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financial statement analysis

Financial Statement Analysis Volume 3 CFA Institute - Solutions

calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate
calculate the tax base of a company’s assets and liabilities
30. Under IFRS, what must be disclosed under the cost model of valuation for investment properties?A. Useful lives B. The method for determining fair value C. Reconciliation between beginning and ending carrying amounts of investment property
29. Under the revaluation model for property, plant, and equipment and the fair value model for investment property:A. fair value of the asset must be able to be measured reliably.B. net income is affected by all changes in the fair value of the asset.C. net income is never affected if the asset
28. 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 properties become less frequent.C. change from the fair value model when the company transfers
27. Investment property is most likely to:A. earn rent.B. be held for resale.C. be used in the production of goods and services.
26. 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 income.
25. 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.
24. 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 Mexican pesos (MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31 March 2010, the
23. A company is comparing straight-line and double-declining balance amortization methods for a non-renewable six-year license, acquired for €600,000. The difference between the Year 4 ending net book values using the two methods is closest to:A. €81,400.B. €118,600.C. €200,000.
22. A company acquires a patent with an expiration date in six years for ¥100 million.The company assumes that the patent will generate economic benefits that will decline over time and decides to amortize the patent using the double-declining balance method. The annual amortization expense in
21. 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:Acquisition cost €5,800,000 Acquisition date 1 January 2009 Patent expiration date 31 December 2015 Total plant
20. 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 gathers the following information about the asset:Acquisition cost €2,300,000 Acquisition date 1
19. 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. A shorter useful life
18. 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. Double-declining balance method
17. 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.
16. 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.
15. Jordan’s response about the ratio impact of Alpha’s decision to capitalise 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.
14. Jordan’s response about the financial statement impact of Alpha’s decision to capitalise the cost of its new computer system is most likely correct with respect to:A. lower net income.B. lower total assets.C. higher cash flow from operating activities.
13. 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 exceed the 2009 net profit margin.C. Cash flow from operating activities in 2009 was likely lower
12. 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 increase.B. Total asset turnover would decrease.C. Cash flow from operating activities would
11. With respect to Statement 1, which of the following is the most likely effect of management’s decision to expense rather than capitalise these expenditures?A. 2009 net profit margin is higher than if the expenditures had been capitalised.B. 2009 total asset turnover is lower than if the
10. A company purchases equipment for $200,000 with a five-year useful life and salvage value of zero. It uses the double-declining balance method of depreciation for two years, then shifts to straight-line depreciation at the beginning of Year 3.Compared with annual depreciation expense under the
9. 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. 202,500.
8. 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.
7. 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 initially but to increase over time.The method chosen for tax reporting must be the same as the
6. A company purchases a piece of equipment for €1,500. The equipment is expected to have a useful life of five years and no residual value. In the first year of use, the units of production are expected to be 15% of the equipment’s lifetime production capacity and the equipment is expected to
5. 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 equipment’s expected production life and use:Year 1 Year 2 Year 3 Year 4 Year 5 Total Units of
4. BAURU, S.A., a Brazilian corporation that prepares its financial statements in accordance with IFRS, borrows capital from a local bank to finance the construction of its manufacturing plant. The loan has the following conditions:Borrowing date 1 January 2009 Amount borrowed 500 million Brazilian
3. When constructing an asset for sale, directly related borrowing costs are most likely:A. expensed as incurred.B. capitalized as part of inventory.C. capitalized as part of property, plant, and equipment.
2. Which costs incurred with the purchase of property and equipment are expensed?A. Delivery charges B. Installation and testing C. Training required to use the property and equipment
1. JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs:Purchase price $12,980 Freight and insurance $1,200 Installation $700 Testing $100 Maintenance staff training costs $500 The total cost of the machine to be shown
compare the financial reporting of investment property with that of property, plant, and equipment
describe the revaluation model
concerning useful life and residual value affect amortisation expense, financial statements, and ratios
describe how the choice of amortisation method and assumptions
describe the different amortisation methods for intangible assets with finite lives and calculate amortisation expense
explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect financial statements and ratios
describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, financial statements, and ratios
describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense
50. Which of the following most likely signals that a manufacturing company expects demand for its product to increase?A. Finished goods inventory growth rate higher than the sales growth rate B. Higher unit volumes of work in progress and raw material inventories C. Substantially higher finished
49. Company A adheres to US GAAP and Company B adheres to IFRS. Which of the following is most likely to be disclosed on the financial statements of both companies?A. Any material income resulting from the liquidation of LIFO inventory B. The amount of inventories recognized as an expense during
48. Carey Company adheres to US GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that:A. Carey has reversed an inventory write-down.B. Jonathan has reversed an inventory write-down.C. Jonathan and Carey both use the FIFO inventory accounting method.
47. Compared to using the FIFO method to account for inventory, during periods of rising prices, a company using the LIFO method is most likely to report higher:A. net income.B. cost of sales.C. income taxes.
46. Nutmeg, Inc. uses the LIFO method to account for inventory. During years in which inventory unit costs are generally rising and in which the company purchases more inventory than it sells to customers, its reported gross profit margin will most likely be:A. lower than it would be if the company
45. Compared to a company that uses the FIFO method, during periods of rising prices a company that uses the LIFO method will most likely appear more:A. liquid.B. efficient.C. profitable.
44. Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the results the company would have reported if the write-down had never occurred, Zimt’s reported 2018:A. profit was overstated.B. cash flow from operations was overstated.C. year-end
43. Zimt AG wrote down the value of its inventory in 2017 and reversed the write-down in 2018. Compared to the ratios that would have been calculated if the write-down had never occurred, Zimt’s reported 2017:A. current ratio was too high.B. gross margin was too high.C. inventory turnover was too
42. Compared to using the weighted average cost method to account for inventory, during a period in which prices are generally rising, the current ratio of a company using the FIFO method would most likely be:A. lower.B. higher.C. dependent upon the interaction with accounts payable.
41. Like many technology companies, TechnoTools operates in an environment of declining prices. Its reported profits will tend to be highest if it accounts for inventory using the:A. FIFO method.B. LIFO method.C. weighted average cost method.
40. Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by:A. Zimt is too high.B. Nutmeg is too low.C. Nutmeg is too high.
39. Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by:A. Zimt is too low.B. Nutmeg is too low.C. Nutmeg is too high.
38. Zimt AG started business in 2017 and uses the FIFO method. During 2017, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2018, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2018 ending inventory balance
37. Cinnamon Corp. started business in 2017 and uses the weighted average cost method. During 2017, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2018, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2018 cost
36. A write down of the value of inventory to its net realizable value will have a positive effect on the:A. balance sheet.B. income statement.C. inventory turnover ratio.
35. Fernando’s Pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando’s inventory balance will most likely be:A. higher if it complies with IFRS.B. higher if it complies with US GAAP.C. the same under US GAAP and
34. Eric’s Used Book Store prepares its financial statements in accordance with IFRS.Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million.
33. Carrying inventory at a value above its historical cost would most likely be permitted if:A. the inventory was held by a producer of agricultural products.B. financial statements were prepared using US GAAP.C. the change resulted from a reversal of a previous write-down.
32. If inventory unit costs are increasing from period-to-period, a LIFO liquidation is most likely to result in an increase in:A. gross profit.B. LIFO reserve.C. inventory carrying amounts.
31. If Karp had used FIFO instead of LIFO, its debt to equity ratio computed as of 31 December 2018 would have:A. increased.B. decreased.C. remained unchanged.
30. If Karp had used FIFO instead of LIFO, which of the following ratios computed as of 31 December 2018 would most likely have been lower?A. Cash ratio B. Current ratio C. Gross profit margin
29. If Karp had used FIFO instead of LIFO, Karp’s retained earnings as of 31 December 2018 would have been higher by an amount closest to:A. $117 million.B. $124 million.C. $155 million.
28. If Karp had used FIFO instead of LIFO, its reported net income for the year ended 31 December 2018 would have been higher by an amount closest to:A. $30 million.B. $38 million.C. $155 million.
27. If Karp had used FIFO instead of LIFO, the amount of cost of goods sold reported by Karp for the year ended 31 December 2018 would have been closest to:A. $2,056 million.B. $2,173 million.C. $2,249 million.
26. If Karp had used FIFO instead of LIFO, the amount of inventory reported as of 31 December 2018 would have been closest to:A. $465 million.B. $658 million.C. $775 million.
25. A company using the LIFO method reports the following in £:2018 2017 Cost of goods sold (COGS) 50,800 48,500 Ending inventories 10,550 10,000 LIFO reserve 4,320 2,600 Cost of goods sold for 2018 under the FIFO method is closest to:A. £48,530.B. £49,080.C. £52,520.
24. LIFO reserve is most likely to increase when inventory unit:A. costs are increasing.B. costs are decreasing.C. levels are decreasing.
23. 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 price pressure.” The downward price pressure could lead to inventory that is valued above
22. Note 2 indicates that, “Inventories valued on the LIFO basis totaled ¥94,578 million and ¥50,037 million at December 31, 2017 and 2018, respectively.” Based on this, the LIFO reserve should most likely:A. increase.B. decrease.C. remain the same.
21. 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 supplies.C. Management expects a further downturn in sales during 2019.
20. Inventory levels decreased from 2017 to 2018 for all of the following reasons except:A. LIFO liquidation.B. decreased sales volume.C. fluctuations in foreign currency translation rates.
19. If ZP had prepared its financial statement in accordance with IFRS, the inventory turnover ratio (using average inventory) for 2018 would be:A. lower.B. higher.C. the same.
18. The 2017 inventory value as reported on the 2018 Annual Report if the company had used the FIFO inventory valuation method instead of the LIFO inventory valuation method for a portion of its inventory would be closest to:A. ¥104,698 million.B. ¥506,125 million.C. ¥618,692 million.
17. 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 would least accurately reflect current prices?A. Raw materials B. Finished goods C. Work in process
16. The best answer to Borghi’s Question 3 is:A. activity ratios.B. solvency ratios.C. profitability ratios.
15. The best answer to Borghi’s Question 2 is:A. stable.B. inflationary.C. deflationary.
14. The best answer to Borghi’s Question 1 is:A. Crux’s.B. Rolby’s.C. Mikko’s.
13. Compared with its unadjusted debt-to-equity ratio, Mikko’s debt-to-equity ratio as of 31 December 2018, after the adjustments suggested by Groff, is:A. lower.B. higher.C. the same.
12. Rolby’s net profit margin for the year ended 31 December 2018, after the adjustments suggested by Groff, is closest to:A. 6.01%.B. 6.20%.C. 6.28%.
11. Crux’s inventory turnover ratio computed as of 31 December 2018, after the adjustments suggested by Groff, is closest to:A. 5.67.B. 5.83.C. 6.13.
10. 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 statements related to its raw materials inventory will be:A. a cost of sales that more closely reflects
9. Ignoring any tax effect, the 2018 net realisable value reassessment for the black licorice jelly beans will most likely result in:A. an increase in gross profit of CHF7,775.B. an increase in gross profit of CHF11,670.C. no impact on cost of sales because under IFRS, write-downs cannot be
8. Using the inventory record for purchased lemon drops shown in Exhibit 4, the cost of sales for 2018 will be closest to:A. CHF3,550.B. CHF4,550.C. CHF4,850.
7. 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
6. 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 US GAAP:A. fair values are used to value inventory.B. the LIFO method is permitted to value inventory.C. the specific identification
5. In Kern’s comparative ratio analysis, the 2018 inventory turnover ratio for Century Chocolate is closest to:A. 5.07.B. 5.42.C. 5.55.
4. What is the most likely justification for Century Chocolate’s choice of inventory valuation method for its purchased finished goods?A. It is the preferred method under IFRS.B. It allocates the same per unit cost to both cost of sales and inventory.C. Ending inventory reflects the cost of goods
3. The costs least likely to be included by the CFO as inventory are:A. storage costs for the chocolate liquor.B. excise taxes paid to the government of Brazil for the cacao beans.C. storage costs for chocolate and purchased finished goods awaiting shipment to customers.
2. In a period of declining inventory unit costs and constant or increasing inventory quantities, which inventory method is most likely to result in a higher debt-to-equity ratio?A. LIFO B. FIFO C. Weighted average cost
1. During periods of rising inventory unit costs, a company using the FIFO method rather than the LIFO method will report a lower:A. current ratio.B. inventory turnover.C. gross profit margin.
analyze and compare the financial statements of companies, including companies that use different inventory methods
calculate and compare ratios of companies, including companies that use different inventory methods
explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information
describe the financial statement presentation of and disclosures relating to inventories
describe implications of valuing inventory at net realisable value for financial statements and ratios
demonstrate the conversion of a company’s reported financial statements from LIFO to FIFO for purposes of comparison describe the measurement of inventory at the lower of cost and net realisable value
explain LIFO reserve and LIFO liquidation and their effects on financial statements and ratios
calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods
calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems
describe different inventory valuation methods (cost formulas)

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