Financial Statement Analysis Volume 3 CFA Institute - Solutions

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. Based on the current competitive landscape presented in Exhibit 1, Archway’s operating profit margins over the forecast horizon are least likely to:A. decrease.B. remain constant.C. increase.
. Based on the current competitive landscape presented in Exhibit 1, French should conclude that Archway’s ability to:A. pass along price increases is high.B. demand lower input prices from suppliers is low.C. generate above-average returns on invested capital is low.
. Which profitability metric should French use to assess Archway’s five-year historic performance relative to its competitors?A. Current ratio B. Operating margin C. Return on invested capital
. When developing forecasts, analysts should most likely:A. develop possibilities relying exclusively on the results of financial analysis.B. aim to develop extremely precise forecasts using the results of financial analysis.C. use the results of financial analysis, analysis of other information,
. A decomposition of ROE for Company A and Company B is as follows:Exhibit 1: ROE for Company A and Company B Company A Company B FY15 FY14 FY15 FY14 ROE 26.46% 18.90% 26.33% 18.90%Tax burden 0.7 0.75 0.75 0.75 Interest burden 0.9 0.9 0.9 0.9 EBIT margin 7.00% 10.00% 13.00% 10.00%Asset turnover 1.5
. A decomposition of ROE for Integra SA is as follows:Exhibit 1: Integra SA ROE FY12 FY11 ROE 18.90% 18.90%Tax burden 0.70 0.75 Interest burden 0.90 0.90 EBIT margin 10.00% 10.00%Asset turnover 1.50 1.40 Leverage 2.00 2.00 Which of the following choices best describes reasonable conclusions an
. An analyst compiles the data in Exhibit 1 for a company:Exhibit 1: Net Profit Margin FY13 FY14 FY15 ROE 19.8% 20.0% 22.0%Return on total assets 8.1% 8.0% 7.9%Total asset turnover 2.0 2.0 2.1 Based only on the information above, the most appropriate conclusion is that, over the period FY13 to
. 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
. 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 current ratio from 0.71 to 0.75.B. Comparing FY14 with FY10, the
. 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 the growth in its profits to GBP 645 million.B. Comparing FY14 with FY10, the company’s
. The company’s total assets at year-end FY9 were GBP3,500 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 deteriorated, as indicated by its current
. An analyst observes the data in Exhibit 1 for two companies:Exhibit 1: Data Comparison (US dollars)Company A Company B Revenue 4,500 6,000 Net income 50 1,000 Current assets 40,000 60,000 Total assets 100,000 700,000 Current liabilities 10,000 50,000 Total debt 60,000 150,000 Shareholders’
. 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 EUR250 increase in the company’s debt from FY3 to FY5 indicates that lenders are viewing the company
. Which of the following would be the analyst’s most likely conclusion?A. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.B. The company is becoming increasingly more liquid, as evidenced by the increase in its
. 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.
. Based on the data in Exhibit 1, what is the analyst least likely to conclude?A. Inventory management has contributed to improved liquidity.B. Management of payables has contributed to improved liquidity.C. Management of receivables has contributed to improved liquidity.
. 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
. 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
. 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
. Comparison of a company’s financial results to other peer companies for the same time period is called:A. time-series analysis.B. common-size analysis.C. cross-sectional analysis.
. An analyst reviewing a firm with a large reported restructuring charge to earnings should:A. view expenses reported in prior years as overstated.B. disregard it because it is solely related to past events.C. consider making pro forma adjustments to prior years’ earnings.
. Which of the following would most likely signal that a company may be using aggressive accrual accounting policies to shift current expenses to later periods?Over the last five-year period, the ratio of cash flow to net income has:A. increased each year.B. decreased each year.C. fluctuated from
. Which of the following is an indication that a company may be recognizing revenue prematurely? Relative to its competitors, the company’s:A. asset turnover is decreasing.B. receivables turnover is increasing.C. days sales outstanding is increasing.
. Bias in revenue recognition would least likely be suspected if:A. the firm engages in barter transactions.B. reported revenue is higher than the previous quarter.C. revenue is recognized before goods are shipped to customers.
. Which technique most likely increases the cash flow provided by operations?A. Stretching the accounts payable credit period B. Applying all non-cash discount amortization against interest capitalized C. Shifting classification of interest paid from financing to operating cash flows
. A company wishing to increase earnings in the reporting period may choose to:A. decrease the useful life of depreciable assets.B. lower estimates of uncollectible accounts receivables.C. classify a purchase as an expense rather than a capital expenditure.
. If a company uses a non-GAAP financial measure in an SEC filing, then the company must:A. give more prominence to the non-GAAP measure if it is used in earnings releases.B. provide a reconciliation of the non-GAAP measure and equivalent GAAP measure.C. exclude charges requiring cash settlement
. An audit opinion of a company’s financial reports is most likely intended to:A. detect fraud.B. reveal misstatements.C. ensure that financial information is presented fairly.
. Which of the following best describes an opportunity for management to issue low-quality financial reports?A. Ineffective board of directors B. Pressure to achieve some performance level C. Corporate concerns about financing in the future
. Which of the following situations will most likely motivate managers to inflate reported earnings?A. Possibility of bond covenant violation B. Earnings that have exceeded analysts’ forecasts C. Earnings that have grown from the prior-year period
. Which of the following situations represents a motivation, rather than an opportunity, to issue low-quality financial reports?A. Poor internal controls B. Search for a personal bonus C. Inattentive board of directors
. A company is experiencing a period of strong financial performance. To increase the likelihood of exceeding analysts’ earnings forecasts in the next reporting period, the company would most likely undertake accounting choices for the period under review that:A. inflate reported revenue.B. delay
. Which of the following conditions best explains why a company’s manager would obtain legal, accounting, and board level approval prior to issuing low-quality financial reports?A. Motivation B. Opportunity C. Rationalization
. Which of the following concerns would most likely motivate a manager to make conservative accounting choices?A. Attention to future career opportunities B. Debt covenant violation risk in the current period C. Unexpected strength in the business environment
. Which of the following statements most likely describes a situation that would motivate a manager to issue low-quality financial reports? The manager has:A. increased the market share of products significantly.B. earned compensation that is linked to stock price performance.C. brought the
. Which of the following is most likely to be considered a potential benefit of accounting conservatism?A. A reduction in litigation costs B. Less biased financial reporting C. An increase in current period reported performance
. Conservative accounting choices will most likely lead to:A. decreased reported earnings in later periods.B. increased reported earnings in the period under review.C. increased debt reported on the balance sheet at the end of the current period.
. If a particular accounting choice is considered aggressive in nature, then the financial performance for the reporting period would most likely:A. be neutral.B. exhibit an upward bias.C. exhibit a downward bias.
. A high-quality financial report may reflect:A. earnings smoothing.B. low earnings quality.C. understatement of asset impairment.
. When earnings are increased by deferring research and development (R&D)investments until the next reporting period, this choice is considered:A. non-compliant accounting.B. earnings management as a result of a real action.C. earnings management as a result of an accounting choice.
. Financial reports of the lowest level of quality reflect:A. fictitious events.B. biased accounting choices.C. accounting that is non-compliant with GAAP.
. Which attribute of financial reports would most likely be evaluated as optimal in the financial reporting spectrum?A. Conservative accounting choices B. Sustainable and adequate returns C. Emphasized pro forma earnings measures
. Earnings that result from non-recurring activities most likely indicate:A. lower-quality earnings.B. biased accounting choices.C. lower-quality financial reporting.
. Low quality earnings most likely reflect:A. low-quality financial reporting.B. company activities which are unsustainable.C. information that does not faithfully represent company activities.
. To properly assess a company’s past performance, an analyst requires:A. high earnings quality.B. high financial reporting quality.C. both high earnings quality and high financial reporting quality.
. The information provided by a low-quality financial report will most likely:A. decrease company value.B. indicate earnings are not sustainable.C. impede the assessment of earnings quality.
. In contrast to earnings quality, financial reporting quality most likely pertains to:A. sustainable earnings.B. relevant information.C. adequate return on investment.
. 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
. 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.Exhibit 1: Selected Data for Samuels Company (US dollar millions)Year 3 Year 2 Year 1 Equipment value for accounting purposes(carrying amount) (depreciation of USD1,000/year)USD7,000 USD8,000 USD9,000 Equipment value for tax
. 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.
11. 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.
10. An analyst gathered the following data for a company ($ millions):31 Dec 2000 31 Dec 2001 Gross investment in fixed assets $2.8 $2.8 Accumulated depreciation $1.2 $1.6 The average age and average depreciable life of the company’s fixed assets at the end of 2001 are closest to:Average Age
9. An analyst is evaluating the balance sheet of a US company that uses last in, first out (LIFO) accounting for inventory. The analyst collects the following data:31 Dec 05 31 Dec 06 Inventory reported on balance sheet $500,000 $600,000 LIFO reserve $50,000 $70,000 Average tax rate 30% 30%After
8. When comparing a US company that uses the last in, first out (LIFO) method of inventory with companies that prepare their financial statements under International Financial Reporting Standards (IFRS), analysts should be aware that according to IFRS, the LIFO method of inventory:A. is never
7. In a comprehensive financial analysis, financial statements should be:A. used as reported without adjustment.B. adjusted after completing ratio analysis.C. adjusted for differences in accounting standards, such as International Financial Reporting Standards and US generally accepted accounting
6. When a database eliminates companies that cease to exist because of a merger or bankruptcy, this can result in:A. look-ahead bias.B. back-testing bias.C. survivorship bias.
5. One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies?A. Net income less than zero B. Debt-to-total assets ratio below a certain
4. When screening for potential equity investments based on return on equity, to control risk, an analyst would most likely include a criterion that requires:A. positive net income.B. negative net income.C. negative shareholders’ equity.
3. Credit analysts are likely to consider which of the following in making a rating recommendation?A. Business risk but not financial risk B. Financial risk but not business risk C. Both business risk and financial risk
2. Galambos Corporation had an average receivables collection period of 19 days in 2003. Galambos has stated that it wants to decrease its collection period in 2004 to match the industry average of 15 days. Credit sales in 2003 were $300 million, and analysts expect credit sales to increase to $400
1. Projecting profit margins into the future on the basis of past results would be most reliable when the company:A. is in the commodities business.B. operates in a single business segment.C. is a large, diversified company operating in mature industries.
explain appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company
describe the use of financial statement analysis in screening for potential equity investments
describe the role of financial statement analysis in assessing the credit quality of a potential debt investment
demonstrate how to forecast a company’s future net income and cash flow
evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance
17. A company redeems $1,000,000 face value bonds with a carrying value of$990,000. If the call price is 104 the company will:A. reduce bonds payable by $1,000,000.B. recognize a loss on the extinguishment of debt of $50,000.C. recognize a gain on the extinguishment of debt of $10,000.
16. The management of Bank EZ repurchases its own bonds in the open market.They pay €6.5 million for bonds with a face value of €10.0 million and a carrying value of €9.8 million. The bank will most likely report:A. other comprehensive income of €3.3 million.B. other comprehensive income of
15. Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have since risen to 7 percent. Using only the carrying amount (based on historical cost) reported on the balance sheet to analyze the company’s financial position would most likely cause an analyst to:A.
14. Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely:A. rise as the maturity date approaches.B. decline as the maturity date approaches.C. remain constant throughout the life of the bond.
13. Comte Industries issues $3,000,000 worth of three-year bonds dated 1 January 2015. The bonds pay interest of 5.5% annually on 31 December. The market interest rate on bonds of comparable risk and term is 5%. The sales proceeds of the bonds are $3,040,849. Under the straight-line method, the
12. For a bond issued at a premium, using the effective interest rate method, the:A. carrying amount increases each year.B. amortization of the premium increases each year.C. premium is evenly amortized over the life of the bond.
11. Lesp Industries issues five-year bonds dated 1 January 2015 with a face value of $2,000,000 and 3% coupon rate paid annually on 31 December. The market interest rate on bonds of comparable risk and term is 4%. The sales proceeds of the bonds are $1,910,964. Under the effective interest rate
10. A company issues $30,000,000 face value of five-year bonds dated 1 January 2015 when the market interest rate on bonds of comparable risk and terms is 5%. The bonds pay 4% interest annually on 31 December. Based on the effective interest rate method, the carrying amount of the bonds on 31
9. A company issues €10,000,000 face value of 10-year bonds dated 1 January 2015 when the market interest rate on bonds of comparable risk and terms is 6%. The bonds pay 7% interest annually on 31 December. Based on the effective interest rate method, the interest expense on 31 December 2015 is
8. Consolidated Enterprises issues €10 million face value, five-year bonds with a coupon rate of 6.5 percent. At the time of issuance, the market interest rate is 6.0 percent. Using the effective interest rate method of amortisation, the carrying value after one year will be closest to:A.
7. On 1 January 2010, Elegant Fragrances Company issues £1,000,000 face value, five-year bonds with annual interest payments of £55,000 to be paid each 31 December. The market interest rate is 6.0 percent. Using the effective interest rate method of amortisation, Elegant Fragrances is most likely
6. A firm issues a bond with a coupon rate of 5.00% when the market interest rate is 5.50% on bonds of comparable risk and terms. One year later, the market interest rate increases to 6.00%. Based on this information, the effective interest rate is:A. 5.00%.B. 5.50%.C. 6.00%.
5. Midland Brands issues three-year bonds dated 1 January 2015 with a face value of$5,000,000. The market interest rate on bonds of comparable risk and term is 3%.If the bonds pay 2.5% annually on 31 December, bonds payable when issued are most likely reported as closest to:A. $4,929,285.B.
4. A company issues $1,000,000 face value of 10-year bonds on 1 January 2015 when the market interest rate on bonds of comparable risk and terms is 5%. The bonds pay 6% interest annually on 31 December. At the time of issue, the bonds payable reflected on the balance sheet is closest to:A.
3. 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. an asset under US GAAP and reduction of the carrying value of the debt under IFRS.B. a liability
2. 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.
1. 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 inflow from operating activities.
explain the derecognition of debt
describe the effective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments
determine the initial recognition, initial measurement and subsequent measurement of bonds
5. Cinnamon, Inc. recorded a total deferred tax asset in Year 3 of $12,301, offset by a $12,301 valuation allowance. Cinnamon most likely:A. fully utilized the deferred tax asset in Year 3.B. has an equal amount of deferred tax assets and deferred tax liabilities.C. expects not to earn any taxable
4. Zimt AG presents its financial statements in accordance with US GAAP. In Year 3, Zimt discloses a valuation allowance of $1,101 against total deferred tax assets of $19,201. In Year 2, Zimt disclosed a valuation allowance of $1,325 against total deferred tax assets of $17,325. The change in the
3. Compared to the provision for income taxes in Year 3, the company’s cash tax payments were:A. lower.B. higher.C. the same.
2. If the valuation allowance had been the same in Year 3 as it was in Year 2, the company would have reported $115 higher:A. net income.B. deferred tax assets.C. income tax expense.
1. 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.
describe the valuation allowance for deferred tax assets—when it is required and what effect it has on financial statements
explain recognition and measurement of current and deferred tax items
identify and contrast temporary versus permanent differences in pre-tax accounting income and taxable income
evaluate the effect of tax rate changes on a company’s financial statements and ratios

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Financial Statement Analysis Volume 3 CFA Institute - Solutions

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