Question

Which of the following economic characteristics is consistent with a grocery store chain?

Minimal Competition

Extensive Competition

High net Income to Sales

Differentiated Product

Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?

Inventory

Marketable Securities

Equipment

Brand Name

The accrual basis for accounting recognizes

Revenue when cash is received from customers

Expenses when Paid

Revenue when all or a substantial portion is performed

Revenue when contracts are signed

A value chain for an industry sets forth

The layers of management needed to be successful

Sequence of activities involved in the creation, manufacture, and distribution of its products

Sequence of activities involved in a firm’s research and development activities

Whether the industry is horizontally or vertically integrated.

Which of the following is not a characteristic of an extraordinary item?

Material in amount

Nonrecurring

Unusual given the nature of the firm’s activities

Requires a cash outflow

The following steps make up the steps in financial statement analysis

Identify the strategies the firm pursues to gain and sustain a competitive advantage

Analyze the current profitability and risk of the firm using information in the financial statements

Value the firm

Identify the economic characteristics and competitive dynamics of the industry in which a particular firm participates.

Assess the quality of the firm’s financial statements and, if necessary, adjust them for such desirable characteristics as sustainability and comparability.

Prepare forecasted financial statements

Which of the following is the proper order for these interrelated sequential steps?

4,1,5,2,6,3

1,2,3,4,5,6

4,6,2,5,1,3

1,4,2,5,3,6

Which SEC form may be the best place to start learning about the economics of an industry and the particular strategy a firm has selected for competing in the industry?

Form 8-K

Form 10-K

Form MD&A

Form FSAP

Which of the following valuation methods reflects current market values?

Acquisition cost

Present value of cash flows using historical interest rates

Fair value measurement of Level 1 financial assets or liabilities.

Adjusted acquisition cost

The use of acquisition cost (historical cost) as a valuation method is justified on the basis that acquisition cost is:

Timeliness

Relevance

Subjectivity

Objectivity

Permanent tax differences arise when there are revenues and expenses

That firms include in income tax returns, but do not ever appear in the income statement

That are included in both the tax return and income statement, but in different accounting periods.

That firms include in the income statement, but do not ever appear in income tax returns

That are not included in either the tax return or the income statement

The traditional accounting model delays the recognition of value changes of assets and liabilities until what event occurs?

A change in value

A market transaction

A balance sheet date

Cash is received, or cash is paid

What level are inputs for estimating fair values are those inputs include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates.

Level 1

Level 2

Level 3

None of the above

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method?

Subtract amortization expense

Subtract gain on sale of subsidiary

Add an increase in accounts payable

Add a decrease in accounts payable

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities in its cash flow from operation will normally be

Greater than net income

Less than net income

Greater than the change in working capital from operations

Greater than the change in cash

Outback Corp. recorded sales of $1,300,000 in 2010, in addition the company’s accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010. How much cash did Outback collect from customers in 2010?

$1,300,000

$1,345,000

$1,255,000

$1,135,000

Toro company recognized $655,000 of cost of goods sold in 2010, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2010. How much cash did Toro spend for inventory in 2010?

$655,000

$980,000

$560,000

$620,000

Krenshaw Company reported total sales revenue of $80,000, total expenses of $72,000, and net income of $8,000 for the year ended December 31, 2009. During 2009, accounts receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000 and $5,000 in depreciation expense was recorded. Assuming no other adjustments to net income are needed, the net cash inflow from operating activities using the indirect method was

A. $19,000

B. $13,000

C. $10,000

D. $11,000

Firms with high levels of operating leverage experience which of the following in comparison to firms with low levels of operating leverage

Higher levels of risk in operations

Lower expected rates of return

Lower variability in returns on assets

Higher sales

Sustainable earnings represent

The level of earnings expected to persist in the future

The level of earnings and the growth in the level of earnings expected to persist in the future

The growth rate of future earnings

Retained Earnings

The next 4 questions require that you use the financial statements for Net Devices, Inc. that contained on the last two pages of this exam.

Refer to the information for Net Devices Inc. What is the rate of return on assets for Net Devices for 2011?

11.64%

14.50%

12.60%

13.90%

Refer to the information for Net Devices Inc. What is the accounts receivable turnover ratio for Net Devices for 2011? Use end of 2011 receivables.

24.65

14.85

14.81

10.50

Refer to the information for net Devices Inc. What is Net Devices’ return on common shareholder’s equity for 2011?

51.26%

30.89%

35.81%

42.16%

Refer to the information for Net Devices Inc. What is the day’s supply of inventory for Net Devices for 2011? Use the 2011 ending inventory.

35.37 days

60.03 days

41.01 days

58.59 days

Which of the following is the primary objective in most valuation assignments that incorporate financial statement analysis?

To value a firm’s equity securities

To look for unrecorded liabilities

To establish a firm’s strategy within the industry

To define markets for the firm

Which is the best indicator for assessing a firm’s long-term solvency risk is its ability to generate what over a period of years?

Sales

Earnings

Positive cash flows

Income from continuing operations

Here are several ratios calculated from Marcus Company’s financial statements:

Days in Receivables = 45

Days in Payables = 36

Days in Inventor = 30

How many days of working capital financing does Marcus need to obtain from other sources?

39 days

36 days

56 days

26 days

The quick acid test ratio contains all of the following except:

Cash

Accounts receivable

Marketable securities

Prepaid expenses

Which of the following properly links the factors affecting a firm’s ability to generate cash with its need to use cash in Investing?

Ability to generate cash                                 Need to use cash

Profitability of goods and services sold Working capital requirements

Sales of existing plant assets                              Plant capacity requirements

Borrowing capacity                                      Debt service requirements

Profitability of goods and services sold Debt service requirements

The best measure of a firm’s sustainable income is

Net income

Income from continuing operations

Income from extraordinary items

Income before extraordinary items and changes in accounting principles

Which of the following is not considered a motive to manage earnings?

To create optimal manager compensation payments

To create optimal job security for senior management

To create optimal measures of assets and liabilities for balance sheet purposes

To manage reported earnings in order to reduce industry-specific regulatory actions

On November 15, 2016, Jacobs Co. sold a segment of its business for $2,750,000. The net book value of the segment at the time of its disposal was $3,000,000. Jacobs had pretax operating income of $1,750,000 for 2016 which included $380,000 earned by the discontinued segment prior to its disposal. Assume Jacob’s tax rate is 30%.

Required:

Compute the total net of tax impact on the 2016 income statement that is associated with the discontinued operations. Combine both the gain (loss) on asset disposals and operating income (loss) on discontinued operations.

$959,000 combined gain and operating income

$266,000 combined gain and operating income

$175,000 combined loss and operating income

$91,000 combined gain and operating income

Answer 1

Answer are provided in Bold

1. Which of the following economic characteristics is consistent with a grocery store chain?

Minimal Competition

Extensive Competition

High net Income to Sales

Differentiated Product

Reasons: Any particular place contains a huge number of grocery shops selling similar products. Thus it is characterised by extensive competition.

2. Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value?

Inventory

Marketable Securities

Equipment

Brand Name

Reasons: The value of Brand Name of a is not generally stated in the Balance sheet of a company. It is shown sometimes, only if any monetary consideration is paid.

3.  The accrual basis for accounting recognizes

Revenue when cash is received from customers

Expenses when Paid

Revenue when all or a substantial portion is performed

Revenue when contracts are signed

Reasons: The accrual basis of accounting is based on the principal that a revenue should be recorded when the earned i.e the work has been performed or substantially performed.

4. A value chain for an industry sets forth

The layers of management needed to be successful

Sequence of activities involved in the creation, manufacture, and distribution of its products

Sequence of activities involved in a firm’s research and development activities

Whether the industry is horizontally or vertically integrated.

Reasons: Value chain is the process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service. Thus it involves sequence of activities involved in the creation, manufacture, and distribution of its products

5. Which of the following is not a characteristic of an extraordinary item?

Material in amount

Nonrecurring

Unusual given the nature of the firm’s activities

Requires a cash outflow

Reason: An extraordinary item consists of gains or losses included on a company's income statement from events, which are unusual and infrequent in nature. Thus this items are material in nature, non recuring and unsual.

6. The following steps make up the steps in financial statement analysis

(1) Identify the strategies the firm pursues to gain and sustain a competitive advantage

(2) Analyze the current profitability and risk of the firm using information in the financial statements

(3) Value the firm

(4) Identify the economic characteristics and competitive dynamics of the industry in which a particular firm participates.

(5) Assess the quality of the firm’s financial statements and, if necessary, adjust them for such desirable characteristics as sustainability and comparability.

(6) Prepare forecasted financial statements

Which of the following is the proper order for these interrelated sequential steps?

4,1,5,2,6,3 (answer)

1,2,3,4,5,6

4,6,2,5,1,3

1,4,2,5,3,6

Reasons: The correct sequence of steps are as given in the answer above.