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financial reporting financial statement analysis and valuation
FINANCIAL STATEMENT ANALYSIS Volume 4 CFA Institute - Solutions
What cautions did Groupon include along with its description of the adjusted CSOI metric?
DEF Co. is a publicly traded company. For the most recent quarter, the average of analysts’ forecasts for earnings per share was USD2.50. In its quarterly earnings announcement, DEF reported net income of USD3,458,780. The number of common shares outstanding was 1,378,000. DEF’s main product is
ABC Co. is a private company. Bank NTBig has made a loan to ABC Co.ABC is required to maintain a minimum 2.0 interest coverage ratio. In its most recent financial reports, ABC reported earnings before interest and taxes of USD1,200 and interest expense of USD600. In the report’s notes, the
GHI Co.’s R&D expenditures for the past five years have been approximately 3 percent of sales. In 2018, the company significantly reduced its R&D expenditures. Without the reduction in R&D expenditures, the company would have reported a loss. No explanation is disclosed.
DEF Co. discloses that, in 2018, it changed the depreciable life of its equipment from 3 years to 15 years. Equipment represents a substantial component of the company’s assets. The company’s disclosures indicate that the change is permissible under the accounting standards of its jurisdiction,
Based on the information provided, explain the differences between the following two disclosures contained in Convatecs’s earnings release:A. The CEO Review of 2016 results states that adjusted EBITDA was USD508 million, up 6.5 percent at constant currency.B. Convatec’s Consolidated Statement
Based on the information provided in Exhibit 7, explain the differences between the following two disclosures contained in Convatec’s press release:A. CEO Review of 2016 results states that revenue grew 4 percent to USD1,688 million.B. Convatec’s Consolidated Statement of Profit or Loss shows
The SEC complaint stated that “PACCAR failed to report the operating results of its aftermarket parts business separately from its truck sales business as required under segment reporting requirements, which are in place to ensure that investors gain the same insight into a company as its
What is the main difference between the note presentation and the MD&A presentation?
Based on the data about the truck’s gross margin presented in the MD&A, was PACCAR’s truck segment profitable in 2009?
Based on the segment data excerpted from the notes to the financial statements, was PACCAR’s truck segment profitable in 2009?
Relative to Marcy’s effective tax rate on foreign income, the company’s effective tax rate on US income was:A. lower in each year presented.B. higher in each year presented.C. higher in some periods and lower in others
Marcy’s effective tax rate was lowest in:A. Year 1.B. Year 2.C. Year 3.
Which of the following statements about tax rates is correct?A. The effective tax rate is typically used for forecasting cash flows.B. The cash tax rate is relevant for projecting earnings on the income statement.C. A company’s income tax expense equals the sum of current taxes plus the change in
Jamison Corp. is domiciled in the United States and has significant operations in the United Kingdom and Australia. The statutory tax rates are 21 percent in the United States, 19 percent in the United Kingdom, and 30 percent in Australia.The company generates Profit before tax of USD2,000,000 in
Which of the following is added to income tax payable to determine the company’s income tax expense as reported on the income statement?A. Deferred tax assets B. Deferred tax liabilities C. Changes in deferred tax assets and liabilities
Please use the selected data in Exhibit 1 for the Samuels Corporation.Assuming a 35 percent tax rate and the selected data below for the Samuels Company, the company’s deferred tax liability in Year 3 is closest to:A. USD450.B. USD750.C. USD900.
James Company has received USD500,000 of tax credits from the recent installation of solar panels that will directly reduce their taxes. Which of the following best describes these tax credits?A. Permanent difference B. Taxable temporary difference C. Deductible temporary difference
In the current year, Michaels Company has a carrying amount of USD3,500,000 and tax base of USD5,000,000 for accounts receivable. Michaels will most likely recognize:A. a deferred tax asset.B. a deferred tax liability.C. no deferred tax asset or liability.
Over the three years presented, changes in the valuation allowance for deferred tax assets were most likely indicative of:A. decreased prospect for future profitability.B. increased prospects for future profitability.
The USD357,000 adjustment in Year 3 most likely resulted in:A. an increase in deferred tax assets.B. an increase in deferred tax liabilities.C. no change to deferred tax assets and liabilities.
In Year 3, the company’s net income (loss) was closest to:A. (USD217,000).B. (USD329,000).C. (USD556,000).
Relative to the company’s effective tax rate on US income, the company’s effective tax rate on foreign income was:A. lower in each year presented.B. higher in each year presented.C. higher in some periods and lower in others.
The company’s effective tax rate was highest in:A. Year 1.B. Year 2.C. Year 3
In Year 3, the company’s US GAAP income statement recorded a provision for income taxes closest to:A. USD30,632.B. USD54,144.C. USD58,772.
When both the timing and amount of tax payments are uncertain, analysts should treat deferred tax liabilities as:A. equity.B. liabilities.C. neither liabilities nor equity.
Deferred tax liabilities should be treated as equity when:A. they are not expected to reverse.B. the timing of tax payments is uncertain.C. the amount of tax payments is uncertain.
Under what circumstances should the analyst consider MU’s deferred tax liability as debt or as equity? Under what circumstances should the analyst exclude MU’s deferred tax liability from both debt and equity when calculating the debt-to-equity ratio?
How would MU’s USD3.88 billion in net operating loss carryforwards in 2017 (see Exhibit 20) affect the valuation that an acquiring company would be willing to offer?
How would reported earnings have been affected if MU were not using a valuation allowance?
How would MU’s deferred tax assets and deferred tax liabilities be affected if the federal statutory tax rate was changed to 21 percent?
MU discloses a valuation allowance of USD2,321 million (see Exhibit 20)against gross deferred assets of USD3,782 million in 2017. Does the existence of this valuation allowance have any implications concerning MU’s future earnings prospects?
Assume on January 1 the following year, 20X2, Neutrino acquires company EFG, which is domiciled in South Korea. The statutory tax rate in South Korea is 25 percent. EFG earns USD500 in profits in 20X2. Assuming US and Ireland operations each increase pre-tax profits by 25 percent, the effective tax
Assuming that there are no other differences between Neutrino’s effective and statutory tax rates, Neutrino’s combined effective tax rate is closest to:A. 12.0 percent.B. 16.5 percent.C. 21.0 percent.
Based on the information in Exhibit 16 and Exhibit 17, Walmart’s cash tax rate is closest to:A. 25.4 percent.B. 29.5 percent.C. 34.1 percent.
Based on the information in Exhibit 16 and Exhibit 17, Walmart’s effective tax rate is closest to:A. 25.4 percent.B. 29.5 percent.C. 34.1 percent.
Which of the following best describes a statutory tax rate?A. Tax paid in cash that period divided by pre-tax income B. Corporate income tax rate in the country in which the company is domiciled C. Reported income tax expense amount on the income statement divided by the pre-tax income
Repeat the exercise of the Tax Rate Estimates Problem, but now assume that Country B, rather than Country A, allows some costs to be taken sooner for tax purposes and that the tax effect described applies to Country B. Continue to assume stable profit before tax in Country A and 15 percent annual
Evaluate the cash tax and effective tax rates for the next three years if the tax authorities in Country A allow some costs (e.g., accelerated depreciation)to be taken sooner for tax purposes. Specifically, assume for Country A, the result is a 50 percent reduction in taxes paid in the current year
What will happen to the effective tax rate for the next three years if the profit before tax in Country A is stable but the profit before tax in Country B grows 15 percent annually?
Relative to the provision for income taxes in Year 3, the company’s cash tax payments were:A. lower.B. higher.C. the same
If the valuation allowance had been the same in Year 3 as it was in Year 2, the company would have reported USD115 higher:A. net income.B. deferred tax assets.C. income tax expense.
A reduction in the statutory tax rate would most likely benefit the company’s:A. income statement and balance sheet.B. income statement but not the balance sheet.C. balance sheet but not the income statement.
A company receives advance payments from customers that are immediately taxable but will not be recognized for accounting purposes until the company fulfills its obligation. The company will most likely record:A. a deferred tax asset.B. a deferred tax liability.C. no deferred tax asset or liability.
A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record:A. a deferred tax asset.B. a deferred tax liability.C. no deferred tax asset or liability
When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record:A. a deferred tax asset.B. a deferred tax liability.C. no deferred tax asset or liability
Analysts should treat deferred tax liabilities that are expected to reverse as:A. equity.B. liabilities.C. neither liabilities nor equity
Income tax expense reported on a company’s income statement equals taxes payable, plus the net increase in:A. deferred tax assets and deferred tax liabilities.B. deferred tax assets, less the net increase in deferred tax liabilities.C. deferred tax liabilities, less the net increase in deferred
Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a:A. deferred tax asset.B. valuation allowance.C. temporary difference.
In early 2018, Sanborn Company must pay the tax authority EUR37,000 on the income it earned in 2017. This amount was most likely recorded on the company’s 31 December 2017 financial statements as:A. taxes payable.B. income tax expense.C. a deferred tax liability.
When certain expenditures result in tax credits that directly reduce taxes, the company will most likely record:A. a deferred tax asset.B. a deferred tax liability.C. no deferred tax asset or liability
When accounting standards require recognition of an expense that is not permitted under tax laws, the result is a:A. deferred tax liability.B. temporary difference.C. permanent difference.
The information below is associated with a company that offers its employees a defined benefit plan:Based on this information, the company’s balance sheet will present a net pension:A. asset of USD300,000,000.B. asset of USD1,400,000,000.C. liability of USD1,100,000,000.
Penben Corporation has a defined benefit pension plan. At 31 December, its pension obligation is EUR10 million and pension assets are EUR9 million. Under either IFRS or US GAAP, the reporting on the balance sheet would be closest to which of the following?A. EUR10 million is shown as a liability,
A company enters into a finance lease agreement to acquire the use of an asset for three years with lease payments of EUR19,000,000 starting next year. The leased asset has a fair market value of EUR49,000,000 and the present value of the lease payments is EUR47,250,188. Based on this information,
Under US GAAP, a lessee’s accounting for a long-term finance lease after incep- tion will include:A. recognizing a single lease expense.B. recording depreciation expense on the right-of-use asset.C. increasing the balance of the lease liability by a portion of the lease payment.
Compared with a finance lease, an operating lease:A. is similar to renting an asset.B. is equivalent to the purchase of an asset.C. has a term for the majority of the economic life of the leased asset.
Under both IFRS and US GAAP, a lessor in an operating lease recognizes:A. selling profit at lease inception.B. a lease asset comprising the lease receivable and relevant residual value at lease inception.C. lease receipts as income and related costs, including depreciation, as expenses over the
Under US GAAP, a lessor’s reported revenues at lease inception will be highest if the lease is classified as:A. a sales-type lease.B. an operating lease.C. a direct financing lease.
For a lessor, the leased asset appears on the balance sheet and continues to be depreciated when the lease is classified as:A. a finance lease.B. a sales-type lease.C. an operating lease.
Beginning with fiscal year 2019, for leases with a term longer than one year, lessees report a right-to-use asset and a lease liability on the balance sheet:A. only for finance leases.B. only for operating leases.C. for both finance and operating leases.
Assume XYZ Company discloses the following information in its Stock Compensation note: As of 31 December 2021, we had USD630 million of unrecognized compensation cost related to nonvested stock-based compensation awards granted under our plan. We expect to recognize this cost over a weighted
Assume ABC Company, a fictional company provides the following disclosure about its stock compensation plans:“The average fair value of shares granted was USD20.86, USD16.42, and USD17.80 in 2021, 2020, and 2019 respectively.” If the company granted 18,000 shares, with a three-year vesting
Which of the following is a difference between a stock grant and a stock option grant?A. Whereas the fair value of stock grants is usually based on the market value at the date of the grant, the fair value of option grants must be estimated.B. Companies account for stock grants by allocating
Which of the following statements is true?A. Share-based compensation does not have to be treated as an expense, when no cash is exchanged.B. Share-based compensation programs can take a variety of forms, including those that are equity-settled and those that are cash settled.C. Employees will
Which of the following is typically an objective of a share-based compensation plan?A. Attracting new employees B. Maximizing executive compensation C. Alignment of employees’ interest with those of management
Which of the following is a potential drawback of compensating employees with stock options?A. The grant may make employees adverse to risk.B. The grant may make employees seek more risk.C. Both of the above are potential drawbacks.:
Approximate compensation expense in 2022 and 2023 relating to options already granted.
Total compensation expense relating to options already granted that will be recognized in future years as options vest.
How are the lessor’s financial statements affected by the classification of the lease as a finance or operating lease?
How would the classification, all else equal, affect EBITDA margin, total asset turnover, and cash flow per share?
How would its financial statements differ, if at all?
What would be the impact of this lease on Proton’s statement of cash flows during the following year?
What would be the impact of this lease on Proton’s income statement during the following year?
What would be the impact of this lease on Proton’s balance sheet at the beginning of the year?
If the fair value of the machine in question 1 was JPY300 million, would the classification of the contract change?A. No B. Yes, from an operating lease to a finance lease C. Yes, from a finance lease to an operating lease
This contract is:A. not a lease.B. an operating lease.C. a finance lease.
Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from:A. contractual or legal rights.B. assets that can be separated from the acquired company
Costs incurred for intangible assets are generally expensed when they are:A. internally developed.B. individually acquired.C. acquired in a business combination.
Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with respect to accounting treatment of:A. revaluation.B. impairment.C. amortization.
Which of the three assets is an intangible asset with a finite useful life?A. Patent B. Goodwill C. Copyright
Which of the following is a required financial statement disclosure for long-lived intangible assets under US GAAP?A. The useful lives of assets B. The reversal of impairment losses C. Estimated amortization expense for the next five fiscal years
According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company’s financial statements and footnotes except for:A. fair value.B. impairment loss.C. amortization rate.
According to IFRS, all of the following pieces of information about property, plant, and equipment must be disclosed in a company’s financial statements and footnotes except for:A. useful lives.B. acquisition dates.C. amount of disposals.
The gain or loss on a sale of a long-lived asset to which the revaluation model has been applied is most likely calculated using sales proceeds less:A. carrying amount.B. carrying amount adjusted for impairment.C. historical cost net of accumulated depreciation.
CROCO S.p.A sells an intangible asset with a historical acquisition cost of EUR12 million and an accumulated amortization of EUR2 million and reports a loss on the sale of EUR3.2 million. Which of the following amounts is most likely the sale price of the asset?A. EUR6.8 million B. EUR8.8 million
Jordan’s response about the effect of Alpha’s revaluation is most likely correct with respect to the impact on its:A. return on equity.B. return on assets.C. debt to capital ratio.
Jordan’s response about the effect of Beta’s impairment loss is incorrect with respect to the impact on its:A. debt to total assets.B. fixed asset turnover.C. cash flow from operating activities.
Jordan’s response about his approach to estimating a company’s need to reinvest in its productive capacity is most likely correct regarding estimating the:A. average age of the asset base.B. total useful life of the asset base.C. average remaining useful life of the asset base.
Jordan’s response about the impact of the different depreciation methods on net profit margin is most likely incorrect with respect to:A. accelerated depreciation.B. straight-line depreciation.C. units-of-production depreciation.
Jordan’s response about the ratio impact of Alpha’s decision to capitalize interest costs is most likely correct with respect to the:A. interest coverage ratio.B. fixed asset turnover ratio.C. interest coverage and fixed asset turnover ratios.
Jordan’s response about the financial statement impact of Alpha’s decision to capitalize the cost of its new computer system is correct with respect to:A. lower net income.B. lower total assets.C. higher cash flow from operating activities.
Based on Exhibit 1, the best estimate of the average remaining useful life of the company’s plant and equipment at the end of 2022 is:A. 20.75 years.B. 24.25 years.C. 30.00 years
With respect to Statement 3, what is the most likely effect of the impairment loss?A. Net income in years prior to 2022 was likely understated.B. Net profit margins in years after 2022 will likely exceed the 2022 net profit margin.C. Cash flow from operating activities in 2022 was likely lower due
With respect to Statement 2, what would be the most likely effect in 2023 if AMRC were to switch to an accelerated depreciation method for both financial and tax reporting?A. Net profit margin would increase.B. Total asset turnover would decrease.C. Cash flow from operating activities would
With respect to Statement 1, which of the following is the most likely effect of management’s decision to expense rather than capitalize these expenditures?A. 2022 net profit margin is higher than if the expenditures had been capitalized.B. 2022 total asset turnover is lower than if the
The impairment of intangible assets with finite lives affects:A. only the balance sheet.B. only the income statement.C. both the balance sheet and the income statement.
Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the carrying amount over the asset’s:A. fair value.B. recoverable amount.C. undiscounted expected future cash flows.
Based on this information, the amount of impairment loss that WLP will need to report on its income statement related to the manufacturing equipment is closest to:A. GBP2,300,000.B. GBP3,100,000.C. GBP4,600,000.
Calculate and compare fixed asset turnover for each company.
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