1.

The following information is available:

($)
Sales 421,000
Cost of goods sold (COGS) 315,000
Cash 30,000
Accounts receivable 40,000
Inventories 36,000
Accounts payable 33,000
Purchase 330,000

The company’s cash conversion cycle (in days) is closest to:

A. 40.1.
B. 39.9.
C. 38.2.

Cash conversion cycle = DOH + DSO – Days of payables

DOH = 365/(315,000/36,000) = 41.7
DSO = 365/(421,000/40,000) = 34.7
Days of payables = 365/(330,000/33,000) = 36.5
→ CCC = 41.7 + 34.7 – 36.5 = 39.9 days

2. An analyst has calculated the following ratios for a company:

Operating Profit Margin 17.5%
Net Profit Margin 11.7%
Total Asset Turnover 0.89 times
Return on Invested Capital 10.3%
Financial Leverage 1.46
Debt to Equity 0.46

The company’s return on equity (ROE) is closest to:

A. 4.8%.
B. 15.2%.
C. 22.7%.

ROE = Net profit margin × Asset turnover × Financial leverage = 11.7 × 0.89 × 1.46 = 15.2

3. 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

4. Selected information for a company and the common size data for its industry are provided
below.
Company Common Size
(£) Industry Data
 (% of sales)
EBIT 76,000 28.0
Pretax profit 66,400 19.6
Net income 44,500 13.1
Sales 400,000 100.0
Total assets 524,488 140.0
Total equity 296,488 74.0
ROE 15.0% 17.7%

Which of the following is most likely a contributor to the company’s inferior ROE compared to
that of the industry? The company’s:
A. tax burden ratio.
B. interest burden ratio.
C. financial leverage ratio.

Calculation Company Industry

Tax burden ratio Net Inc/EBT 44,500/66,400 = 0.67 13.1/19.6 = 0.67
Financial leverage Total assets/Equity 524,488/296,488 = 140/74 = 1.89
1.77
Interest burden ratio EBT/EBIT 66,400/76,000 = 0.87 19.6/28.0 = 0.70
The company has a lower financial leverage ratio relative to the industry, which is one of the
causes of the company’s lower relative ROE performance. The tax burden ratio is the same
as the industry and the interest burden ratio is higher, which would increase ROE.

5. The following information is available about a company:

(all figures in $ thousands) 2011 2010
Deferred tax assets 200 160
Deferred tax liabilities (450) (360)
Net deferred tax liabilities (250) (200)
Earnings before taxes 4,000 3,800
Income taxes at the statutory rate 1,200 1,140
Current income tax expense 1,000 900
The company’s 2011 income tax expense (in thousands) is closest to:
A. $1,000.
B. $1,050.
C. $1,250.

Income tax expense reported on the income statement = Income tax payable + Net changes in the
deferred tax assets and deferred tax liabilities. The change in the net deferred tax liability is a $50
increase (indicating that the income tax expense is $50 in excess of the income tax payable [or
current income tax expense] and representing an increase in the expense). Therefore, the income
tax expense = 1,000 + 50 = 1,050.

6. A retail company that leases the majority of its space has:

• total assets of $4,500 million,
• total long-term debt of $2,125 million, and
• average interest rate on debt of 12%.
Note 8 to the 2011 financial statements contains the following information about the company’s
future beginning of year lease commitments:

Note 8: Operating Millions

leases Year
2012 $ 200
2013 200
2014 200
2015 200
2016 200
Total $ 1,000
After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the
company is closest to:
A. 55%.
B. 57%.
C. 65%.

The present value of the operating leases should be added to both the total debt and the total
assets.
The present value of an annuity due of $200 for 5 years at 12% = $807.5.
(N = 5; I = 12; PMT = 200; Mode = Begin)
Adjusted debt to total assets = (2,125 + 807.5) ÷ (4,500 + 807.5) = 55.3%.

7. Which of the following will most likely result in an increase in a company’s sustainable
growth rate?

A. Higher tax burden ratio

B. Lower interest burden ratio
C. Higher dividend payout ratio

Sustainable growth rate = Retention ratio × ROE.

ROE = Tax burden × Interest burden × EBIT margin × Asset turnover × Leverage.

8. The following information is available about a manufacturing company:

$ million
Cost of ending inventory computed using FIFO 4.3
Net realizable value 4.1
Current replacement cost 3.8
If the company is using International Financial Reporting Standards (IFRS), instead of U.S.
GAAP, its cost of goods sold ($ millions) is most likely:
A. the same.
B. 0.3 lower.
C. 0.3 higher.

Under IFRS, the inventory would be written down to its net realizable value ($4.1 million),
whereas under U.S. GAAP, market is defined as current replacement cost and hence would be
written down to its current replacement cost ($3.8 million). The smaller write down under IFRS
will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and
result in a lower cost of goods sold of $0.3 million.

9. Given the following information about a company:

(€ millions) 2011 2010
Short-term borrowings 2,240 5,400
Current portion of long-term interest bearing 2,000 1,200
debt
Long-term interest bearing debt 12,000 9,000
Total shareholders’ equity 23,250 21,175
EBIT 3,850 3,800
Interest payments 855 837
Operating lease payments 800 800

What is the most appropriate conclusion an analyst can make about the solvency of the
company? Solvency has:
A. improved because the debt-to-equity ratio decreased.
B. deteriorated because the debt-to-equity ratio increased.
C. improved because the fixed charge coverage ratio increased.
2011 2010 Comments
Debt-to-equity ratio 2,240+2,000+12,000 5,400+1,200+9,00021 Ratio decreased:
(Total debt ÷ Equity) /23,250 ,175 Company has less
= 70% = 74% financial risk; more
solvent
Fixed charge 3,850+800/855+800 3,80+800/837+800 No change in FCC
coverage ratio = = 2.81 = 2.81 ratio
EBIT + Lease pmts
Interest pmts + Lease
pmts

10. Which of the following will most likely increase a company’s operating cash flow? An
increase in:
A. days sales payable (DSP).
B. gains on the sale of long-term assets.
C. use of operating leases versus financing leases.
11. Which of the following is least likely a benefit of the direct method for reporting cash flow
from operating activities? Compared with the indirect method, the direct method provides:

A. supplementary data under U.S. GAAP.

B. details on the specific sources of operating receipts and payments.
C. insight on differences between net income and operating cash flows.

Providing insight on the differences between net income and cash flow is a benefit of the indirect
method. The indirect method starts with net income and integrates a series of adjustments to
calculate cash flow from operations.

12. A firm reported the following financial statement items:

Cash Flow Item (€)
Net income 2,100
Non-cash charges 400
Interest expense 300
Capital expenditure 210
Working capital 0
expenditures
Net borrowing 1,600
Tax rate 40%

The free cash flow to the firm is closest to:

A. €2,110.
B. €2,470.
C. €2,590.

Cash Flow Item Amount (€)

Net income 2,100
Plus non-cash charges 400
Plus interest expense (1 – Tax rate) 300 (1 – 0.40) 180
Less capital expenditure (210)
Less working capital expenditures 0
FCFF €2,470

13. An analyst gathers the following information about a company’s common stock:
•1 January 2011 200,000 shares outstanding
• 1 June 2011 50,000 shares issued
• 1 August 2011 2 for 1 stock split
• 31 December 2011 500,000 shares outstanding
To calculate earnings per share for 2011, the company’s weighted average number of shares
outstanding is closest to:
A. 333,333.
 B. 350,000.
C. 458,333.

The weighted average number of shares is determined by the length of time each quantity of
shares was outstanding. A stock split is treated as if it occurred at the beginning of the year.
200,000 × 5/12 83,333
250,000 × 7/12 145,833
Total before split 229,166
Including effect of 458,333
2:1 split

14. A company’s information from its first year of operation is as follows:

2011
Event Units NZ$/unit
Opening 0 0
inventory
Purchase #1 1,000 $22.50
Purchase #2 800 $25.00
Purchase #3 400 $25.50
Sales 1,700 $40.00

Using a periodic inventory system and the weighted average method, the ending inventory
value is closest to:
A. $11,975.
B. $12,165.
C. $12,700.

Ending Inventory Weighted Average Calculations

Units NZ$/unit Total NZ$
Purchase #1 1,000 $22.50 $22,500
Purchase #2 800 $25.00 $20,000
Purchase #3 400 $25.50 $10,200
Total available 2,200 $52,700
Average cost 52,700 ÷ 2,200 $ 23.95
Ending inventory 2,200 – 1,700 = 500 $ 11,975
units

15. A company purchased equipment for $50,000 on 1 January 2009. It is depreciating the
equipment over a period of 10 years on a straight-line basis for accounting purposes, but for
tax purposes, it is using the declining balance method at a rate of 20%. Given a tax rate of
30%, the deferred tax liability as at the end of 2011 is closest to:
A. $420.
B. $2,820.
C. $6,720.
The deferred tax liability is equal to the tax rate times the difference between the carrying
amount of the asset and the tax base.
Value for accounting 50,000 – [3 x (50,000 ÷ $35,000
purposes after 3 years: 10)]=
Value for tax purposes: 50,000 × 0.8 × 0.8 × 0.8 = 25,600
Carrying amount = Start of
year balance × (1 – 0.20)
After three years:
Difference between accounting and tax 9,400
values
Deferred tax liability @ 30% × 9,400 = 2,820
30%:

16. A company uses the percentage-of-completion method to recognize revenue from its long
term construction contracts and estimates percent completion based on expenditures
incurred as a percentage of total estimated expenditures. A three-year contract for €10
million was undertaken with a 30% gross profit anticipated. The project is now at the end of
its second year, and the following end-of-year information is available:
Year 1 Year 2
Costs incurred during year €3,117,500 €2,582,500
Estimated total costs 7,250,000 7,600,000

The gross profit recognized in year 2 is closest to:

A. €617,500.
B. €880,000.
C. €960,000.
Percent Completed Costs Incurred/Total Costs Anticipated x
100
Gross Profit % Complete x Anticipated Profit - Profit
Already Recognized
Year 1 Year 2
Costs Incurred 3,117,500 3,117,500+2,582,500=
5,700,000
Percent Complete 3,117,500/7,250,000 = 5,700,000/7,600,000 =
43.0% 75.0%
Gross Profit 43.0% x (10,000,000 - 75.0% x (10,000,000 -
7,250,000) 7,600,000) – 1,182,500 =
= 1,182,500 617,500
17. The following financial information is available at the end of the year.
Share Information
Security Authorized Issued & outstanding Other features
Common stock 500,000 250,000 Currently pays a
dividend of $1 per
share.
Preferred stock, series 50,000 12,000 Nonconvertible,
A cumulative; pays a
dividend of $4 per
share.
Preferred stock, series B 50,000 30,000 Convertible; pays a
dividend of $7.50 per
share. Each share is
convertible into 2.5
common shares.
Additional Information:
Retained earnings at start of year = $6,000,000
Reported income for the year = $1,000,000
The diluted EPS is closest to:
A. $2.91.
B. $2.93.
C. $3.08.
Basic EPS Diluted EPS
Net Income 1,000,000 1,000,000
Pref Div, Series A (48,000) (48,000) 12,000 sh x 4/sh
Pref Div, Series B (225,000) 0 30,000 sh x 7.50/sh
Using If-Converted
Method
Earnings available to common shareholders 727,000 952,000
Weighted Average Number of Common Shares (WACS)
Shares o/s 250,000 250,000
If converted ______ 75,000 2.5 com/pf x 30,000
pf
WACS 250,000 325,000
EPS = (Earnings available to Common 2.91 2.93*
Shareholders)/ (WACS)
* Exceeds Basic EPS; Series B is antidilutive and is therefore not included

18. At the start of the year, a company acquired new equipment at a cost of €50,000, estimated
to have a 3 year life and a residual value of €5,000. If the company depreciates the asset
using the double declining balance method, the depreciation expense that the company will
report for the third year is closest to:

A. €555.
B. €3,328.
C. €3,705.
 Under double declining balance method, the depreciation rate would be 2 x the straight line rate
of 33.3%, i.e., 66.6%, or 2/3 depreciation rate per year. However, the asset should not be
depreciated below its assumed residual value in any year.
Double Declining Method of Depreciation
Year Net BV at Start of Depreciation Net BV at End of
Year Year
1 50,000 33,333 16,667
2 16,667 11,111 5,555
3 5,555 * 555 ** 5,000
* Alternative calculation for start of Year 3 Net
Book Value:
50,000 x (1-0.667) x (1-0.667) = 5,555
** Depreciation cannot be 2/3 x 5,555 = 3,705
since that would reduce book value to below
the estimated 5,000

19. Assume a company has the following portfolio of marketable securities which was acquired
at the end of 2009:
Category Original Cost in € Fair Market Value in
as at the Year End, €
2009 as at the Year End,
2010
Held for trading 12,000,000 12,500,000
Available for sale 17,000,000 16,000,000
If the company reports under IFRS instead of U.S. GAAP, its net income will most likely be:
A. the same.
B. €500,000 lower.
C. €500,000 higher.
Whether securities are classified as held for trading or available for sale, they are measured at
their fair value on the balance sheet, but all gains/losses on held for trading securities are
reported on the income statements. The unrealized gains/losses on available for sale securities
are reported in equity. However, this treatment is the same for both IFRS and U.S. GAAP
reporting.

20. The following is selected data from a company’s operations:

Net Income $100,000
Increase in Accounts receivable 12,000
Increase in Accounts payable 9,000
Depreciation and amortization 8,000

The cash flow from operations is closest to:

A. $89,000.
B. $105,000.
C. $111,000.
Net Income 100,000
plus Depreciation & Amortization 8,000
 less Increase in Accounts Receivable (12,000)
plus Increase in Accounts Payable 9,000
Net Cash from Operations 105,000

21. An analyst gathered the following data for two companies in the same industry:
Company A Company B
Days in sales outstanding 28 32
Days of inventory on hand 32 35
Days of payables 42 40
Current assets $203,000 $189,000
Total assets 581,000 469,000
Current liabilities 73,000 71,000
Total liabilities 429,000 350,000
Shareholders' equity 152,000 119,000

Which of the following is the most appropriate conclusion the analyst can make? Compared to
Company B, Company A:
A. is more liquid.
B. has more financial risk.
C. has a longer time between cash outlay and cash collection.
Company A has a higher current ratio and shorter cash conversion cycle and it therefore more
liquid. The lower financial leverage ratio indicates that it has less financial risk, not more, and it
has less time between cash outlay and cash collection.
Measure Definition Company A Company B
Current ratio CA/CL 2.78 2.66
Cash conversion DOS + DOH – 28 + 32 – 42 = 18 32 + 35 – 40
cycle Days payable = 27
Financial Total assets/Sh 3.82 3.94
Leverage equity

22. A company incurs the followings costs related to its inventory during the year:
Cost ¥ millions
Purchase price 100,000
Trade discounts 5,000
Import duties 20,000
Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Abnormal costs as a result of waste material 8,000
Storage cost prior to shipping to customers 2,000

The amount charged to inventory cost (in millions) is closest to:

A. ¥175,000.
B. ¥177,000.
C. ¥185,000.
The costs to include in inventories are all costs of purchase, costs of conversion, and other costs
incurred in bringing the inventories to their present location and condition.
 Cost ¥ millions
Purchase price 100,000
Less Trade discounts (5,000)
Import duties 20,000
Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Total inventory costs 175,000

23. A company which prepares its financial statements using IFRS wrote down its inventory
value by €20,000 in 2009. In 2010, prices increased and the same inventory was worth
€30,000 more than its value at the end of 2009. Which of the following statements is most
accurate? In 2010, the company’s cost of sales:

A. was unaffected.
B. decreased by €20,000.
C. decreased by €30,000.
Under IFRS, the recovery of previous write-down is limited to the amount of the original write-
down (€20,000) and is reported as a decrease in the cost of sales.

24. A Mexican corporation is computing the depreciation expense of a piece of manufacturing

equipment for the fiscal year ended December 31, 2010 using the information below. The
company takes a full year’s depreciation in the year of acquisition.
Date of purchase January 1, 2010
Cost of equipment MXN 2,000,000
Estimated residual value MXN 200,000
Expected useful life 10 years
Total productive capacity 5,000,000 units
Production in 2010 800,000 units

The depreciation expense (in MXN) will most likely be:

A. 180,000 lower using the straight-line method compared with the double-declining balance
method.
B. 140,000 higher using the units-of-production method compared with the straight-line method.
C. 112,000 higher using the double-declining method compared with the units-of-production
method.
Straight-line Units of Production Declining balance
Rate 1/10 5,000,000 units 1/10 x 2 = 20%
Annual expense 2,000,000 – (2,000,000 – 0.20 x 2,000,000
200,000 200,000)
10 x
(800,000/5,000,0
00)
= 180,000 = 288,000 = 400,000
Difference between the declining balance and units of production is:
= 400,000 – 288,000 = 112,000
25. A company, which prepares its financial statements in accordance with IFRS uses the
revaluation model to value land. At the end of the current year the land value of the land has
increased and will be adjusted on the balance sheet. Which of the following statements is
most accurate? In the current period the revaluation of the land will:

A. increase return on sales.

B. increase return on assets.
C. decrease the debt to equity ratio.
The increase in the value of the land bypasses the income statement and goes directly to a
revaluation surplus account in equity. Equity increases thereby decreasing the debt to equity ratio

26. At the beginning of the year a company purchased a fixed asset for $500,000 with no
expected residual value. The company depreciates similar assets on a straight-line basis over
10 years, while the tax authorities allow declining balance depreciation at the rate of 15%
per year. In both cases the company takes a full year’s depreciation in the first year and the
tax rate is 40%. Which of the following statements concerning this asset at the end of the
year is most accurate?

A. The tax base is $500,000.

B. The deferred tax asset is $10,000.
C. The temporary difference is $25,000.
The temporary difference is the difference between the net book value of the asset for accounting
purposes [500,000 – (500,000/10)] = $450,000 and the net book value for taxes, [500,000 -
0.15(500,000) = $425,000]. 450,000 – 425,000 = $25,000.

27. An analyst has gathered the following tax information:

Year 1: pretax income $60,000, taxable income $50,000

Year 2: pretax income $60,000, taxable income $65,000

The current tax rate is 40%. Assume the tax rate will be reduced to 30% and the change is
enacted at the beginning of year 2. Total income tax expense for year 1 if adjusted would be:

A. $23,000
B. $20,000
C. $24,000
Tax expense = Tax payable + DTL = 50*40% + 10*40% + 10*(30%-40%) = 23.

28. A company, which prepares its financial statements in accordance with IFRS issues
£5,000,000 face value ten year bonds on January 1, 2010 when interest rates are 5.50%. The
bonds carry a coupon of 6.50%, with interest paid annually on December 31. The carrying
value of the bonds as of December 31, 2011 will be closest to:

A. £4,695,562.
B. £5,301,000.
C. £5,316,000.
Year Carrying Interest Interest Amortisatio Carrying
Amount at Expense Payment @ n of Amount @
Start of @ EAI Coupon Premium End of
Year Rate Year
2010 5,376,881 295,728 325,000 29,272 5,347,609
2011 5,347,609 294,119 325,000 30,881 5,316,728
Alternatively, take the PV of the cash flows over the remaining 8 years at 5.5%
5,000,000 x 6.5% x PVA(8y, 5.5%) + 5,000,000 x PV(8y, 5.5%) = 5,316,728

29. At the start of a month, a retailer paid $5,000 in cash for different types of candies. He sold
candies costing $2,000 for $3,000 during the month. The most likely effect of these
transactions on the retailer’s accounting equation for the month is that assets will:

A. be unchanged.
B. increase by $1,000.
C. decrease by $2,000.

30. The following information is available on a company for the current year.
Net income $1,000,000
Average number of common shares outstanding 100,000
Details of convertible securities outstanding:
Convertible preferred shares outstanding 2,000
o dividend/share $10
o each preferred is convertible into 5 shares of common stock
Convertible bonds, $100 face value per bond $80,000
o 8% coupon
o each bond is convertible into 25 shares of common stock
Corporate tax rate 40%
The company’s diluted EPS is closest to:
A. $7.57.
B. $7.69.
C. $7.72.
31. The following information is from a company’s investment portfolio:
Investment
Classification Held-to-maturity
Market value, 31 Dec 2009 $ 17,000
Cost/Amortized cost 31 Dec 2009 22,000
Market value, 31 Dec 2010 10,000
Cost/Amortized cost 31 Dec 2010 20,000

If the investment is reclassified as Available-for-sale as of 31 December 2010, the balance sheet

carrying value of the company’s investment portfolio would most likely:
A. remain the same.
B. decrease by $10,000.
C. decrease by $12,000.
Held-for-trading and available-for-sale securities are carried at market value, whereas held-to-
maturity securities are carried at amortized cost. If the investment is reclassified as available-for-
sale in 2010, the carrying amount should be adjusted to its market value, which is $10,000.
Compared with the amortized cost of $20,000, it’s a decrease of $10,000.

32. The following information (in millions) on a company is available:

Cost of goods sold $ 500
Increase in total assets 250
Increase in total liabilities 200
Change in inventory (30)
Change in accounts payable (25)

The amount of cash (in millions) that the company paid to its suppliers is closest to:
A. $445.
B. $495.
C. $505.
Cost of goods sold $500
 Less: Decrease in inventory (30)
Equals purchases from suppliers $470
Plus: Decrease in accounts payable 25
Cash paid to suppliers $495

33. A Canadian printing company which prepares its financial statements according to IFRS has
experienced a decline in the demand for its products. The following information relates to
the company’s printing equipment as of 31 December 2010.
C$
Carrying value of equipment (net book value) 500,000
Undiscounted expected future cash flows 550,000
Present value of expected future cash flows 450,000
Fair Value 480,000
Costs to sell 50,000
Value in use 440,000

The impairment loss (in C$) is closest to:

A. 0.
B. 60,000.
C. 70,000.
Under IFRS, an asset is considered to be impaired when its carrying amount exceeds its
recoverable amount (the higher of fair value less cost to sell or value in use).
Fair value less costs to sell: 480,000 – 50,000 = 430,000
Value in use = 440,000
Recoverable amount (higher value) = 440,000
Impairment loss under IFRS = Carrying value – recoverable amount = 500,000 – 440,000 =
60,000

34. A company has recently revalued one of its depreciable properties and estimated that its
remaining useful life would be another 20 years. The applicable tax rate for all years is 30%
and the revaluation of the property is not recognized for tax purposes. Details related to this
asset are provided in the table below, with all £-values in millions.
Accounting Purposes Tax
Purposes
Original values and estimates, start of 2007
2007 Acquisition cost £8,000 £8,000
Depreciation, straight-line 20 years 8 years
Accumulated depreciation end of 2009 £1,200 £3,000
Net balance end of 2009 £6,800 £5,000
Re-estimated values and estimates, start of 2010
Revaluation balance start of 2010 £10,000 Not applicable
New estimated life 20
years

The deferred tax liability (in millions) as at the end of 2010 is closest to:
A. £690.
B. £960.
C. £1,650.
Accounting Purposes Tax Purposes
Revaluation surplus (10,000 – 6,800) =3,200 no revaluation
allowed
Depreciation, straight-line 20 years 5 years remaining
2009 start of year balance after revaluation 10,000 5,000
Depreciation 2009 500 1,000
Net balance end of 2009 9,500 4,000
Less revaluation surplus (3,200) _____
Carrying value for purposes of deferred taxes 6,300 4,000
Deferred tax liability = 0.30 x (6,300 – 4,000) = 690
Only the portion of the difference between the tax base and the carrying amount that is not the result of
the revaluation is recognized as giving rise to a deferred tax liability.
Or Accounting Profit = X – AD = X – 1200 – 500 = X – 1700
Tax Profit = X – AD = X – 4000 → Temp. Diff. = (X-1700)-(X-4000) = 2,300

35. An analyst uses a stock screener and selects the following metrics: a global equity index,
P/E ratio lower than the median P/E ratio, and a price-book value ratio lower than the
median price-book value ratio. The stocks so selected would be most appropriate for
portfolios of which type of investors?

A. Value investors.
B. Growth investors.
C. Market-oriented investors.