buys shares of its own stock to be held in treasury, it records a reduction in:A. both assets and liabilities.B. both assets and shareholders’ equity.C. assets and an increase in shareholders’ equity.
Which of the following would an analyst most likely be able to determine from a common-size analysis of a company’s balance sheet over several periods?A. An increase or decrease in sales.B. An increase or decrease in financial leverage.C. A more efficient or less efficient use of assets.
An investor concerned whether a company can meet its near-term obligations is most likely to calculate the:A. current ratio.B. return on total capital.C. financial leverage ratio.
The most stringent test of a company’s liquidity is its:A. cash ratio.B. quick ratio.C. current ratio.
An investor worried about a company’s long-term solvency would most likely examine its:A. current ratio.B. return on equity.C. debt-to-equity ratio.
Using the information presented in Exhibit 4, the quick ratio for SAP Group at 31 December 2009 is closest to:A. 1.01.B. 1.44.C. 1.54. EXHIBIT 4 SAP Group Consolidated Statements of Financial Position (Excerpt: Current Assets Detail) (in millions of ) Assets Cash and cash equivalents Other
Using the information presented in Exhibit 12, the financial leverage ratio for SAP Group at 31 December 2009 is closest to:A. 0.08.B. 0.58.C. 1.58. EXHIBIT 12 SAP Group Consolidated Statements of Financial Position (Excerpt: Non-Current Liabilities Detail) (in millions of ) Assets Total current
A company recorded the following in Year 1:On the Year 1 statement of cash flows, the company would report net cash flow from investing activities closest to:A. (€150,000).B. (€80,000).C. €200,000. Proceeds from issuance of long-term debt Purchase of equipment Loss on sale of equipment
On 31 December 2009, a company issued a £30,000 180-day note at 8 percent, using the cash received to pay for inventory, and issued £110,000 long-term debt at 11 percent annually, using the cash received to pay for new equipment. Which of the following most accurately reflects the combined effect
Blue Bayou, a fictitious advertising company, reported revenues of $50 million, total expenses of $35 million, and net income of $15 million in the most recent year. If accounts receivable decreased by $12 million, how much cash did the company receive from customers?A. $38 million.B. $50
Orange Beverages Plc., a fictitious manufacturer of tropical drinks, reported cost of goods sold for the year of $100 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, but accounts payable decreased by $2 million. How
Black Ice, a fictitious sportswear manufacturer, reported other operating expenses of $30 million. Prepaid insurance expense increased by $4 million, and accrued utilities payable decreased by $7 million. Insurance and utilities are the only two components of other operating expenses. How much cash
Copper, Inc., a fictitious brewery and restaurant chain, reported a gain on the sale of equipment of $12 million. In addition, the company’s income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of$15 million, all of which was for the
Based on the following information for Pinkerly Inc., a fictitious company, what are the total adjustments that the company would make to net income in order to derive operating cash flow?A. Add $5 million.B. Add $21 million.C. Subtract $9 million. Income statement item Net income Depreciation
Derek Yee, CFA, is preparing to forecast cash fl ow for Groupe Danone (FP: BN) as an input into his valuation model. He has asked you to evaluate the historical cash flow statement of Groupe Danone, which is presented in Exhibit 12 . Groupe Danone prepares its fi nancial statements in conformity
Andrew Potter is examining an abbreviated common-size cash flow statement for Dell Inc. (NASDAQ: DELL), a provider of technological products and services. The common-size cash flow statement was prepared by dividing each line item by total net revenue for the same year. The terminology is that used
Andrew Potter is comparing the cash-flow-generating ability of Dell Inc. with that of other computer manufacturers: Hewlett Packard (NYSE: HPQ) and Apple Inc. (NASDAQ: AAPL). He collects information from the companies’ annual reports and prepares the following table.Cash Flow from Operating
The three major classifications of activities in a cash flow statement are:A. inflows, outflows, and net flows.B. operating, investing, and financing.C. revenues, expenses, and net income.
The sale of a building for cash would be classified as what type of activity on the cash flow statement?A. Operating.B. Investing.C. Financing.
Which of the following is an example of a financing activity on the cash flow statement under US GAAP?A. Payment of interest.B. Receipt of dividends.C. Payment of dividends.
A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be:A. reported as a $1 million investing cash inflow and outflow.B. reported as a $1 million financing cash outflow and inflow.C. reported as supplementary information to the cash flow
Interest paid is classified as an operating cash flow under:A. US GAAP but may be classified as either operating or investing cash flows under IFRS.B. IFRS but may be classified as either operating or investing cash flows under US GAAP.C. US GAAP but may be classified as either operating or
Cash flows from taxes on income must be separately disclosed under:A. IFRS only.B. US GAAP only.C. both IFRS and US GAAP.
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP?A. Operating.B. Investing.C. Financing.
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method?A. Net income.B. Cash paid to suppliers.C. Cash received from customers.
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers?A. $90 million.B. $100
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the
White Flag, a women’s clothing manufacturer, reported salaries expense of $20 million.The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries?A. $18 million.B. $21 million.C. $22 million.
An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):Based only on the information above, the company’s 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to
Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes?A. $22 million for
An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity.
Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company’s income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $10 million, all of which was for
Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2010?A. Issuance of common
Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?A. Add $2 million.B. Add $6 million.C. Subtract $6 million. Income Statement Item Net income Depreciation Balance Sheet Item Accounts
The first step in cash flow statement analysis should be to:A. evaluate consistency of cash flows.B. determine operating cash flow drivers.C. identify the major sources and uses of cash.
Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3?A. The primary use of cash is financing activities.B. The primary source of cash is operating activities.C. Telefónica classifies interest received as an
Which is an appropriate method of preparing a common-size cash flow statement?A. Show each item of revenue and expense as a percentage of net revenue.B. Show each line item on the cash flow statement as a percentage of net revenue.C. Show each line item on the cash flow statement as a percentage of
Which of the following is an appropriate method of computing free cash flow to the firm?A. Add operating cash flows to capital expenditures and deduct after-tax interest payments.B. Add operating cash flows to after-tax interest payments and deduct capital expenditures.C. Deduct both after-tax
An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate?A. This ratio is an interest coverage ratio, measuring a company’s
An analyst is examining the profitability of three Asian companies with large shares of the global personal computer market: Acer Inc. (Taiwan SE: ACER), Lenovo Group Limited (HKSE: 0992), and Toshiba Corporation (Tokyo SE: 6502). Taiwan-based Acer has pursued a strategy of selling its products at
A US insurance company reports that its “combined ratio” is determined by dividing losses and expenses incurred by net premiums earned. It reports the following combined ratios:Explain what this ratio is measuring and compare the results reported for each of the years shown in the chart. What
On 15 July, an analyst is examining a company with a fiscal year ending on 31 December.Use the following data to calculate the company’s trailing 12 month earnings (for the period ended 30 June 2010):• Earnings for the year ended 31 December, 2009: $1,200;• Earnings for the six months ended
An analyst would like to evaluate Lenovo Group’s efficiency in collecting its trade accounts receivable during the fiscal year ended 31 March 2010 (FY2009). The analyst gathers the following information from Lenovo’s annual and interim reports:Calculate Lenovo’s receivables turnover and
A credit analyst is evaluating the solvency of Alcatel-Lucent (Euronext Paris: ALU) as of the beginning of 2010. The following data are gathered from the company’s 2009 annual report (in € millions):1.A. Calculate the company’s financial leverage ratio for 2009.B. Interpret the financial
An analyst is evaluating the profitability of Daimler AG (Xetra: DAI) over a recent five-year period. He gathers the following revenue data and calculates the following profitability ratios from information in Daimler’s annual reports:a EBIT (Earnings before interest and taxes) is the operating
An analyst collects the information shown in Exhibit 16 for two companies:Which of the following choices best describes reasonable conclusions an analyst might make about the companies’ efficiency?A. Over the past four years, Anson has shown greater improvement in efficiency than Clarence, as
Referring to the data for Anson Industries and Clarence Corporation in Example 14 , which of the following choices best describes reasonable conclusions an analyst might make about the companies’ ROE?A. Anson’s inventory turnover of 76.69 indicates it is more profitable than Clarence.B. The
An analyst examining Royal Dutch Shell PLC (Amsterdam and London SEs: RDSA) wishes to understand the factors driving the trend in ROE over a recent four-year period.The analyst obtains and calculates the following data from Shell’s annual reports:What might the analyst conclude? ROE Tax burden
The information contained in Exhibit 22 relates to the business segments of Groupe Danone (EuronextParis: BN) for 2008 and 2009 in millions of euro. According to the company’s 2009 annual report:Over the course of the past 10 years, the Group has refocused its activities on the health food
Comparison of a company’s financial results to other peer companies for the same time period is called:A. technical analysis.B. time-series analysis.C. cross-sectional analysis.
In order to assess a company’s ability to fulfill its long-term obligations, an analyst would most likely examine:A. activity ratios.B. liquidity ratios.C. solvency ratios.
Which ratio would a company most likely use to measure its ability to meet short-term obligations?A. Current ratio.B. Payables turnover.C. Gross profit margin.
Which of the following ratios would be most useful in determining a company’s ability to cover its lease and interest payments?A. ROA.B. Total asset turnover.C. Fixed charge coverage.
An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion:Based on this data, what is the analyst least likely to conclude?A. Inventory management has contributed to improved liquidity.B. Management of
An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro):Which of the following would be the analyst’s most likely conclusion?A. The company is becoming increasingly less solvent, as evidenced by the increase in its
With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data?A. The decline in the company’s equity results from a decline in the market value of this company’s common shares.B. The €250 increase in the company’s debt from FY3 to FY5 indicates
An analyst observes a decrease in a company’s inventory turnover. Which of the following would most likely explain this trend?A. The company installed a new inventory management system, allowing more efficient inventory management.B. Due to problems with obsolescent inventory last year, the
Which of the following would best explain an increase in receivables turnover?A . The company adopted new credit policies last year and began offering credit to customers with weak credit histories.B. Due to problems with an error in its old credit scoring system, the company had accumulated a
Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent
An analyst observes the following data for two companies:Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies’ abilities to pay their current and long-term obligations?A. Company A’s current ratio of 4.0 indicates it is more
The company’s total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company’s efficiency?A. Comparing FY14 with FY10, the company’s efficiency improved, as indicated by a total asset turnover
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s solvency?A. Comparing FY14 with FY10, the company’s solvency improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.B. Comparing FY14 with FY10, the
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s liquidity?A. Comparing FY14 with FY10, the company’s liquidity improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.B. Comparing FY14 with FY10, the
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s profitability?A. Comparing FY14 with FY10, the company’s profitability improved, as indicated by an increase in its debt-to-assets ratio from 0.14 to 0.27.B. Comparing FY14 with FY10,
Assuming no changes in other variables, which of the following would decrease ROA?A. A decrease in the effective tax rate.B. A decrease in interest expense.C. An increase in average assets.
An analyst compiles the following data for a company:Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company’s:A. net profit margin and financial leverage have decreased.B. net profit margin and financial leverage have increased.C.
A decomposition of ROE for Integra SA is as follows:Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition?A Profitability and the liquidity position both improved in FY12.B. The higher average tax rate in FY12 off set the
A decomposition of ROE for Company A and Company B is as follows:An analyst is most likely to conclude that:A. Company A’s ROE is higher than Company B’s in FY15, and one explanation consistent with the data is that Company A may have purchased new, more efficient equipment.B. Company A’s ROE
What does the P/E ratio measure?A. The “multiple” that the stock market places on a company’s EPS.B. The relationship between dividends and market prices.C. The earnings for one common share of stock.
A creditor most likely would consider a decrease in which of the following ratios to be positive news?A. Interest coverage (times interest earned).B. Debt-to-total assets.C. Return on assets.
When developing forecasts, analysts should most likely :A. develop possibilities relying exclusively on the results of financial analysis.B. use the results of financial analysis, analysis of other information, and judgment.C. aim to develop extremely precise forecasts using the results of
Compared with using the Singapore dollar as Acceletron’s functional currency for 2007, if the US dollar were the functional currency, it is most likely that Redline’s consolidated:A. inventories will be higher.B. receivable turnover will be lower.C. fixed asset turnover will be higher.Redline
Compared to 2009 net income as reported, if XYZ had used the same expected volatility assumption for its 2009 option grants that it had used in 2008, its 2009 net income would have been:A. lower.B. higher.C. the same.XYZ SA, a hypothetical company, offers its employees a defined benefit pension
Compared to the reported 2009 financial statements, if Stereo Warehouse had used the 2007 expected volatility assumption to value its employee stock options, it would have most likely reported higher:A. net income.B. compensation expense.C. deferred compensation liability.Stereo Warehouse is a US
Compared to the assumptions Stereo Warehouse used to value stock options in 2008, earnings in 2009 were most favorably affected by the change in the:A. expected life.B. risk-free rate.C. dividend yield.Stereo Warehouse is a US retailer that offers employees a defined benefit pension plan and stock
In this example, two fictitious companies are used. On 1 January 2011, Baxter Inc. invested £300,000 in Cartel Co. debt securities (with a 6% stated rate on par value, payable each 31 December). The par value of the securities was £275,000. On 31 December 2011, the fair value of Baxter’s
In 2009, Cinnamon’s earnings before taxes includes a contribution (in £ millions) from its investment in Cambridge Processing that is closest to:A. £3.8.B. £5.8.C. £7.6.Cinnamon, Inc. is a diversified manufacturing company headquartered in the United Kingdom. It complies with IFRS. In 2009,
Branch (a fictitious company) purchases a 20% interest in Williams (a fictitious company) for €200,000 on 1 January 2010. Williams reports income and dividends as follows:Calculate the investment in Williams that appears on Branch’s balance sheet as of the end of 2012. 2010 2011 2012 Income
In 2010, if Cinnamon is deemed to have control over Cambridge, it will most likely account for its investment in Cambridge using:A. the equity method.B. the acquisition method.C. proportionate consolidation.Cinnamon, Inc. is a diversified manufacturing company headquartered in the United Kingdom.
Assume that the hypothetical Blake Co. acquires 30% of the outstanding shares of the hypothetical Brown Co. At the acquisition date, book values and fair values of Brown’s recorded assets and liabilities are as follows:Blake Co. believes the value of Brown Co. is higher than the fair value of its
At 31 December 2010, Cinnamon’s shareholders’ equity on its balance sheet would most likely be:A. highest if Cinnamon is deemed to have control of Cambridge.B. independent of the accounting method used for the investment in Cambridge.C. highest if Cinnamon is deemed to have significant
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