Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

In Kern’s comparative ratio analysis, the 2009 inventory turnover ratio for Century Chocolate is closest to:A. 5.07.B. 5.42.C. 5.55.Hans Annan, CFA, a food and beverage analyst, is reviewing
The most accurate statement regarding Annan’s reasoning for requiring Kern to select a competitor that reports under IFRS for comparative purposes is that under U.S. GAAP:A. fair values are used to
Annan’s statement regarding the perpetual and periodic inventory systems is most significant when which of the following costing systems is used?A. LIFO.B. FIFO.C. Specific identification.Hans
Using the inventory record for purchased lemon drops shown in Exhibit D, the cost of sales for 2009 will be closest to:A. CHF 3,550.B. CHF 4,550.C. CHF 4,850.Hans Annan, CFA, a food and beverage
Ignoring any tax effect, the 2009 net realizable value reassessment for the black licorice jelly beans will most likely result in:A. an increase in gross profit of CHF 9,256.B. an increase in gross
If the trend noted in the ICCO report continues and Century Chocolate plans to maintain constant or increasing inventory quantities, the most likely impact on Century Chocolate’s financial
If Karp had used FIFO instead of LIFO, the amount of inventory reported as of 31 December 2009 would have been closest to:A. $465 million.B. $658 million.C. $775 million.John Martinson, CFA, is an
If Karp had used FIFO instead of LIFO, the amount of cost of goods sold reported by Karp for the year ended 31 December 2009 would have been closest to:A. $2,056 million.B. $2,173 million.C. $2,249
If Karp had used FIFO instead of LIFO, its reported net income for the year ended 31 December 2009 would have been higher by an amount closest to:A. $30 million.B. $38 million.C. $155 million.John
If Karp had used FIFO instead of LIFO, Karp’s retained earnings as of 31 December 2009 would have been higher by an amount closest to:A. $117 million.B. $124 million.C. $155 million.John Martinson,
If Karp had used FIFO instead of LIFO, which of the following ratios computed as of 31 December 2009 would most likely have been lower?A. cash ratio B. current ratio C. gross profit marginJohn
If Karp had used FIFO instead of LIFO, its debt to equity ratio computed as of 31 December 2009 would have:A. increased.B. decreased.C. remained unchanged.John Martinson, CFA, is an equity analyst
Crux’s inventory turnover ratio computed as of 31 December 2009, after the adjustments suggested by Groff , is closest to:A. 5.67.B. 5.83.C. 6.13.Robert Groff , an equity analyst, is preparing a
Rolby’s net profit margin for the year ended 31 December 2009, after the adjustments suggested by Groff , is closest to:A. 6.01%.B. 6.20%.C. 6.28%.Robert Groff , an equity analyst, is preparing a
Compared with its unadjusted debt-to-equity ratio, Mikko’s debt-to-equity ratio as of 31 December 2009, after the adjustments suggested by Groff , is:A. lower.B. higher.C. the same.Robert Groff ,
The best answer to Borghi’s Question 1 is:A. Crux’s.B. Rolby’s.C. Mikko’s.Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a
The best answer to Borghi’s Question 2 is:A. stable.B. inflationary.C. deflationary.Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a
The best answer to Borghi’s Question 3 is:A. Activity ratios.B. Solvency ratios.C. Profitability ratios.Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report,
The MD&A indicated that the prices of raw material, other production materials, and parts increased. Based on the inventory valuation methods described in Note 2, which inventory classification
The 2008 inventory value as reported on the 2009 consolidated balance sheet if the company had used the FIFO inventory valuation method instead of the LIFO inventory valuation method for a portion of
What is the least likely reason why ZP may need to change its accounting policies regarding inventory at some point after 2009?A. The U.S. SEC is likely to require companies to use the same inventory
If ZP had prepared its financial statement in accordance with IFRS, the inventory turn over ratio (using average inventory) for 2009 would be:A. lower.B. higher.C. the same.ZP Corporation is a
Inventory levels decreased from 2008 to 2009 for all of the following reasons except:A. LIFO liquidation.B. sales volume decreased.C. fluctuations in foreign currency translation rates.ZP Corporation
Which observation is most likely a result of looking only at the information reported in Note 9?A. Increased competition has led to lower unit sales.B. There have been significant price increases in
Note 2 indicates that, “Inventories valued on the LIFO basis totaled ¥94,578 million and ¥50,037 million at 31 December 2008 and 2009, respectively.” Based on this, the LIFO reserve should most
The Industry and Business Risk excerpt states that, “Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward
Assume a (hypothetical) company, Trofferini S. A., incurred the following expenditures to purchase a towel and tissue roll machine: €10,900 purchase price including taxes, €200 for delivery of
BILDA S. A., a hypothetical company, borrows €1,000,000 at an interest rate of 10 percent per year on 1 January 2010 to finance the construction of a factory that will have a useful life of 40
Assume REH AG, a hypothetical company, incurs expenditures of €1,000 per month during the fiscal year ended 31 December 2009 to develop software for internal use.Under IFRS, the company must treat
Assume two identical (hypothetical) companies, CAP Inc. (CAP) and NOW Inc. (NOW), start with €1,000 cash and €1,000 common stock. Each year the companies recognize total revenues of €1,500 cash
A company buys a £300 computer in Year 1 and capitalizes the expenditure. The computer has a useful life of three years and an expected salvage value of £0, so the annual depreciation expense using
MTR Gaming Group, Inc. (NasdaqGS: MNTG) disclosed the following information in one of the footnotes to its financial statements: “Interest is allocated and capitalized to construction in progress
You are working on a project involving the analysis of JHH Software, a (hypothetical) software development company that established technical feasibility for its first product in 2007. Part of your
You are analyzing three hypothetical companies: EVEN-LI Co., SOONER Inc., and AZUSED Co. At the beginning of Year 1, each company buys an identical piece of box manufacturing equipment for $2,300 and
CUTITUP Co., a hypothetical company, purchases a milling machine, a type of machine used for shaping metal, at a total cost of $10,000. $2,000 was estimated to represent the cost of the rotating
IAS 38 Intangible Assets provides illustrative examples regarding the accounting for intangible assets, including the following:A direct-mail marketing company acquires a customer list and expects
UPFIRST, a hypothetical manufacturing company, has elected to use the revaluation model for its machinery. Assume for simplicity that the company owns a single machine, which it purchased for
DOWNFIRST, a hypothetical manufacturing company, has elected to use the revaluation model for its machinery. Assume for simplicity that the company owns a single machine, which it purchased for
Sussex, a hypothetical manufacturing company in the United Kingdom, has a machine it uses to produce a single product. The demand for the product has declined substantially since the introduction of
Moussilauke Diners Inc., a hypothetical company, as a result of revamping its menus to focus on healthier food items, sells 450 used pizza ovens and reports a gain on the sale of $1.2 million. The
The following exhibits include excerpts from the annual report for the year ended 31 March 2009 of Vodafone Group Plc (London: VOD), a global mobile telecommunications company headquartered in the
You are analyzing the property, plant, and equipment of three international paper and paper products companies:• AbitibiBowater Inc. (NYSE: ABY) is a Canadian company that manufactures newsprint,
The following exhibit presents an excerpt from the annual report for the year ended 31 March 2009 of Daejan Holdings PLC (London: DJAN), a property company headquartered in the United Kingdom.1. What
Bi-ly Company is considering the following alternatives in obtaining the use of a new piece of equipment at the beginning of Year 1:Alternative 1: Buy the equipment and finance the purchase with new
CEC Entertainment, Inc. (NYSE: CEC) has significant commitments under capital (finance) and operating leases. Following is selected financial statement information and note disclosure to the
Assume a (hypothetical) company, Selnow Inc., owns a piece of machinery and enters into an agreement to lease the machinery on 1 January Year 1. In the lease contract, the company requires four
JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs:The total cost of the machine to be shown on JOOVI’s balance
BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the construction of its manufacturing plant. The loan has the following conditions:The construction of the plant
After reading the financial statements and footnotes of a company that follows IFRS, an analyst identified the following intangible assets:• product patent expiring in 40 years• copyright with no
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.
A financial analyst is studying the income statement effect of two alternative depreciation methods for a recently acquired piece of equipment. She gathers the following information about the
Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use for a new machine. The machine has an expected useful life of six years. Production is expected to be relatively low
If MARIO uses the straight-line method, the amount of depreciation expense on MARIO’s income statement related to the manufacturing equipment is closest to:A. 125,000.B. 150,000.C. 168,750.Miguel
If MARIO uses the units-of-production method, the amount of depreciation expense (in UYP) on MARIO’s income statement related to the manufacturing equipment is closest to:A. 118,750.B. 168,750.C.
Which of the following amortization methods is most likely to evenly distribute the cost of an intangible asset over its useful life?A. Straight-line method B. Units-of-production method C.
Which of the following will cause a company to show a lower amount of amortization of intangible assets in the first year after acquisition?A. A higher residual value B. A higher amortization rate C.
An analyst in the finance department of BOOLDO, S.A., a French corporation, is computing the amortization of a customer list, an intangible asset, for the fiscal year ended 31 December 2009. She
A financial analyst is analyzing the amortization of a product patent acquired by MAKETTI S.p.A., an Italian corporation. He gathers the following information about the patent:If the analyst uses the
MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for its property, plant, and equipment. One of MARU’s machines was purchased for 2,500,000
An analyst is studying the impairment of the manufacturing equipment of WLP Corp., a U.K.-based corporation that follows IFRS. He gathers the following information about the equipment:The amount of
A financial analyst at BETTO, S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on 31 December 2009. The analyst compiles the following information about the
CROCO S.p.A. sells an intangible asset with a historical acquisition cost of €12 million and an accumulated depreciation of €2 million and reports a loss on the sale of €3.2 million.Which of
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.
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
Which of the following characteristics is most likely to differentiate investment property from property, plant, and equipment?A. It is tangible.B. It earns rent.C. It is long-lived.
If a company uses the fair value model to value investment property, changes in the fair value of the asset are least likely to affect:A. net income.B. net operating income.C. other comprehensive
Investment property is most likely to:A. earn rent.B. be held for resale.C. be used in the production of goods and services.
A company is most likely to:A. use a fair value model for some investment property and a cost model for other investment property.B. change from the fair value model when transactions on comparable
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. 2009 net profit margin is higher than
With respect to Statement 2, what would be the most likely effect in 2010 if AMRC were to switch to an accelerated depreciation method for both financial and tax reporting?A. Net profit margin would
With respect to Statement 3, what is the most likely effect of the impairment loss?A. Net income in years prior to 2009 was likely understated.B. Net profit margins in years after 2009 will likely
Based on Exhibits A and B, the best estimate of the average remaining useful life of the company’s plant and equipment at the end of 2009 is:A. 20.75 years.B. 24.25 years.C. 30.00 years.Melanie
With respect to Statement 4, if AMRC had used its old classification method for its leases instead of its new classification method, its 2009 total asset turnover ratio would most likely be:A.
With respect to Statement 4 and Exhibit A, if AMRC had used its old classification method for its leases instead of its new classification method, the most likely effect on its 2009 ratios would be
Jordan’s response about the financial statement impact of Alpha’s decision to capitalize the cost of its new computer system is most likely correct with respect to:A. lower net income.B. lower
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.
Jordan’s response about the impact of Alpha’s decision to classify its lease as an operating lease instead of finance lease is most likely incorrect with respect to:A. net income.B. solvency and
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.
Jordan’s response about his approach to estimating a company’s need to reinvest in its productive capacity is most likely correct regarding:A. estimating the average age of the asset base.B.
Jordan’s response about the effect of Beta’s impairment loss is most likely incorrect with respect to the impact on its:A. debt to total assets.B. fixed asset turnover.C. cash flow from operating
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.Brian Jordan is
Debond Corp. (a hypothetical company) issues £1,000,000 worth of five-year bonds, dated 1 January 2010, when the market interest rate on bonds of comparable risk and terms is 5 percent per annum.
Debond Corp. issues £1,000,000 worth of five-year bonds, dated 1 January 2010, when the market interest rate on bonds of comparable risk and terms is 6 percent. The bonds pay 5 percent interest
Debond Corp. issues £1,000,000 face value of five-year bonds, dated 1 January 2010, when the market interest rate is 6 percent. The sales proceeds are £957,876. The bonds pay 5 percent interest
Prembond Corp. issues £1,000,000 face value of five-year bonds, dated 1 January 2010, when the market interest rate is 4 percent. The sales proceeds are £1,044,518. The bonds pay 5 percent interest
The following are excerpts from Notes 2 and 13 of Sony Corporation’s (NYSE: SNE) 20-F filing for the fiscal year ended 31 March 2009. These discuss the option for reporting fair values in the
The following excerpts are from the 2008 20-F filing of B+H Ocean Carriers (NYSE Alternext: BHO ). In its statement of cash flows, the company uses the indirect method to reconcile net income with
The following excerpt is from TORM A/S (NASDAQ: TORM) from the Risk Factors section of Item 3, Key Information, in its fiscal year 2008 20-F filing. The excerpt illustrates debt covenants and their
Exhibit 1 is an excerpt from Note 6 of Johnson & Johnson’s (NYSE: JNJ) 2008 financial statements that illustrates financial statement disclosure for long-term debt, including type and nature of
The following excerpt is from the fiscal year 2008 Annual Report of the China Petroleum & Chemical Corporation (NYSE Euronext: SNP).Excerpt from NOTE 29: DEBENTURES PAYABLE On 26 February 2008, the
CAPBS Inc. enters into a lease agreement to acquire the use of a piece of machinery for four years beginning on 1 January 2010. The lease requires four annual payments of€28,679 starting on 1
BASF Group (OTC: BASFY) has significant commitments under finance and operating leases. Presented below is selected note disclosure from its fiscal year 2008 financial statements.In the current
Use the following excerpts taken from Royal Dutch Shell (LSE: RDSA) 2008 consolidated financial statements and notes to the consolidated financial statements to answer the questions below.Use the
DIRFIN Inc. owns a piece of machinery and plans to lease the machine on 1 January 2010. In the lease contract, DIRFIN requires four annual payments of €28,679 starting on 1 January 2010. DIRFIN is
Assume a (hypothetical) company, Selnow, manufactures machinery and enters into an agreement to lease a machine on 1 January 2010. Under the lease, the company is to receive four annual payments of
The following are excerpts of pension-related disclosures from Novo Nordisk’s (NYSE: NVO) 2010 Annual Report. NOVO Nordisk reports under IFRS. These financial statements were issued prior to the
A credit analyst is evaluating and comparing the solvency of two companies—Nokia Corporation (NYSE: NOK) and LM Ericsson Telephone Company (NYSE: ERIC)—at the beginning of 2009. The following
A company issues €1 million of bonds at face value. When the bonds are issued, the company will record a:A. cash inflow from investing activities.B. cash inflow from financing activities.C. cash
At the time of issue of 4.50% coupon bonds, the effective interest rate was 5.00%. The bonds were most likely issued at:A. par.B. a discount.C. a premium.
Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other costs associated with its recent bond issue. It is most likely to record these costs on its financial statements as:A.

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