[ 2009 Mock Exam (PM) ] Financial Statement Analysis .Questions 45-68 border, company, following, face

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45. An analyst gathers the following information about a company:

Cost of goods sold	$18.4 million
Average inventory	$2.5 million
Receivables turnover	24 times
Number of days of payables	25 days

The company’s cash conversion cycle (in days) is closest to:

A. 40.
B. 59.
C. 65.

46. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Two companies operating in the same industry both achieved the same return on equity with the same net sales, but the two companies were different with respect to return on total assets. Compared with the company that had the higher return on total assets, the company with the lower return on total assets most likely had a higher:

A. total asset turnover.
B. financial leverage multiplier.
C. proportion of common equity in its capital structure.

47. If an analyst is preparing common-size financial statements the most appropriate way of expressing the interest expense is as a percentage of:

A. sales.
B. total liabilities.
C. total interest-bearing debt.

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66. The unrealized gains and losses arising from changes in the market value of available-for-sale securities are reported under U.S. GAAP and International Financial Reporting Standards (IFRS) in the:

A. equity section for both.
B. equity section for U.S. GAAP and the income statement for IFRS.
C. income statement for U.S. GAAP and the equity section for IFRS.

67. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company records the following two transactions:

I.

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66. The unrealized gains and losses arising from changes in the market value of available-for-sale securities are reported under U.S. GAAP and International Financial Reporting Standards (IFRS) in the:

A. equity section for both.
B. equity section for U.S. GAAP and the income statement for IFRS.
C. income statement for U.S. GAAP and the equity section for IFRS.

Answer: A
“Understanding the Income Statement,” Thomas R. Robinson, CFA, Jan Hennie van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, p.179-180
“Understanding the Balance Sheet,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, pp 217-219
“International Standards Convergence,” Thomas R. Robinson, CFA, Jan Hennie van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, pp.624-625
Study Session: 8-32-k, 8-33-g, 10-43-a
State the accounting classification for items that are excluded from the income statement but affect owners’ equity, and list the major types of items receiving that treatment. Demonstrate the appropriate classifications and related accounting treatments for marketable and non-marketable financial instruments held as assets or owed by the company as liabilities.
Identify and explain the major international accounting standards for each asset and liability category on the balance sheet and the key differences from U.S. generally accepted accounting principles (GAAP).
Under both U.S. GAAP and IFRS the unrealized gains and losses arising from carrying available-for-sale securities at market value are reported in equity as part of accumulated other comprehensive income.

67. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company records the following two transactions:

I.

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63. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Which of the following best describes taxes payable?

A. Total liability for current and future taxes.
B. Tax return liability resulting from current period taxable income.
C. Actual cash outflow for income taxes including payments (refunds) for other years.

64. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company is considering issuing either a straight coupon bond or a coupon bond with warrants attached. The proceeds from either issue would be the same. If the firm issues the bond with warrants attached instead of the straight coupon bond, which of the following ratios will most likely be lower for the bond with warrants?

A. Return on assets.
B. Debt to equity ratio
C. Interest coverage ratio.

65. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst is forecasting EPS for a company. She prepares the following common sized data from its recent annual report and estimates sales for 2009.

	2009 forecast	2008 actual	2007 actual
Sales $ millions	2,250.0	2,150.0	1,990.0
Sales as % of sales		100.00%	100.00%
Cost of goods sold		45.00%	45.00%
Operating Expenses		40.00%	40.00%
Interest expense		3.72%	4.02%
Restructuring expense			7.20%
re-tax margin		11.28%	3.78%
Taxes (35%)		3.95%	1.32%
Net Income		7.33%	2.46%

The capital structure of the company has not changed and the company has no shortterm interest bearing debt outstanding. The projected net income (in $ millions) for 2009 is closest to:

A. 162.8.
B. 164.9.
C. 167.4.

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63. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Which of the following best describes taxes payable?

A. Total liability for current and future taxes.
B. Tax return liability resulting from current period taxable income.
C. Actual cash outflow for income taxes including payments (refunds) for other years.

Answer: B
“Income Taxes,” Elbie Antonites, CFA, and Michael Broihahn, CFA
2009 Modular Level I, Volume 3, p. 385
Study Session: 9-37-a
Explain the differences between accounting profit and taxable income, and define key terms including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense.
Taxes payable is the current liability resulting from the current period taxable income based on the company’s tax rate and the portion of its income that is subject to income taxes under the tax laws of the jurisdiction.

64. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company is considering issuing either a straight coupon bond or a coupon bond with warrants attached. The proceeds from either issue would be the same. If the firm issues the bond with warrants attached instead of the straight coupon bond, which of the following ratios will most likely be lower for the bond with warrants?

A. Return on assets.
B. Debt to equity ratio
C. Interest coverage ratio.

Answer: B
“Long-term Liabilities and Leases,” Elizabeth Gordon and R. Elaine Henry, CFA
2009 Modular Level I, Volume 3, pp. 440-442
Study Session 9-38-e
Describe two types of debt with equity features (convertible debt and debt with warrants) and calculate the effect of issuance of such instruments on a company’s debt ratios.
The portion of the proceeds attributable to the warrants would be classified as equity, thus the portion classified as a liability would be smaller (lower). Therefore the debtto- equity ratio will be lower, for the bonds with warrants.
EBIT would be the same regardless of financing method; the coupon on the bond with warrants attached would be lower if the two issues provided the same proceeds, so the interest coverage would be higher for a bond with warrants attached.
Since interest expense would be lower for a bond with warrants attached, Net Income would be higher and ROA would be higher.

65. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst is forecasting EPS for a company. She prepares the following common sized data from its recent annual report and estimates sales for 2009.

	2009 forecast	2008 actual	2007 actual
Sales $ millions	2,250.0	2,150.0	1,990.0
Sales as % of sales		100.00%	100.00%
Cost of goods sold		45.00%	45.00%
Operating Expenses		40.00%	40.00%
Interest expense		3.72%	4.02%
Restructuring expense			7.20%
re-tax margin		11.28%	3.78%
Taxes (35%)		3.95%	1.32%
Net Income		7.33%	2.46%

The capital structure of the company has not changed and the company has no shortterm interest bearing debt outstanding. The projected net income (in $ millions) for 2009 is closest to:

A. 162.8.
B. 164.9.
C. 167.4.

Answer: C
“Understanding the Income Statement,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, R. Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, pp.175-177
“Financial Statement Analysis: Applications,” Thomas R. Robinson, CFA, Jan Hennie van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2009 Modular Level I, Volume 3, pp.583-587
Study Session: 8-32-j, 10-42-b
Evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement.
Prepare a basic projection of a company’s future net income and cash flow.
The cost of goods sold and operating expenses are constant over the two-year period and they can reasonably be used to forecast 2009. Interest expense is declining as a percent of sales, implying it is a fixed cost. Conversion into dollars for each year shows what interest expense has been; 2008 =$80 (3.72% x 2,150); 2007=$80 (4.02 x 1,990) and that would be a reasonable projected amount to use. The restructuring charge should not be included as it is a non-recurring item. The tax rate, 35%, is given.
         Sales                             $2,250.00
         COGS (45%)                    1,012.50
         Operating expenses (40%)   900.00
         Interest expense                   80.00
         Pretax margin                      257.50
         Tax (35%)                              90.1
         Net Income                          167.40

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60. Which of the following is least likely to be a characteristic of an effective financial reporting framework?

A. Consistency.
B. Comparability.
C. Comprehensiveness.

61. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathers the following data about a company and the industry in which it operates:

	Company ($ millions)	Industry Averages as a percent of sales
Revenues	5,000	100%
Cost of goods sold	2,100	45%
Operating expenses	1,750	32%
rofit margin	475	9.5%

Which of the following conclusions is most reasonable? Compared to the industry, the company:

A. has the same cost structure and net profit margin.
B. has a lower gross profit margin and spends more on its operating costs.
C. is better at controlling product costs, but less effective at controlling operating costs.

62. A European based company follows IFRS (International Financial Reporting Standards) and capitalizes new product development costs. During 2008 they spent