答案和详解如下： 6.Regarding Basten’s and Matthews’ statements about the gain/loss that Flitenight had at the end of 2004 on its investment in Rocky
Mountain, which is CORRECT? A) Basten’s statement is correct and Matthews’ statement is incorrect. B) Basten’s statement is incorrect and Matthews’ statement is incorrect. C) Basten’s statement is correct and Matthews’ statement is correct. D) Basten’s statement is incorrect and Matthews’ statement is correct.
The correct answer was C) If Flitenight accounted for its Rocky
Mountain investment using the equity method, the value of the investment as of December 31, 2004, would be: Flitenight’s original $10 million investment + (Flitenight’s share of Rocky Mountain’s 2003 earnings less dividends Flitenight received in 2003) + (Flitenight’s share of Rocky Mountain’s 2004 earnings less dividends Flitenight received in 2004). Since we know that Flitenight owns 20 percent of Rocky
Mountain and consequently receives 20 percent of the dividends that Rocky
Mountain pays, we can calculate: Value of Rocky
Mountain on Flitenight’s books at the end of 2004 = $10 million + (0.20 x $3 million in 2003 earnings - 0.20 x $1.5 million in 2003 dividends) + (0.20 x -$800,000 in 2004 earnings - 0.20 x $1 million in 2004 dividends) = $10 million + ($600,000 - $300,000) + (-$160,000 - $200,000) = $10,000,000 + $300,000 - $360,000 = $9,940,000 Basten’s statement is correct. On a cash basis, Flitenight spent $10 million to acquire its stake in Rocky
Mountain, and received ($300,000 in 2003 dividends + $200,000 in 2004 dividends) = $500,000 in dividends over the two years. $500,000 in cash return on a $10,000,000 cash investment equals 5 percent over the two years. Matthews’ statement is also correct.
7.Regarding Basten’s and Glenn’s statements about the impact of Rocky
Mountain on Flitenight’s 2005 balance sheet and cash flow statement, which is CORRECT? A) Basten’s statement is correct and Matthews’ statement is incorrect. B) Basten’s statement is correct and Matthews’ statement is correct. C) Basten’s statement is incorrect and Matthews’ statement is incorrect. D) Basten’s statement is incorrect and Matthews’ statement is correct.
The correct answer was C) The equity method of accounting is used when the parent has significant influence over the investee but does not exercise control. Consolidation is required when the parent controls, directly or indirectly, more than 50 percent of the voting stock. Once Flitenight exercised its option to purchase the additional 40 percent of Rocky
Mountain’s stock (for total ownership of 60 percent) on December 31, 2004, it could no longer use the equity method and had to switch to the consolidation method. In the consolidation method, Flitenight’s investment in Rocky Mountain is no longer listed as a separate asset on the balance sheet (all of Rocky Mountain’s assets and liabilities are combined with Flitenight’s, with the minority interest shown as a liability), so Basten’s statement is incorrect. In the consolidation method, parent company cash flows exclude those between parent and investee, so Glenn’s statement is also incorrect.
8 .Michael Smith is an analyst at Valley Securities following the automotive industry. Universal Motors (UM) is a large U.S. based automotive company and Smith currently has the company rated as a strong buy and comments that it is an industry leader. His conclusion is primarily based on comparing the company to three other very large U.S. automakers: National, Gemeni and Crystal. Smith has used a number of financial measures based solely on data taken directly from the financial statements of these companies. Susan Stone, CFA, is Smith's supervisor and has called his analysis into question, because various underlying factors may prevent a direct comparison of Universal Motors to National, Gemeni and Crystal. She believes that adjustments to the financial data are necessary before a meaningful analysis can be completed. Universal Motors provides credit to its customers through a partially owned finance company, which it accounts for under the equity method. Gemeni provides financing through a wholly owned, consolidated subsidiary. Finance companies typically carry a higher level of debt relative to most other industries. Over the last five years, Crystal has made several large acquisitions that it financed through the issuance of new common stock and accounted for the acquisitions using the purchase method. Universal Motors has made no acquisitions in the last 15 years. Stone believes that Smith's analysis is not valid because he has not properly taken into consideration the impact of Gemeni's wholly owned financing subsidiary, Crystal's acquisition history, and a foreign subsidiary owned by National. Due to the recent economic boom and interest rates that are at historic lows, the wholesale prices of durable goods have been rising over the last five years, specifically new automobile prices that have risen at a rate of about 6.5 percent per annum. All of the car manufactures account for their inventories using FIFO. Present management at each firm believes this method most accurately reflects the actual flow of their inventories and claim that it will not change in the foreseeable future. Smith is having difficulty understanding why the debt to equity ratios of Universal Motors and Gemeni are not directly comparable. Stone explains that Gemeni's debt to equity ratio will be different under the consolidation method than if it used the equity method. Which of the following most accurately describes the difference in the debt-to-equity ratio under the two methods? Under the consolidation method Gemeni's debt-to-equity ratio will be: A) lower because the finance company has a larger profit margin than Gemeni's automotive business. B) higher because Gemeni's finance company has a higher debt-to-equity ratio than Universal Motors' finance company. C) higher because Gemeni must include all of the finance company's assets and liabilities on it's balance sheet. D) lower because falling interest rates make the finance company's loans more valuable, thereby increasing the equity on its balance sheet.
The correct answer was C) Under consolidation, the debt-to-equity ratio will be higher, because the parent company must include the high amount of debt that the finance company has on their balance sheet. In this case UM, using the equity method, does not carry their finance company's debt on their balance sheet and, therefore, will have a lower debt-to-equity ratio than if it used the consolidation method. 9.Stone is also critical of Smith's direct comparison of the return on assets of Universal Motors and Gemeni. She explains that the effect the consolidation of Gemeni's finance company will cause its return on assets to be different than under the equity method used by Universal Motors. Which of the following most accurately describes the difference on return on assets under the two methods? Under the consolidation method Gemeni's return on assets will be: A) higher because the finance company has a higher profit margin than Gemeni's core business. B) lower because falling interest rates increase the value of the finance company's assets but do not improve returns. C) lower because net income is no different under the two accounting methods, and Gemeni must include all assets of the subsidiary on the balance sheet. D) higher because falling interest rates increase the value of the finance company's loans outstanding, in turn increasing net income.
The correct answer was C) Net income is the same under both methods, but total assets are higher under the consolidated method because all of the finance company's assets must be included on the balance sheet of the parent.
10.Smith is starting to understand Stone's point. He now turns his attention to the interest coverage ratio of Universal Motors 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 EBIT will decrease under consolidation. B) higher because interest expense will decrease under consolidation. C) lower because interest expense will increase under consolidation. D) higher because EBIT will increase greatly under the consolidation of the finance company.
The correct answer was C) 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. | 
发表于 2008-4-2 17:13
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