CFA Level I:FSA : understanding balance sheet(Reading 26) 习题精选 balance

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1. IF a company’s current ratio is less than 1.0x, which of the following accounting actions will increase its current ratio? A. Accruing direct labor costs. B. Making a cash payment on accounts payable. C. Using a short-term revolving credit facility to pay down long-term debt.

Ans: A Accruing direct labor costs increases current asset (inventory) and current liabilities by the same amount. Since the initial current ratio is less than 1.0x, adding equal amounts to the numerator and denominator causes a larger percentage in crease to the numerator and the ratio will increase. B. Paying accounts payable results in an equal reduction of current assets and current liabilities. Since the initial current ratio is less than 1.0x, equal decrease of the numerator and the denominator would decrease the ratio. C. Borrowing on a short-term revolving credit facility will increase the current liability which is the denominator, thus reducing the current ratio.

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2. At the beginning of the year, a firm sold half of its accounts receivable at book value without recourse and used the proceeds to pay down a long-term bank loan. Assuming that the transaction has met all conditions to constitute a sale of the receivables, this transaction will: A. Increase the current ratio. B. Reduce the debt-to-equity ratio. C. Reduce the interest coverage ratio.

Ans. B. By using the proceeds from the sale of the accounts receivable without recourse to reduce total debt, the debt-to-equity ratio will fall, as the numerator is now lower. Additionally, since the interest expense associated with the total debt is now lower, net income and equity (the denominator) will be higher. A is incorrect. The current ratio will decrease rather than increase because the current assets were reduced as a result of the sale of the accounts receivable (cash received was used immediately to permanently pay down the long-term loan) while the current liabilities remained unchanged (the debt that was paid down did not represent a short-term liability). C is incorrect. The reduction of debt from the transaction will result in lower interest expense and an increase in, rather than a reduction of, the interest coverage ratio.

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3. Cash and marketable securities are included in the numerator of the: A. Cash ratio. B. Quick ratio. C. Both the cash ratio and the quick ratio.

Ans: C. The cash ratio is the most conservative solvency measure as its numerator includes only cash and marketable securities, the most liquid assets. The quick ratio also includes accounts receivable in its numerator, making it less conservative than the cash ratio.

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4. Which of the following best reflects the reporting of unrealized gains and losses for investments in trading and available-for-sale marketable securities under IFRS? A. For both trading and available-for-sale securities report as income from continuing operations. B. For trading securities report as income from continuing operations and for available-for-sale report in equity. C. For trading securities report in equity and for available-for-sale report as income from continuing operations.

Ans. B. Marketable securities Held-to-maturity Available-for-sale Trading Definition Debt securities that management intends and is able to hold to maturity Debt/equity security that management does not expect to trade on a short-term basis (and for debt securities that are not likely to be held to maturity). Debt/equity securities that management intends to actively trade on a short-term basis. Measurement base Amortized cost Fair value Fair value Nature Long term asset Current/long term asset Current asset On the income statement Interest earned±realized gains/losses Dividends or interest earned ±realized gains/losses.(the unrealized G/L do not affect income statement. They appear as a separate item in the equity portion of balance sheet as other comprehensive income). Dividends or interest earned± realized G/L± realized G/L Investment in marketable securities held as trading securities or available-for-sale securities are reported at fair value. Unrealized gains or losses (G/L) on the trading securities are reported on the income statement as a component of income from continuing operations. Unrealized GG/L on available-for-sale securities are reported in equity as a component of accumulated other comprehensive income under U.S.GAAP and as direct-to-equity adjustments under IFRS and do not affect reported earnings.

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5. During 2010, the following events occurred at a company. The company: · purchased a customer list for $100,000, which is expected to provide equal annual benefits for the next 4 years. · recorded $200,000 of goodwill in the acquisition of a competitor. It is estimated that the acquisition would provide substantial benefits for the company for at least the next 10 years. · spent $300,000 on media placements announcing the company had donated products and services to the community. The CEO believes the firm’s reputation was enhanced substantially and the company will likely benefit from it for the next 5 years. Based on those events, the amortization expense that the company should report in 2011 is closest to: A. $25,000. B. $45,000. C. $85,000.

Ans: A. The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life: $100,000 ÷ 4 = $25,000/year. Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, this is an internally generated intangible that is not recorded on the balance sheet and is therefore not amortized.

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		Ans: A. The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life: $100,000 ÷ 4 = $25,000/year. Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, this is an internally generated intangible that is not recorded on the balance sheet and is therefore not amortized.
6. During the three months ended 12/31/20x2, Delon Company reported net income of $1,800,000 and paid $360,000 in dividends to common stockholders (the dividends had been declared in the previous quarter). In addition Delon declared a dividend of $0.22 per share to be paid in the next quarter. The company currently has 1.8 million shares outstanding. What was the increase in stockholders’ equity from 09/30/20x2 to 12/31/20x2? A. $1,440,000 B. $1,404,000 C. $1,044,000		Ans. B. Three months ended 12/31/20x2 Net income $1,800,000 Dividends declared ($0.22*1,800,000) (396,000) Change in stockholders’ equity $1,404,000 A is incorrect. This is the amount of dividends paid dducted from net income ($1,800,000-360,000), which decreases stockholders’ equity on the books. C is incorrect. Both dividends declared and paid were incorrectly deducted from net income ($1,800,000-360,000-396,000).

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7. Lonic Company purchased 10,000 shares of its common stock for the treasury at $30 per shares at the end of 20x2. The par value of the stock is $1 and the shares were originally issed at $10 per share. The effect of the repurchase on common stockholders’ equity and return on equity are a decrease in stockholders’ equity of: A. $300,000 and a higher return-on equity. B. $300,000 and a lower return-on equity C. $200,000 and a lower return-on equity

Ans: A. The treasury stock was recorded at the purchase price (10,000 shares *$30). Since the balance in the treasury stock is deducted from the total of common stock, additional paid-in capital, and retained earnings to determine stockholders’ equity, the purchase reduces stockholders’ equity by the same amount of the purchase price. Return on equity for 20x2 is higher since the equity is lower. B is incorrect. Return on equity will be higher, not lower. C is incorrect. The purchased shares are recorded at the purchased price, not the difference between the purchase price and the original issue price ($30 -10=$20*10,000 shares).

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8. The following data are available for a company and its industry: Company Common-Size Balance Sheet As at 31 December 2010 Assets (%) Cash & Short-Term Investments 43.2 Accounts Receivable 9.4 Inventory 0.6 Total Current Assets 53.2 Net Property, Plant, and Equipment 3.9 Goodwill 40.0 Other Long-Term Assets 2.9 Total Assets 100.0 Liabilities and Shareholders’ Equity Short-Term Debt 1.6 Accrued Liabilities and Accounts Payable 17.8 Total Current Liabilities 19.4 Long-Term Debt 20.1 Other Long-Term Liabilities 6.5 Total Liabilities 46.0 Total Stockholders’ Equity 54.0 Total Liabilities & Shareholders’ Equity 100.0 Data for comparison Industry Current ratio 3.0 Debt-to-equity 50.0% Long-term debt-to-equity 40.0% Which of the following statements about the company is most appropriate? The company: A. operates in the manufacturing industry. B. has made significant acquisitions in the past. C. has higher financial leverage than the industry.

Ans: B. Goodwill makes up 40% of total assets; therefore, the company has made significant acquisitions at some point because goodwill is only recognized during acquisitions. A is incorrect. The low PP&E and inventory levels indicate the company is not likely a manufacturer. C is incorrect. Leverage is below the industry average for both the debt-to-equity ratio of 40% [(20.1 + 1.6) ÷ 54] versus the industry average of 50% and long-term debt-to-equity ratio of 37% [20.1 ÷ 54] versus the industry average of 40%.

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9. To gain insight into what portion of the company’s assets is liquid, an analyst will most likely use: A. the cash ratio. B. the current ratio. C. common-size balance sheets.

Ans: C. A common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and provides insight into what portion of a company’s assets is liquid. A is incorrect. Cash ratios measure liquidity relative to current liabilities, not relative to total assets. C is incorrect. Current ratios measure liquidity relative to current liabilities, not relative to total assets.

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10. Assume a company has the following portfolio of marketable securities which was acquired at the end of 2009: Category Original Cost in € as at the Year End, 2009 Fair Market Value in € 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.

Ans: A. 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.