Question 46
   

Connex produces products that enable different software systems to work together. They have planned multiple product rollouts over the foreseeable future with product lines designed for both the consumer and business sectors. Based on increasing profits, Connex plans on increasing capital expenditures from 12% to 18% annually. Connex has recorded $30 million in deferred tax liabilities due to the use of accelerated depreciation for tax purposes.

Based on the information above, what is the most appropriate way for a financial analyst to treat the deferred tax liability?

A)    Decrease the deferred tax liability account by $30 million and increase the deferred tax asset account by the same amount.

B)   Decrease the deferred tax liability account by $30 million and increase stockholders' equity by the same amount.

C)   Make no adjustments because the deferred tax liability is appropriately classified.

D)   Ignore the deferred tax liability when calculating Connex's leverage ratios.

Question 47

Which of the following debt covenants is least likely to result in a decreased equity value for a firm? The firm must not:

A)    have a current ratio less than 1.0 at any given point in time.

B)   sell, or sell and lease back, capital assets.

C)   pay any dividends without the approval of the debt holders.

D)   issue additional debt in excess of $500,000 without the approval of the existing debt holders.

Question 48

Analysts reviewing Amber, Inc.’s and Bold, Inc.’s long-term contracting activities observe that Amber, Inc.’s contracts are being accounted for under the percentage-of-completion method while Bold, Inc.’s are being accounted for under the completed contract method. This difference is least likely to affect the two companies':

A)    statements of cash flows.

B)   income statements.

C)   assets on the balance sheets.

D)   liabilities and equity on the balance sheets.

Question 49

Maritza Inc. is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Maritza record this transaction?

A)    Investing activities section.

B)   Financing activities section.

C)   Footnotes to the cash flow statement.

D)   Operating activities section.

Question 50

In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?

       Cash collections from customers:       Cash payments to suppliers:

A)    Subtract decrease in unearned revenue     Add an inventory writedown

B)   Add decrease in unearned revenue          Subtract an inventory writedown

C)   Subtract decrease in unearned revenue     Subtract an inventory writedown

D)   Add decrease in unearned revenue          Add an inventory writedown

[此贴子已经被作者于2008-11-8 14:11:24编辑过]

Question 46

Connex produces products that enable different software systems to work together. They have planned multiple product rollouts over the foreseeable future with product lines designed for both the consumer and business sectors. Based on increasing profits, Connex plans on increasing capital expenditures from 12% to 18% annually. Connex has recorded $30 million in deferred tax liabilities due to the use of accelerated depreciation for tax purposes.

Based on the information above, what is the most appropriate way for a financial analyst to treat the deferred tax liability?

A)    Decrease the deferred tax liability account by $30 million and increase the deferred tax asset account by the same amount.

B)   Decrease the deferred tax liability account by $30 million and increase stockholders' equity by the same amount.

C)   Make no adjustments because the deferred tax liability is appropriately classified.

D)   Ignore the deferred tax liability when calculating Connex's leverage ratios.

The correct answer was B) Decrease the deferred tax liability account by $30 million and increase stockholders' equity by the same amount

Since capital expenditures are expected to continue growing, the deferred tax liability is unlikely to reverse in the foreseeable future. An analyst should decrease Connex's deferred tax liability account by $30 million and increase stockholder’s equity by the same amount.

This question tested from Session 9, Reading 38, LOS d

Question 47

Which of the following debt covenants is least likely to result in a decreased equity value for a firm? The firm must not:

A)    have a current ratio less than 1.0 at any given point in time.

B)   sell, or sell and lease back, capital assets.

C)   pay any dividends without the approval of the debt holders.

D)   issue additional debt in excess of $500,000 without the approval of the existing debt holders.

The correct answer was A) have a current ratio less than 1.0 at any given point in time.

To the extent that covenants restrict, for example, the firm’s ability to invest/divest, pay dividends, or take on additional debt, the analyst must consider this lack of flexibility in valuing the firm (i.e. potential devaluation). In contrast, the requirement to have a current ratio of 1.0 is not particularly onerous as 1.0 suggests that there would be just enough current assets to discharge the firm’s current liabilities. In fact, it is a prudent requirement to impose as it will likely prevent or minimize the risk of liquidity problems. Consider if the firm were allowed to maintain current ratios below 1.0. This suggests that there would be a higher risk of liquidity problems and would more likely result in a decreased equity value.

This question tested from Session 9, Reading 39, LOS h

Question 48

Analysts reviewing Amber, Inc.’s and Bold, Inc.’s long-term contracting activities observe that Amber, Inc.’s contracts are being accounted for under the percentage-of-completion method while Bold, Inc.’s are being accounted for under the completed contract method. This difference is least likely to affect the two companies':

A)    statements of cash flows.

B)   income statements.

C)   assets on the balance sheets.

D)   liabilities and equity on the balance sheets.

The correct answer was A) statements of cash flows.

Cash flows are no different under the percentage-of-completion method compared to the completed contract method. The income statement and balance sheet accounts will differ between the two firms.

This question tested from Session 8, Reading 32, LOS b, (Part 2)

Question 49

Maritza Inc. is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Maritza record this transaction?

A)    Investing activities section.

B)   Financing activities section.

C)   Footnotes to the cash flow statement.

D)   Operating activities section.

The correct answer was C) Footnotes to the cash flow statement

This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved here, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

This question tested from Session 8, Reading 34, LOS b

Question 50

In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?

       Cash collections from customers:       Cash payments to suppliers:

A)    Subtract decrease in unearned revenue     Add an inventory writedown

B)   Add decrease in unearned revenue          Subtract an inventory writedown

C)   Subtract decrease in unearned revenue     Subtract an inventory writedown

D)   Add decrease in unearned revenue          Add an inventory writedown

The correct answer was C) Subtract decrease in unearned revenue      Subtract an inventory writedown

Beginning with net sales, calculating cash collected from customers requires the addition (subtraction) of any increase (decrease) in unearned revenue. Cash advances from customers represent unearned revenue and are not included in net sales, so any advances must be added to net sales in order to calculate cash collected.

An inventory writedown, as a result of applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the period. However, no cash flow is associated with the writedown, so COGS is reduced by the amount of the writedown in calculating cash paid to suppliers.

This question tested from Session 8, Reading 34, LOS g

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