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11. Which of the following statements is most accurate? A. Treasury stock is non-voting and receives no dividends. B. Minority interest on the balance sheet represents a position the company owns in other companies. C. A classified balance sheet arises when in an auditor’s opinion the financial statements materially depart from accounting standards and are not presented fairly.

Ans: A. Treasury stock is stock that has been reacquired by the issuing firm but not yet retired. Treasury stock reduces stockholders’ equity. It does not represent an investment in the firm. Treasury stock has no voting rights and does not receive dividends. B is incorrect. Minority interest (noncontrolling interest) is the minority shareholders’ pro-rata share of the net assets (equity) of a subsidiary that is not wholly owned by the parent. C is incorrect. The balance sheet reports the firm’s financial position at a point of time. Most entities should present a classified balance sheet showing current and noncurrent assets and liabilities. When in an auditor’s opinion the financial statements materially depart from accounting standards and are not presented fairly, an auditor will issue an adverse opinion.

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12. A company’s balance sheet shows the following: December 31, 2010 Current Assets     Cash and cash equivalents $ 2,950     Marketable securities 730     Notes and accounts receivable, trade 5,740     Allowance for doubtful accounts (650)     Inventories 1,320     Deferred income taxes 1,160     Other current assets 690 Total current assets $ 11,940 Current Liabilities     Accounts payable and other accrued liabilities $ 5,100     Current portion of borrowings 1,820     Other current liabilities 2,560 Total current liabilities $ 9,480 The company’s quick ratio is closest to: A. 0.4. B. 0.9. C. 1.3.

Ans: B. Quick ratio =                     =                      =0.93

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13. 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.

Ans: B. 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.

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14. Which of the following is the least appropriate accounting treatment for marketable securities under IAS No. 39? Category Measurement Method Realized Gains & Losses Reported In A. Trading Fair Value Income Statement B. Held to maturity Amortized Cost Income Statement C. Available for sale Fair Value Equity

Ans: C. All categories treat realized gains or losses in the same way - they are reported on the income statement. It is the unrealized gains and losses that are included in other comprehensive income (in equity) for available for sale securities carried at market value. Reference: question 4.

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15. Under International Financial Reporting Standards (IFRS) a bank, or other financial institution, would normally use which type of balance sheet format? A. Classified B. Liquidity-based C. Market-value based

Ans: B. Liquidity-based format presents assets and liabilities in the order of liquidity. Under IAS No. 1 liquidity-based presentation is recommended when it provides information that is more relevant and reliable than the current/noncurrent format, such as in the case of banks and financial institutions. A is incorrect. Both IFRS and U.S.GAAP require firms to separately report their current assets and noncurrent assets and current and noncurrent liabilities. The current/noncurrent format is known as a classified balance sheet and is useful in evaluating liquidity. But banking industry often uses liquidity-based format. C is incorrect. There is no market-value based format balance sheet.

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16. A company presents its financial statements according to U.S. GAAP (generally accepted accounting principles) and has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7% dividend. The issue matures in 5 years. Which of the following statements is least likely correct? At the time of the issue, the company’s: A. debt-to-total capital ratio will improve B. interest coverage ratio will deteriorate. C. preferred shareholders will rank below debt holders should the company file for bankruptcy.

Ans: A. SFAS 150 require that issuers report as liabilities any financial instruments that will require repayment of principal in the future. Mandatory redeemable preferred shares must be reported as debt; dividends on such stock must be reported as interest expense (consistent with the view that the preferred stock is debt) which will lower the interest coverage ratio. In the Debt/(Debt + Equity) ratio, the Debt will increase making the debt/total capital increase, (the numerator will increase more than the denominator), thus the ratio will increase (deteriorate), not decrease (improve). B is incorrect. Mandatory redeemable preferred shares must be reported as debt; dividends on such stock must be reported as interest expense (consistent with the view that the preferred stock is debt) which will lower the interest coverage ratio. C is incorrect. It is true that preferred shareholders will rank below debt holders should the company file for bankruptcy.

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17. A company issued bonds in 2009 that mature in 2019. The measurement basis that will most likely be used on the 2009 balance sheet for the bonds is: A. market value. B. historical cost. C. amortized cost.

Ans: C. Bonds payable issued by a company are financial liabilities that are measured at amortized cost.

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18. Presented below are abbreviated balance sheets for two merchandising companies following the format found in each of their annual reports. Company A (in $ U.S. Millions) Assets Noncurrent assets 9,640 Current Assets 2,096 Total Assets 11,736 Shareholders’ Equity Issued Capital 2,490 Retained Earnings 1,333 Other Reserves 2,926 Minority Interests 506 Total Equity 7,255 Non-Current Liabilities 3,313 Current liabilities 1,168 Total Liabilities 4,481 Total Equity & Liabilities 11,736 Company B (in ￥ Millions) Assets Current Assets 4,333 Noncurrent assets 19,923 Total Assets 24,256 Liabilities & Shareholders’ Equity Current liabilities 2,413 Non-Current Liabilities 6,847 Minority Interests 1,045 Shareholders’ Equity Issued Capital 5,149 Retained Earnings 2,755 Other Reserves 6,047 Total Equity 13,951 Total Equity & Liabilities 24,256 Which of the companies most likely prepares their financial statements in accordance with U.S. GAAP (generally accepted accounting principles)? A. Both B. Company A only C. Company B only

Ans: C. Company A prepares its financial statements under IFRS while company B uses U.S. GAAP. The common practice under IFRS presentation is to present noncurrent assets before current assets and long term liabilities before current ones. Minority interest must be shown as a component of equity under IFRS. Under U.S. GAAP, current assets are presented before long term assets and current liabilities before long term ones; under U.S. GAAP, minority interest is often shown “in-between” liabilities and equity (although it could also be shown as an equity component).

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19. The following information is available from the accounting records of a company as at 31 December 2012 (all figures in $ thousands): Account: $ Accounts payable 20 Accounts receivable 82 Bank loan, due on demand 44 Cash 12 Income taxes payable 5 Inventory 47 Investments accounted for by the equity method 112 Loan payable, due 30 June 30 2010 50 Deposits from customers for deliveries in 2009 8 The working capital for the company (in $ thousands) is closest to: A. 64. B. 72. C.  C. 176.

Ans: A. Current Assets: Cash 12 Accounts receivable 82 Inventory 47 141 Current Liabilities Bank loan, due on demand 44 Accounts payable 20 Income taxes payable 5 Deposits from customers for deliveries in 2009 8 77 Working capital (CA – CL) 64.0 The Investments accounted for by the equity method and the Loan payable due June 2010 are non-current assets and liabilities respectively.

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20. During late December 2008 Company A acquires a small competitor, Company B. During the evaluation of the acquisition it is determined that the customer lists of Company B have a fair value of $50,000. Company A has spent $15,000 during the year updating and maintaining its own customer lists. What will be the value of the customer list intangible asset on Company A’s 31 December 2008 consolidated financial statements? A. $15,000. B. $50,000. C. $65,000.

Ans: B. The purchased customer list is an identifiable intangible because it can be sold separately from the company and it would be recorded at its fair market value, the amount paid for it in the acquisition, $50,000. The amount spent by Company A on its own lists, $15,000, would have to be expensed because internally generated intangibles are not capitalized.