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Mock exam paper

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Mock exam paper

    BEFM011

    UNIVERSITY OF EXETER

    SCHOOL OF BUSINESS AND ECONOMICS

    January 2007

    FINANCIAL STATEMENT ANALYSIS

    Module Convenor: Dr Jonathan Tucker

    Duration: 2 HOURS

Answer ALL multiple choice questions in Section A.

    Answer ANY TWO questions from Section B.

Calculators permitted.

    Closed Note.

    100 marks are available in Section A. Each question in Section B is awarded a maximum of 100 marks. Total marks awarded out of 300 are scaled to 100 per cent.

    Please note that all calculations should conform to US GAAP definitions. BEFM011 FSA Jan 2007

Section A: Multiple Choice Questions

    You must answer ALL questions in this section. Each correct answer is awarded 5 marks. The total marks for this section is 100.

    Use the following information to address questions 1 to 4.

    The cash flow data on Patrick Products for the year ended December 2005 is as follows:

     Purchase of land $14,000

     Cash paid for salaries 55,000

     Cash paid to suppliers 95,000

     Equipment depreciation 20,000

     Cash payment of dividends 35,000

     Sale of equipment 38,000

     Retirement of common stock 25,000

     Purchase of equipment 30,000

     Cash collected from customers 250,000

     Issue of preference shares 50,000

     Cash paid for interest 10,000

     Cash at beginning of year 50,000

Answer the following questions according to the provisions of SFAS 95:

Question 1

    Cash flows from operating activities are:

     A. $ 70,000

     B. $ 88,000

     C. $ 90,000

     D. $108,000

Question 2

    Cash flows from investing activities are:

     A. $(6,000)

     B. $ 0

     C. $ 6,000

     D. $20,000

Question 3

    Cash flows from financing activities are:

     A. $(10,000)

     B. $(24,000)

     C. $ 28,000

     D. $ 10,000

BEFM011 FSA Jan 2007 2

Question 4

    What is Patrick’s cash balance at the year end?

     A. $(124,000)

     B. $ 124,000

     C. $ 74,000

     D. $104,000

Question 5

    For companies in an expansion phase, capitalisation of interest may result in a gain in earnings over an extended period because:

    A. The amount of interest amortisation will not catch up with the amount of

    interest capitalised in the current period;

    B. The average projected expenditures for the period exceed specific

    borrowings;

    C. The cost of financing project debt exceeds the cost of equity finance;

    D. Earnings are greater under capitalisation than under the expense

    method over the life of the qualifying asset.

Question 6

    Gorgeous Inc. has a marginal tax rate of 35 per cent and uses LIFO to account for its inventory, which at December 2005 stood at $ 420,000 ($ 390,000). The footnotes to the 2005 financial statements detail the LIFO Reserve as being $50,000 ($46,000).

    Under FIFO Gorgeous’ 2005 inventory would have been:

     A. $ 370,000

     B. $ 436,000

     C. $ 440,000

     D. $ 470,000

Question 7

    If Gorgeous Inc. in question 4 had used FIFO for both years, the net income for 2005 would have changed by:

     A. $ (2,600)

     B. $ 1,400

     C. $ 2,600

     D. $ 4,000

Question 8

    If cost of goods sold is overstated by ?3,000 and the ending inventory is understated by ?2,000, then a firm’s income before taxes will be:

    A. Overstated by ?1,000

    B. Overstated by ?5,000

    C. Understated by ?1,000

    D. Understated by ?5,000

    Turn over/…

BEFM011 FSA Jan 2007 3

Question 9

    Analysts debating how they should adjust a firm’s cost of goods sold reported under FIFO to a LIFO basis, suggested: they should use the inflation rate for the economy; a rate derived from a competitor’s LIFO reserve calculations; or use figures derived for the industry by its trade association. Which combination of the three is valid?

    A. Rate for the economy;

    B. Rate derived from the trade association;

    C. Rates for both the economy and the trade association;

    D. Rates for both the competitor’s LIFO reserve and the trade association.

Question 10

    A change in depreciation method is:

    A. Not allowed under GAAP;

    B. Considered a change in accounting estimates;

    C. Considered a change in accounting principles;

    D. Required when an asset is judged impaired.

Question 11

    Which of the following statements about treatment of intangible assets is false?

    A. Under US GAAP, research and development cost is capitalised;

    B. Advertising costs are expensed as incurred;

    C. In the case of a patent, the costs of developing it are expensed and

    any legal costs are capitalised;

    D. The costs associated with a brand name may be capitalised as part of

    the cost of an acquisition.

Question 12

    An analyst gathered the following information about a fixed asset purchased by a company:

     Cost of purchase $12,000,000

     Estimated useful life 5 years

     Estimated salvage value $2,000,000

Assuming the double declining balance depreciation method, the company’s

    depreciation expense in Year 2 will be closest to:

    A. $2,000,000

    B. $2,400,000

    C. $2,880,000

    D. $7,680,000

BEFM011 FSA Jan 2007 4

Question 13

    Quark Corporation earns a margin of 12 percent on sales before interest and tax and generates total asset turnover of 0.75x. If Quark embarks on a new product requiring an investment of $14 million with expected sales of $5 million/year and EBIT of $1 million, what is the effect on its EBIT/sales and EBIT/total assets?

EBIT/sales EBIT/total assets

    A. Increase, Decrease

    B. Increase, Increase

    C. Decrease, Increase

    D. Decrease, Decrease

Question 14

    Which of the following is the most stringent measure of a firm’s liquidity?

    A. Cash ratio

    B. Quick ratio

    C. Current ratio

    D. Debt/equity ratio

Question 15

    Consider a firm that has won a contract worth $500 million with the payments of $125 million, $100 million, $150 million and $125 million over the four years. The estimate for the cost of executing the contract is $380 million spread evenly over the four years. During the first year, the firm incurs expenses of $110 million. Also the firm’s estimate of the total cost of the contract has now risen to $420 million. How much revenue can this firm recognise for the year using the percentage of completion method?

    A. $0 million

    B. $113 million

    C. $131 million

    D. $145 million

Question 16

    When calculating the weighted average number of shares outstanding, the shares repurchased by the company should be:

    A. Excluded for the entire period;

    B. Excluded from the day of repurchase;

    C. Included from the day of repurchase;

    D. Accounting for in the same way as stock dividends.

Question 17

    Which of the following items can feature in a simple capital structure for EPS computation purposes?

    A. Convertible preferred stock

    B. Stock options

    C. Warrants

    D. Non-convertible bonds

    Turn over/…

    BEFM011 FSA Jan 2007 5

Question 18

    Park Corporation has decided to retire its long-term debt before maturity. The book value of debt is currently $8 million, while the amount to be paid to retire the debt early is $7.75 million. The accounting treatment of this early retirement is:

    A. Recognise a $0.25 million interest gain and treat it as an extraordinary

    item;

    B. Recognise a $0.25 million interest gain but do not treat it as an

    extraordinary item;

    C. Recognise a $0.25 million gain and treat it as an extraordinary item;

    D. Recognise a $0.25 million gain but do not treat it as an extraordinary

    item.

Question 19

    An analyst has gathered the following data for a firm:

    Operating profit margin: 6.5%

    Interest expense rate: 0.4%

    Tax rate: 40%

    Total asset turnover: 2.5

    Equity multiplier: 2.8

    Employing the Extended DuPont system, the return on equity is closest to:

    A. 15.85%

    B. 17.75%

    C. 18.65%

    D. 26.63%

Question 20

    What is the impact on a firm’s cash flow from operations and cash flow from financing of issuing bonds at a premium to par?

Cash flow from operations Cash flow from financing

    A. Understated, Understated

    B. Understated, Overstated

    C. Overstated, Understated

    D. Overstated, Overstated

BEFM011 FSA Jan 2007 6

Section B: Long Answer Questions

    You must answer ANY TWO questions from this section.

Question 1

a) Briefly discuss how an analysis of a firm’s cash flow from operations and

    that from its investing activities can provide an indication of its financial

    health and of the financial strategy it is pursuing.

     [20 marks]

b) Using the extract below, illustrate which ratios you would suggest

    appropriate to monitor its results and what is your interpretation of the

    abbreviated cash flow statement with regard to a request for a new loan?

    2003 2004 2005

     000s 000s 000s

     Cash from operations:

     Collections from customers 2,120 2,421 2,744

     Payments for merchandise (1,502) (1,742) (2,065)

     Payments SG &A (454) (523) (602)

     Interest paid (38) (33) (34)

     Taxes paid (13) (23) (8)

     Other (13) (1) (4)

     100 99 31

     Cash for investing:

     Capital expenditure (56) (111) (90)

     Leasehold property acquired (31) (22) (8)

     (85) (132) (98)

     Cash for financing

     Long-term borrowings (3) (24) (19)

     Revolving credit facilities - - 70

     Proceeds from stock and warrant issues 2 54 1

     (1) 30 52

     Net change in cash 14 (3) (15)

     === === ===

     Sales 2,127 2,414 2,749

     Cost of goods sold 1,528 1,742 1,975

     SG&A expense 459 521 606

     Net income 37 41 44

     Inventory increase 28 61 83

    [80 marks]

    [Total = 100 marks]

    Turn over/…

BEFM011 FSA Jan 2007 7

Question 2

    a) Given the following financial statement and market information for Wal Mart, a US retail company, compute appropriate financial ratios to enable you to comment upon the following aspects of the firm:

(1) Profitability;

(2) Asset utilisation;

(3) Leverage;

(4) Liquidity.

    [70 marks]

b) A fund manager asks you for your overall impression of Wal Mart’s

    strengths and weaknesses as revealed by the financial statements. What advice do you give her?

    [30 marks]

    [Total = 100 marks]

BEFM011 FSA Jan 2007 8

Turn over/…

BEFM011 FSA Jan 2007 9

BEFM011 FSA Jan 2007 10

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