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标题: Financial Reporting and Analysis 【Reading 32】Sample [打印本页]
作者: mouse123    时间: 2012-3-27 15:17     标题: [2012 L1] Financial Reporting and Analysis 【Session 9 - Reading 32】Sample

A company issued an annual-pay bond with the following characteristics:
Face value$67,831
Maturity4 years
Coupon7%
Market interest rates8%
What is the unamortized discount on the date when the bonds are issued?
A)
$2,249.
B)
$15,729.
C)
$1,748.


The unamortized discount at the time bonds are issued will be $2,249.
Face value of bonds = $67,831
Proceeds from bond sale = $65,582 [I/Y = 8.00%; N = 4; PMT = $4,748.17 ($67,831 × 0.07); FV = $67,831; CPT → PV]
Unamortized discount = $2,249 ($67,831 − $65,582)

What is the unamortized discount at the end of the first year?
A)
$538.
B)
$1,750.
C)
$1,209.


The unamortized discount will decrease by $499 at the end of first year and will be $1,750.
Interest expense = $5,247 ($65,582 × 0.08)
Coupon payment = $4,748 ($67,831 × 0.07)
Change in discount = $499 ($5,247 − $4,748)
Discount at the end of first year = $1,750 ($2,249 − $499)
作者: mouse123    时间: 2012-3-27 15:18

Assuming all else equal, if the coupon rate offered on a bond is less than the corresponding market rate of interest, the bond will be issued at:
A)
a premium.
B)
a discount.
C)
par.


If the coupon rate is less than the market rate, the bond must be sold at a discount so the effective rate on the bond equals the market rate.
作者: mouse123    时间: 2012-3-27 15:18

Proceeds from issuing a bond are recorded on the statement of cash flows as an inflow from:
A)
investing (CFI).
B)
financing (CFF).
C)
operations (CFO).


Cash from financing (CFF) is increased by the amount of the proceeds.
作者: mouse123    时间: 2012-3-27 15:19

Over time, the reported amount of the annual interest expense on a long-term bond issued at a discount will:
A)
increase.
B)
remain constant.
C)
decrease.


A portion of the discount must be amortized to the interest expense each year. The amortized amount is debited to interest expense and credited to debt. So debt goes up. The interest expense is debt times the effective interest rate. Thus, interest expense will increase over time.
作者: mouse123    时间: 2012-3-27 15:20

At the date of issuance the market interest rate was above the coupon rate. Bonds of this nature would sell for:
A)
par.
B)
discount.
C)
premium.


When the contract rate on a bond is lower than the market rate, a bond will sell for a discount.
作者: mouse123    时间: 2012-3-27 15:20

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%. Assume semi-annual compounding.
What is the firm's initial liability and the value of the liability in six months?
[td=1,1,100]Initial LiabilityLiability in 6 months
A)
$3,675,149$3,675,149
B)
$5,000,000$5,000,000
C)
$3,653,451$3,799,589


The initial liability is: N = 8, I/Y = 4%, PMT = 0, FV = $5,000,000, Compute PV = -$3,653,451.
The value of the liability 6 months is: [$3,653,451 + {0.04($3,653,451)}] = $3,799,589
作者: mouse123    时间: 2012-3-27 15:21

When the market rate is greater than the coupon rate, the bond is called a:
A)
par bond.
B)
discount bond.
C)
premium bond.


When the market rate is greater than the coupon rate, the bond will sell at a discount as investors will only buy the bond at a price which is less than fair value due to the coupon being lower than the market rate.
作者: mouse123    时间: 2012-3-27 15:21

Which of the following statements regarding zero-coupon bonds is most accurate?
A)
The interest expense in each period is found by applying the discount rate to the book value of debt at the end of the period.
B)
Interest expense is a combination of operating and financing cash flows.
C)
A company should initially record zero-coupon bonds at their discounted present value.


The liability initially recorded for a zero-coupon bond is equal to the proceeds received, which is the present value of the principal repayment discounted at the company's normal borrowing rate. Interest expense is found by applying the discount rate to the book value of debt at the beginning of the period, and there is no cash outflow from operations for a zero coupon bond.
作者: mouse123    时间: 2012-3-27 15:23

A $1,000 bond is issued with an 8% semiannual coupon rate and 5 years to maturity when market interest rates are 10%. What is the initial liability?
A)
855.
B)
1023.
C)
923.


FV = 1000; PMT = 80/2; N = 5 × 2; I/Y = 10/2; solve for PV = 923.
作者: mouse123    时间: 2012-3-27 15:23

A company issued a bond with a face value of $67,831, maturity of 4 years, and 7% annual-pay coupon, while the market interest rates are 8%.What is the unamortized discount when the bonds are issued?
A)
$2,246.65.
B)
$1,748.07.
C)
$498.58.


Coupon payment = ($67,831)(0.07) = $4,748.17.
Present value of bond: FV = $67,831, N = 4, I = 8, PMT = $4,748.17, CPT PV = $65,584.35.
Discount = $67,831 - $65,584.35 = $2,246.65.
作者: mouse123    时间: 2012-3-27 15:24

A company issued an annual-pay bond with a face value of $135,662, maturity of 4 years, and 7% coupon, while the market interest rates are 8%.What is the unamortized discount on the date when the bonds are issued?
A)
$4,493.
B)
$499.
C)
$1,748.


The unamortized discount rate at the time bonds are issued will be $4,493.
Face value of bonds = $135,662.
Proceeds from bond sale = $131,168.70 [I/Y = 8.00%; N = 4; PMT = $9,496.34 ($135,662 × 0.07 ); FV = $135,662; CPT → PV].
Unamortized discount = $4,493 = ($135,662 − $131,169).

What is the unamortized discount at the end of the first year?
A)
$3,495.
B)
$1,209.
C)
$538.


The unamortized discount will decrease by $998 at the end of first year and will be $3,495.
Interest expense = ($131,169)(0.08) = $10,493.52, or $10,494.
Coupon payment = ($135,662)(0.07) = $9,496.
Change in discount = ($10,494 − $9,496) = $998.
Discount at the end of first year = $4,493 − $998 = $3,495.
作者: mouse123    时间: 2012-3-27 15:24

Interest expense is reported on the income statement as a function of:
A)
the coupon payment.
B)
the market rate.
C)
the unamortized bond discount.


Interest expense is always equal to the book value of the bond at the beginning of the period multiplied by the market rate at issuance.
作者: mouse123    时间: 2012-3-27 15:24

On December 31, 2004, Newberg, Inc. issued 5,000 $1,000 face value seven percent bonds to yield six percent. The bonds pay interest semi-annually and are due December 31, 2011. On its December 31, 2005, income statement, Newburg should report interest expense of:
A)
$316,448.
B)
$300,000.
C)
$350,000.


Newberg, upon issuance of the bonds, recorded bonds payable of (N = (2 × 7) = 14, PMT = $175,000, I/Y = (6/2) = 3, FV = $5,000,000) $5,282,402. Interest paid June 30, 2005, was ($5,282,402 × (0.06 / 2) =) $158,472. The coupon payment was $175,000, reducing bonds payable to ($5,282,402 – ($175,000 - $158,472) =) $5,265,874. Interest paid December 31, 2005, was ($5,265,874 × (0.06 / 2) =) $157,976. Total interest paid in 2005 was ($158,472 + $157,976 =) $316,448.
作者: mouse123    时间: 2012-3-27 15:25

Assume a city issues a $5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. Interest expense in the second semiannual period is closest to:
A)
$106,550.
B)
$80,000.
C)
$210,830.


Step 1: Compute the present value of the bond: Since the current interest rate is above the coupon rate the bond will be issued at a discount.
FV = $5,000,000; N = 20; PMT = (0.04)(5 million) = $200,000; I/Y = 4.5; CPT → PV = -$4,674,802
Step 2: Compute the interest expense at the end of the first period.
= (0.045)(4,674,802) = $210,366
Step 3: Compute the interest expense at the end of the second period.
= (new balance sheet liability)(current interest rate)
= $4,674,802 + $10,366 = $4,685,168 new balance sheet liability
(0.045)(4,685,168) = $210,833
作者: mouse123    时间: 2012-3-27 15:25

A bond is issued with the following data:Assuming market rates do not change, what will the bond's market value be one year from now and what is the total interest expense over the life of the bond?
Value in 1-YearTotal Interest Expense
A)
10,181,495 2,962,107
B)
11,099,495 2,437,893
C)
10,181,495   2,437,893


To determine the bond's market value one year from now: FV = 10,000,000; N = 4; I = 4; PMT = 450,000; CPT → PV = $10,181,495.
To determine the total interest expense:
[(6)(450,000) + 10,000,000] – 10,262,107 = 2,437,893
作者: mouse123    时间: 2012-3-27 15:25

A bond is issued with an 8 percent semiannual coupon rate, 5 years to maturity, and a par value of $1000. What is the liability at the beginning of the third period if market interest rates are 10%?
A)
929.
B)
923.
C)
935.


Beginning liability of the third period = liability of the second period + difference in the cash payment and the interest expense for the third period.
Liability for the first period = present value of the bond present value of the bond is computed as follows: FV = 1000 PMT = [(1000)(0.08)]/2 = 40 I/Y = 5 N = 10 Compute PV = -923
Liability for the second period = 923 + [(0.05)(923) – 40] = 923 + 6 = 929
Liability for the third period = 929 + [(0.05)(929) – 40] = 929 + 6 = 935
作者: mouse123    时间: 2012-3-27 15:26

Nomad Company issued $1,000,000 face value 2-year zero coupon bonds on December 31, 20X2 to yield 8% interest. Bond proceeds were $857,339. In 20X3 Nomad recorded interest expense of $68,587. In 20X4 Nomad recorded interest expense of $74,074 and paid out $1,000,000 to redeem the bonds. Based on these transactions only, Nomad’s Statement of Cash Flows would show cash flow from operations (CFO) of:
A)
zero in all years.
B)
-$68,587 in 20X3 and -$74,074 in 20X4.
C)
-$142,661 in 20X4.


All of the cash flows for zero coupon bonds are included in cash flow from financing activities and none in cash flow from operations.
作者: mouse123    时间: 2012-3-27 15:26

For a given par value, which of the following debt issues will have the highest cash flows from financing?
A)
Bonds issued at premium.
B)
Zero-coupon bond.
C)
Bonds issued at discount.


The bonds issued at premium will have the highest cash flows from financing.
作者: mouse123    时间: 2012-3-27 15:26

A zero coupon bond, compared to a bond issued at par, will result in higher:
A)
interest expense.
B)
cash flows from financing (CFF).
C)
cash flows from operations (CFO).


The zero-coupon bond will have higher cash flows from operations, as the cash interest expense in this case is zero and no cash is paid until maturity. Candidates should remember that any bond issued at a discount will have more cash flow from operations and less cash flow from financing.
作者: andytrader    时间: 2012-3-27 15:28

Which of the following statements is least accurate? When a bond is issued at a discount:
A)
cash flows from financing will be increased by the par value of the bond issue.
B)
the interest expense will be equal to the coupon payment plus the amortization of the discount.
C)
the interest expense will increase over time.


Upon issuance, cash flow from financing will be increased by the amount of the proceeds.
作者: andytrader    时间: 2012-3-27 15:28

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%. Assuming semiannual compounding periods, the total interest on this bond is:
A)
$1,346,549.
B)
$1,200,000.
C)
$1,600,000.


The interest paid on the bond will be the difference between the future value of the bond of $5,000,000 and the proceeds of the bond when it was originally issued.
First find the present value of the bond found by N = 8; FV = 5,000,000; I = 4; PMT = 0; CPT → PV = −3,653,451.  This is the amount of money the bond generated when it was originally issued.
Then take the difference between the $5,000,000 future price and the $3,653,451 from the proceeds  = $1,346,549 which is the interest paid on the bond.
作者: andytrader    时间: 2012-3-27 15:29

When bonds are issued at a premium:
A)
coupon interest paid decreases each period as bond premium is amortized.
B)
earnings of the firm decrease over the life of the bond as the bond premium is amortized.
C)
earnings of the firm increase over the life of the bond as the bond premium is amortized.


As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond.
作者: andytrader    时间: 2012-3-27 15:29

Which of the following statements for a bond issued with a coupon rate above the market rate of interest is least accurate?
A)
The bond will be shown on the balance sheet at the premium value.
B)
The value of the bond will be amortized toward zero over the life of the bond.
C)
The associated interest expense will be lower than that implied by the coupon rate.


The value of the bond’s premium will be amortized toward zero over the life of the bond, not the value of the bond.
作者: andytrader    时间: 2012-3-27 15:29

For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?
A)
Interest expense.
B)
Cash flow from financing.
C)
Debt-to-equity ratio.


For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not the coupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense will change when interest rates change, but the market value of the variable-rate debt will not change significantly.)
作者: andytrader    时间: 2012-3-27 15:30

An analyst is considering a bond with the following characteristics:At issuance the bond will:
A)
increase total assets by $9.626 million.
B)
provide cash flow from investing of approximately $9.626 million.
C)
increase total liabilities by $10.0 million.


First we must determine the present value of the bond. FV = 10,000,000; PMT = 560,000; I/Y = 6.5; N = 5; CPT → PV = 9,625,989, or approximately $9.626 million. At issuance, the university will receive cash flow from financing of $9.626 million.

Using the effective interest method, the interest expense in year 3 and the total interest paid over the bond life are approximately:
Year 3 Interest ExpenseTotal Interest
A)
$560,000$2.80 million
B)
$634,506$3.17 million
C)
$560,000$3.17 million


Amount paid by issuer = face value + total coupon payments
= 10,000,000 + (0.056 × 10,000,000 × 5) = 12,800,000
Total interest paid over the life = 12,800,000 – 9,625, 989 = 3,174,011, or approximately $3.2 million.
作者: andytrader    时间: 2012-3-27 15:30

On December 31, 20X3 Okay Company issued 10,000 $1000 face value 10-year, 9% bonds to yield 7%. The bonds pay interest semi-annually. On its financial statements (prepared under U.S. GAAP) for the year ended December 31, 20X4, the effect of this bond on Okay's cash flow from operations is:
A)
-$700,000.
B)
-$900,000.
C)
-$755,735.


The coupon payment is a cash outflow from operations. ($10,000,000 × 0.09) = $900,000.
作者: andytrader    时间: 2012-3-27 15:30

At the beginning of 20X3, Creston Company issues $10 million face amount of 6% coupon bonds when the market rate of interest is 7%. The bonds mature in four years and pay interest annually. Assuming the effective interest rate method, what is the bond liability Creston will report at the end of 20X3?
A)
$9,661,279
B)
$9,737,568
C)
$10,346,511


Under the effective interest rate method, the bond liability is equal to the present value of the remaining cash flows discounted at the market rate of interest at the issue date. At the end of this year, there are 3 annual payments of $600,000 and one payment of $10,000,000 remaining. Using your financial calculator, the present value is $9,737,568 (N = 3, I = 7, PMT = 600,000, FV = 10,000,000, Solve for PV).
作者: andytrader    时间: 2012-3-27 15:31

A firm can recognize a gain or loss on derecognition of a bond the firm has issued:
A)
either before maturity or at maturity.
B)
before maturity, but not at maturity.
C)
at maturity, but not before maturity.


If a firm redeems a bond before maturity for a price that is different from the carrying value of the bond liability, the firm will recognize the difference as a gain or a loss. At maturity, the carrying value of the bond liability is equal to the face value of the bond, therefore the firm does not experience a gain or loss by repaying the face value.
作者: andytrader    时间: 2012-3-27 15:31

A company redeems $10,000,000 of bonds that it issued at par value for 101% of par or $10,100,000. In its statement of cash flows, the company will report this transaction as a:
A)
10,100,000 CFF outflow.
B)
$10,000,000 CFF outflow and $100,000 CFO outflow.
C)
$10,100,000 CFO outflow.


Cash paid to redeem a bond is classified as a cash flow from financing activities.
作者: andytrader    时间: 2012-3-27 15:32

Larry Purcell, an entry-level fixed income analyst at Knowlton & Smeades LLC, was discussing debt covenants with his supervisor, Andy Holzman. During the meeting Purcell made the following statements regarding bond covenants:
Statement 1: If a firm violates any of its debt covenants, the company will immediately go into bankruptcy and the creditors of the firm will take over the liquidation of its assets.
Statement 2: Debt covenants are important in evaluating a firm’s credit risk and to better understand how the restrictions of the covenants can affect the firm’s growth prospects and choice of accounting policies.
With respect to these statements:
A)
only one is correct.
B)
both are incorrect.
C)
both are correct.


Lenders and other creditors use debt covenants in their lending agreements to restrict the activities of the debtor that could adversely impact the creditors’ position. If any bond covenant is violated, the firm is in technical default on its debt. The creditors can demand payment of the debt, however, the terms are generally renegotiated. As such, the company does not automatically enter into bankruptcy and have its assets liquidated by the creditors.
作者: andytrader    时间: 2012-3-27 15:32

Which of the following provisions would least likely be included in the bond covenants? The borrower must:
A)
maintain a debt-to-equity ratio of no less than 2:1.
B)
maintain insurance on the collateral that secures the bond.
C)
not increase dividends to common shareholders while the bonds are outstanding.


A lender wants to prohibit the borrower from becoming more leveraged. This can be done by requiring a leverage ratio that is no more than a specified amount. Reducing leverage would be beneficial to the lender by lowering risk.
作者: andytrader    时间: 2012-3-27 15:32

In analyzing disclosures related to the financing liabilities of a company, which of the following disclosures would be least helpful to the analyst?
A)
The interest expense for the period as provided on the income statement or in a footnote.
B)
The present value of the future bond payments discounted at the coupon rate of the bonds.
C)
Filings with the Securities and Exchange Commission (SEC) that disclose all outstanding securities and their features.


When analyzing disclosures related to financing liabilities, analysts would review the balance sheet and find the present value of the promised future liability payments. These payments would then be discounted at the rate in effect at issuance (i.e., the yield to maturity), not the coupon rate of the bonds.
作者: andytrader    时间: 2012-3-27 15:32

Which of the following is least likely to be disclosed in the financial statements of a bond issuer?
A)
The market rate of interest on the balance sheet date.
B)
Collateral pledged as security in the event of default.
C)
The amount of debt that matures in each of the next five years.


The market rate on the balance sheet date is not typically disclosed. The amount of principal scheduled to be repaid over the next five years and collateral pledged (if any) are generally included in the footnotes to the financial statements.
作者: andytrader    时间: 2012-3-27 15:33

As compared to purchasing an asset, which of the following is least likely an incentive to structure a transaction as a finance lease?
A)
Risk of obsolescence is reduced because the asset is returned to the lessor.
B)
The terms of the lease can be negotiated to better meet each party's needs.
C)
The lease enhances the balance sheet by the lease liability.


Operating leases enhance the balance sheet by excluding the lease liability. With a finance lease, an asset and a liability are reported on the balance sheet just like a purchase made with debt.
作者: andytrader    时间: 2012-3-27 15:33

The lessee has an incentive to classify a lease as an operating lease, rather than as a finance lease, because an operating lease:
A)
has no risk involved because the lessor assumes all risk.
B)
has payments that are less than a capital lease's payments.
C)
does not appear on the balance sheet.


Having less assets and liabilities on the balance sheet than would exist if the asset were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., the debt to equity ratio).
作者: andytrader    时间: 2012-3-27 15:33

Compared to a finance lease, an operating lease is most likely to be favored when:
A)
management compensation is not based on returns on invested capital.
B)
the lessee has bond covenants relating to financial policies.
C)
at the end of the lease, the lessee may be better able to sell the asset than the lessor.


If the lessee has bond covenants (e.g., debt-to-equity ratio) relating to its financial policies that it must follow, it is best to have an operating lease due to the fact that the operating lease will keep the asset off of the balance sheet resulting in less liabilities.
作者: andytrader    时间: 2012-3-27 15:34

A lessee most likely has an incentive to structure a lease as an operating lease rather than a finance lease when it:
A)
does not have debt covenants.
B)
is very profitable.
C)
has a high debt-to-equity ratio.


A firm with a high debt-to-equity ratio is more likely to use an operating lease instead of a capital lease. Use of an operating lease avoids the recognition of debt on the lessee’s balance sheet and will not increase the debt-to-equity ratio.
作者: andytrader    时间: 2012-3-27 15:34

An analyst compares two companies that are identical except that Company X uses finance leases and Company Y uses operating leases. The analyst would expect Company X’s debt-to-equity ratio, relative to Company Y’s, to be:
A)
higher.
B)
lower.
C)
the same.


Lease capitalization adds both current and noncurrent liabilities to debt, resulting in a corresponding increase in the debt-to-equity and other leverage ratios. Thus, Company X’s (Debt + Lease)/Equity is greater than Company Y’s Debt/Equity.
作者: andytrader    时间: 2012-3-27 15:35

Under an operating lease (versus a finance lease) which of the following is higher for the lessee?
A)
Cash flow from financing.
B)
Cash flow from operations.
C)
Assets.


The lessee's cash flows from financing will be higher for an operating lease because the payments made for an operating lease are operating cash outflows, not financing cash outflows. The payments made under a finance lease are split between interest paid and principal. The latter is charged to cash flow from financing.
作者: andytrader    时间: 2012-3-27 15:35

Which of the following statements that classify a lease as a finance lease under U.S. GAAP is least accurate?
A)
Title is transferred at the end of the lease period.
B)
The present value of the lease payments is at least 80% of the fair market value of the asset.
C)
A bargain purchase option exists.


For a lease to be classified as a finance (capital) lease the present value of the lease payments must be at least 90% of the fair market value of the asset.
作者: andytrader    时间: 2012-3-27 15:36

Which of the following statements about the impact of leases on the financial statements of the lessee is least accurate?
A)
Cash flow from investing is higher for a finance lease than an operating lease.
B)
Net income is lower in the early years of a finance lease than an operating lease.
C)
A finance lease results in higher liabilities compared to an operating lease.


Cash flow from investing is not affected by a lease being either a finance or an operating lease. Finance leases reduce cash flow from operations by only the portion of the lease payment attributed to interest expense. Cash flow from financing is reduced by the rest of the finance lease payment which is the principal part of the payment.
作者: andytrader    时间: 2012-3-27 15:37

Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The:
A)
lease contains a bargain purchase option.
B)
term of the lease is 75% or more of the estimated economic life of the leased property.
C)
lessor retains ownership of the property at the end of the lease term.


If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a finance lease.
作者: andytrader    时间: 2012-3-27 15:37

According to U.S. GAAP, which of the following would least likely require a lessee to capitalize a lease?
A)
The lease term is 75% or more of the estimated life of the leased asset.
B)
The present value of the minimum lease payments is 90% or more of the fair value of the leased asset.
C)
The lessee has an option to purchase the asset for its fair market value at the end of the lease.


Under U.S. GAAP, a lease must be capitalized if it contains a bargain purchase option, not just a purchase option.
作者: andytrader    时间: 2012-3-27 15:38

In a direct-financing lease, the implicit rate is such that the present value of the minimum lease payments:
A)
equals the sale price of the leased asset.
B)
is lower than the cost of the leased asset.
C)
equals the cost of the leased asset.


In a direct-financing lease, the implicit rate is such that the present value of the MLPs equals the cost of the leased asset. Thus, at lease inception the total assets do not change and no gain is recognized.
作者: andytrader    时间: 2012-3-27 15:38

For a finance lease, the amount recorded initially by the lessee as a liability will:
A)
be less than the total of the minimum lease payments.
B)
equal the total of the minimum lease payments.
C)
equal the present value of the minimum lease payments at the beginning of the lease.


With a finance lease, both an asset and liability are reported on the lessee's balance sheet, with lease payments divided between interest and principal components. The future payments on principal and interest must be discounted to present value at the beginning of the lease.
作者: andytrader    时间: 2012-3-27 15:38

Compared to an operating lease, a lessee using a finance lease is least likely to have:
A)
a lower current ratio.
B)
lower net income in the earlier years of the lease.
C)
higher cash flow from financing during the lease period.


Since a portion of the lease payment is treated as repayment of principal under a finance lease, cash flow from financing will be lower.
作者: andytrader    时间: 2012-3-27 15:39

Under a finance lease (versus an operating lease) which of the lessee's financial ratios will be higher?
A)
Debt/equity.
B)
Asset turnover.
C)
Return on equity.


The debt/equity ratio will be higher because the finance lease requires the creation of a long-term liability on the balance sheet.
作者: andytrader    时间: 2012-3-27 15:39

On the lessee's cash flow statement, the principal portion of a finance lease payment is a:
A)
financing cash flow.
B)
operating cash flow.
C)
investing cash flow.


The principal portion of a finance lease payment is a financing cash outflow for the lessee. The interest portion is an operating cash outflow.
作者: andytrader    时间: 2012-3-27 15:39

If a lease is treated as a finance lease, as compared to being treated as an operating lease, the effect on the lessee's current ratio and the debt/equity ratio will be an:
Current Ratio Debt/Equity Ratio
A)
Increase Increase
B)
Increase Decrease
C)
Decrease Increase


With finance leases the lessee's assets, current liabilities, and long-term liabilities will be greater than if the lease was an operating lease. With the debt to equity ratio, the liability is in the numerator, which results in an increase in the ratio. With the current ratio, current liabilities are increased and are in the denominator which results in a decrease in the ratio.
作者: andytrader    时间: 2012-3-27 15:40

For a given lease payment and term, which of the following is least accurate regarding the effects of the classification of the lease as a finance lease as compared to an operating lease?
A)
The lessee's asset turnover will be lower for a finance lease.
B)
The lessee's debt-to-equity ratio will be higher for a finance lease.
C)
The lessee's current ratio will be higher for a finance lease.


The lessee's current ratio will be lower because the current portion of the finance lease increases current liabilities, hence reducing the current ratio.
作者: andytrader    时间: 2012-3-27 15:41

Which of the following statements about leases is least accurate?
A)
In the first years of a finance lease, the lessee's current ratio is greater than it would have been had the firm used an operating lease.
B)
In the first years of a finance lease, the lessee's debt to equity ratio is greater than it would have been if the firm had used an operating lease.
C)
All else equal, when a lease is capitalized the lessee's income will rise over the term of the lease.


From the lessee's perspective, if a lease is considered to be a finance lease instead of an operating lease, then the lessee's current liabilities will be greater until the lease has expired. This will result in a lower current ratio (larger denominator).
In the early years, the capitalized lease expense (interest plus depreciation) is greater than in the later years because interest expense decreases over time. Less expenses = more income.
In the first years of a finance lease the lessee's debt to equity ratio will be greater than if the firm had used an operating lease because in the case of the finance lease, the numerator is comprised of (debt + lease), while the numerator in the case of the operating lease is (debt) only. In addition, the greater capitalized lease expense flows through to decrease shareholder's equity (the denominator).
作者: andytrader    时间: 2012-3-27 15:41

If a lessee enters into a finance lease rather than an operating lease, it can expect to have a:
A)
higher return on assets.
B)
lower debt-to-equity ratio.
C)
higher debt-to-equity ratio.


Leasing the asset with an operating lease avoids recognition of the debt on the lessee’s balance sheet. Having fewer assets and liabilities on the balance sheet than would exist if the assets were purchased increases profitability ratios (e.g., return on assets) and decreases leverage ratios (e.g., debt-to-equity ratio). In the case of a finance lease, the assets are reported on the balance sheet and are depreciated.
作者: andytrader    时间: 2012-3-27 15:41

Which of the following statements regarding the effect of a finance lease on the lessee's statement of cash flows is least accurate?
A)
The rental expense serves to reduce the cash flow for financing because it is an investment expense.
B)
The change in the finance lease liability on the balance sheet is a cash flow from financing.
C)
The interest expense portion of the lease payments reduces cash flow from operations.


In finance leases, there is only interest expense and principal repayment. Rental expense is only charged when the lease is an operating lease.
作者: andytrader    时间: 2012-3-27 15:42

The Mader Corporation leases an asset for five years with lease payments of $10,000 per year. If Mader classifies the lease as a finance lease, which financial statements are affected at the end of the first year?
A)
Income statement and balance sheet only.
B)
Statement of cash flows, income statement, and balance sheet.
C)
Income statement only.


The classification of a lease as a finance lease creates an asset, a debt obligation, financing cash flows (amortization of the loan), and operating cash flows (interest expense).
作者: andytrader    时间: 2012-3-27 15:42

Which of the following statements regarding a direct financing lease is least accurate?
A)
The principal portion of the lease payment is a cash inflow from investing on the lessor's cash flow statement.
B)
The lessor recognizes no gross profit at the inception of the lease.
C)
Interest revenue on the lessor's income statement equals the implicit interest rate times the lease payment.


Interest revenues are calculated by multiplying the implicit interest rate by net receivables at the beginning of the period.
作者: andytrader    时间: 2012-3-27 15:42

Penguin Company is planning to lease a $5 million machine to produce goods for eventual sale. Penguin is able to structure the lease so as to classify it as either an operating or a finance lease. Advantages to Penguin of classifying this lease as an operating lease are least likely to include that:
A)
no disclosures of payments due under the lease are required.
B)
depreciation is not recorded.
C)
the lease is not reported as debt on Penguin's balance sheet, so leverage ratios are not increased.


Cash payments due under an operating lease must be disclosed in the notes to the financial statements for each of the following five years and in aggregate. Operating leases are simpler to account for and the often adverse ratio implications of offsetting increases in assets and liabilities are avoided.
作者: andytrader    时间: 2012-3-27 15:43

Which of the following statements regarding finance and operating leases is least accurate?
A)
For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease.
B)
During the life of an operating lease, the rent expense equals the lease payment.
C)
Asset turnover is higher for the lessee with an operating lease than a finance lease.


If the lease is an operating lease there is no entry made on the balance sheet for the lessee. For finance leases, the leased asset and liability are recognized on the balance sheet by the amount equal to the present value of the minimum lease payments using as the discount rate the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.
作者: andytrader    时间: 2012-3-27 15:43

Classifying a lease as an operating lease for a lessee, as opposed to a finance lease, will result in:
Current Ratio
Debt/Equity Ratio
Asset Turnover Ratio
A)
HigherLowerHigher
B)
HigherLowerLower
C)
LowerLowerHigher


For a lessee using operating leases, the current ratio will be higher, the debt/equity ratio will be lower, and the asset turnover will be higher than they would be with finance leases. With operating leases, assets and liabilities are lower.
作者: andytrader    时间: 2012-3-27 15:43

Which of the following is least likely disclosed in the financial statement footnotes of a lessee?
A)
A general description of the leasing arrangement.
B)
The lease payments to be paid in each of the next five years.
C)
The lease interest rate.


The interest rate used by the lessee is not a required disclosure.
作者: clearlycanadian    时间: 2012-3-27 15:45

In a defined contribution pension plan, investment risk is borne by the:
A)
employee.
B)
employer.
C)
plan manager.


In a defined contribution plan, the employee makes the investment decisions and assumes the investment risk.
作者: clearlycanadian    时间: 2012-3-27 15:45

The defined benefit obligation is best described as:
A)
present value of future pension benefits earned to date.
B)
projected value of pension benefits owed to plan participants.
C)
stated periodic payment owed to a plan participant upon retirement.


The defined benefit obligation is the present value of the future benefits earned to date by participants in a defined benefit pension plan.
作者: clearlycanadian    时间: 2012-3-27 15:45

In a defined benefit pension plan:
A)
the employee is promised a periodic payment upon retirement.
B)
the employee is responsible for making investment decisions.
C)
the employer’s pension expense is equal to its contributions to the plan.


In a defined benefit pension plan, a periodic payment, typically based on the employee’s salary, is promised to the employee upon retirement and the employer contributes to an investment trust that generates the principal growth and income to meet the pension obligation. The employees do not direct the investments in their accounts as they do in a defined contribution plan. Pension expense for a defined benefit plan has several components, including service cost, prior service cost, and interest cost, and depends on actuarial assumptions and the expected rate of return on plan assets.
作者: clearlycanadian    时间: 2012-3-27 15:46

The present value of benefits earned during the current period by participants in a defined benefit pension plan is best described as the plan’s:
A)
service cost.
B)
prior service cost.
C)
defined benefit obligation.


Service cost refers to the benefits earned in the current period by a defined benefit plan’s participants. Prior service costs are benefits awarded retroactively when a plan is initiated or changed. Defined benefit obligation is the present value of future benefits earned to date.
作者: clearlycanadian    时间: 2012-3-27 15:46

An employer offers a defined benefit pension plan and a defined contribution pension plan. The employer’s balance sheet is most likely to present an asset or liability related to:
A)
both of these pension plans.
B)
the defined contribution plan.
C)
the defined benefit plan.


Only a defined benefit plan has a funded status that would appear on the balance sheet as an asset or liability. Employer payments into a defined contribution plan are recognized as expenses in the period incurred.
作者: clearlycanadian    时间: 2012-3-27 15:46

The difference between a defined benefit pension plan’s assets and its defined benefit obligation is best described as the plan’s:
A)
prior service cost.
B)
funded status.
C)
actuarial gain or loss.


The funded status of a defined benefit plan is the difference between the plan’s assets and the defined benefit obligation. If assets are greater than the obligation, the plan is said to be overfunded, and if assets are less than the obligation, the plan is said to be underfunded.
作者: clearlycanadian    时间: 2012-3-27 15:47

The asset or liability reported on the balance sheet for a defined benefit plan is equal to the plan’s funded status under:
A)
Both IFRS and U.S. GAAP.
B)
U.S. GAAP, but not IFRS.
C)
Neither IFRS nor U.S. GAAP.


Under U.S. GAAP, the asset presented for an overfunded plan or liability presented for an underfunded plan is the plan’s funded status. Under IFRS, the asset or liability presented does not include unrecognized prior service costs or unrecognized actuarial gains and losses.
作者: clearlycanadian    时间: 2012-3-27 15:47

A firm is more solvent if it has:
A)
low leverage and coverage ratios.
B)
low leverage ratios and high coverage ratios.
C)
high leverage and coverage ratios.


Low leverage ratios suggest the firm has relatively little debt compared to its equity and assets. High coverage ratios suggest the firm generates enough earnings to meet its interest payments.
作者: clearlycanadian    时间: 2012-3-27 15:48

Other things equal, and ignoring issuance costs, a firm that raises cash by issuing a new bond is most likely to:
A)
increase its leverage ratios and increase its coverage ratios.
B)
decrease its leverage ratios and increase its coverage ratios.
C)
increase its leverage ratios and decrease its coverage ratios.


Leverage ratios will increase because debt increases while equity remains unchanged, and (assuming equity is positive) debt increases proportionally by more than assets. Coverage ratios decrease because interest payments increase while EBIT is unchanged.
作者: terpsichorefan    时间: 2013-4-16 19:19

thanks for sharing



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