FRA Calculation Questions Flashcards

Question 1

Q

Selected information from Caledonia, Inc.’s financial activities in the year 20X6 is as follows:

Net income = $460,000.
2,300,000 shares of common stock were outstanding on January 1.
The average market price per share was $2 and the year-end stock price was $1.50.
1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1. Preferred dividends were paid in 20X6.
10,000 warrants, each of which allows the holder to purchase 100 shares of common stock at an exercise price of $1.50 per common share, were outstanding the entire year.
Caledonia’s diluted earnings per share for 20X6 are closest to:

A) $0.165.
B) $0.15.
C) $0.180.

Answer

A

B
Caledonia’s basic EPS = (net income − preferred stock dividends) / (weighted average common shares outstanding)
= [$460,000 − ($1,000 × 1,000 × 0.08)] / 2,300,000 = $0.17.
Using the treasury stock method, if the warrants were exercised, cash inflow would be 10,000 × 100 × $1.50 = $1,500,000. The number of Caledonia shares that could be purchased with the inflow, using the average share price, is $1,500,000 / $2 = 750,000. The net increase in common shares outstanding would have been 1,000,000 − 750,000 = 250,000.

Diluted EPS = $380,000 / (2,300,000 + 250,000) = $0.15.

Question 2

Q

Stanley Corp. had 100,000 shares of common stock outstanding throughout 2004. It also had 20,000 stock options with an exercise price of $20 and another 20,000 options with an exercise price of $28. The average market price for the company’s stock was $25 throughout the year. The stock closed at $30 on December 31, 2004. What are the number of shares used to calculate diluted earnings per share for the year?

A) 104,000.
B) 105,000.
C) 110,000.

Answer

A

A
(for options, need to add new stocks minus the ones from buy back using money from exercise)

Only the stock options with an exercise price of $20 are dilutive. The additional shares of 4,000 (20,000 − [(20,000 × 20) / 25]) are added to the 100,000 common shares outstanding.

Question 3

Q

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) $1,600,000.
B) $1,346,549.
C) $1,200,000.

Answer

A

B
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.

Question 4

Q

This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax:
A) asset of $21,760.
B) liability of $21,760.
C) liability of $16,320.

Answer

A

B (since accrual basis tax > cash basis, need to pay more tax later => liability)

Since pretax income ($195,000) exceeds the taxable income ($131,000), Blue Horizon will have a deferred tax liability of $21,760 [($195,000 − $131,000)(0.34)].

Question 5

Q

An analyst has gathered the following information about a company:

110,000 shares of common outstanding at the beginning of the year.
The company repurchases 20,000 of its own common shares on July 1.
Net income is $300,000 for the year.
10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that is not in arrears at the beginning or ending of the year.
The company also has $1 million in 10 percent callable bonds outstanding.
The company has declared a $0.50 dividend on the common.
What is the company’s basic Earnings Per Share?

Answer

A

$2.00

remember to subtract preferred dividend from net income in the numerator

Question 6

Q

If a firm has a net profit margin of 0.05, an asset turnover of 1.465, and a leverage ratio of 1.66, what is the firm’s ROE?
A) 12.16%.
B) 3.18%.
C) 5.87%.

Answer

A

One of the many ways to express ROE = net profit margin × asset turnover × leverage ratio

ROE = (0.05)(1.465)(1.66) = 0.1216

Question 7

Q

Selected information from the most recent cash flow statement of Thibault Company appears below:

Cash collections	€8,900
Cash paid to suppliers	(€3,700)
Cash operating expenses	(€1,500)
Cash taxes paid	(€2,400)
Cash from operating activities	€1,300

Cash paid for plant and equipment (€2,600)
Cash interest received €700
Cash dividends received €600
Cash from investing activities (€1,300)

Cash received from debt issuance €2,000
Cash interest paid (€400)
Cash dividends paid (€600)
Cash from financing activities €1,000

Total change in cash €1,000
Thibault’s reinvestment ratio for this period is closest to:

A) 0.75.
B) 1.00.
C) 0.50.

Answer

A

C
The reinvestment ratio is CFO divided by cash paid for long-term assets: 1,300 / 2,600 = 0.5. (Note that on this cash flow statement, CFI includes interest and dividends received and CFF includes interest paid, which is acceptable under IFRS.)

Question 8

Q

In the year 20X4, a company had a net profit margin of 18%, total asset turnover of 1.75, and a financial leverage multiplier of 1.5. If the company’s net profit margin declines to 10% in 20X5, what total asset turnover would be needed in order to maintain the same return on equity as in 20X4, assuming there is no change in the financial leverage multiplier?

A) 1.85.
B) 2.50.
C) 3.15.

Answer

A

C
ROE in 20X4 was 0.18 × 1.75 × 1.5 = 0.4725.

If ROE for 20X5 is unchanged from 20X4, then:
0.10 × asset turnover × 1.5 = 0.4725
Asset turnover = 3.15.

**Need to memorize formula for ROE from ratios, not from $$

Question 9

Q

Protocol, Inc.'s net income for 2005 was $4,800,000. Protocol had 800,000 shares of common stock outstanding for the entire year. The tax rate was 40 percent. The average share price in 2005 was $37.00. Protocol had 5,000 8 percent $1,000 par value convertible bonds that were issued in 2004. Each bond is convertible into 25 shares of common stock. Protocol, Inc.'s basic and diluted earnings per share for 2005 were closest to:
              Basic EPS	     Diluted EPS
A)              $6.00	         $4.92
B)              $5.19	         $4.92
C)              $6.00	         $5.45

Answer

A

Protocol’s basic EPS (net income / weighted average common shares outstanding) was $4,800,000 / 800,000 = $6.00. Diluted EPS is calculated under the assumption that the convertible bonds were converted into common stock, and the bond interest net of tax was restored to net income. The common shares from the conversion of the bonds are added to the denominator of the equation. Protocol’s Diluted EPS was [$4,800,000 + (5,000 × $1,000 × 0.08)(1 − 0.40)] / [800,000 + (5,000 × 25)] = $5.45.

new stock to issue = 25*5000-the buy back ones using the money saved from interest (which will be 240,000/37)
待查

Question 10

Q

A firm had the following numbers of shares outstanding during the year:

Beginning of year: 8,000,000 shares
Issued on April 1: 750,000 shares
Paid stock divided of 20% on July 1
Issued on October 1: 100,000 shares
Purchased Treasury stock November 1: 1,000,000 shares
Split 2 for 1 on December 31

Based on this information, what is the weighted number of shares outstanding for the year?

A) 42,444,444.
B) 20,266,667.
C) 20,783,333.

Answer

A

B

Outstanding all year
8,000,000 × 1.2 × 2 × 1.0=19,200,000

Outstanding for 0.75 years
750,000 × 1.2 × 2 × 0.75=1,350,000

Outstanding for 0.25 years
100,000 × 2 × 0.25=50,000

Retired for 2 months
-1,000,000 × 2 × (2/12)=-333,333

Weighted average number of shares for year: 20,266,667

*splits and stock dividend count all the way back to 1/1

Question 11

Q

CXW, Inc. has issued 9,986 warrants, which were outstanding for the entire year, with an exercise price of $38. Each warrant is convertible into 1 share of common. The average market price of CXW’s common stock for the year is $52.00 per share and its price at the end of the year is $45.00 per share. In the calculation of CXW’s diluted earnings per share, how many new shares would theoretically need to be issued to facilitate warrant conversion?

A) 8,433.
B) 2,689.
C) 9,986.

Answer

A

B

If the warrants were exercised, the firm would receive the exercise price for each warrant:
9,986 × $38 = $379,468

Using the treasury stock method, we assume the firm uses this cash to repurchase shares at the average price for the year:
$379,468 / $52 = 7,297 common shares

If these repurchased shares were used toward fulfilling the warrants, the firm would need to issue 9,986 − 7,297 = 2,689 new common shares to fulfill the rest of the warrants.

Question 12

Q

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) $1,748.07.
B) $498.58.
C) $2,246.65.

Answer

A

C

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.

Question 13

Q

Advantage Corp.’s capital structure was as follows:

                   December 31, 2005	December 31, 2004 Outstanding shares of stock:		 Common	                        110,000	                110,000 Convertible Preferred	10,000	                 10,000 8% Convertible Bonds	$1,000,000	     $1,000,000

During 2005, Advantage paid dividends of $3 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for 2005 was $850,000. Assume the income tax rate is 30%.

Calculate Advantage’s basic and diluted earnings per share (EPS) for 2005.

Basic EPS	Diluted EPS A)       $7.45	     $5.66 B)       $7.45	     $6.26 C)       $6.31	     $5.66

Answer

A

Basic EPS = net income − pref div / wt. ave. shares of common

[850,00 − (3 × 10,000)] / 110,000 = $7.45

Diluted EPS = [(net income − preferred dividends) + convertible preferred dividends + (convertible debt interest)(1 − t)] / [(weighted average shares) + (shares from conversion of conv. pfd shares) + (shares from conversion of conv. debt) + (shares issuable from stock options)]

[(850,000 − (3 × 10,000)) + 30,000 + (80,000)(1 − 0.3)] / [(110,000) + (20,000) + (30,000)] = $5.66.

Question 14

Q

Alpha Company reported the following financial statement information:

December 31, 2006:

Assets $70,000
Liabilities 45,000

December 31, 2007:

Assets 82,000
Liabilities 55,000

During 2007:

Stockholder investments . 3,000
Net income ?
Dividends 6,000

Calculate Alpha’s net income for the year ended December 31, 2007 and the change in stockholders’ equity for the year ended December 31, 2007.

  Net income	Change in stockholders' equity A)    ($3,000)	                    $2,000 increase B)    $5,000	                    $2,000 decrease C)    $5,000	                    $2,000 increase

Answer

A

C
Stockholders’ equity, as of December 31, 2006, was $25,000 ($70,000 assets - $45,000 liabilities) and stockholders’ equity, as of December 31, 2007, was $27,000 ($82,000 assets - $55,000 liabilities). Stockholders’ equity increased $2,000 during 2007. Net income for 2007 was $5,000 ($27,000 ending equity + $6,000 dividends - $3,000 stockholder investments - $25,000 beginning equity).

Question 15

Q

The Kammel Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, Kammel had costs of $30 million. Kammel’s reported profit for the first year of the contract, using the completed contract method, is:
A) $10 million.
B) $15 million.
C) $0.

Answer

A

C

Under the completed contract method, profit is only reported upon completion of the contract.

Question 16

Q

Selected information from Gerrard, Inc.’s financial activities in the most recent year was as follows:

Net income was $330,000.
The tax rate was 40%.
700,000 shares of common stock were outstanding on January 1.
The average market price per share for the year was $6.
Dividends were paid during the year.
2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of 200 common shares for each preferred share, were outstanding for the entire year.
200,000 shares of common stock were issued on March 1.

Gerrard, Inc.’s diluted earnings per share (diluted EPS) was closest to:

A) $0.197.
B) $0.289.
C) $0.261.

Answer

A

C
To compute Gerrard’s basic earnings per share (EPS) ((net income - preferred dividends) / weighted average common shares outstanding), the weighted average common shares outstanding must be computed. 700,000 shares were outstanding from January 1, and 200,000 shares were issued on March 1, so the weighted average is 700,000 + (200,000 × 10 / 12) = 866,667. Basic EPS was $330,000 − (2,000 × $500 × 0.08)) / 866,667 = $0.289.

If the convertible preferred shares were converted to common stock, 2,000 × 200 = 400,000 additional common shares would have been issued and dividends on the preferred stock would not have been paid. Diluted EPS was $330,000 / (866,667 + 400,000) = $0.261.

Question 17

Q

A company issues an annual-pay bond with the following characteristics:

Face value	$67,831
Maturity	4 years
Coupon	7%
Market interest rates	8%
What is the unamortized discount at the end of the first year?

A) $1,750.
B) $538.
C) $1,209.

Answer

A

A
Face value of bonds = $67,831
Proceeds from bond sale: I/Y = 8; N = 4; PMT = $67,831 × 0.07 = $4,748.17; FV = $67,831; CPT PV = $65,582
Unamortized discount at issuance = $67,831 − $65,582 = $2,249.

First year interest expense = $65,582 × 0.08 =$5,247
Coupon payment = $67,831 × 0.07 = $4,748
Change in discount = $5,247 − $4,748 = $499
Unamortized discount at end of first year = $2,249 − $499 = $1,750.

Question 18

Q

An analyst has gathered the following information about Zany Corp.

Net income of $200,000 for the year ended December 31, 2004.
During 2004, 50,000 common shares were outstanding.
Zany has 10,000 shares of 7%, $50 par convertible preferred stock outstanding, each convertible into two shares of common.
5,000 warrants are outstanding with an exercise price of $24. Each warrant is convertible into one common share.
The average market price per common share during 2004 was $20.

Calculate Zany’s basic and diluted earnings per share (EPS) for 2004.

    Basic EPS	Diluted EPS A)      $3.30	            $2.86 B)      $4.00	            $2.86 C)      $3.30	            $2.00

Answer

A

A
Basic EPS = (net income − preferred dividends) / number of common shares = (200,000 − 35,000) / 50,000 = $3.30 per share

The preferred shares are converted into 20,000 common shares, the firm does not pay preferred dividends. Diluted EPS = 200,000 / (50,000 + 20,000) = $2.86 per share. The warrants are out of the money at a stock price of $20.

Question 19

Q

Units Unit Price
Beginning Inventory 709 $2.00
Purchases 556 $6.00
Sales 959 $13.00

What is gross profit using the FIFO method and LIFO method?

    FIFO	LIFO A)  $8,862	$9,549 B)  $8,325	$8,862 C)  $9,549	$8,325

Answer

A

C
FIFO COGS = (709 units)($2/unit) + (959 − 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales − COGS

= 12,467 − 2,918 = $9,549

LIFO COGS = (556 units)($6/unit) + (959 − 556)($2/unit) = $3,336 + $806 = $4,142

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales − COGS

= 12,467 − 4,142 = $8,325

Question 20

Q

Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables turnover of 8 times. What is Goldstar’s cash conversion cycle?
A) 171.64 days.
B) 80.38 days.
C) 6.50 days.

Answer

A

B
The cash conversion cycle = average receivables collection period + average inventory processing period - payables payment period.
The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 - 45.63 = 80.38.

Question 21

Q

An analyst compiled the following information from Hampshire, Inc.’s financial activities in the most recent year:

Net income was $2,800,000.
100,000 shares of common stock were outstanding on January 1.
The average market price per share for the year was $250.
10,000 shares of 6%, $1,000 par value preferred shares were outstanding the entire year.
10,000 warrants, which allow the holder to purchase 10 shares of common stock for each warrant held at a price of $150 per common share, were outstanding the entire year.
30,000 shares of common stock were issued on September 1.

Hampshire, Inc.’s diluted earnings per share are closest to:

A) $18.38.
B) $14.67.
C) $20.00.

Answer

A

B
To compute Hampshire’s basic EPS ((net income - preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. 100,000 shares were outstanding from January 1, and 30,000 shares were issued on September 1, so the weighted average is 100,000 + (30,000 × 4 / 12) = 110,000. Basic EPS is ($2,800,000 - (10,000 × $1,000 × 0.06)) / 110,000 = $20.00.
If the warrants were exercised, cash inflow would be 10,000 × $150 × 10 = $15,000,000 for 10 × 10,000 = 100,000 shares. Using the treasury stock method, the number of Hampshire shares that can be purchased with the cash inflow (cash inflow / average share price) is $15,000,000 / $250 = 60,000. The number of shares that would be created is 100,000 - 60,000 = 40,000. Diluted EPS is $2,200,000 / (110,000 + 40,000) = $14.67.

Question 22

Q

Brigham Corporation uses the last-in, first-out (LIFO) method of accounting for inventory. For the year 20X5, the following is provided:

Cost of goods sold (COGS): $24,000
Beginning inventory: $6,000
Ending inventory: $7,500

The notes accompanying the financial statements indicate that the LIFO reserve at the beginning of the year was $2,250 and at the end of the year was $6,000

If Brigham had used first-in, first-out (FIFO), cost of goods sold for 20X5 would be:

A) $3,750.
B) $29,250.
C) $20,250.

Answer

A

C

FIFO COGS = LIFO COGS − change in LIFO reserve. Therefore, $24,000 − ($6,000 − 2,250) = $20,250.

Question 23

Q

Selected information from Baltimore Corp’s financial activities in the year 2004 is as follows:

Net income was $4,200,000 .
750,000 shares of common stock were outstanding on January 1.
The average market price per share was $50 in 2004.
Dividends were paid in 2004.

10,000 warrants, which allowed the holder to purchase 10 shares of common stock for each warrant held at a price of $40 per common share, were outstanding the entire year.

Baltimore’s diluted earnings per share (Diluted EPS) for 2004 is closest to:

A) $5.45.
B) $4.94.
C) $5.60.

Answer

A

A
Baltimore’s basic earnings per share (EPS) (net income / weighted average shares outstanding) for 2004 was $4,200,000 / 750,000 = $5.60.

To calculate diluted EPS, we use the treasury stock method to account for the warrants:

Number of common shares created if options are exercised = 10,000 × 10 = 100,000
Cash inflow if warrants are exercised = $40 × 100,000 = $4,000,000
Shares purchased with these funds = $4,000,000 / 50 = 80,000
Net increase in shares outstanding = 100,000 - 80,000 = 20,000
Diluted EPS = $4,200,000 / (750,000 + 20,000) = $5.45.

Question 24

Q

Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit $150,000
Purchased office equipment for cash 10,000
Recognized salaries expense 54,000
Purchased paint supplies on on credit 25,000
Consumed paint supplies 20,000
Paid salaries 50,000
Collected accounts receivable 157,000
Recognized straight-line depreciation expense 2,000
Paid accounts payable 15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.

  Working capital	Change in cash A)        $416,000	             $82,000 B)        $414,000	             $82,000 C)        $416,000	             $80,000

Answer

A

Performed services on credit $150,000 Increase A/R
Purchased PP&E for cash 10,000 Decrease cash (-$10,000)
Recognized salaries expense 54,000 Increase A/P
Purchased paint supplies on on credit 25,000 Increase inventories, increase A/P
Consumed paint supplies 20,000 Decrease inventories
Paid salaries 50,000 Decrease cash, decrease A/P
Collected accounts receivable 157,000 Increase cash, decrease A/R
Recognized straight-line depreciation expense 2,000 (no effect on either)
Paid accounts payable 15,000 Decrease cash, decrease A/P

The change in cash was $82,000 ($157,000 collections - $10,000 from equipment purchase - $50,000 salaries paid - $15,000 for payables).

Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services - $10,000 office equipment purchase - $54,000 salaries expense accrual - $20,000 consumed supplies).

Purchasing $25,000 of paint supplies on credit has no net effect on working capital (current assets and current liabilities increase). Consuming $20,000 of these supplies reduces working capital (current assets decrease).
Salary expense reduces working capital by $54,000 when recognized (current liabilities increase). Paying $50,000 of these salaries has no net effect on working capital (current assets and current liabilities decrease).
Collecting accounts receivable has no net effect on working capital (one current asset increases and another decreases).
Recognizing depreciation does not affect working capital.
Paying accounts payable has no net effect on working capital (current assets and current liabilities decrease).

Question 25

Q

Given the following income statement:

Net Sales	200
Cost of Goods Sold	55
Gross Profit	145
Operating Expenses	30
Operating Profit (EBIT)	115
Interest	15
Earnings Before Taxes (EBT)	100
Taxes	40
Earnings After Taxes (EAT)	60
What are the interest coverage ratio and the net profit margin?

Interest Coverage Ratio Net Profit Margin
A) 2.63 0.30
B) 0.57 0.56
C) 7.67 0.30

Answer

A

Interest coverage ratio = (EBIT / interest expense) = (115 / 15) = 7.67

Net profit margin = (net income / net sales) = (60 / 200) = 0.30

Question 26

Q

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) 923.
B) 855.
C) 1023.

Answer

A

FV = 1000; PMT = 80/2; N = 5 × 2; I/Y = 10/2; solve for PV = 923.

Question 27

Q

Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Company’s cash needs. Harris began by calculating Longhorn’s turnover ratios for 2007. After a discussion with Longhorn’s management, Harris decides to adjust the turnover ratios for 2008 as follows:

2007 Actual Turnover
Expected Increase / (Decrease)

Accounts receivable 5.0 10%
Fixed asset 3.0 7%
Accounts payable 6.0 (20%)
Inventory 4.0 (5%)
Equity 5.5 -
Total asset 2.3 8%

Longhorn’s expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year, is closest to:

A) 46 days.
B) 86 days.
C) 82 days.

Answer

A

B
2008 expected days of sales outstanding is 66 [365 / (5.0 × 1.1)], 2008 days of inventory on hand is 96 [365 / (4.0 × 0.95)], and 2008 days of payables is 76 [365 / (6.0 × 0.8)]. Expected cash conversion cycle is 86 days [66 days of sales outstanding + 96 days of inventory on hand - 76 days of payables].

Question 28

Q

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?

   Initial Liability	        Liability in 6 months A)       $3,675,149	                 $3,675,149 B)       $3,653,451	                 $3,799,589 C)       $5,000,000	                 $5,000,000

Answer

A

B
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

Question 29

Q

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,384 over these five years. If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3?

A) $2,948.
B) $1,039.
C) $3,144.

Answer

A

C
*pay attention to new tax rate

DTL = (14384-25352/5).313-(143843-25352).31

Question 30

Q

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,384 over these five years. If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3?

A) $2,948.
B) $1,039.
C) $3,144.

Answer

A

C
*pay attention to new tax rate

DTL = (14384-25352/5).313-(143843-25352).31

Question 31

Q

Walsh Furniture has purchased a machine with a 7-year useful life for $250,000. At the end of its life it will have an estimated salvage value of $15,000. Using the double-declining balance (DDB) method, depreciation expense in year 2 is closest to:

A) $58,750.
B) $71,430.
C) $51,020.

*formular for Double declining balance dep?

Answer

A

C

Dep = 2/ dep life * BV at the beginning of the year

1st year = 2/7 * 250,000 = 71,429
2nd year = 2/7*(250,000-71,429) = 51,020

Question 32

Q

A bond is issued with the following data:

$10 million face value.
9% coupon rate.
8% market rate.
3-year bond with semiannual payments.

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-Year	Total Interest Expense A)             10,181,495	           2,962,107 B)             10,181,495 	           2,437,893 C)             11,099,495	           2,437,893

Answer

A

B

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:

FV = 10,000,000; N = 6; I = 4; PMT = 450,000; CPT → PV = $10,262,107. This is the price the purchaser of the bond will pay to the issuer of the bond. From the issuer’s point of view this is the amount the issuer will receive from the bondholder.
Total interest expense over the life of the bond is equal to the difference between the amount paid by the issuer and the amount received from the bondholder.
[(6)(450,000) + 10,000,000] - 10,262,107 = 2,437,893

Question 33

Q

Baetica Company reported the following selected financial statement data for the year ended December 31, 20X7:
in millions % of Sales
Sales $500 100%
Cost of goods sold (300) 60%
Selling and admin exp (125) 25%
Depreciation (50) 10%
Net income $25 5%
Non-cash operating working capital (a)
$100 20%
Cash balance $35 N/A

(a) - Non-cash operating working capital = Receivables + Inventory - Payables

Baetica expects that sales will increase 20% in 20X8. In addition, Baetica expects to make fixed capital expenditures of $75 million in 20X8. Ignoring taxes, calculate Baetica’s expected cash balance, as of December 31, 2008, assuming all of the common-size percentages remain constant.

A) $40 million.
B) $30 million.
C) $80 million.

Answer

A

B

Sales 2018 = $500 x 120% = $600
NI 2018 = $600 x 5% = $30
Non-cash working capitol = $600 x 20% = $120

The change in cash is expected to be
= $30 million 20X8 net income + $60 million 20X8 depreciation - $20 million increase in non-cash operating working capital - $75 million 20X8 capital expenditures
= -$5 million

The 20X8 ending balance of cash is expected to be
= $35 million beginning cash balance - $5 million decrease in cash
= $30 million

Question 34

Q

Assume that the exercise price of an option is $5, and the average market price of the stock is $8. Assuming 816 options are outstanding during the entire year, tax rate is 10%, what is the number of shares to be added to the denominator of the diluted EPS?

Answer

A

816 x 5 / 8 = 510 shares.
816 − 510 = 306 new shares or [(8 − 5) / 8]816 = 306.

*not affected by tax rate.

Question 35

Q

Impala Corporation reported the following financial information:

Balance sheet values as of December 31, 2016 vs 2017:

Prepaid insurance $650,000 $475,000
Interest payable 250,000 300,000

Cash flows for the year ended December 31 2016 vs 2017:

Insurance premiums paid $845,000 $750,000
Interest paid 900,000 900,000

Calculate Impala’s insurance expense and interest expense for the year ended December 31, 2007.

        Insurance expense	Interest expense A)                $925,000	             $850,000 B)              $1,020,000	             $950,000 C)                $925,000	             $950,000

Answer

A

C
Cash paid for insurance = insurance expense + change in prepaid insurance, so insurance expense = cash paid for insurance - change in prepaid insurance. Insurance expense for 2007 is equal to $925,000 [($750,000 cash paid for insurance - (-$175,000)].

Interest expense for 2007 is equal to $950,000 ($900,000 cash interest paid + $50,000 increase in interest payable).

Question 36

Q

Rushford Corp.’s net income is $16,500,000 with 300,000 shares outstanding. The tax rate is 40%. The average share price for the year was $372. Rushford has 50,000, 9%, $1,000 par value convertible bonds outstanding. Each bond is convertible into two shares of common stock.
Rushford Corp.’s basic and diluted earnings per share (EPS) are closest to:

           Basic EPS	Dilutied EPS A)               $65.63  	     $48.00 B)               $55.00   	     $48.00 C)               $55.00   	     $51.56

Answer

A

B
Rushford’s basic EPS (net income / weighted average common shares outstanding) is $16,500,000 / 300,000 = $55.00. Diluted EPS is calculated under the assumption that the convertible bonds were converted into common stock, the bond interest net of tax is restored to net income, and the additional common shares are added to the denominator of the equation. Rushford’s diluted EPS is [$16,500,000 + (50,000 × $1,000 × 0.09)(1 - .40)] / (300,000 + (50,000 × 2) = $48.00.

Question 37

Q

Selected information from Doors, Inc.’s financial activities in the year 2005 included the following:

Net income was $372,000.
100,000 shares of common stock were outstanding on January 1.
The average market price per share was $18 in 2005.
Dividends were paid in 2005.
2,000, 6 percent $1,000 par value convertible bonds, which are convertible at a ratio of 25 shares for each bond, were outstanding the entire year.
Doors, Inc.’s tax rate is 40%.

Doors, Inc.’s diluted earnings per share (Diluted EPS) for 2005 was closest to?

Answer

A

Doors basic earnings per share (EPS) was ($372,000 / 100,000 =) $3.72. If the bonds were converted, interest payments would not have been made. Net income is increased by the interest paid on the bonds net of taxes: $372,000 + (($1000 × 2,000 × 0.06) × (1 − 0.40)) = $444,000.

Diluted EPS was $444,000 / (100,000 + (2,000 × 25)) = $2.96.

Question 38

Q

Selected information from Rockway, Inc.’s U.S. GAAP financial statements for the year ended December 31, included the following (in $):

                                               2004               2005

Sales 17,000,000 21,000,000
Cost of Goods Sold 11,000,000 15,000,000
Interest Paid 800,000 1,000,000
Current Income Taxes Paid 700,000 1,000,000
Accounts Receivable 3,000,000 2,500,000
Inventory 2,400,000 3,000,000
Property, Plant & Equip. 2,000,000 16,000,000
Accounts Payable 1,000,000 1,400,000
Long-term Debt 8,000,000 9,000,000
Common Stock 4,000,000 5,000,000

Using the direct method, cash provided or used by operating activities(CFO) in the year 2005 was:

A) $4,300,000.
B) $6,300,000.
C) $5,300,000.

Answer

A

= sales - COGS - Interest Paid - tax paid + decrease in AR - increase of inventory + increase of AP
= 21M - 15M - 1M - 1M +.5M - .6M + .4M
= 4.3M

Changes in property, plant and equipment, long-term debt and common stock do not affect cash from operations.

Question 39

Q

An analyst has gathered the following information about a firm:

Quick ratio of 0.25.
Cash ratio of 0.20.
$2 million in marketable securities.
$10 million in cash.

What is their receivables balance?

A) 2 million.
B) 3 million.
C) 5 million.

Answer

A

B
Cash ratio = (cash + marketable securities) / current liabilities
Quick ratio = [cash + marketable securities + receivables] / current liabilities

Question 40

Q

The net income for Miller Bat Company was $3 million for the year ended December 31, 20X4. Additional information is as follows:

Depreciation on fixed assets: $1,500,000
Gain from cash sales of land: 200,000
Increase in accounts payable: 300,000
Dividends paid on preferred stock: 400,000

Under U.S. GAAP, the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 20X4 is:

A) $4,200,000.
B) $4,500,000.
C) $4,600,000.

Answer

A

$3,000,000 + $1,500,000 − $200,000 + $300,000 = $4,600,000.

Question 41

Q

Selected information from Able Company’s financial activities is as follows:

Net Income was $720,000.
1,000,000 shares of common stock were outstanding on January 1.
1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1.
The tax rate was 40%.
The average market price per share for the year was $20.
6,000 shares of 3%, $500 par value preferred shares, convertible into common shares at a rate of 40 common shares for each preferred share, were outstanding for the entire year.

Able’s basic and diluted earnings per share (EPS) are closest to:

    Basic EPS	Diluted EPS A)       $0.55	              $0.55 B)       $0.55	              $0.52 C)       $0.64	              $0.64

Answer

A

B (第一次做的时候diluted没有算对）
Able’s basic earnings per share ((Net Income − Preferred Stock Dividends) / weighted average shares outstanding) for 2004 was [($720,000 − ($500 × 6,000 × 0.03) − ($1,000 × 1,000 × 0.08)] / 1,000,000 = $0.55. If the convertible preferred were converted to common stock on January 1, 6,000 × 40 = 240,000 additional shares would have been issued. Also, dividends on the convertible preferred would not have been paid.

** only the convertible part is considered during diluted EPS calculation

Question 42

Q

A bond is issued at the end of the year 20X0 with an 8% semiannual coupon rate, 5 years to maturity, and a par value of $1,000. The bond’s yield at issuance is 10%. Using the effective interest method, if the yield has decreased to 9% at the end of the year 20X1, the balance sheet liability for the bond is closest to:

A) 967.
B) 935.
C) 923.

Answer

A

B (picked A first, using 9%)
Using the effective interest method, the value of the liability is calculated using the bond’s yield at issuance. At the end of 20x1 the bond will have 8 semiannual periods remaining until maturity.

N = 8; I/Y = 10 / 2 = 5; PMT = 8 / 2 × 1,000 = 40; FV = 1,000; CPT PV = −935.37.

Question 43

Q

Units	Unit Price
Beginning Inventory	709	$2.00
Purchases	556	$6.00
Sales	959	$13.00
Sales Expenses	$2,649 per annum	
Ignoring taxes, what is profit using the weighted average method?
A)
$5,676.00.
 B)
$6,027.56.
 C)
$6,213.98.

Answer

A

C
weighted average cost per unit = (709 units)($2/unit) + (556 units)($6/unit) = $4,754 / 1,265units = $3.7581

weighted average COGS = ($3.7581)(959 units) = $3,604.02

Sales = (959 units)($13/unit) = $12,467

Profit = Sales − COGS − Sales Expenses = 12,467 − 3,604.02 − 2,649 = $6,213.

Question 44

Q

Selected financial information gathered from the Matador Corporation follows:
2007 2006 2005
Average debt $792,000 $800,000 $820,000
Average equity $215,000 $294,000 $364,000
Return on assets 5.9% 6.6% 7.2%
Quick ratio 0.3 0.5 0.6
Sales $1,650,000 $1,452,000 $1,304,000
Cost of goods sold $1,345,000 $1,176,000 $1,043,000

Using only the data presented, which of the following statements is most correct?

A) Gross profit margin has improved.
B) Return on equity has improved.
C) Leverage has declined.

Answer

A

B (picked A on accident, make sure to look at the years..)
Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007.
A - Gross profit margin declined from 20.0% in 2005 to 18.5% in 2007.
C - Return on equity has improved since 2005. One measure of ROE is ROA × financial leverage. Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA × (1 + 2.25 debt-to-equity)]. In 2007, ROE was 27.6% [5.9% ROA × (1 + 3.68 debt-to-equity)].

Question 45

Q

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) $350,000.
C) $300,000.

Answer

A

A (not B, need to include amortization of discount)
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, CPT PV = $5,282,402. Interest expense 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 expense December 31, 2005, was $5,265,874 × (0.06 / 2) = $157,976. Total interest expense in 2005 was $158,472 + $157,976 = $316,448.

Question 46

Q

Adams Co.’s common sized balance sheet shows that:

Current Liabilities = 20%
Equity = 45%
Current Assets = 45%
Total Assets = $2,000

What are Adams’ long-term debt to equity ratio and working capital?

      Debt to Equity	Working Capital A)             1.22	                        $500 B)             0.78	                        $250 C)             0.78	                        $500

Answer

A

C (first picked A, didn’t realized it asks long-term liability to equity ratio instead of normal D to E)
If equity equals 45% of assets, and current liabilities equals 20%, then long-term debt must be 35%.

Long-Term Debt / Equity = 0.35 / 0.45 = 0.78

Working capital = CA − CL = 45% - 20% = 25% of assets

WC = 2,000(0.25) = $500

Question 47

Q

A firm’s financial statements reflect the following:

Net income $1,700,000
EBIT $2,900,000
Effective tax rate 35%
Interest payments $285,000
Common equity $3,100,000
Total assets $6,600,000
Preferred dividends paid $1,100,000
Weighted avg. shares outstanding 523,000

Based on this information, what is the firm’s basic EPS?

A) $2.75.
B) $3.25.
C) $1.15.

Answer

A

C

The firm’s basic EPS = ($1,700,000 - $1,100,000) / (523,000) = $1.147.

Question 48

Q

Given the following information about a firm what is its return on equity (ROE)?

An asset turnover of 1.2.
An after tax profit margin of 10%.
A financial leverage multiplier of 1.5.

A) 0.12.
B) 0.18.
C) 0.09.

Answer

A

B
ROE = (NI / Sales)(Sales / Assets)(Assets / EQ)
ROE = (0.1)(1.2)(1.5) = 0.18

Question 49

Q

Capital Corp.’s activities in the year 20X5 included the following:

At the beginning of the year, Capital purchased a cargo plane from Aviation Partners for $10 million in exchange for $2 million cash, $3 million in Capital Corp. bonds and $5 million in Capital Corp. preferred stock.
Interest of $150,000 was paid on the bonds, and dividends of $250,000 were paid on the preferred stock.
At the end of the year, the cargo plane was sold for $12,000,000 cash to Standard Company. Proceeds from the sale were used to pay off the $3 million in bonds held by Aviation Partners.

On Capital Corp.’s U.S. GAAP statement of cash flows for the year ended December 31, 20X5, cash flow from investments (CFI) related to the above activities is:

A) $10,000,000.
B) $6,750,000.
C) $9,750,000.

Answer

A

A - interest expense is an operating activity

Investing cash of $2 million was used to purchase the cargo plane. Proceeds from the sale of the plane were a source of $12 million of investing cash. Net CFI is $12 million − $2 million = $10 million. Under U.S. GAAP, the interest payment is included in cash from operations (CFO) and the dividend payment in cash from financing (CFF). Redemption of the bonds is a use of cash from financing (CFF).

Question 50

Q

Robinson Company had 1 million shares outstanding at the beginning of the year. On April 1, Robinson issued an additional 300,000 shares. On July 1, Robinson issued 200,000 more shares. What is Robinson’s weighted average number of shares outstanding for the calculation of earnings per share?

A) 1,500,000 shares.
B) 1,325,000 shares.
C) 1,200,000 shares.

Answer

A

B

Weighted average shares = 1,000,000 + (0.75) 300,000 + (0.5) 200,000 = 1,325,000 shares

Question 51

Q

A company that uses the LIFO inventory cost method records the following purchases and sales for an accounting period:

Beginning inventory, July 1: $5,000, 10 units
July 8: Purchase of $2,600 (5 units)
July 12: Sale of $2,200 (4 units)
July 15: Purchase of $2,800 (5 units)
July 21: Sale of $1,680 (3 units)

The company’s cost of goods sold using a perpetual inventory system is:

A) $3,500.
B) $3,780.
C) $3,760.

Answer

A

C
With a perpetual inventory system, units purchased and sold are recorded in inventory in the order that the purchases and sales occur. Cost of goods sold for the July 12 sale uses 4 of the units purchased on July 8: 4 × ($2,600 / 5) = $2,080. Cost of goods sold for the July 21 sale uses 3 of the units purchased on July 15: 3 × ($2,800 / 5) = $1,680. COGS = $2,080 + $1,680 = $3,760.

Question 52

Q

An analyst has collected the following data about a firm:

Receivables turnover = 20 times.
Inventory turnover = 16 times.
Payables turnover = 24 times.
What is the cash conversion cycle?

A) 56 days.
B) 26 days.
C) Not enough information is given.

Answer

A

B (Remember to subtract AP, not add)

Cash conversion cycle = receivables collection period + inventory processing period - payables payment period.

Receivables collection period = (365 / 20) = 18
Inventory processing period = (365 / 16) = 23
Payables payment period = (365 / 24) = 15
Cash conversion cycle = 18 + 23 - 15 = 26

Question 53

Q

Duster Company reported the following financial information at the end of 2007 (in millions):

Unearned revenue $240
Common stock at par 30
Capital in excess of par 440
Accounts payable 1,150
Treasury stock 2,000
Retained earnings 5,160
Accrued expenses 830
Accumulated other comprehensive loss 210
Long-term debt 1,570

Calculate Duster’s liabilities and stockholders’ equity as of December 31, 2007.

         Liabilities	    Stockholders' equity A)      $3,790 million	$3,420 million B)      $3,790 million	$7,420 million C)      $3,550 million	$7,840 million

Answer

A

A (remember to minus treasury stock)

Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long-term debt + $1,150 accounts payable + $830 accrued expenses).

Stockholders’ equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par - $2,000 treasury stock + $5,160 retained earnings - $210 accumulated other comprehensive loss).

Question 54

Q

An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 20X2:

                                                   Project 1	       Project 2 Contract price	                              $420,000	       $300,000 Costs incurred in 20X2	                240,000	         280,000 Estimated costs to complete	         120,000	            40,000 Billed to customers during 20X2	 150,000	          270,000 Cash received during 20X2	          90,000	          250,000

If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 20X2 income statement for:

Project 1	Project 2 A)      $0	       ($20,000) B) ($20,000)	    $0 C)      $0	            $0

Answer

A

A
No profit is recognized until the completion of the project; however, expected losses are recognized. Project 2 has an expected loss of $20,000.

Question 55

Q

An analyst compiled the following information for Universe, Inc. for the year ended December 31, 20X4:

Net income was $850,000.
Depreciation expense was $200,000.
Common stock was sold for $100,000.
Preferred stock (eight percent annual dividend) was sold at par value of $125,000.
Common stock dividends of $25,000 were paid.
Preferred stock dividends of $10,000 were paid.
Equipment with a book value of $50,000 was sold for $100,000.
Using the indirect method and assuming U.S. GAAP, what was Universe Inc.’s cash flow from operations (CFO) for the year ended December 31, 20X4?

A) $1,015,000.
B) $1,050,000.
C) $1,000,000.

Answer

A

C
Cash flow from operations (CFO) using the indirect method is computed by taking net income plus non-cash expenses (i.e. depreciation) less gains from the equipment sale. Note that cash flow from operations must be adjusted downward for the amount of the gain on the sale of the equipment. Cash flow from operations is ($850,000 + $200,000 - ($100,000 − $50,000)) = $1,000,000. The other information relates to financing cash flows.

Question 56

Q

An analyst gathered the following information about a company:

01/01/04 - 50,000 shares issued and outstanding at the beginning of the year
04/01/04 - 5% stock dividend
10/01/04 - 10% stock dividend
What is the company’s weighted average number of shares outstanding at the end of 2004?

A) 55,000.
B) 57,750.
C) 57,500.

Answer

A

B
The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/04 dividend to the beginning-of-year shares: Adjusted shares = 1.05 × 50,000 = 52,500

Step 2) Apply the 10/01/04 dividend the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 × 52,500).

Step 3) Compute the weighted average number of shares. 57,750 × (12/12) = 57,750 shares.

Question 57

Q

Selected information from the financial statements of Salvo Company for the years ended December 31, 20X3 and 20X4 is as follows (in $ millions):

                                           20X3	20X4 Sales	                                $21	          $23 Cost of Goods Sold	          (8)	            (9) Gross Profit	                          13	             14 Cost of Franchise	                  (6)	             0 Other Expenses	                  (6)	            (6) Net Income	                          $1	           $8

Cash $4 $5
Accounts Receivable $6 5
Inventory 9 7
Net PPE 12 15
Total Assets $31 $32

Accounts Payable $7 $5
Long-term Debt 10 5
Common Stock 8 8
Retained Earnings 6 14
Total Liabilities and Equity $31 $32

If Salvo had amortized the cost of the franchise acquired in 20X3 over six years instead of expensing it, Salvo’s return on average total equity for 20X4 would have been closest to:

A) 31.1%.
B) 35.6%.
C) 38.9%.

Answer

A

A
If the franchise cost had been amortized over six years beginning in 20X3, net income in 20X3 would have been $6 million instead of $1 million due to the cost of franchise expense of $6 million being eliminated and replaced by franchise amortization of $1 million. Net income in 20X4 would have been reduced by the franchise amortization to $7 million instead of $8 million. On the equity side, retained earnings at the end of 20X3 would have been $11 million ($5 million higher), and total equity for 20X3 would have been $8 + $11 = $19 million. Retained earnings for 20X4 would be the 20X3 retained earnings of $11 million increased by 20X4 net income of $7 million for a total of $18 million, and total equity for 20X4 would be $8 + $18 = $26 million. If the franchise cost were amortized, return on total equity for 20X4 would be $7 / ((19 + 26) / 2) = 31.1%.

Question 58

Q

Selected information from Jupiter Corp.’s financial activities in the year 20X5 is as follows:

Net income is $18,300,000.
115,000 shares of common stock were outstanding on January 1.
The average market price per share was $150 in 20X5.
200 warrants, which each allow the holder to purchase 100 shares of common stock at an exercise price of $100 per common share, were outstanding the entire year.
60,000 shares of common stock were issued on April 1.
45,000 shares of common stock were purchased by the company as treasury stock on October 1.

Jupiter Corp.’s diluted earnings per share for 20X5 are closest to:

A) $159.13.
B) $123.02.
C) $117.75.

Answer

A

C
To compute Jupiter’s basic earnings per share (EPS) use the formula: (net income − preferred dividends) / weighted average common shares outstanding. Weighted average common shares outstanding = [(115,000 × 12) + (60,000 × 9) - (45,000 × 3)] / 12 = 148,750. Basic EPS = $18,300,000 / 148,750 = $123.02.

Using the treasury stock method, if the warrants were exercised cash inflow would be 200 × $100 × 100 = $2,000,000. The number of Jupiter shares that can be purchased with this cash at the average share price is $2,000,000 / $150 = 13,333. The net number of shares that would have been created is 20,000 − 13,333 = 6,667. Diluted EPS = $18,300,000 / (148,750 + 6,667) = $117.75. Since diluted EPS is less than basic EPS, the warrants are dilutive.

Question 59

Q

Lawson, Inc.’s net income for the year was $1,060,000 with 420,000 shares of common stock outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson’s diluted earnings per share are closest to:

A) $2.04.
B) $1.94.
C) $2.14.

Answer

A

A
Lawson’s basic EPS ((net income - preferred dividends) / weighted average common shares outstanding) is ($1,060,000 - (2,000 × $1,000 × 0.08)) / 420,000 = $2.14.

To calculate diluted EPS the convertible preferred shares are presumed to have been converted, the preferred dividends paid are added back to the numerator of the EPS equation, and the additional common shares are added to the denominator of the equation. Lawson’s diluted EPS is $1,060,000 / (420,000 + 100,000) = $2.04.

Question 60

Q

A firm’s financial statements reflect the following:

Current liabilities$4,000,000
Cash$400,000
Inventory$1,200,000
Accounts receivable$800,000
Short-term investments$2,000,000
Long-term investments$800,000
Accounts payable$2,500,000

What are the firm’s current ratio, quick ratio, and cash ratio?

      Current Ratio	Quick Ratio	Cash Ratio A)                1.1	                        0.8	             0.6 B)                1.1	                        0.6	             0.8 C)              0.8	                        0.6	              1.1

Answer

A

A
!! short-term investment is categorized as cash equivalent!!

Current ratio = (0.4 + 2.0 + 0.8 + 1.2) / 4.0 = 1.1.
Quick ratio = (0.4 + 2.0 + 0.8) / 4.0 = 0.8.
Cash ratio = (0.4 + 2.0) / 4.0 = 0.6.

Question 61

Q

The following data pertains to the McGuire Company:

Net income equals $15,000.
5,000 shares of common stock issued on January 1.
10% stock dividend issued on June 1.
1000 shares of common stock were repurchased on July 1.
1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year.

What is the company’s basic earnings per share (EPS)?

A) $1.00.
B) $1.20.
C) $2.50.

Answer

A

A
Number of average shares:
1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000
7/1 1,000 shares repurchased × 6 months = 6,000
66,000 − 6,000 = 60,000
60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)($1,000) = $10,000

Basic EPS = [$15,000(NI) - $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share

Question 62

Q

A company has the following sequence of events regarding their stock:

One million shares outstanding at the beginning of the year.
On June 30th, they declared and issued a 10% stock dividend.
On September 30th, they sold 400,000 shares of common stock at par.

Basic earnings per share at year-end will be computed on how many shares?

A) 1,100,000.
B) 1,200,000.
C) 1,000,000.

Answer

A

B

1M1.1 + 400K3/12 = 1.2M

Question 63

Q

Zichron, Inc., had the following equity accounts on December 31:

Common stock: 20,000 shares.
Preferred stock A: 10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year.
Preferred stock B: 10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year.
The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders.

Diluted earnings per share for the year are:

A) $3.00.
B) $1.33.
C) $1.50.

Answer

A

C (although picked the right option, did not do the right cal for dilutive test. Should just use related dividend over new stock)

Basic EPS = ($120,000 − $40,000 − $5,000) / 20,000 = $3.75.

Convertible preferred stock A: $40,000 / 2(10,000) = $2.00, which is less than basic EPS so the convertible preferred stock is dilutive.

Convertible preferred stock B: $5,000 / 4($10,000) = $0.125, which is less than basic EPS so the convertible preferred stock is dilutive.

Diluted EPS = $120,000 / [20,000 + 2(10,000) + 4(10,000)] = $1.50.

Question 64

Q

Balance sheet data for two comparable firms are presented below:
Amplus, Inc. Brevis, Inc.
Cash and equivalents 3,800 500
Accounts receivable 2,400 700
Inventories 5,800 1,100
Current assets 12,000 2,300
Land 400 100
PPE 24,600 6,400
Noncurrent assets 25,000 6,500
Total assets 37,000 8,800

Accounts payable 1,800 400
Unearned revenue 600 100
Current liabilities 2,400 500
Long-term borrowing 9,600 3,300
Total liabilities 12,000 3,800

Common stock 1,500 300
Retained earnings 23,500 4,700
Total equity 25,000 5,000

Total liabilities and equity 37,000 8,800

Based on common-size analysis of the two firms’ balance sheets, Amplus Company:

A) is more financially leveraged than Brevis Company.
B) uses relatively more fixed assets then Brevis Company.
C) has a greater investment in working capital than Brevis Company.

Answer

A

C
Working capital (current assets minus current liabilities) is 32.4% - 6.5% = 25.9% of assets for Amplus and 26.1% - 5.7% = 20.4% of assets for Brevis. 
Fixed assets (property, plant, and equipment) are relatively larger for Brevis than for Amplus. 
Based on long-term borrowing and total liabilities, Brevis is significantly more leveraged than Amplus.

Answer 65

A

C
ROE = profit margin x asset turnover x leverage ratio
12% = x/1M x 1.5 x 2
x = 40K

Answer 66

A

C (picked A, dep should be added back since acc. is contra asset account)

Silverstone Company’s cash flow from operations would be calculated as +Net Income $8,000 + Inventory $250 - Prepaid exp. $500 + Depreciation $175 + A/P $200 = $8,125.

Answer 67

A

A (picked C, didn’t calculate beginning inventory)
First, calculate beginning inventory given COGS, purchases, and ending inventory. Beginning inventory was $35 million [$130 million COGS + $45 million ending inventory - $140 million purchases]. Next, calculate average inventory of $40 million [($35 million beginning inventory + $45 million ending inventory) / 2]. Finally, calculate inventory turnover of 3.25 [$130 million COGS / $40 million average inventory].

Answer 68

A

A
Weighted average cost = [559($1) + 785($5)] / (559 + 785) = $3.3363
COGS = Units sold × weighted average cost = 848 × 3.3363 = $2,829.19

Answer 69

A

C
One of the many ways ROE can be expressed is: ROE = net income / equity
0.12 = $10,000,000 / equity
Equity = $10,000,000 / 0.12 = $83,333,333

Answer 70

A

A
2008 sales are expected to be $30 million ($20 million 2007 sales × 1.5) and 2008 net income is expected to be $4.5 million ($30 million 2008 sales × 15%). 2007 non-cash operating working capital was $4 million ($20 million 2007 sales × 20%) and 2008 non-cash operating working capital is expected to be $7.5 million ($30 million 2008 sales × 25%). 2008 operating cash flow is expected to be $4 million ($4.5 million 2008 net income + $3 million 2008 depreciation - $3.5 million increase in non-cash operating working capital).

Forecasts for small firms, start-ups, or firms operating in volatile industries may be less reliable than a forecast for a large, well diversified, firm operating in mature industries.

Answer 71

A

C
FIFO ending inventory = LIFO ending inventory + LIFO reserve = 22,000 + 4,000 = $26,000

FIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 − t) = $2,000 + ($1,000)(1 − 0.4) = $2,000 + $600 = $2,600

*Decrease cash by LIFO reserve × tax rate.

Answer 72

A

C (picked A on accident)

Since pretax income ($97,500) exceeds the taxable income ($65,500), United Technologies will have a deferred tax liability of $10,880 = [( $97,500 − $65,500)(0.34)]

Answer 73

A

A
Initial shares: 90,000 × 1.20 =108,000
- Reacquired treasury shares: 10,000 × 3/12 = -2,500
105,500

Answer 74

A

C (first picked B, thinking it is preferred stock)
Kendall’s basic EPS is $830,000 / 200,000 = $4.15. To compute diluted EPS, bond interest paid net of taxes is added to net income, and the number of shares that would be issued in the conversion is added to the denominator. Kendall’s diluted EPS = [$830,000 + (1,000 × $1,000 × 0.06) × (1 - 0.4)] / (200,000 + 20,000) = $3.94. Since diluted EPS is less than basic EPS, we know that the bonds are dilutive and should be considered in calculating diluted EPS.

Answer 75

A

A (didn’t know how to calculate..should ignore salvage value)

yr. 2004 = 24,000 × 2/5 = 9,600
yr. 2005 = (24,000 − 9,600) × 2/5 = 5,760
yr. 2006 = (24,000 − 9,600 − 5,760) × 2/5 = 3,456

Answer 76

A

B

COGS = 559 × $1 + (848 - 559) × $5 = $2,004.

Answer 77

A

C
Only the October 1 transaction affects the weighted average common shares outstanding because the April 1 transaction would not affect the number of shares outstanding and the July 1 transaction involves warrants which would not be included in the basic EPS calculation. The computation for basic EPS is [(500,000 × 12) − (60,000 × 3)] / 12 = 485,000.

Answer 78

A

A
Weighted average = cost of goods available / total units available.

[(699 × 5) + (710 × 8)] / (699 + 710) = 6.51171

COGS = Units sold × Weighted average cost = 806 × 6.51171 = $5,248.44.

Answer 79

A

C
Based on a semiannual interest rate of 6.65% (13.30% / 2):

Period Int. Expense Payment Discount Amor. Bond Value
0 0.00 $800.00
1 53.20 25.00 28.20 828.20
2 55.08 25.00 30.08 858.28
3 57.08 25.00 32.08 890.36
4 59.21 25.00 34.21 $924.57
Interest expense for Year 2 is $57.08 + $59.21 = $116.29.

Answer 80

A

C
Net Income	+$96
Depreciation	+30
Gain on sale of asset	-30
Accts. Rec.	+30
Inventory	+20
Accts. Payable	+20
Wages Payable	-10
CFO	+$156

Answer 81

A

B
Net book value at the end of year 3 is $100,000 × 3/5 × 3/5 × 3/5 = $21,600. DDB amortization in year 4 of 2/5 × $21,600 = $8,640 would amortize the asset below its salvage value, so amortization expense is the remaining $1,600 that will amortize net book value to $20,000.

Answer 82

A

B (picked C, flipped cash and liability)

Proceeds raised are the present value of the bond: FV = 10,000,000; PMT = 560,000; I/Y = 6.5; N = 5; CPT PV = 9,625,989. At issuance, the firm will receive cash flow from financing of $9.626 million. Assets (cash) and liabilities (long-term debt) will increase by this amount.

Answer 83

A

A
Face value of bonds = $135,662.

Proceeds from bond sale: I/Y = 8.00%; N = 4; PMT = $135,662 × 0.07 = $9,496.34; FV = $135,662; CPT PV = $131,169

Unamortized discount at issuance = $135,662 − $131,169 = $4,493.

First year interest expense = $131,169 × 0.08 = $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.

Answer 84

A

A
PV at issue = 9.66M, discount = .34M
at end of year 1, interest exp = 9.66M x 7%= .6762M. Coupon payment = .6M, so amort = .0762M
Liability = 10-.34+.762=9.7362M

OR

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).

Answer 85

A

A
ROE = profit margin × asset turnover × A/E = 0.08 × 1.2 × 1.1 = 0.1056
RR = (1 - 0.45) = 0.55
g = ROE × RR = 0.1056 × 0.55 = 0.0581

Answer 86

A

A
Average cost = cost of goods available / total units available
= (709 × $2 + 556 × $6) / (709 + 556) = $3.7581
COGS using average cost = Units sold × average cost = 959 × $3.7581 = $3,604.02

FIFO COGS = (709 × $2) + [(959 - 709) × $6] = $2,918.00

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