CFA Level 1 Mock Exam Question Answers (90 MCQs Quiz)

Which of the following statements is the most appropriate description of gross domestic product (GDP)?

Suppose a painting is produced and sold in 2018 for £5,000. The expenses involved in producing the painting amounted to £2,000. According to the sum- of-value-added method of calculating GDP, the value added by the final step of creating the painting was:

Suppose a painting is produced and sold in 2018 for £5,000. The expenses involved in producing the painting amounted to £2,000. According to the sum- of-value-added method of calculating GDP, the value added by the final step of creating the painting was:

Based only on the data given, the gross domestic product and national income are respectively closest to:

An economic forecasting firm has estimated the following equation from historical data based on the neoclassical growth model:

Potential output growth = 1.5 + 0.72 × Growth of labor + 0.28 × Growth of capital

The intercept (1.5) in this equation is best interpreted as:

An economic forecasting firm has estimated the following equation from historical data based on the neoclassical growth model:

Potential output growth = 1.5 + 0.72 × Growth of labor + 0.28 × Growth of capital

The coefficient on the growth rate of labor (0.72) in this equation is best inter- preted as:

In the morning business news, a financial analyst, Kevin Durbin, learned that average hourly earnings had increased last month. The most appropriate action for Durbin is to:

The following table shows the trends in various economic indicators in the two most recent quarters:

Given the information, this economy is most likely experiencing a:

An analyst writes in an economic report that the current phase of the business cycle is characterized by accelerating inflationary pressures and borrowing by companies. The analyst is most likely referring to the:

A national government responds to a severe recession by funding numerous infrastructure projects using deficit spending. Which school of economic thought is most consistent with such action.

The treasury manager of a large company has recently left his position to accept a promotion with a competitor six months from now. A statistical employment survey conducted now should categorize the status of the former treasury manager as:

Assuming the base period for 2010 consumption is November and the initial price index is set at 100, then the inflation rate after calculating the December price index as a Laspeyres index is closest to:

For the December consumption basket in Exhibit 1, the value of the Paasche index is closest to:

Of the following statements regarding the Producer Price Index (PPI), which is the least likely? The PPI:

The following presents selected commodity price data for July–August 2015:

Given the consumption basket and prices presented, which type of price index will result in the highest calculated inflation rate over a two-month time period?

A product is part of a price index based on a fixed consumption basket. If over time, the product’s quality improves while its price stays constant, the measured inflation rate is most likely:

The following exhibit shows the supply and demand for money:

There is an excess supply of money when the nominal rate of interest is:

Which of the following equations is a consequence of the Fisher effect?

A central bank that decides the desired levels of interest rates and inflation and the horizon over which the inflation objective is to be achieved is most accu- rately described as being:

Quantitative easing, the purchase of government or private securities by the central banks from individuals and/or institutions, is an example of which mon- etary policy stance?

Suppose Mexico exports vegetables to Brazil and imports flashlights used for mining from Brazil. The output per worker per day in each country is as follows:

Which country has a comparative advantage in the production of vegetables and what is the most relevant opportunity cost?

Suppose three countries produce bananas and pencils with output per worker per day in each country as follows

Which country has the greatest comparative advantage in the production of bananas?

Germany has much more capital per worker than Portugal. In autarky each country produces and consumes both machine tools and wine. Production of machine tools is relatively capital intensive whereas winemaking is labor-intensive. According to the Heckscher–Ohlin model, when trade opens:

If Brazil and South Africa have free trade with each other, a common trade pol- icy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a:

Which of the following factors best explains why regional trading agreements are more popular than larger multilateral trade agreements?

During the most recent quarter, a steel company in South Korea had the follow- ing transactions

• Bought iron ore from Australia for AUD50 million.
• Sold finished steel to the United States for USD65 million.
• Borrowed AUD50 million from a bank in Sydney, Australia.
• Received a USD10 million dividend from US subsidiary.
• Paid KRW550 million to a Korean shipping company.

Which of the following would be reflected in South Korea’s current account balance for the quarter?

Which of the following international trade organizations has a mission to help developing countries fight poverty and enhance environmentally sound economic growth?

From the perspective of the Mexican client, the most accurate statement is that the:

If the bid/offer quote from the dealer was 18.8580 ~ 18.8600 MXN/USD, then the bid/offer quote in USD/MXN terms would be closest to:

A research report produced by a dealer includes the following exhibit:

The spot CHF/EUR cross-rate is closest to:

A French company has recently finalized a sale of goods to a UK-based client and expects to receive a payment of GBP50 million in 32 days. The corporate treasurer at the French company wants to hedge the foreign exchange risk of this transaction and receives the following exchange rate information from a dealer:

GBP/EUR spot rate 0.8752

One-month forward points –1.4

Given the above data, the treasurer could hedge the foreign exchange risk by:

A French company has recently finalized a sale of goods to a UK-based client and expects to receive a payment of GBP50 million in 32 days. The corporate treasurer at the French company wants to hedge the foreign exchange risk of this transaction and receives the following exchange rate information from a dealer:

GBP/EUR spot rate 0.8752

One-month forward points –1.4

If the 270-day Libor rates (annualized) for the EUR and GBP are 1.370% and 1.325%, respectively, and the spot GBP/EUR exchange rate is 0.8489, then the number of forward points for a 270-day forward rate (F_GBP/EUR) is closest to:

An executive from Switzerland checked into a hotel room in Spain and was told by the hotel manager that 1 EUR will buy 1.2983 CHF. From the executive’s perspective, an indirect exchange rate quote would be

An exchange rate between two currencies has increased to 1.4500. If the base currency has appreciated by 8% against the price currency, the initial exchange rate between the two currencies was closest to:

In practice, both a fixed parity regime and a target zone regime allow the exchange rate to float within a band around the parity level. The most likely rationale for the band is that the band allows the monetary authority to:

A large industrialized country has recently devalued its currency in an attempt to correct a persistent trade deficit. Which of the following domestic industries is most likely to benefit from the devaluation?

A country with a persistent trade surplus is being pressured to let its currency appreciate. Which of the following best describes the adjustment that must occur if currency appreciation is to be effective in reducing the trade surplus?

An auditor determines that a company’s financial statements are prepared in accordance with applicable accounting standards except with respect to inven- tory reporting. This exception is most likely to result in an audit opinion that is:

Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations?

According to the Conceptual Framework for Financial Reporting, which of the following is not an enhancing qualitative characteristic of information in finan- cial statements?

Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements?

Which of the following disclosures regarding new accounting standards pro- vides the most meaningful information to an analyst?

Assume a company’s beginning shareholders’ equity is €200 million, its net income for the year is €20 million, its cash dividends for the year are €3 million, and there was no issuance or repurchase of common stock. The company’s actual ending shareholders’ equity is €227 million.

What amount has bypassed the net income calculation by being classified as other comprehensive income?

Denali Limited, a manufacturing company, had the following income statement information:

Revenue $4,000,000
Cost of goods sold $3,000,000
Other operating expenses $500,000
Interest expense $100,000
Tax expense $120,000

Denali’s gross profit is equal to:

Fairplay had the following information related to the sale of its products during 2009, which was its first year of business:

Revenue $1,000,000
Returns of goods sold $100,000
Cash collected $800,000
Cost of goods sold $700,000

Under the accrual basis of accounting, how much net revenue would be reported on Fairplay’s 2009 income statement?

Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information:

• Total sales price of items sold during 2009 on consignment was €2,000,000.
• Total commissions retained by Apex during 2009 for these items was €500,000.

How much revenue should Apex report on its 2009 income statement?

For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo’s basic earnings per share for 2009?

Laurelli Builders (LB) reported the following financial data for year-end 31 December:

Common shares outstanding, 1 January 2,020,000
Common shares issued as stock dividend, 1 June 380,000
Warrants outstanding, 1 January 500,000
Net income $3,350,000
Preferred stock dividends paid $430,000
Common stock dividends paid $240,000

 
Which statement about the calculation of LB’s EPS is most accurate?

For its fiscal year-end, Sublyme Corporation reported net income of $200 mil- lion and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual div- idend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to:

When preparing an income statement, which of the following items would most likely be classified as other comprehensive income?

Which of the following is most likely classified as a current liability?

The initial measurement of goodwill is most likely affected by:

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in:

A company has total liabilities of £35 million and total stockholders’ equity of £55 million. Total liabilities are represented on a vertical common-size balance sheet by a percentage closest to:

A company recorded the following in Year 1:

Proceeds from issuance of long-term debt €300,000
Purchase of equipment €200,000
Loss on sale of equipment €70,000
Proceeds from sale of equipment €120,000
Equity in earnings of affiliate €10,000

On the Year 1 statement of cash flows, the company would report net cash flow from investing activities closest to:

On 31 December 2018, a company issued a £30,000 180-day note at 8 percent and used the cash received to pay for inventory and issued £110,000 long-term debt at 11 percent annually and used the cash received to pay for new equipment. Which of the following most accurately reflects the combined effect of both transactions on the company’s cash flows for the year ended 31 December 2018 under IFRS? Cash flows from:

Orange Beverages Plc., a fictitious manufacturer of tropical drinks, reported cost of goods sold for the year of $100 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, but accounts payable decreased by $2 million. How much cash did the company pay to its suppliers during the year?

Black Ice, a fictitious sportswear manufacturer, reported other operating expenses of $30 million. Prepaid insurance expense increased by $4 million, and accrued utilities payable decreased by $7 million. Insurance and utilities are the only two components of other operating expenses. How much cash did the company pay in other operating expenses?

Using the above information from the comparative balance sheets, how much cash did the company receive from the equipment sale?

Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes?

An analyst gathered the following information from a company’s 2018 financial statements (in $ millions):

In 2018, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company con- siders dividends paid a financing activity. The company’s 2018 cash flow from operations (in $ millions) was closest to

Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?

Which of the following is an appropriate method of computing free cash flow to the firm?

An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate?

An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion

Based on this data, what is the analyst least likely to conclude?

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 collec- tion practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown’s goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to:

Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies’ ability to pay their current and long-term obligations?

The company’s total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company’s efficiency?

Which of the following choices best describes reasonable conclusions an analyst might make about the company’s liquidity?

Which of the following choices best describes reasonable conclusions an analyst might make about the company’s profitability?

When developing forecasts, analysts should most likely:

A company using the LIFO method reports the following in £:

Cost of goods sold for 2018 under the FIFO method is closest to:

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 of sales (€ thousands) was closest to: assume the companies use a periodic inventory system.

Hans Annan, CFA, a food and beverage analyst, is reviewing Century Chocolate’s inventory policies as part of his evaluation of the company. Century Chocolate, based in Switzerland, manufactures chocolate products and purchases and resells other confectionery products to complement its chocolate line. Annan visited Century Chocolate’s manufacturing facility last year. He learned that cacao beans, imported from Brazil, represent the most significant raw material and that the work-in-progress inventory consists primarily of three items: roasted cacao beans, a thick paste produced from the beans (called chocolate liquor), and a sweetened mixture that needs to be “conched” to produce chocolate. On the tour, Annan learned that the conch- ing process ranges from a few hours for lower-quality products to six days for the highest-quality chocolates. While there, Annan saw the facility’s climate-controlled area where manufactured finished products (cocoa and chocolate) and purchased finished goods are stored prior to shipment to customers. After touring the facility, Annan had a discussion with Century Chocolate’s CFO regarding the types of costs that were included in each inventory category.

Annan has asked his assistant, Joanna Kern, to gather some preliminary information regarding Century Chocolate’s financial statements and inventories. He also asked Kern to calculate the inventory turnover ratios for Century Chocolate and another chocolate manufacturer for the most recent five years. Annan does not know Century Chocolate’s most direct competitor, so he asks Kern to do some research and select the most appropriate company for the ratio comparison.

Kern reports back that Century Chocolate prepares its financial statements in accordance with IFRS. She tells Annan that the policy footnote states that raw materials and purchased finished goods are valued at purchase cost whereas work in progress and manufactured finished goods are valued at production cost. Raw material inventories and purchased finished goods are accounted for using the FIFO (first-in, first-out) method, and the weighted average cost method is used for other inventories. An allowance is established when the net realisable value of any inventory item is lower than the value calculated above.

Kern provides Annan with the selected financial statements and inventory data for Century Chocolate shown in Exhibits 1 through 5. The ratio exhibit Kern pre- pared compares Century Chocolate’s inventory turnover ratios to those of Gordon’s Goodies, a US-based company. Annan returns the exhibit and tells Kern to select a different competitor that reports using IFRS rather than US GAAP. During this initial review, Annan asks Kern why she has not indicated whether Century Chocolate uses a perpetual or a periodic inventory system. Kern replies that she learned that Century Chocolate uses a perpetual system but did not include this information in her report because inventory values would be the same under either a perpetual or periodic inventory system. Annan tells Kern she is wrong and directs her to research the matter.

While Kern is revising her analysis, Annan reviews the most recent month’s Cocoa Market Review from the International Cocoa Organization. He is drawn to the statement that “the ICCO daily price, averaging prices in both futures markets, reached a 29-year high in US$ terms and a 23-year high in SDRs terms (the SDR unit comprises a basket of major currencies used in international trade: US$, euro, pound sterling and yen).” Annan makes a note that he will need to factor the potential continuation of this trend into his analysis.

Exhibit 1 Century Chocolate Income Statements (CHF Millions)

Exhibit 2 Century Chocolate Balance Sheets (CHF Millions)

Exhibit 3 Century Chocolate Supplementary Footnote Disclosures: Inventories (CHF Millions)

Exhibit 4 Century Chocolate Inventory Record for Purchased Lemon Drops

Exhibit 5 Century Chocolate Net Realisable Value Information for Black Licorice Jelly Beans

What is the most likely justification for Century Chocolate’s choice of inventory valuation method for its purchased finished goods?

Hans Annan, CFA, a food and beverage analyst, is reviewing Century Chocolate’s inventory policies as part of his evaluation of the company. Century Chocolate, based in Switzerland, manufactures chocolate products and purchases and resells other confectionery products to complement its chocolate line. Annan visited Century Chocolate’s manufacturing facility last year. He learned that cacao beans, imported from Brazil, represent the most significant raw material and that the work-in-progress inventory consists primarily of three items: roasted cacao beans, a thick paste produced from the beans (called chocolate liquor), and a sweetened mixture that needs to be “conched” to produce chocolate. On the tour, Annan learned that the conch- ing process ranges from a few hours for lower-quality products to six days for the highest-quality chocolates. While there, Annan saw the facility’s climate-controlled area where manufactured finished products (cocoa and chocolate) and purchased finished goods are stored prior to shipment to customers. After touring the facility, Annan had a discussion with Century Chocolate’s CFO regarding the types of costs that were included in each inventory category.

Annan has asked his assistant, Joanna Kern, to gather some preliminary information regarding Century Chocolate’s financial statements and inventories. He also asked Kern to calculate the inventory turnover ratios for Century Chocolate and another chocolate manufacturer for the most recent five years. Annan does not know Century Chocolate’s most direct competitor, so he asks Kern to do some research and select the most appropriate company for the ratio comparison.

Kern reports back that Century Chocolate prepares its financial statements in accordance with IFRS. She tells Annan that the policy footnote states that raw materials and purchased finished goods are valued at purchase cost whereas work in progress and manufactured finished goods are valued at production cost. Raw material inventories and purchased finished goods are accounted for using the FIFO (first-in, first-out) method, and the weighted average cost method is used for other inventories. An allowance is established when the net realisable value of any inventory item is lower than the value calculated above.

Kern provides Annan with the selected financial statements and inventory data for Century Chocolate shown in Exhibits 1 through 5. The ratio exhibit Kern pre- pared compares Century Chocolate’s inventory turnover ratios to those of Gordon’s Goodies, a US-based company. Annan returns the exhibit and tells Kern to select a different competitor that reports using IFRS rather than US GAAP. During this initial review, Annan asks Kern why she has not indicated whether Century Chocolate uses a perpetual or a periodic inventory system. Kern replies that she learned that Century Chocolate uses a perpetual system but did not include this information in her report because inventory values would be the same under either a perpetual or periodic inventory system. Annan tells Kern she is wrong and directs her to research the matter.

While Kern is revising her analysis, Annan reviews the most recent month’s Cocoa Market Review from the International Cocoa Organization. He is drawn to the statement that “the ICCO daily price, averaging prices in both futures markets, reached a 29-year high in US$ terms and a 23-year high in SDRs terms (the SDR unit comprises a basket of major currencies used in international trade: US$, euro, pound sterling and yen).” Annan makes a note that he will need to factor the potential continuation of this trend into his analysis.

Exhibit 1 Century Chocolate Income Statements (CHF Millions)

Exhibit 2 Century Chocolate Balance Sheets (CHF Millions)

Exhibit 3 Century Chocolate Supplementary Footnote Disclosures: Inventories (CHF Millions)

Exhibit 4 Century Chocolate Inventory Record for Purchased Lemon Drops

Exhibit 5 Century Chocolate Net Realisable Value Information for Black Licorice Jelly Beans

In Kern’s comparative ratio analysis, the 2018 inventory turnover ratio for Century Chocolate is closest to:

Hans Annan, CFA, a food and beverage analyst, is reviewing Century Chocolate’s inventory policies as part of his evaluation of the company. Century Chocolate, based in Switzerland, manufactures chocolate products and purchases and resells other confectionery products to complement its chocolate line. Annan visited Century Chocolate’s manufacturing facility last year. He learned that cacao beans, imported from Brazil, represent the most significant raw material and that the work-in-progress inventory consists primarily of three items: roasted cacao beans, a thick paste produced from the beans (called chocolate liquor), and a sweetened mixture that needs to be “conched” to produce chocolate. On the tour, Annan learned that the conch- ing process ranges from a few hours for lower-quality products to six days for the highest-quality chocolates. While there, Annan saw the facility’s climate-controlled area where manufactured finished products (cocoa and chocolate) and purchased finished goods are stored prior to shipment to customers. After touring the facility, Annan had a discussion with Century Chocolate’s CFO regarding the types of costs that were included in each inventory category.

Annan has asked his assistant, Joanna Kern, to gather some preliminary information regarding Century Chocolate’s financial statements and inventories. He also asked Kern to calculate the inventory turnover ratios for Century Chocolate and another chocolate manufacturer for the most recent five years. Annan does not know Century Chocolate’s most direct competitor, so he asks Kern to do some research and select the most appropriate company for the ratio comparison.

Kern reports back that Century Chocolate prepares its financial statements in accordance with IFRS. She tells Annan that the policy footnote states that raw materials and purchased finished goods are valued at purchase cost whereas work in progress and manufactured finished goods are valued at production cost. Raw material inventories and purchased finished goods are accounted for using the FIFO (first-in, first-out) method, and the weighted average cost method is used for other inventories. An allowance is established when the net realisable value of any inventory item is lower than the value calculated above.

Kern provides Annan with the selected financial statements and inventory data for Century Chocolate shown in Exhibits 1 through 5. The ratio exhibit Kern pre- pared compares Century Chocolate’s inventory turnover ratios to those of Gordon’s Goodies, a US-based company. Annan returns the exhibit and tells Kern to select a different competitor that reports using IFRS rather than US GAAP. During this initial review, Annan asks Kern why she has not indicated whether Century Chocolate uses a perpetual or a periodic inventory system. Kern replies that she learned that Century Chocolate uses a perpetual system but did not include this information in her report because inventory values would be the same under either a perpetual or periodic inventory system. Annan tells Kern she is wrong and directs her to research the matter.

While Kern is revising her analysis, Annan reviews the most recent month’s Cocoa Market Review from the International Cocoa Organization. He is drawn to the statement that “the ICCO daily price, averaging prices in both futures markets, reached a 29-year high in US$ terms and a 23-year high in SDRs terms (the SDR unit comprises a basket of major currencies used in international trade: US$, euro, pound sterling and yen).” Annan makes a note that he will need to factor the potential continuation of this trend into his analysis.

Exhibit 1 Century Chocolate Income Statements (CHF Millions)

Exhibit 2 Century Chocolate Balance Sheets (CHF Millions)

Exhibit 3 Century Chocolate Supplementary Footnote Disclosures: Inventories (CHF Millions)

Exhibit 4 Century Chocolate Inventory Record for Purchased Lemon Drops

Exhibit 5 Century Chocolate Net Realisable Value Information for Black Licorice Jelly Beans

Using the inventory record for purchased lemon drops shown in Exhibit 4, the cost of sales for 2018 will be closest to:

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 on JOOVI’s balance sheet is closest to:

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:

Borrowing date 1 January 2009
Amount borrowed 500 million Brazilian real (BRL)
Annual interest rate 14 percent
Term of the loan 3 years
Payment method Annual payment of interest only. Principal amortization is due at the end of the loan term.

The construction of the plant takes two years, during which time BAURU earned BRL 10 million by temporarily investing the loan proceeds. Which of the following is the amount of interest related to the plant construction (in BRL million) that can be capitalized in BAURU’s balance sheet?

Miguel Rodriguez of MARIO S.A., an Uruguayan corporation, is computing the depreciation expense of a piece of manufacturing equipment for the fiscal year ended 31 December 2009. The equipment was acquired on 1 January 2009. Rodriguez gathers the following information (currency in Uruguayan pesos, UYP)

 Cost of the equipment UYP 1,200,000
Estimated residual value UYP 200,000
Expected useful life 8 years
Total productive capacity 800,000 units
Production in FY 2009 135,000 units
Expected production for the next 7 years 95,000 units each year

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:

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 machine has a fair value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine?

Brian Jordan is interviewing for a junior equity analyst position at Orion Investment Advisors. As part of the interview process, Mary Benn, Orion’s Director of Research, provides Jordan with information about two hypothetical companies, Alpha and Beta, and asks him to comment on the information on their financial statements and ratios. Both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and are identical in all respects except for their accounting choices.

Jordan is told that at the beginning of the current fiscal year, both companies purchased a major new computer system and began building new manufacturing plants for their own use. Alpha capitalised and Beta expensed the cost of the computer system; Alpha capitalised and Beta expensed the interest costs associated with the construction of the manufacturing plants. Benn asks Jordan, “What was the impact of these decisions on each company’s current fiscal year financial statements and ratios?” Jordan responds, “Alpha’s decision to capitalise the cost of its new computer system instead of expensing it results in lower net income, lower total assets, and higher cash flow from operating activities in the current fiscal year. Alpha’s decision to capitalise its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio.”

Jordan is told that Alpha uses the straight-line depreciation method and Beta uses an accelerated depreciation method; both companies estimate the same useful lives for long-lived assets. Many companies in their industry use the units-of-production method. Benn asks Jordan, “What are the financial statement implications of each depreciation method, and how do you determine a company’s need to reinvest in its productive capacity?”

Jordan replies, “All other things being equal, the straight-line depreciation method results in the least variability of net profit margin over time, while an accelerated depreciation method results in a declining trend in net profit margin over time. The units-of-production can result in a net profit margin trend that is quite variable.

I use a three-step approach to estimate a company’s need to reinvest in its productive capacity. First, I estimate the average age of the assets by dividing net property, plant, and equipment by annual depreciation expense. Second, I estimate the average remaining useful life of the assets by dividing accumulated depreciation by depreciation expense.

Third, I add the estimates of the average remaining useful life and the average age of the assets in order to determine the total useful life.” Jordan is told that at the end of the current fiscal year, Alpha revalued a manufac- turing plant; this increased its reported carrying amount by 15 percent.

There was no previous downward revaluation of the plant. Beta recorded an impairment loss on a manufacturing plant; this reduced its carrying by 10 percent. Benn asks Jordan “What was the impact of these decisions on each company’s current fiscal year financial ratios?” Jordan responds, “Beta’s impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities. Alpha’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.” At the end of the interview, Benn thanks Jordan for his time and states that a hiring decision will be made shortly.

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:

Brian Jordan is interviewing for a junior equity analyst position at Orion Investment Advisors. As part of the interview process, Mary Benn, Orion’s Director of Research, provides Jordan with information about two hypothetical companies, Alpha and Beta, and asks him to comment on the information on their financial statements and ratios. Both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and are identical in all respects except for their accounting choices.

Jordan is told that at the beginning of the current fiscal year, both companies purchased a major new computer system and began building new manufacturing plants for their own use. Alpha capitalised and Beta expensed the cost of the computer system; Alpha capitalised and Beta expensed the interest costs associated with the construction of the manufacturing plants. Benn asks Jordan, “What was the impact of these decisions on each company’s current fiscal year financial statements and ratios?” Jordan responds, “Alpha’s decision to capitalise the cost of its new computer system instead of expensing it results in lower net income, lower total assets, and higher cash flow from operating activities in the current fiscal year. Alpha’s decision to capitalise its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio.”

Jordan is told that Alpha uses the straight-line depreciation method and Beta uses an accelerated depreciation method; both companies estimate the same useful lives for long-lived assets. Many companies in their industry use the units-of-production method. Benn asks Jordan, “What are the financial statement implications of each depreciation method, and how do you determine a company’s need to reinvest in its productive capacity?”

Jordan replies, “All other things being equal, the straight-line depreciation method results in the least variability of net profit margin over time, while an accelerated depreciation method results in a declining trend in net profit margin over time. The units-of-production can result in a net profit margin trend that is quite variable.

I use a three-step approach to estimate a company’s need to reinvest in its productive capacity. First, I estimate the average age of the assets by dividing net property, plant, and equipment by annual depreciation expense. Second, I estimate the average remaining useful life of the assets by dividing accumulated depreciation by depreciation expense.

Third, I add the estimates of the average remaining useful life and the average age of the assets in order to determine the total useful life.” Jordan is told that at the end of the current fiscal year, Alpha revalued a manufac- turing plant; this increased its reported carrying amount by 15 percent.

There was no previous downward revaluation of the plant. Beta recorded an impairment loss on a manufacturing plant; this reduced its carrying by 10 percent. Benn asks Jordan “What was the impact of these decisions on each company’s current fiscal year financial ratios?” Jordan responds, “Beta’s impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities. Alpha’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.” At the end of the interview, Benn thanks Jordan for his time and states that a hiring decision will be made shortly.

Jordan’s response about his approach to estimating a company’s need to reinvest in its productive capacity is most likely correct regarding

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 valuation allow- ance most likely indicates that Zimt’s:

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 company’s provision for income taxes resulted in effective tax rates attributable to loss from continuing operations before cumulative effect of change in accounting principles that varied from the statutory federal income tax rate of 34 percent, as summarized in the table below.

In Year 3, the company’s net income (loss) was closest to:

A company’s provision for income taxes resulted in effective tax rates attributable to loss from continuing operations before cumulative effect of change in accounting principles that varied from the statutory federal income tax rate of 34 percent, as summarized in the table below.

Over the three years presented, changes in the valuation allowance for deferred tax assets were most likely indicative of

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 December 2015 is closest to:

An analyst evaluating a company’s solvency gathers the following information: ($ Millions)

Short-term interest-bearing debt 1,258
Long-term interest-bearing debt 321
Total shareholder’s equity 4,285
Total assets 8,750
EBIT 2,504
Interest payments 52

The company’s debt-to-assets ratio is closest to

The following information is associated with a company that offers its employees a defined benefit plan:

Fair value of fund’s assets $1,500,000,000
Estimated pension obligations $2,600,000,000
Present value of estimated pension obligations $1,200,000,000

Based on this information, the company’s balance sheet will present a net pension:

Which of the following best describes an opportunity for management to issue low-quality financial reports?

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: