11/02/2021 Take Test: ACCT7106 Summer Semester Final Examination 2020 &…
Take Test: ACCT7106 Summer Semester Final Examination 2020
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Description
Instructions Timed Test
Multiple Attempts
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QUESTION 1
1 points
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Having made its required interest payments, which of the following is NOT an alternative the firm has for using its remaining free cash flow (FCF) determined in the reformulated Statement of Cash Flows?
1. Purchase of short-term investments 2. Purchase of a subsidiary
3. Repurchase of common shares
4. Payment of dividends
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QUESTION 2
1 points Save Answer https://learn.uq.edu.au/webapps/assessment/take/launch.jsp?course_assessment_id=_202665_1&course_id=_142497_1&content_id=_6138413_1&step=null 1/14
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Which of the following statements about the reformulated Income Statement is TRUE?
1. The allocation of tax expense to the Core Operating Income from Sales is a residual amount
2.
3. The reported tax expense must be allocated to both operating and nancial Other Comprehensive Income (OCI) items
4. Income generated from an investment in marketable securities should always be included in the NFE section of the reformulated Income Statement.
QUESTION 3
The separation of Core Operating Income from Sales and Core Other Operating Income is to identify recurring versus non- recurring components of Operating Income
Suppose that you have been provided with the following
1 points
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Remaining Time: 2 hours, 29 minutes, 50 seconds.
Operating Assets Financial Assets (FA)
reformulated Balance Sheet for a typical manufacturing company.
Question Completion Status:
(OA)
Operating cash
20
Financial cash
50
Accounts Receivable
100
Short-term investments
100
Inventory
100
Total Financial Assets
150
Leased assets
Property and Plant
150
370
Financial Obligations (FO)
Intangibles
100
Lease liability
200
Other Assets
30
Bonds payable
300
Total Operating Assets
870
Derivative financial securities
20
Operating Liabilities (OL)
Total Financial Obligations
520
Accounts payable
100
Net Financial Obligations (NFO)
370
Deferred tax liability
20
Provisions
50 Shareholders’ Equity Preference shares 80
Click SaveTaontdaSlubOmpitetroastainvegand1s7u0bmit. Click Save All Answers to save all answers. Liabilities
Common shares 100
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Common shares 100
Net Operating Assets (NOA)
Balance Sheet
700
Which account has NOT been reclassified correctly when reformulating the Balance Sheet?
1. Preference shares
2. Derivative nancial securities 3. Lease liabilities
4. Non-controlling interest
QUESTION 4
Remaining Time: 2 hours, 29 minutes, 50 seconds.
Condensed versions of the 2019 and 2020 Balance Sheet and
Income Statement for a company which pays no tax are presented
1 points
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Retained earnings
100
Non-controlling interest
50
Total Shareholders’ Equity
330
below.
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2019
2020
2019
2020
Operating Assets (OA)
232
246
Operating Liabilities (OL)
58
35
Financial Assets (FA)
12
10
Financial Obligations (FO)
135
141
Total Liabilities
193
176
Total Assets
244
256
Shareholders’ Equity
51
80
Income Statement
2019
2020
Operating Revenue
496
506
Operating Expenses
(250) (320)
Operating Income 246 186
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Financial Revenue 2 3 Financial Expenses (14) (16)
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Net Financial Expenses
(12)
(13)
Comprehensive Income
Based on this information, what is company’s free cash flow (FCF) for 2020?
1. 37 2. 223 3. 149 4. 186
QUESTION 5
Which of the following statements about a ‘rules-based’ versus ‘principles-based’ approach to setting accounting standards is NOT true?
1. A ‘rules-based’ approach provides a relatively more limited scope
Remaining Time: 2 hours, 29 minutes, 50 seconds.
2. A ‘principles-based’ approach allows management to use
accounting policy choice as a means of communication
4. A ‘principles-based’ approach provides management with the exibility to exercise judgement
QUESTION 6
Which of the following is NOT an example of an accounting-based earnings management (EM) strategy designed to increase reported earnings?
1. Delaying the disposal of obsolete inventory
2. Overestimating the amount of expenses that are prepaid
3. Increasing the discount rate used to estimate the pension liability 4. Failing to write down obsolete inventory
234
173
1 points
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for earnings management (EM) activity to occur
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3. A ‘rules-based’ approach provides companies with guidance on how they should they should account for various items and situations
1 points
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QUESTION 7
1 points Save Answer Click Save and Submit to save and submit. Click Save All Answers to save all answers.
Which of the following is NOT an example of a situation where earnings
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management (EM) is likely to have occurred?
1. When the growth in sales exceeds the growth in long-term operating assets such as property, plant and equipment
2. When net operating assets (NOA) increase as a result of the acquisition of another business
3. When the growth in short-term operating assets such as accounts receivable and inventory is faster than the growth in sales
4. When the growth in short-term operating liabilities is slower than the growth in sales
QUESTION 8
Which of the following would be a ‘red ag’ that a company might be overstating its operating accruals to in ate earnings?
1. An unusual increase in the provision for employee bene ts
2. An unusual increase in nancial obligations
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3. An unusual increase in the provision for doubtful debts
Remaining Time: 2 hours, 29 minutes, 50 seconds. 4. An unusual decrease in deferred revenue
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QUESTION 9
Which of the following statements about the process of forecasting a rm’s pro forma Financial Statements is TRUE?
1. If a rm’s net nancial obligations (NFO) increases, its shareholders’ equity (S/E) must decrease because NOA = NFO + S/E
2. Without an enduring competitive advantage, a rm’s abnormal earnings (residual income) will ultimately decline
3. The focus of the forecasting process should be on the rm’s transitory (core) earnings
4. The best approach to forecasting a rm’s future sales is to use its historical growth in sales
1 points
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QUESTION 10
1 points
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Which of the following statements about the process of forecasting a
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rm’s pro forma Financial Statements is NOT true?
1. The focus of the forecasting process should be on the rm’s
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gp
sustainable (core) earnings
2. If a rm wishes to grow at a rate in excess of its sustainable growth rate, g*, its only option is to raise additional external nancing
3.
4. In the ideal, year-by-year forecasts should be made up until the point in time when the rm reaches a steady state growth rate
QUESTION 11
Which of the following statements about the process of forecasting a rm’s pro forma Financial Statements is NOT true?
1. In developing the pro forma Financial Statements, it is important to understand both the market for the rm’s products and the rm’s
changes in activities
4. Following the development of sales forecasts, one of the next critical steps is to forecast the rm’s asset turnover ratio (ATO)
QUESTION 12
You have been provided the following actual nancial information from the reformulated nancial statements of Lillooet Inc. for the year 2020, and then a set of forecasted nancial information for the three-year period, 2021 – 2023.
A rm’s sustainable growth rate is based on its current level of pro tability and its current dividend policy
1 points
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1 points
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2020 Actual: 2021 Forecasts:
sales = $800,000
Shareholders’ Equity = $200,000
sales growth = 5%
operating profit margin after tax = 0.10 asset turnover ratio = 1.90
net financing expenses = $15,000
marketing plan
2.
RemaininFgorTeicmaest:s2ohfothuers ,r2m9’smfuinturtesa,c5tiv0itsiescosnhodus.ld be conservative to
ensure that the value of the rm is not overstated Questi3o.n Completion Status:
In developing the pro forma Financial Statements, it is important to have some accounts that expand or contract in response to
2022 Forecasts: sales growth = 4%
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asset turnover ratio = 2.0
net financing expenses = $15,500
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net financing expenses $15,500
2023 Forecasts: sales growth = 3%
operating profit margin after tax = 0.10
asset turnover ratio = 2.0
net financing expenses = $16,000
In conjunction, you have also been provided with the following additional information:
the forecasted growth rate in comprehensive income after tax (CI) after 2023 is 2.5%
Lillooet’s cost of equity capital is 7.5%
Lillooet’s net borrowing cost (NBC) after tax is 6% Lillooet has no Other Comprehensive Income (OCI) items to report during any years
Lillooet has 1 million common shares outstanding
Using the Abnormal Earnings (Residual Income) valuation model, what is the intrinsic value of a common share of Lillooet Inc. based on the forecasts and additional information presented above?
1. $1.21
1 points
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QUESTION 13
The current market-to-book (M/B) and forward price-earnings (P/E) ratios for two companies, X Ltd. and Y Inc., are presented below. The two companies are direct competitors in the same industry sector, produce the same product and sell it to the same set of customers. They have the same scale of operation and the same capital structure. The average values of the market-to-book (M/B) and forward price-earnings (P/E) ratios for the industry sector are also presented below.
Industry Mean
Price-Earnings (P/E) ratio 5.00
Market-to-Book (M/B) ratio 3.90
X Ltd.
9.00 1.25
Y Inc.
2.50 0.75
Based on this information, which of the following statements MUST be TRUE?
2. $1.35
Remaining Time: 2 hours, 29 minutes, 50 seconds. 3. $1.02
4. $1.55
Question Completion Status:
1. The market believes that the two companies have the same risk since they have the same capital structure
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2. The market believes that the abnormal earnings (residual income)
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of both X Ltd. and Y Inc. are negative because each has a market- to-book (M/B) ratio that is well below the industry mean value
3. The market believes that X Ltd.’s abnormal earnings (residual income) will increase more than the abnormal earnings (residual income) of Y Inc.
4.
QUESTION 14
Which of the following factors typically will NOT in uence the magnitude of the market-to-book (M/B) ratio?
1. An increase in the size of the rm as measured by its total assets through internal expansion, all else remaining unchanged
2. The industry sector within which the rm operates
3. An increase in the rm’s pro tability, all else remaining unchanged
The market believes that X Ltd.’s earnings (NPAT) will increase more than the earnings (NPAT) of Y Inc.
1 points
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4. An increase in the growth rate of the rm’s book value
Remaining Time: 2 hours, 29 minutes, 50 seconds. (shareholders’ equity), all else remaining unchanged
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QUESTION 15
An analyst has provided you with the following actual financial information developed from the reformulated financial statements of Tsawwassen Inc. for the year 2020, and then a set of forecasted financial information for the two-year period, 2021 – 2022:
1 points
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2020 Actual:
2021 Forecasts:
2022 Forecasts:
sales = $250,000
operating profit margin after tax = 0.25 asset turnover ratio = 1.5
sales growth = 5%
operating profit margin after tax = 0.25 asset turnover ratio = 1.75
sales growth = 3%
operating profit margin after tax = 0.25 asset turnover ratio = 2.0
In conjunction, you have also been provided with the following
additional information:
the forecasted growth rate in operating income after tax
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(OI) after 2022 is 3%
the firm’s weighted average cost of capital is 8%
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Having received this information from the analyst, you have now conducted your own investigation into the financial prospects of Tsawwassen. While you agree with the analyst’s core forecasts, you disagree with both their forecast of the terminal growth rate and their estimate of the appropriate discount rate. Specifically, you believe that the appropriate terminal growth rate should be
1.5% instead of 3% and that the discount rate should be 7% instead of 8%.
Given this information, which of the following statements is TRUE?
1. Your estimate of Tsawwassen’s overall rm value will be higher than the analyst’s estimate
2. Your estimate of Tsawwassen’s overall rm value will be lower than the analyst’s estimate
3. Your estimate of Tsawwassen’s overall rm value will be the same as the analyst’s estimate
4. Based on the information provided, it is not possible to estimate Tsawwassen’s overall rm value
An analyst has provided you with the following actual financial information developed from the reformulated financial statements of Revelstoke Inc. for the year 2020, and then a set of forecasted financial information for the two-year period, 2021 – 2022:
2020 Actual:
2022 E
Sales growth 5%
Sales = $750,000
Financial leverage (FLEV) = 3.50
Net Financial Obligations (NFO) = $350,000
2021 E
10%
Operating Profit Margin (after tax) 0.05 0.05
Financial Leverage (FLEV) 3.25 3.00
Net Financial Obligations (NFO) $350,000
$350,000
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In conjunction, you have also been provided with the following
additional information:
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the forecasted growth rate in comprehensive income after tax (CI) after 2022 is 2.5%
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Revelstoke has 100,000 common shares outstanding Revelstoke’s firm’s cost of equity capital is 8% Revelstoke’s net borrowing cost (NBC) after tax is 4.5%
While you agree with the analyst’s forecasts of future sales growth and operating profit margins, you believe that rather than decreasing its financial leverage (FLEV), Revelstoke will change
its capital structure in 2021 so that its financial leverage ratio (FLEV) increases to 4.0, and then remains constant at 4.0 from 2021 into the future. This increase will result in net financial obligations (NFO) increasing to $425,000 in 2021 and $450,000 in 2022. As a result, you believe that the appropriate cost of equity capital will be 9.0% and the net borrowing cost will be 5% after tax because the firm will be more risky, and that its terminal growth rate will be 3% because its CI will grow more rapidly because of the benefits of the increased financial leverage.
Given this information, which of the following statements is TRUE? 1. Your estimate of the price of Revelstoke’s common shares will be
lower than the analyst’s estimate
2. Based on the information provided, it is not possible to estimate the price of Revelstoke’s common shares
3. Your estimate of the price of Revelstoke’s common shares will be
Remaining Time: 2 hours, 29 minutes, 50 seconds. higher than the analyst’s estimate
4. Your estimate of the price of Revelstoke’s common shares will be
Question Completion Status:
the same as the analyst’s estimate
QUESTION 17
You work for ABC Bank and are reviewing the financial statements for one of the bank’s customers under the terms of the line of credit facility. The credit facility requires the customer to maintain a minimum current ratio of 1.5. During the year, the customer’s current ratio increased from 1.5 to 1.8, so you have asked the customer to explain the reason for this change. Which of the following is the most plausible explanation for this result?
1. The company re nanced a mortgage two years before it came due during the year
2. The company experienced reduced bad debts because of improved cash collection practices
3. The company repurchased some of its own stock this year
4. The company incurred a loss this year
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QUESTION 18
1 points Save Answer
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If a company has an return on net operating assets (RNOA) of 12.5%, a gross pro t margin of 60%, an operating pro t margin after tax of 10%, and a cost of goods sold (COGS) of $500,000, what is its asset turnover ratio assuming all calculations are based on end-of-year balances?
1. 0.833 2.
0.750 3. 1.250 4. 0.800
QUESTION 19
Which of the following calculations is correct if sales are $75,000, operating pro t after tax is $4,000, the tax rate is 30%, there are no ‘other comprehensive income’ items, net operating assets (NOA) are $40,000, shareholders’ equity (S/E) is $15,000, and the net borrowing cost after tax (NBC) is 5%?
1 points
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1 points
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QUESTION 20
Which of the following statements relating to nancial statement analysis is NOT true?
1. The operating spread measures the return that the rm is earning on its investment in assets above its nancing costs
2. To determine the asset turnover ratio (ATO) implied by the forecasted turnover ratios for each of the individual item on the Balance Sheet, these forecasted turnover ratios must be inverted
3. For forecasting purposes, pro tability ratios should be based on the reported accounting amounts to ensure that the gures are reliable
4. ROCE is a levered measure of pro tability
1. ROCE = 0.183
Remain2i.ng Time: 2 hours, 29 minutes, 50 seconds. Asset turnover (ATO) = 5.000
3. Financial leverage (FLEV) = 2.667
Question Completion Status:
4. RNOA = 0.267
QUESTION 21
1 points Save Answer Click Save and Submit to save and submit. Click Save All Answers to save all answers.
Which of the following statements relating to nancial statement
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analysis is NOT true?
1. RNOA is an unlevered measure of pro tability
2. The common size Balance Sheet expresses items as a percentage of sales in order to measure the e ciency with which each item is being used (i.e., its turnover ratio)
3. An increase in the inventory ratio indicates that the rm is generating more sales per dollar invested in inventory than before
4. If the rm is pro table and its RNOA exceeds its net borrowing costs, then ROCE will be greater than RNOA
QUESTION 22
Which of the following statements relating to nancial statement analysis is NOT true?
1. One of the reasons that the measure of leverage based on the
reported accounting gures (debt-to-equity) will typically be higher
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than the comparable gure based on the reformulated nancial
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statements (FLEV) is because the debt-to-equity ratio ignores
nancial assets
3. If a rm’s net borrowing cost (NBC) is higher than the return on its net operating assets (NOA), the use of debt nancing will enhance the return to the common shareholder
4. Typically, the return to the rm calculated based on reported accounting gures (ROA) will be lower than the comparable measure based on the reformulated nancial statements (RNOA)
QUESTION 23
If for the most recent year, a rm’s RNOA is 12.0%, its sales were $2,400,000, its asset turnover is 1.5, its net nancial obligations (NFO) balance is $550,000, and its net nancial expenses after tax are $16,500, what is its ROCE?
1. 25.1% 2. 18.3%
Question Completion Status:
2. One of the critical aspects of undertaking sensitivity analysis is to ensure that the proposed changes to the nancial ratios are feasible
1 points
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3. 16.7%
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1 points
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QUESTION 24
If for the most recent year, a rm’s RNOA is 17.5%, its sales were $2,000,000, its asset turnover is 2.0, its operating liability (OL) balance is
$250,000, and its short-term borrowing rate (STBC) is 2.5% after tax, what is its ROOA?
1. 18.0% 2. 14.5% 3. 18.1% 4. 14.0%
QUESTION 25
The following balances and turnover ratios for individual operating
1 points
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Accounts receivable 16.00
Inventory 8.00
Property, plant & equipment 0 4.44
Accounts payable 14.55
Provisions 22.86
Net Operating Assets 0 2.96
$ 250,000 $ 500,000
$ 900,00 $ 275,000
$ 175,000
$1,350,00
Assuming that Kamloops’ operating profit margin after tax remains the same, what will happen to its RNOA if the Accounts Receivable turnover decreases to 15, the inventory turnover increases to 9, and the Accounts Payable turnover increases to 18?
1. Kamloops’ RNOA will increase
2. Kamloops’ RNOA will remain the same
3. It is not possible to determine how the changes will a ect Kamloops’ RNOA based on the information provided.
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4. Kamloops’ RNOA will decrease
assets and operating liabilities have been calculated using end-of-year gures based on Kamloops Inc.’s reformulated 2020 Balance Sheet:
Remaining Time: 2 hours, 29 minutes, 50 seconds. Turnover
Balance
$ 150,000
Question Completion Status:
Operating cash 26.67
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