答案和详解如下： Q67. Smith is starting to understand Stone's point. He now turns his attention to the interest coverage ratio of UM and Gemeni. Which of the following most accurately describes the difference in the interest coverage ratio under the consolidation method compared to the equity method? Under the consolidation method, Gemeni's interest coverage ratio will be:
A) lower because interest expense will increase under consolidation. B) lower because earnings before interest and taxes (EBIT) will decrease under consolidation. C) higher because EBIT will increase greatly under the consolidation of the finance company. Correct answer is A) Because of the higher debt level characteristic of finance companies, they typically have a higher interest expense. EBIT is likely to increase under the consolidated method, but the substantially higher interest expense will reduce the interest coverage ratio under consolidation. Q68. Stone now asks Smith how Gemeni's accounts receivable turnover is affected under the consolidation method when compared to the equity method. Which of the following most accurately describes the difference on accounts receivable turnover under the two methods? Under the consolidation method, Gemeni's accounts receivable turnover will be: A) lower because reported sales will decrease under consolidation. B) higher because reported sales will increase under consolidation. C) lower because accounts receivables will be higher under consolidation. Correct answer is B) Under the consolidation method, sales would increase. Note that the accounts receivable account of the subsidiary will also increase, but not as much as sales. This will cause the accounts receivable turnover ratio to be higher. Q69. Rocky
Mountain Air Cargo is a privately held commercial aviation company serving the western United States. It publishes financial statements in accordance with U.S. GAAP and uses a fiscal year that matches the calendar year. Rocky
Mountain was in good financial shape heading into 2003, with assets of $50 million at the beginning of the fiscal year. That year, it earned $3 million in net income and was easily able to maintain its traditional 50% dividend payout ratio. However, Rocky
Mountain had a very difficult year in 2004, reporting a loss of $800,000. It managed to pay $1 million in dividends, but the decision to pay dividends in such a weak financial year further undermined the company’s fiscal stability. Flitenight Air Lines, a publicly-traded aviation firm serving the central and Midwestern United States, wanted to expand its range of service by coordinating its flight schedule with airlines serving different geographic regions of North America. One of these airlines was Rocky Mountain Air Cargo. To cement the relationship, Flitenight’s CEO, John “Bulldog” Basten, decided to make a significant investment in Rocky Mountain Air Cargo. He was easily able to convince both boards of the wisdom of the deal, and, in his usual brash style, personally negotiated the terms with his counterpart at Rocky
Mountain, Buck Matthews. Flitenight Air Lines acquired a 20% stake in Rocky Mountain Air Cargo (with an option to purchase 40% more) for $10 million cash. The deal closed on January 1, 2003 and Flitenight accounted for the investment using the equity method. Basten was not happy to find that he had invested right at the peak of Rocky Mountain’s profitability and wound up with a money-losing airline. He had a difficult conversation with Matthews in early 2005, complaining about the impact of the Rocky
Mountain investment on Flitenight’s financials. Basten pointed out that he had a loss on his books: the original $10 million investment in Rocky
Mountain was carried at only $9,940,000 on Flitenight’s December 31, 2004 balance sheet. Matthews countered that this was just an accounting entry: on a cash basis, Flitenight had a gain of 5% on its investment over the two years. Matthews’ insistence that the investment had earned money for Flitenight did not sit well with Basten. Basten decided that Rocky
Mountain was clearly being mismanaged and concluded it was time to gain control of the company. Basten assured Neil Glenn, the Chairman of Flitenight’s board, that he could turn Rocky
Mountain around. He promised Glenn that, in 2005, Rocky
Mountain would once again achieve $3 million in earnings and a 50% payout ratio. “With those results,” Basten promised Glenn, “our asset accounts will value the Rocky
Mountain investment at $10,240,000 on our December 31, 2005 balance sheet – so we’ll show a gain on our original investment.” Glenn was skeptical of anyone’s ability to turn the airline around so quickly. Even so, Glenn assured Basten, “If it takes you longer to turn it around, at least we’ll have the dividend income on our 2005 cash flow statements.” Basten notified Matthews and Rocky
Mountain’s board that Flitenight intended to exercise its option. At the direction of Basten and Glenn, Flitenight purchased the additional shares for cash and gained control of Rocky
Mountain on December 31, 2004. In 2003, Flitenight would reflect its investment in Rocky
Mountain on its income statement by recording: A) $300,000. B) $600,000. C) −$200,000. Correct answer is B) Under the equity method, Flitenight would record $600,000 (= $3 million × 0.2) on its 2003 income statement as its share of Rocky
Mountain's earnings. The dividends received by Flitenight are already included as part of its share of Rocky
Mountain’s net income in the equity method. | 
发表于 2009-1-8 10:56
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