CH 3 Financial Reporting Analysis Questions

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Level I of the CFA® 2022 Exam
Questions - Financial Reporting & Analysis
Offered by AnalystPrep
Last Updated: Nov 16, 2021
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Table of Contents
15 - Introduction to Financial Statement Analysis 3

16 - Financial Reporting Standards 4
17 - Understanding Income Statement 5
18 - Understanding Balance Sheet 6
19 - Understanding Cashflow Statement 7
20 - Financial Analysis Techniques 8
21 - Inventories 9
22 - Long Lived Assets 10
23 - Income Taxes 11
24 - Non-Current (Long-Term) Liabilities 12
25 - Financial Reporting Quality 13
26 - Applications of Financial Statement Analysis 14
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© 2014-2021 AnalystPrep.
Reading 15: Introduction to Financial Statement Analysis
Q.244 To best see the change in the owner's equity over time, you will most likely look at the:
A. income statement.
B. cash flow statement.
C. statement of change in owners' equity.
Q.245 T he management interpretation of the financial data can best be found in the:
A. supplementary information.
B. financial statement footnotes.
C. management discussions and analysis.
Q.246 Stock performance and potential conflicts of interest can best be found in the:
A. balance sheets.
B. proxy statements.
C. financial statement footnotes.
Q.247 ABC Corp is a large publicly traded company. At the end of the Auditor's report, the auditor
most likely provides:
A. assurance that financial statements are fairly presented.
B. no assurance that financial statements are fairly presented.
C. reasonable assurance that financial statements are fairly presented.
3
Q.336 T im started a cloth trading business in January 2014. T he company's performance during 2014
was as follows:
Revenue $551,000
Cost of Goods Sold $187,000
Rent $26,000
During 2015, the revenue and the cost were the same as the previous year due to long-term
contracts with customers and vendors. However, the rent expense increased by 10%. What would
be the most likely impact of the increase in rent on the company's gross profits?
A. T here will be no changes in gross profit.
B. T he gross profits will be 10% less than the previous year.
C. T he gross profits will be $2,600 less than the previous year.
Q.337 Which of the following is least likely part of other comprehensive income?
A. Cash flow hedges.
B. Issuance of equity shares.
C. Exchange differences on translating foreign operations.
Q.339 Which of these statements is least likely accurate regarding the financial statement analysis
framework?
A. T he follow-up of the investment report is part of the financial statement analysis

framework.
B. T he financial statement analysis framework provides general steps that can be followed in
any financial statement analysis project.
C. T he output in the processing data step of the financial statement analysis framework may
include a financial data table and completed questionnaires.
4
Q.341 Regarding the financial statement analysis framework, a visit to production facilities is most
likely required in which of the following phases?
A. T he collection of input data.
B. T he interpretation of the processed data.
C. Developing and communicating conclusions and recommendations.
Q.342 Which of the following is most likely a financial statement that highlights a company's financial
position by disclosing its resources and obligations to lenders and other creditors?
A. Balance sheet.
B. Income statement.
C. Statement of changes in equity.
Q.343 T he methods and estimates used in the preparation of financial statements are most likely
mentioned in
A. T he auditor's report.
B. T he management commentary.
C. T he notes to the financial statements.
Q.344 Contractual commitments and off-balance-sheet obligations are most likely described in
A. T he proxy statement.
B. T he income statement.
C. T he management's discussion and analysis.
5
Q.346 T he following information is available on a company for the current year.
Total assets $5, 480 million

Total liabilities $4,760 million
Interest due on long-term debt $4 million
Interest coverage ratio 10
T he value of owner's equity is closest to:
A. $716 million
B. $720 million
C. $724 million
Q.347 Accounting policies adopted by a company to record depreciation would most likely be
specified in the
A. income statement.
B. management commentary.
C. notes to the financial statements.
Q.348 A company's ability to meet short-term obligations is most likely termed as
A. solvency.
B. liquidity.
C. profitability.
Q.350 T he auditors were not provided with the supporting documents for the majority of the
transactions (including material transactions) selected for the audit. Which type of audit opinion
should most likely be issued in such case?
A. An adverse opinion.
B. A qualified opinion.
C. A disclaimer of opinion.
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Q.352 Which of the following is most likely an external source of information when analyzing a
company's reports?
A. Auditor's report.
B. Management commentary.
C. Financial analyses of peer companies.
Q.353 Which of these statements is least likely accurate regarding financial statement analysis?
A. Relative performance can be measured through the preparation of common-size financial

statements.
B. Analysts should not make any adjustments to the financial statements for financial
statement analysis.
C. T he industry situation and the inflation are important factors to be considered for financial
statement analysis.
Q.354 An equity analyst's report will least likely include
A. the historical performance.
B. the industry and competitive analysis.
C. the opinion on the fairness of financial statements.
Q.355 T he payment of commission to selling agents can be classified as a(an):
A. a financing activity.
B. an investing activity.
C. an operating activity.
7
Q.1785 Ahmed Alam has recently joined MLA Investments as a summer intern under the supervision
of Britney Taylor, a senior research analyst. Taylor asked Alam to send her a financial report of BCD
Corp. which she can use to analyze BCD's financial position. Which of the following reports should
Ahmed most likely forward to Britney?
A. Balance sheet.
C. Cash flow statement.
Q.1786 Which of the following accounts is most likely to be reported in the statement of
comprehensive income?
A. Dividends paid.
B. Secondary issuance.
C. Gains on available-for-sales securities.
Q.1787 Which of the following statements is most useful to analyze the financial performance of a
firm during a given year?
A. Balance sheet.
Q.1790 An analyst is reviewing the consolidated income statement of a company. He is unable to

understand the reporting of the disposal of land. Which of the following will the analyst most likely
find details regarding this disposal?
A. Balance Sheet.
B. Financial statement notes.
C. Management's commentary.
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Q.1791 Which of the following auditor's opinions is most appropriate for a financial report that is
free from error or material omission?
A. Adverse opinion.
B. Qualified opinion.
C. Unqualified opinion.
Q.1792 Which of the following statements is least likely part of the standard auditor's opinion?
A. Generally accepted principles were followed, thus providing reasonable assurance.
B. Whereas we prepared the financial statements, the managers have performed an

independent review.
C. Auditors are satisfied that the statement is prepared in accordance with generally
accepted principles and contains reasonable estimates.
Q.1793 According to which of the following accounting standards can a firm most likely choose to
report comprehensive income in the statement of shareholders' equity?
A. IFRS.
B. US GAAP.
C. Both IFRS and US GAAP.
Q.1794 Which of the following statements is most likely to present financial data of a firm at a
specific point in time?
A. Balance sheet.
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Q.1796 Which of the following transactions will be recorded on the balance sheet?
A. Office supplies expense.
B. Prepaid transportation rent.
C. Salaries paid to the sales team.
Q.1798 Which of the following best describes the interim reports released by a company?
A. T hey are four qualified basic financial reports and condensed notes issued on semiannually
or quarterly.
B. T hey are four unqualified basic financial reports and condensed notes issued on a
semiannually or quarterly basis.
C. T hey are four unaudited basic financial reports and condensed notes issued on a
semiannually or quarterly basis.
Q.1799 MZJ & Sons, an audit firm, is reviewing the financial statements of Xspace, a space tech firm.
Xspace has developed a communication device that will never require being charged nor require any
batteries. Since the scope of the valuation of such a product is limited, the auditors are unable to
express their opinion. In such a situations an auditor will most likely issue a/an:
A. disclaimer of opinion.
B. qualified audit opinion.
C. unqualified audit opinion.
Q.1800 Internal controls are the processes by which a firm ensures that it presents accurate
financial statements. Internal controls are most likely the responsibility of:
A. auditors.
B. management.
C. shareholders.
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Q.1802 Which of the following will most likely contain information regarding the qualification of
board members?
A. Form 8-K.
B. Proxy statements.
C. Management Discussion and Analysis (MD&A).
Q.1803 Which of the following is least likely to be reviewed by independent outside auditors?
A. Corporate press releases.
B. Internal controls of a company.
C. Management Discussion and Analysis (MD&A).
Q.1804 XCX Forex is a forex broker. Assuming that XCX has cash of $200 million, receivables of
$300 million, shareholders' equity of $170 million and long-term debt of $80 million. T he short-term
liabilities FOR XCX Forex is closest to:
A. $220 million
B. $250 million
C. $350 million
Q.1806 Which of the following is least likely a step of the financial statement analysis framework?
A. Update analysis.
B. State objective and context.
C. Share the analysis with regulators.
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Q.1807 In which of the following steps should an analyst most likely ensure that a financial statement
analysis complies with Code and Standards?
A. Collecting input data.
B. State the purpose and context of the analysis.
C. Developing and communicating conclusions/recommendations.
Q.1808 Which section of a cash flow statement will most likely include the cash inflow from the sale
of a subsidiary segment of the firm?
A. Cash flow from financing.
B. Cash flow from investing.
C. Cash flow from operations.
Q.1810 Which of the following will most likely contain information regarding the inventory cost flow
method that a specific company uses?
A. T he balance sheet.
B. T he cash flow statement.
C. Notes to the financial statements.
Q.1811 Which of the following statements is most likely accurate?
A. T he Management Discussion and Analysis (MD&A) is provided as a separate supplement.
B. T he Management Discussion and Analysis (MD&A) provides detailed numerical

information regarding cash inflows and outflows of the firm.
C. In the U.S., the Securities and Exchange Commission (SEC) requires the Management
Discussion and Analysis (MD&A) to discuss trends and uncertainties.
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Q.1812 T he process of showing financial performance to creditors, debtors, and other parties
interested by presenting financial statements ismost likely described as:
A. auditing.
B. financial reporting.
C. financial statement analysis.
Q.1813 T he process of reviewing and examining financial reports and supporting documentation to
provide an opinion on the fairness and reliability of the financial reports is most likely described as:
A. auditing.
B. internal controls.
C. financial analysis.
Q.1814 Andrew Anderson is an auditor for SRS Corp. While reviewing all of the income statements,
he found some instances of accounts materially nonconforming to accounting standards. Which of the
following is most likely the suitable opinion that Andrew should give regarding the SRS income
statement?
A. A qualified opinion.
B. An adverse opinion.
C. An unqualified opinion.
Q.3788 ABC is an asset management firm. Assume that ABC has accounts receivables of $500 million
(representing the firm’s total assets), shareholders' equity of $350 million, and trade payables of $50
million. Calculate ABC's long-term debt.
A. $50 million.
B. $100 million.
C. $150 million.
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Q.3789 Given the data below, calculate the owner’s assets.
Equity $100, 000, 000

Long-term debt $20, 000, 000
Short-term debt $5, 000, 000
Interest expense of long-term debt $5, 000, 000
Interest expense of short-term debt $1, 000, 000
A. $75,000,000
B. $119,000,000
C. $125,000,000
Q.3790 T he selected information below has been extracted from the financial statements of XYZ
Company.
Current Assets $150, 000

Non-Current Assets $50, 000
Retained Earnings $25, 000
Common Stock $100, 000
Preference Stock $25, 000
Determine the company’s liabilities.
A. $50,000
B. $75,000
C. $350,000
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Reading 16: Financial Reporting Standards
Q.255 Which of the following is most likely one of the major constraints to the IFRS?
A. Verifiability.
B. Understandability.
C. T he cost/benefit consideration.
Q.256 Which one of the following is least likely required by the IFRS?
A. Statement of dividends paid.
B. Notes to the financial statements.
C. Statements from earlier comparative periods.
Q.257 Which of these is least likely one of the general features underlying the preparation of
financial statements as specified by IAS No. 1?
A. Accuracy.
B. No offsetting.
C. Going concern.
Q.258 Compared to the US GAAP, the IFRS is most likely :
A. rules-based.
B. financial-based.
C. principles-based.
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Q.259 Which of the following best describes the International Organization of Securities
Commissions (IOSCO)?
A. A U.S.-based commission that regulates the U.S.'s securities and futures markets.
B. An independent, not-for-profit private sector standard-setting body based in the US.
C. An organization whose members are typically securities commissions that regulate a

significant portion of the world's financial capital markets.
Q.345 Which of the following is the most appropriate description of the 'going concern' assumption?
A. T he assumption that internal controls are adequate.
B. T he assumption that the organization will operate for the foreseeable future.
C. T he assumption that the organization's financial statements reflect transactions when

they occur and not when the cash is received.
Q.436 Which of the following is least likely a fundamental qualitative characteristic given in the
Conceptual Framework for Financial Reporting?
A. Relevance.
B. Accrual basis.
C. Faithful representation.
Q.439 Which of the following bodies is least likely a core objective of the International Organization
of Securities Commissions (IOSCO)?
A. Protecting Investors.
B. Reducing unsystematic risk.
C. Ensuring that the markets are fair, efficient, and transparent.
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Q.442 Which of the following is least likely a recognized standard-setting approach?
A. Principle-based.
B. Rules-based approach.
C. Market capitalization approach.
Q.443 Which of the following is a recognized standard-setting approach?
A. Process automation
B. Objectives-oriented approach
C. Market capitalization approach
Q.444 According to the International Organization of Securities Commissions (IOSCO), which of the
following activities is least likely one of its core objectives?
A. Protection of investors.
B. Reducing systematic risk.
C. Ensuring that financial reports are prepared in accordance with specified standards.
Q.445 In which of the following cases can an asset most likely be offset against liability as per IAS
No.1?
A. Decision by CFO.
B. Required or permitted by IFRS.
C. If it results in reasonable financial statements.
17
Q.447 Anne Berry purchased an electric vaporizer to reduce the contamination in fruit juices in her
plant. She paid $550,000 to the vendor and $4,000 to another company to install the machine. She
recorded the vaporizer in her books at $554,000. Which measurement method was most likely
adopted in this case?
A. Fair value.
B. Historical cost.
C. Settlement value.
Q.1801 An analyst is analyzing Blessed Pharm, a publicly-traded pharmaceutical firm headquartered in

the US. Using only publicly available data, he wants to gain insight into the acquisition of a small
pharma distributor by Blessed Pharm. Which of the following filings will serve this purpose?
A. Footnotes.
B. Form 8-K.
C. Proxy statements.
Q.1805 Which of the following is least likely filed with the Securities and Exchange Commission
(SEC)?
A. Proxy statements.
B. Corporate press report.
C. Annual financial accounts.
Q.1845 Which of the following is the most appropriate statement regarding financial reporting
standards?
A. Financial reporting standards must remain flexible to reflect the true economics of a firm.
B. Financial reporting standards provide information related to current and potential

investors only.
C. Financial reporting standards provide inconsistency by narrowing the possible financial

statement results.
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Q.1846 Which of the following is most likely the definition of a standard-setting body?
A. A government-run organization that can enforce financial reporting standards.
B. An organization of accountants and auditors that establish financial reporting standards.
C. An organization that evaluates whether the financial statements of a company are

prepared in accordance with an applicable reporting framework.
Q.1847 Which of the following statements is least likely true regarding regulatory authorities?
A. T he US Securities and Exchange Commission (SEC) is a regulatory authority.
B. Regulatory authorities are government-run organizations that can enforce financial

reporting standards.
C. Regulatory authorities can also be non-government-run organizations with the legal

authority to enforce compliance with financial reporting standards.
Q.1848 Which of the following reporting standards are most likely set by the Financial Accounting
Standard Board?
A. IASB.
B. US GAAP.
C. IFRS Foundation.
Q.1849 Which of the following is the least desirable attribute of standard-setting bodies?
Standard-setting bodies must:
A. observe high professional standards.
B. have a clear and consistent standard-setting process.
C. operate independently without seeking input from stakeholders.
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Q.1850 Which of the following organizations has the objective of reducing systematic risk?
A. International Accounting Standards Board.
B. International Financial Reporting Standards.
C. International Organization of Securities Commission.
Q.1852 Which of the following in SEC filing most likely required for firms in the United States of
America to file before selling new securities to the public?
A. Form S-1.
B. Form 10-Q.
C. Form DEF 14A.
Q.1857 Which of the following standard-setting bodies most likely base its accounting standards on
"Conceptual Framework for Financial Reporting"?
A. IASB.
B. FASB.
C. Both IASB and FASB.
Q.1858 Which of the following financial reporting standards are set by the International Accounting
Standard Board?
A. IFRS.
B. IASB.
C. US GAAP.
20
Q.1861 Which of the following is least likely a fundamental qualitative characteristic identified by the
Conceptual Framework that makes the financial information useful?
A. Relevance.
B. Understandability.
C. Faithful representation.
Q.1863 Based on Conceptual Framework, which of the following elements of financial statements is
most likely related to the measurement of the financial position and is an obligation that requires the
outflow of economic resources?
A. Assets.
B. Expenses.
C. Liabilities.
Q.1865 T he amount a firm could currently recover by selling its asset in an orderly manner is best
described as the:
A. present value.
B. amortized cost.
C. realizable value.
Q.1866 Milan-Ronaldo Inc. is a purchasing agent of antique paintings in the Detroit area. T he firm has
found a seller named Mr. X ready to sell a World War II painting to Milan- Ronaldo Inc. at the mutually
agreed price of $15 million. T he painting was sold to Mr. X a few years ago for $17 million, but
because Mr. X has legal issues, he is willing to let it go for less. T he most appropriate term for the
price at which the transaction will take place is:
A. fair value.
B. present value.
C. amortized cost.
21
Q.1867 Which of the following is most likely the most important underlying assumptions of financial
statements?
A. Comparability and verifiability.
B. Relevance and faithful representation.
C. Going concern and accrual accounting.
Q.1871 Guzel Corp. is a firm that wants to list its shares in the United States but presents its
financial statements according to T urkish GAAP. In order to list its shares, Guzel Corp. is most likely
required to reconcile its financial statements to:
A. IFRS.
B. US GAAP.
C. T urkish GAAP.
22
Reading 17: Understanding Income Statement
Q.261 Which of the following valuation methods is least likely used under IFRS accounting standards?
A. Weighted average.
B. Last in, first-out (LIFO).
C. First in, first-out (FIFO).
Q.264 ABC Company has a net income of $11 million from January 1st, 2016, to December 31st,
2016. On January 1st, 2016, it had 1 million shares outstanding, and the company bought back 200,000
shares on October 1st, 2016. ABC's earnings per share for the fiscal year of 2016 is closest to:
A. $6.11
B. $10.48
C. $11.58
Q.265 ABC Corp reported a net income of $3 million for 2018. T here are currently 2 million shares
outstanding, and upper management holds 200,000 share options, which are likely to be exercised.
No other potentially dilutive financial instruments ABC Corp's diluted EPS is closest to:
A. $1.36
B. $1.50
C. $1.67
Q.266 Unrealized gains and losses on derivative contracts used for hedging are least likely part of the:
A. net income.
B. comprehensive income.
C. other comprehensive income.
23
Q.267 A company has reported the following for the year 2015:
Revenue $500,000
Expenses $250,000
Dividends Paid $40,000
Gains from Available-for-sale Securities $24,000
Loss on Foreign Currency T ransactions $2,100
T he company's total comprehensive income for the year 2015 is closest to:
A. $21,900.
B. $247,900.
C. $271,900.
Q.349 Which of the following will most likely be included in the total number of shares while
calculating diluted earnings per share?
A. Secured creditors.
B. Stock options (if dilutive).
C. T he number of shares calculated by dividing outstanding tax dues by the market price per
share.
Q.448 For its fiscal year-end, Brighter World Limited, a manufacturer of personal computers,
reported a net income of $800 million and a weighted average of 80,000,000 common shares
outstanding. At the moment, there is a total of 4,000,000 convertible preferred shares outstanding
that paid an annual dividend of $8. Given that each preferred share is convertible into two shares of
the common stock, the diluted EPS is closest to:
A. $8.72
B. $9.09
C. $10.67
24
Q.449 During 2018, Smart Electronics, SE, which began business in August of that year, purchased
10,000 units of a microchip for $250 per unit in August. T he microchip sold well in August. In
anticipation of heavy sales in the last four months of 2018, SE purchased 50,000 additional units at
the beginning of September for $265 per unit. During 2018, SE managed to sell a total of 22,000 units
for $299 per unit. Under the first-in, first-out (FIFO) method, what is SE's cost of goods sold for
2018?
A. $5,680,000
B. $5,775,000
C. $5,830,000
Q.453 ABC Company purchased machinery on the first day of the fiscal year for $767,000. T he
useful life of the asset is 10 years, and the terminal value is $17,000.T he amount of depreciation to
be charged using the straight-line method on an annual basis is closest to:
A. $75,000
B. $76,700
C. $78,400
Q.457 Which of the following approach is most likely to be adopted during the analysis if the
warranty expense in relation to sales of two identical companies is substantially different?
A. Adjust the financials to increase the warranty expense to a higher level.
B. Adjust the financials to decrease the warranty expense to a lower level.
C. Review the trend of warranty claims received by the two companies and assess the need
for adjustments.
Q.459 Which of the following is most likely an example of expenses grouped by nature?
A. Expenses.
B. Depreciation.
C. Cost of goods sold.
25
Q.1921 Peta Inc. has 80% controlling interest in Tower Corp. T he 20% interest not controlled by
Peta will be reported in (on) the:
A. balance sheet of Tower Corp.
B. income statement of Peta Inc.
C. income Statement of Tower Corp.
Q.1922 Jay Sinha is evaluating an income statement of a firm that presents accounts like Gross
profit, EBIT DA, EBIT, and net income. Which of the following is most likely the format of this
Income Statement?
A. Multi-step Income Statement.
B. Single-step Income Statement.
C. Common-size Income Statement.
Q.1923 Which of the following statements is most likely accurate?
A. Under the accrual method of accounting, revenues are recognized when earned, and
expenses are recognized when paid.
B. Under the accrual method of accounting, revenues are recognized when received, and
expenses are recognized when paid.
C. Under the accrual method of accounting, revenues are recognized when earned, and
expenses are recognized when incurred.
Q.1927 Peta Inc. has 80% controlling interest in Tower Corp. T he 20% share of income not owned
by Peta will be reported in Peta's Income Statement as a:
A. Minority interest.
B. Controlling interest.
C. Uncollectible revenue.
26
Q.1928 Josplay Inc. a cosmetic manufacturing company had the following information related to sale
of products in 2021 which was its inception year:
Total Revenue $2, 000, 000

Returns of goods sold $300, 000
Total cash collected $1, 500, 000
Cost of goods sold $800, 000
Assuming the accrual basis of accounting, the net revenue for Josplay Inc. is closest to ?
A. $1 million.
B. $1.2 million.
C. $1.7 million.
Q.1930 DADA Engineering is a construction firm based in India that has undertaken a long-term
contract to build a conveyer belt for a client in 4 years for $10 million. T he total cost of the project
is $6 million, as given in the following table 1.
Table 1
Year 1 $2,000,000
Year 2 $1,500,000
Year 3 $500,000
Year 4 $2,000,000
T he net income for the 1st year of the project is closest to:
A. $1.33 million
B. $3.33 million
C. $4 million
27
Q.1939 Which of the following is least likely a step of the converged five-step revenue recognition
process provided by the IASB and FASB?
A. Determine the transaction price.
B. Identify the separate performance obligations in the contract.
C. Subsequently, recognize the revenue after determining the transaction price.
Q.1942 Durbin Surgicals is a surgical instrument manufacturing firm based in Paris. Assuming it
follows IFRS, which of the following is least likely an inventory cost recognition method available to
Durbin?
A. LIFO.
B. FIFO.
C. Weighted average method.
Q.1951 Data Factory is a data processing firm that has just bought a new building for $2 million with a
useful life of 8 years and a salvage value of $150,000. Using the straight-line method of depreciation,
the accumulated depreciation at the end of the 3rd year is closest to:
A. $231,250.
B. $462,500.
C. $693,750.
Q.1953 Cloud 89 is a cloud data-storage provider that just purchased a patent worth $2 million. Which
of the following method is most appropriate to allocate the cost of the patent?
A. Straight-line depreciation.
B. Straight-line amortization.
C. Double-declining balance method.
28
Q.1954 Which of the following will most likely result in the lowest net income in the initial stages of
production?
A. T he firm delays the recognition of its expenses.
B. T he firm uses the double-declining balance method of depreciation.
C. T he firm uses the FIFO inventory method in an inflationary environment.
Q.1955 Which of the following is the most appropriate definition of extraordinary items?
A. Income statement items that are usual in nature and infrequent in occurrence.
B. Income statement items that are unusual in nature and frequent in occurrence.
C. Income statement items that are unusual in nature and infrequent in occurrence.
Q.1956 Entity A uses the straight-line depreciation method, while entity Z uses the double-declining
method of depreciation. Which entity will have the highest total depreciation expense over the
useful life of an asset?
A. Entity A will have a higher total depreciation expense.
B. Entity Z will have a higher total depreciation expense.
C. Both the entities will have the same total depreciation expense.
Q.1957 Baku Mart, a chain of hypermarkets, reported a net income of $400,000 and paid cash
dividends of $260,000 to preferred stockholders for the year 2016. At the beginning of 2016, Baku
had 8,000 shares of common stock outstanding, but the firm issued 3,000 new shares on November
1st, 2016. Given this information, the basic EPS of Baku Mart is closest to:
A. $12.73
B. $16.47
C. $48.06
29
Q.1958 A firm has 10,000 shares of common stocks outstanding. Which of the following options will
result in the highest number of total shares outstanding?
A. A 2-for-1 stock split.
B. A 5-for-4 stock split.
C. A 60% stock dividend.
Q.1959 AHZ Corp. has had a net income of $150,000 for the year 2016. T he company had an average
of 100,000 common shares and 1,500 preferred shares outstanding for the entire year. Assuming that
each share of preferred stock is convertible into 20 shares of common stock, the diluted EPS is
closest to:
A. $1.15.
B. $1.50.
C. $2.14.
Q.1960 AHZ Corp. has a net income of $150,000 and paid preferred dividends of $30,000. T he firm
had 100,000 common shares and 1,500 preferred shares outstanding for the entire year. Assuming
that each share of preferred stock is converted into 20 shares of common stock, which of the
following statements is most accurate regarding the earnings per share of AHZ Corp.?
A. T he EPS is dilutive because the EPS after the conversion is less than the basic EPS.
B. T he EPS is dilutive because the EPS after the conversion is greater than the basic EPS.
C. T he EPS is anti-dilutive because the EPS after the conversion is greater than the basic
EPS.
Q.3754 At the beginning of 2019, ABC Company issued 120,000 common shares. If it issued an
additional 30,000 shares on March 1st and did a 2 for 1 stock split on Aguust 1st, the weighted average
number of shares outstanding is closest to:
A. 145,000
B. 207,500
C. 290,000
30
Q.3755 A company has reported the following for the year 2018:
Comprehensive Income - $ 305,000
Dividends paid - $ 70,000
Retained earnings (ending) - $ 921,000
Retained earnings (beginning) – $ 680,000
Calculate the Company's Other Comprehensive Income (OCI).
A. -6,000
B. 134,000
C. 616,000
Q.3756 T wo companies, A and B, recorded the below information.
Company A Company B
Sales $10.1 million $13.4 million
Cost of Goods sold $4.6 million $6.6 million
Administration costs $0.8 million $0.6 million
Rent expense $0.1 million $0.2 million
Research expense $0.4 million $0.3 million
T he information above suggests that:
A. Company B has a higher gross margin as compared to company A.
B. Company B has a gross margin of 51%, while company A has an operating margin of 42%.
C. Company A has an operating margin of 43%, while Company B has an operating margin of
41%.
31
Q.3757 A company reported an $800,000 unrealized holding gain on foreign currency translation
adjustments and a $200,000 unrealized gain on securities held for trading. Determine the Other
Comprehensive Income of the company.
A. $200,000
B. $800,000
C. $100,0000
Q.3758 75% of Company Y is owned by Company X. What percent of company Y’s revenues and
expenses will be included in Company X’s income statement?
A. 0%
B. 75%
C. 100%
Q.3759 For its fiscal year-end 2018, Zee Diners recorded the following:
Beginning Shareholders' equity - $385 million
Ending Shareholders' Equity - $395 million
Dividends paid - $1 million
Comprehensive income - $14.5 Million
Zee Diners’ Other Comprehensive Income is closest to:
A. 3.5 Million
B. 11 Million
C. 25.5 Million
32
Q.3760 During 2018, ABC Company had 1,000,000 average outstanding common shares and 150,000
outstanding options. T he options were priced at $10 each. T he average stock price of ABC Company
during the year was $20. T he number of shares used in the denominator for the calculation of ABC's
diluted EPS is closest to:
A. 1,000,000
B. 1,075,000
C. 1,150,000
Q.3761 A US-based company prepares its financial statements per US GAAP. In 2019, the company
recorded $70,000 in revenue. If the company’s cost of goods sold was $42,000, and the operating and
restructuring expenses were $5,000 and $ 2,500 respectively. T he company's operating profit is
closest to:
A. $20,500
B. $23,000
C. $28,000
Q.3762 In 2019, MMU Actuaries reported a net income of $35 million, a weighted average of
2,000,000 common shares outstanding, and 200,000 options outstanding with an average exercise
price of $10. T he company paid $5 million in preferred dividends. T he company's average market
price over the year was $25. T he company's diluted EPS (using the treasury stock method) is closest
to:
A. 14.15
B. 15
C. 16.51
33
Q.3763 ABC Company’s gross, operating, and net profit margin for 2015 was 61.5%, 25%, and
16.51%. For the year 2016, use the financial data below to determine the profitability ratio that had
the largest increase.
Metric Current year (%)

Revenue 100
Cost of goods sold 37.2
Interest expense 4.4
Research expense 5.3
Selling and General Expenses 31.7
Income Tax Rate 22
A. Net profit margin.
B. Gross profit margin.
C. Operating profit margin.
Q.3764 A sales agent receives a commission of 30% for any items sold. If he sold items worth $
3,000,000 in 2019, how much revenue should he report on his income Statement?
A. $900,000
B. $2,100,000
C. $3,000,000
Q.3765 During its first year of business, Cute House, a clothes manufacturing company, recorded the
following:
Revenue $4, 356, 000

Returns of goods sold $1, 234, 500
Cash collected $3, 851, 000
Cost of goods sold $3, 500, 000
T he net revenue reported on Cute House’s income statement iscloset to:
A. $856,000
B. $3,121,500
C. $4,356,000
34
Q.3767 LAGIE chemicals had the following information in their income statement.
Revenue $38, 500, 000

Operating expenses $835, 000
Interest expense $532, 000
Tax expense $389, 000
LAGIE’s gross profit margin is closest to:
A. 0.6349
B. 0.6805
C. 26,200,000
Q.3768 T he table below represents the information available on a company for the year 2019.
Net Income $2, 000, 000

T he average number of common shares outstanding 200,000
Convertible preferred shares outstanding 4,000
Dividend/Share $20
Convertible bonds, $100 face value per bond $100,000
T he bond coupon and the corporate tax rate are 8% and 40%, respectively. Each preferred share is
converted into 50 common shares and each bond into 30 common shares. T he company's diluted EPS
is closest to:
A. 4.66
B. 5.00
C. 6.00
35
Q.3769 In 2018, XYZ Corporation recorded a net income of $30 million. It paid its preference
shareholders a dividend of $15 million. T he Corporation had 300,000 outstanding common shares and
100,000 outstanding preference shares at the end of the year. Assume that each preferred share is
convertible to 4 common shares. T he diluted EPS of XYZ Corporation is closest to:
A. 21.43
B. 42.85
C. 50
Q.3770 A doughnut manufacturing company acquired a doughnut-making machine at the beginning of

2019 at the cost of $500,000. T he machine has a salvage value of $50,000 and a useful life of 5 years.
Using the straight-line method, the depreciation amount for the year 2020 is closest to:
A. $90,000
B. $410,000
C. $450,000

2020 at $500,000. T he machine has a residual value of $50,000 and a useful life of 5 years. Using the
double-declining method, the depreciation for 2021 is closest to:
A. 72,000.
B. 120,000.
C. 200,000.

2019 at $500,000. T he machine has a residual value of 50,000 and a useful life of 5 years. Using the
double-declining method, the depreciation in the fifth year for financial reporting purposes is closest
to:
A. 14,800
B. 25,920
C. 43,200
36
Q.3837 Which of the following expenses is least likely deducted from gross profit to obtain operating
profit for non-financial companies?
A. Selling expenses.
B. Interest expenses.
C. Administrative expenses.
Q.3839 Which of the following statement(s) is least likely to be true with regard to income and
expenses on the income statement?
A. Expenses may be grouped by their nature but not by function.
B. T he definition of income encompasses both revenues and gains.
C. Expenses reflect outflows, depletions of assets, and incurrences of liabilities in the

course of the activities of a business.
Q.3841 Consider the following information on Charlie's Company, for the year ended December 31st,
2015:
Outstanding shares January 1st,2015 5, 000, 000

Stock options outstanding January 1st, 2015 150, 000 Exercise price : $10.00
Shares issued March 1st, 2015 450, 000
Shares repurchased July 1st, 2015 120, 000
Average market price of common shares $42/shares
Net income (2015) $5, 500, 000
Charlie’s diluted EPS is closest to:
A. 0.99
B. 1.00
C. 1.01
37
Q.3852 Under which accounting standards are unrealized gains and losses on available-for-sale
securities most likely reflected in the income statement?
A. IFRS.
B. US GAAP.
C. Neither US GAAP nor IFRS,
38
Reading 18: Understanding Balance Sheet
Q.270 ABC Corp has a high working capital compared to its industry, which means that it most likely
has:
A. a liquidity problem.
B. inefficient use of funds.
C. an efficient use of funds.
Q.271 Gino Corp.'s inventory has been bought for $8 million by ACA Inc. and is predicted to be sold
for $18 million. Both firms report under IFRS, and the net realizable value of the inventory is
assumed to be $9 million. On the balance sheet of ACA Inc., inventories should most likely be shown
at:
A. $8 million.
B. $9 million.
C. $10 million.
Q.272 One year ago, Malzhem Inc. bought a corporate bond for $1,000 and classified it as available
for sale. It collected $50 in coupons, and the bond is now worth $1,040. On its balance sheet,
Malzhem Inc. most likely should show for this bond the value of:
A. $1,000.
B. $1,040.
C. $1,090.
Q.273 Under IFRS, minority interests should be shown in the:
A. assets section.
B. equity section.
C. liabilities section.
39
Q.462 T he financial statements of a small company show the following accounts at the end of the
year 2016:
Property, Plant, and Equipment (PPE) $342,999

Accounts Receivable $129,898
Inventory $129,898
Bond issued at 7% $100,000
Current Liabilities $308,898
Note: T he bond was issued in 2016. T he interest due on the bond has neither been paid nor recorded
in the books yet.
Note 2: T he values of inventories and accounts receivable are the same.
Given the information, the Financial leverage for the firm is closest to:
A. 2.54.
B. 3.11.
C. 3.23
Q.464 In which of the following situation would the accounting equation 'Assets = Liabilities +
Equity' most likely not hold?
A. Window Dressing.
B. No case. Accounting equation will always remain balanced.
C. Depression in the economy resulting in a reduction of the market value of assets.
Q.465 Which of the following would most likely be shown first if the company follows a liquidity-
based presentation for their balance sheet?
A. Land-use rights.
B. Debt securities are classified as receivables.
C. Financial assets are held under resale agreements.
40
Q.466 Which of the following is least likely a marketable security?
A. T reasury Bills.
B. Promissory notes.
C. Mutual fund shares.
Q.468 Jason Inc. paid $430,000 for a liability insurance product for the period June 01, 2015, to May
31, 2016. T he payment was made on July 01, 2015. Jason Inc. expects that all of the product sales
would take place during the period Jan'16 to May'16. Which of the following most likely denotes the
best approximate value of the prepaid insurance as of December 31, 2015?
A. $179,167
B. $250,833
C. $430,000
Q.469 Which of the following will most likely increase allowances for doubtful debts in absolute
terms?
A. Stricter credit policies.
B. An increase in insurance against potential defaults.
C. A decrease in the percentage of sales on a cash basis.
Q.470 Which of the following inventory valuation is least likely adopted by a company following
IFRS?
A. First In, First Out (FIFO).
B. Last In, First Out (LIFO).
C. Weighted Average Cost (WAC).
41
Q.471 Mansion LLC has a spare machine that is not used currently in the production of goods due to
the shortage of demand. Under which of the following categories will the machine most likely be
classified?
A. Inventory.
B. Investment property.
C. Property, plant, and equipment (PPE),
Q.1962 Which of the following equations is most likely a balance sheet equation?
A. Equity = Total Assets + Debt - Liabilities.
B. Equity = Current Assets + Fixed Assets + Liabilities.
C. Equity = Current Assets - Current Liabilities + Fixed Assets - Fixed Liabilities.
Q.1963 Which of the following items is least likely to appear on the balance sheet?
A. Retained income.
B. Minority interest.
C. Defined contribution pension cost.
Q.1965 Orange Corp is a firm based in Silicon Valley reporting under US GAAP. Which balance sheet
format is Orange Corp. most likely required to present?
A. Classified balance sheet format.
B. Liquidity-based balance sheet format.
C. Either the classified balance sheet format or the liquidity-based balance sheet format.
42
Q.1966 PowerPivot is an automotive firm based in Lithuania. Using the information given in the
following table, calculate the working capital of the firm.
Account Amount (in million $)

Cash 10
Inventory 5.5
Property, Plant and Equipment 35.15
Current Liabilities 8.5
Long-term Debt 14.65
A. $7 million.
B. $27.5 million.
C. $42.15 million.
Q.1969 A firm following IFRS reports its inventory with the carrying value of $450,000. If the net
realizable value of inventory is $500,000, then the amount of the gain/loss on write-down of
inventory is closest to:
A. $0.
B. a $50,000 loss.
C. a $50,000 gain
Q.1971 Core Corp. has an inventory with a carrying value of $12,000 with the additional data given
below.
Selling Price $8,000

Selling Cost $1,500
Normal Profit $2,000
Replacement Cost $5,500
T he current inventory value after adjustments if Core reports under IFRS is closest to:
A. $4,500
B. $5,500
C. $6,500
43
Q.1973 Core Corp. has an inventory that was written down to $6,500. Due to a shortage in supply,
the Net Realizable Value of inventory increased to $8,000. T he value of write-up of inventory if
Core Corp reports under US GAAP is closest to:
A. $0
B. $1,500
C. $14,500
Q.1974 Which of the following is the most appropriate statement regarding deferred tax assets?
A. Deferred tax assets are created when the amount of tax expense exceeds the amount of
taxes payable.
B. Deferred tax assets are created when the amount of taxes payable exceeds the amount of
tax expense in the income statement.
C. Deferred tax assets are created when the amount of taxes payable is equal to the amount
of taxes expense in the income statement.
Q.1975 Which of the following non-current assets is least likely to be reported at its depreciated
cost?
A. Land.
B. Building.
C. Equipment.
Q.1976 Which of the following Property, Plant & Equipment (PP&E) cost models are allowed under
IFRS?
A. Cost model only.
B. Revaluation model only.
C. Cost model and Revaluation model.
44
Q.1977 Which of the following is the least likely an identifiable intangible asset?
A. Patents.
B. Goodwill.
C. Copyrights.
Q.1978 Everest Bank is analysing D-Corp to measure its ability to pay off a long-term debt that D-
Corp has recently applied for. Which of the following analyses will serve this purpose?
A. Solvency analysis.
B. Liquidity analysis.
C. Profitability analysis.
Q.1979 T rance Inc. purchased outstanding stocks of Deep House Corp. for $675 million. Some
financial accounts of Deep House Corp. are provided in the following table:

Cash 200
Inventory 50
Property, Plant and Equipment 480
Short-term Liabilities 80
Long-term Liabilities 150
Common Equity 500
If the fair value of the plant is $125 million higher than its book value, the amount of goodwill that
T rance Inc. paid is closest to:
A. $50 million.
B. $125 million.
C. $175 million.
45
Q.1981 T rance Inc. purchased outstanding stocks of Deep House Corp for $450 million. T he
following table is an excerpt of Deep House's balance sheet., calculate the amount of goodwill or the
amount of gain on the purchase of Deep House's stocks if the fair value of the assets of Deep House
is equal to its book value.

Cash 200
Inventory 50
Property, Plant and Equipment 480
Short-term Liabilities 80
Long-term Liabilities 150
Common Equity 500
If Deep House's fair value is equal to its book value, the amount of goodwill or the amount of gain on
the purchase of Deep House's stocks is closest to:
A. Goodwill of $50 million is recognized on the balance sheet.
B. A loss of $50 million is recognized in the income statement.
C. A gain of $50 million is recognized in the income statement.
Q.1982 Which of the following is most appropriate statement regarding financial assets?
A. Available-for-sale securities are reported on the balance sheet at their amortized cost.
B. Held-to-maturity assets are stocks acquired with the intent of holding them until maturity.
C. T rading securities are debt, and equity securities acquired with the intent of selling them
within a short period of time.
Q.1983 Which of the following financial assets are least likely reported at their fair value on the
balance sheet?
A. Held-for-trading securities.
B. Held-to-maturity securities
C. Available-for-sale securities.
46
Q.1984 At the beginning of the year, Black Jet Co. purchased a 5-year 7.5% bond at the par value of
$1,000. Due to an increase in interest rates, the value of the bond has decreased by $135. If Black Jet
recognized the bond as an available-for-sale security, the value of the bond will be reported on the
balance sheet is closest to:
A. $75
B. $135
C. $865
Q.1986 A firm purchased a 3-year callable bond for $950 with the intent of making a profit in the
short term. After the first year of holding the security, the value of the bond has decreased to $890.
Determine the appropriate treatment of the amount of the loss on the bond.
A. No loss will be recognized.
B. A loss of $60 will be recognized in the income statement.
C. A loss of $60 will be recognized in changes in stockholders equity.
Q.1988 Which of the following is the most appropriate term for the difference between the number
of shares issued by a firm and the number of shares repurchased by the firm for treasury purposes?
A. Issued Shares.
B. Authorized Shares.
C. Outstanding shares.
Q.1989 Manilla Johnson is preparing accounts for One Corp., whose capital structure consists of
50% bonds, 40% common shares, and 10% mandatorily redeemable preferred stocks. In which of the
following options can Johnson most likely classify the preferred stocks?
A. Mandatorily redeemable preferred stocks can only be classified as debt.
B. Mandatorily redeemable preferred stocks can only be classified as equity.
C. Mandatorily redeemable preferred stocks can either be classified as debt or equity.
47
Q.1992 Simon Belfast, an equity analyst, analyzes two market leaders (Sun Corp. & Moon Inc.) in the
automotive industry. As such, he collected the following data.
Sun Corp. Moon Inc.

Cash 250,000 410,000
Marketable Securities 380,000 240,000
Inventory 220,000 550,000
PP&E 650,000 1,300,000
Short-term Liabilities 300,000 300,000
Long-term Liabilities 700,000 400,000
Common equity 500,000 1,800,000
T he Sun Corp's cash ratio is closest to:

A. 0.63
B. 2.10
C. 2.83
Q.1993 Simon Belfast, an equity analyst, is analyzing two market leaders (Sun Corp. & Moon Inc.) in
the automotive industry. Using the data given in the following table, calculate Moon Inc's debt ratio.
Sun Corp. Moon Inc.

Cash 250,000 410,000
Inventory 220,000 550,000
PP&E 650,000 1,300,000
Common equity 500,000 1,800,000
A. 0.16
B. 0.28
C. 0.48
48
Q.1994 Simon Belfast, an equity analyst, is analyzing two market leaders (Sun Corp. & Moon Inc.) in
the automotive industry. Using the data given in the following table, determine which firm is more
liquid based on current ratios.
Sun Corp. Moon Inc.

Cash 250,000 410,000
Inventory 220,000 550,000
PP&E 650,000 1,300,000
Common equity 500,000 1,800,000
A. Sun Corp is more liquid because its current ratio is 2.83.
B. Moon Inc. is more liquid because its current Ratio is 4.
C. Moon Inc. is more liquid because its current ratio is 2.83.
Q.1995 Which of the following is most likely a conservative liquidity ratio?
A. Cash Ratio.
B. Quick Ratio.
C. Current Ratio.
Q.1996 Identify an appropriate term for the number of shares a company can sell according to the
capital clause mentioned in its Articles of Incorporation.
A. Issued capital.
B. Authorized capital.
C. Contributed Capital.
49
Q.3810 A company had a $50 million allowance for doubtful accounts in the year 2018. T he amount
increased to $100 million in 2019. If the Company wrote off $ 40 million in 2018 and $ 80 million in
2019, the company's bad debt expenses in 2019 is closest to:
A. $50 million.
B. $100 million.
C. $130 million.
Q.3811 In 2018, the cash, quick and current ratios of a company were 2.09, 3.10, and 2.29
respectively. Below is select information from the balance sheet of the Company in 2019. Determine
the ratio that most likely decreased.
Amount in Millions
Cash and Cash Equivalents 102.0
Marketable Securities 369.5
Accounts Receivables 13.5
Other Current Assets 123
Total Current Assets 608
Accrued Interests and Expenses 92.0
Other Current Liabilities 103.0
Total Current Liabilities 195.0
A. Cash Ratio.
B. Quick Ratio,
C. Current Ratio.
Q.3812 Calculate the financial leverage of a company based on the data below.
Working Capital $70 Million

Non-Current Assets $245 Million
Equity $180 Million
Current Ratio 2.0
A. 0.78
B. 1.36
C. 2.14
50
Q.3813 Below is select information lifted from the balance sheet of a company. Total Liabilities -
$100 Million Total Shareholders’ Equity - $150 Million On a vertical common size balance sheet, total
liabilities will be represented by a percentage close to:
A. 0.4
B. 0.6
C. 0.7
Q.3814 Select information from a company's 2018 balance sheet is as follows:
Cash and cash equivalents $500 Million

Marketable Securities $200 Million
Accounts Receivables $100 Million
Inventories $400 Million
Goodwill $800 Million
Long Term Debt $700 Million
Total Current Liabilities $900 Million
If the current ratio of the company in 2017 was 1.50, its ability to meet its short-term obligations has
most likely ?
A. Increased.
B. Decreased.
C. Remained the same.
51
Q.3815 T he data below is available on a company for its current financial year.
Allowance for doubtful Accounts, 1st January $142, 000

Write-offs during the year $90, 000
Bad debts expense recognized during the year $145, 000
Accounts Receivables Balance as at 31st December $600, 000
If at year-end it is discovered that the appropriate allowance for doubtful accounts is 25% of the
accounts receivables balance, the most appropriate year-end adjustment to the allowance for
doubtful accounts will be a(n):
A. Increase of $47,000.
B. Decrease of $47,000
C. Decrease of $137,000
Q.3816 Calculate the percentage that will be represented by shareholders’ equity on a vertical
common size balance sheet based on the information below.
Liabilities of a company - $ 40 Million
Shareholders' equity - $ 25 Million
A. 0.385
B. 0.615
C. 0.625
52
Q.3817 Consider the information below.
Long Term Debt – $30 Million
Current Liabilities - $20 Million
Total equity – $50 Million
Current Assets –$35 Million
Non-Current Assets – $65 Million
What can be concluded from the information?
A. T he total debt ratio of the Company is 0.6.
B. T he financial leverage of the Company is 1.
C. T he debt-to-equity percentage of the Company is 1.
Q.3838 Which of the following financial assets is least likely measured at cost or amortized cost?
A. Unquoted equity instruments.
B. Held-to-maturity instruments.
C. Derivatives, whether stand-alone or embedded in non-derivative instruments.
53
Reading 19: Understanding Cashflow Statement
Q.275 Buying a preferred stock from another company is an example of:
A. financing activities.
B. investing activities.
C. operating activities.
Q.276 Under the IFRS Framework, a company could put the dividends it paid into two different
categories. Which of these is not one of the categories it could put it in?
A. financing activities.
B. investing activities.
C. operating activities.
Q.277 A small manufacturing firm adhering to US GAAP reported the following:
Net Income $600,000

Non-cash Charges $25,000
Interest Expense $30,000
Capital Expenditures $21,000
Tax Rate 20%
T he company's free cash flow to the firm (FCFF) is closest to:

A. $604,000.
B. $628,000.
C. $634,000.
54
Q.338 Capital obtained from shareholders on the last day of the fiscal year is used to purchase
machinery on the same day. Which of the following statements is most likely accurate?
A. T he transaction impacts cash flows from investing activities only.
B. T he transaction impacts cash flows from investing and financing activities.
C. T he transaction impacts cash flows from investing and operating activities due to
additional depreciation.
Q.472 FRJ Inc. is a firm operating in the Netherlands. In 2016, the cash flows were presented using
the direct method. T he cash flow from financing activities showed $145,000 for the year, and the
cash flow from investing activities showed $290,000. T he accountant of the firm now wants to
change the method of presenting cash flows for the year 2016. If interest income received amounted
to $5,000 under the direct method, what will be the new values under the indirect method?
A. Unchanged.
B. Cash flow from investing activities: $140,000

Cash flow from financing activities: $295,000
C. Cash flow from investing activities: $150,000

Cash flow from financing activities: $285,000
Q.473 Zwing, a company operating shuttle services for corporations, has made total sales worth $46
million in 2016. If the debtors at the beginning of the year exceeded the debtors at the end of the
year by $4 million, then the amount of cash Zwing most likely received from its customers is closest
to:
A. $42 million.
B. $46 million.
C. $50 million.
Q.474 Which of the following statements is least likely accurate?
A. US GAAP allows the recognition of interest expenses as operating or financing expenses.
B. IFRS allows the recognition of interest expenses as operating or financing expenses.
C. Interest expenses are always classified as operating activity under US GAAP.
55
Q.475 An analyst gathered the following data on YMU Corp. for the year 2009:
Free cash flow to the firm: $90 million

Net income: $80 million
Depreciation: $30 million
Capital expenditure: $20 million
Tax rate: 36%
No change in working capital
For the year 2009, the interest expense is closest to:
A. $0.
B. $160 million.
C. $222 million.
Q.476 Which of the following is most likely a coverage ratio?
A. Reinvestment ratio.
B. Cash to income ratio.
C. Cash return on assets.
56
Q.477 T he accountant of a small firm has recorded the following information for the year 2016:
Book value of plant, property and equipment (PPE) $100, 000

at the beginning of the year:
Book value of plant, property and $130, 000
equipment (PPE) at the end of the year:
Sale of a plant during the year $8, 000
T he book value of the plant on the date of the sale $15, 000
Depreciation charged during the year: $20, 000
From the given data, the cash flow from investing activities is closest to a:
A. cash inflow of $8,000.
B. cash inflow of $15,000.
C. cash outflow of $57,000.
Q.478 Alpha LLC created a provision for doubtful debts for the year 2014. How should this provision
for doubtful debts be treated while preparing operating cash flows under the indirect method? T he
doubtful debt is most likely
A. Added to net income.
B. Deducted from net income.
C. Neither added nor deducted from net income.
Q.480 T wo companies have the same cash inflow from operating activities and the same number of
equity shares. However, the cash flow per share for the two companies is not the same. If both
companies follow IFRS, then which of the following is most likely a possible reason for the
difference?
A. Different applicable tax rates.
B. Different preferred dividends.
C. Different paid-up value of shares
57
Q.481 Which of the following is the least likely approach for preparing common-size statements of
cash flow?
A. Revenue method.
B. Net revenue method.
C. Total cash inflows/outflows method.
Q.2058 T ransactions related to the sale or purchase of used plants and equipment is most likely
classified as:
A. Cash flow from operating activities.
B. Cash flow from investing activities.
C. Cash flow from financing activities.
Q.2060 Global Gaming is a Nevada-based casino that reports its financial information under US GAAP.
Global is expected to receive a dividend income from its investments in a German club called Golf
Co., which follows IFRS. What is the most likely impact of the dividend on the cash flow statement
of Global Gaming?
A. An increase in cash flow from investing activities.
B. An increase in cash flow from operations activities.
C. An increase in cash flow from either operating or investing activities.
Q.2061 Vital Foods is a subsidiary of Vital Holdings. Assuming that Vital Foods exchange its debt for
equity in Vital Holdings to adjust its capital structure, determine the most likely impact of this
transaction on the cash flow statement of Vital Foods.
A. No impact on cash flows.
B. Increased cash flow from investing activities.
C. Decreased cash flow from investing activities.
58
Q.2062 Firm A reports under US GAAP, and Firm B follows IFRS. Both firms sell identical assets held
for investment purposes for the same price of $2.5 million. Assuming that the income tax on the sale
of the investment is $275,000, which firm is most likely to report lower cash flows from operating
activities?
A. Firm A.
B. Firm B.
C. Both firms will always have identical cash flows from operations.
Q.2063 Which of the following is least likely accurate regarding the presentation of cash flow
statements?
A. In the direct method, we start by listing cash payments and receipts.
B. Under the direct method, adjustments related to depreciation and amortization are
necessary.
C. T he starting point of the indirect method of presenting the statement of cash flows is
''Net income.''
Q.2066 Consider a plant with the beginning gross value of $500,000, the Ending gross value of
$700,000, and the Gross cost of $175,000. Calculate the cash flow from investing activities for the
plant.
A. $325,000
B. $375,000
C. $700,000
Q.2068 Petrobras, an oil shipping company, reported interest expense of $24 million and taxes of $10
million. Interest payable increased by $8 million, while taxes payable decreased by $3 million over
the period. How much cash did the company pay for interest and taxes?
A. $16 million for interest and $7 million for taxes.
B. $16 million for interest and $13 million for taxes.
C. $32 million for interest and $13 million for taxes.
59
Q.2069 Assume, for this question, that Alaska Tex recently changed its accounting standard from US
GAAP to IFRS and earned $500,000 in net income in 2016. T he interest expenses are related to
financing activity. Using the accounts given in the following table, calculate the cash flow from
operations using the indirect method after making appropriate adjustments to net income.
2016 2015
Depreciation Exp. 100,000 80,000
Gain on Sale of Land 55,000
Interest Exp. 37,000 22,000
Plant 450,000 370,000
Accounts Receivable 170,000 135,000
Inventory 90,000 115,000
Wages Payable 87,000 69,000
Taxes Payable 85,000 63,000
A. $538,000
B. $590,000
C. $612,000
Q.2070 Atlas Corp. is a fast-moving consumers firm based in Italy whose financial data is provided in
the following table. For this question only, assume that Loss on the sale of land is $5 million.
(In million $) 2005 2004

Accounts Receivable 96 85
Inventory 75 65
Gross Land 85 96
Gross Plant 46 31
Accumulated Depreciation 11 6
Net Plant 35 25
T he cash from the sale of land using the given data is closest to:
A. -$16 million.
B. $6 million.
C. $16 million.
60
Q.2071 Atlas Corp. is a fast-moving consumers firm based in Italy whose financial data is provided in
the following table. For this question only, assume that Loss on the sale of Land is $5 million.
Calculate the cash flow from investing activities using the given data.
(In million $) 2005 2004

Inventory 75 65
Gross Land 85 96
Gross Plant 46 31
Accumulated Depreciation 11 6
Net Plant 35 25
A. $-9 million.
B. $-1 million.
C. $6 million.
Q.2073 A firm recently adjusted its capital structure, and some of the accounts related to its balance
sheet are given in the following table:
Year 2015 2014

Dividends Payable $69,000 $24,000
Bonds $160,000 $90,000
Common Shares $250,000 $300,000
Assuming that the company recently declared dividends of $100,000, the cash flow from financing
activities is closest to:
A. -$35,000.
B. $15,000.
C. $70,000.
61
Q.2074 Which of the following transactions is most likely considered an investing activity under
IFRS?
A. Interest received.
B. Dividend paid on shares.
C. Increase in accounts receivables.
Q.2075 Which of the following financing activity is most likely considered an operating activity under
IFRS?
A. Issuance of corporate debt.
B. Cash paid for reacquiring preferred shares.
C. Interest paid on a long-term corporate bond.
Q.2076 An analyst is analyzing the cash flow statement of a firm that reports under US GAAP. Which
of the following activities is an analyst most likely to report under financing activities?
A. Interest paid to the bondholders.
B. Dividend paid to the shareholders.
C. Taxes paid on dividend income from investments.
Q.2077 Dallas Company has had sales of $600,000 in 2016. Its accounts receivable have increased by
$40,000, its inventory has increased by $60,000, and its accounts payable have increased by $90,000.
T he cash collection during the year using the direct method is closest to:
A. $560,000
B. $690,000
C. $790,000
62
Q.2078 Hind Steel is an American steel molding company that reports under US GAAP. An analyst has
gathered the following information regarding the company for the year 2016:
Net Income 400

Depreciation Expense 10
Decrease in Acc. Rec. 50
Increase in Inventory 35
Increase in Plant 120
Decrease in Land 40
Gain on Sale of Land 60
Share Repurchase 170
Issuance of Bond 210
Increase in Dividend Payables 45
Given that the information is accurate, the cash flow from operations for the company is closest to:
A. $365.
B. $415.
C. $425.
63
Q.2079 Hind Steel is an American steel molding company that reports under US GAAP. An analyst has
gathered the following information regarding the company for the year 2016:
Net Income 400

Increase in Plant 120
Decrease in Land 40
Gain on Sale of Land 60
Share Repurchase 170
Issuance of Bond 210
Increase in Dividend Payables 45
Given that the information is accurate, the cash flow from investing activities for the company is
closest to:
A. -$20.
B. -$80.
C. $220.
Q.2080 Beverly Drinks reported the cost of goods sold of $120 million for the current year. Total
assets increased by $75 million while inventory declined by $26 million. Also, total liabilities
increased by $65 million while accounts payable increased by $2 million. T he amount of purchases
made during the year is closest to:
A. $92 million.
B. $94 million
C. $146 million
64
Q.2081 An analyst gathered the following information from a company’s 2018 financial statements (in
$ millions):
Balances as of Year Ended 31 Dec 2017 2018

Retained Earnings 150 175
Inventory 75 78
Accounts Payable 66 59
In 2018, the company paid cash dividends of $40 million and recorded $55 million in depreciation
expense. T he company considers dividends paid a financing activity. Given this information, the
company’s 2018 cash flow from operations (in $ millions) was closest to:
A. $105
B. $110
C. $112
Q.2082 Under IFRS, dividends received is most likely classified as:
A. either financing or investing activities.
B. either operating or financing activities.
C. either operating or investing activities.
65
Q.2083 Mavi Inc. is a male fashion brand based in Italy. Ahmed is an analyst working on the cash flow
statement of Mavi using the direct method.
Sales 150
COGS 90
Interest Expenses 30
Dep. Expenses 25
Increase in Acc. Pay. 20
Increase in Int. Pay. 50
Using the financial data provided in the table, the cash collection (cash collected from customers) of
Mavi Inc. is closest to:
A. $20
B. $140
C. $160
statement of Mavi using the direct method.
Sales 150
COGS 90
Dep. Expenses 25
Using the financial data provided in the table above, the value of Mavi's Cash Interest that should be
used when calculating cash flow from operating activities is closest to:
A. $10
B. $30
C. $70
66
statement of Mavi using the direct method. Using the financial data provided in the following table,
Mavi's cash flow from operating activities closest to:
Sales 150
COGS 90
Dep. Expenses 25
A. $50
B. $80
C. $135
Q.2088 Free cash flow for the firm (FCFF) is most likely available to:
A. debt holders.
B. equity holders.
C. debt holders and equity holders.
Q.2089 Which of the following is the most appropriate equation for calculating Free Cash flow to the
Equity (FCFE)?
A. FCFE = CFO - Fixed capital expenditure + Net borrowing
B. FCFE = CFO + Interest×(1 - Tax rate) - Fixed Capital Expenditure
C. FCFE = CFO + Interest×(1- Tax rate) - Fixed capital expenditure + Net borrowing
67
Q.2090 T he financial data of a hypothetical firm is provided below.
Net Income 700

Interest Expense 100
Increase in Capital Expenditure 180
Debt Issued 450
Debt Repaid 330
Assuming a tax rate of 40%, the Free Cash Flow for the Firm (FCFF) using the cash flow from
operating activities equation is closest to:
A. $650
B. $690
C. $770
Q.2091 T he financial data of a UniLateral Equipments for the year 2014 is provided in the following
table:
Net Income 700

Debt Issued 450
Debt Repaid 330
Assuming a tax rate of 40% for the firm, the free cash flow to equity (FCFE) for the year 2014 is
closest to:
A. $650.
B. $710.
C. $770.
68
Q.2092 Which of the following is least likely a performance ratio that uses cash flow from operating
activities?
A. CFO/Revenue.
B. CFO/Total average assets.
C. CFO/Cash paid for long-term assets.
Q.2093 Which of the following is the most appropriate formula for the reinvestment ratio using cash
flow from operating activities?
A. CFO/Dividends paid.
B. CFO/Cash paid for long-term Assets.
C. CFO/Cash paid for long-term debt repayment.
Q.2094 A firm has recently repaid its long-term debt obligations. Using the data given below, based on
cash flow from operations the debt payment ratio is closed to:
Net Income 700

Debt Issued 450
Debt Repaid 330
A. 0.99
B. 1.77
C. 2,33
69
Q.2095 Alam Khan has been given the question in his accounting exam to convert a cash flow
statement into a common-size cash flow statement. Which of the following accounts will be most
likely used as the basis for calculating percentages of each item?
A. Net revenue.
B. Total cash inflows.
C. Total cash outflows.
Q.2096 Grand Co. is a laptop distributor firm whose financial data is provided in the following table.
Using the given data, the FCFF of Grand Co. is closest to:
Net Income 200,000

Depreciation 70,000
Interest Expense (Net of Taxes) 37,000
Fixed Capital Expenditure 110,000
Working Capital Expenditure 77,000
Net Borrowing 65,000
Tax Rate 30%
Interest Rate 8%
A. $108,000
B. $120,000
C. $200,000
70
Q.3801 A company reported the following information:
Net income $323 Million

Cash flow from Investing Activities $13 Million
Cash flow from Financing Activities $40 Million
Cash flow from Operating Activities $62 Million
Total Cash Flows $115 Million
Assets at the beginning of the period $100 Million
Assets at the end of the period $143 Million
T he company's cash return on asset ratio is closed to:
A. 0.1069
B. 0.5102
C. 0.9465
Q.3802 Determine the cash flow debt coverage ratio of a company based on the information provided
below. Cash Flow Metrics From Investing Activities - $ 15 Million From Financing Activities - $ 13
Million From Operating Activities - $ 90 Million Total Cash flows - $ 118 Million Total debt - $ 270
Million
A. 0.333
B. 0.437
C. 0.556
71
Q.3803 Consider the information given below.
2019 2018
Accounts Receivables $75 Million $100 Million
Revenues $50 Million $60 Million
Based solely on the information above, the amount of cash received from clients in 2019 is closest
to:
A. $75 Million
B. $85 Million
C. $150 Million
Q.3804 At its fiscal year-end 2019, a company reported $120 million in revenue, $ 90 Million in
expenses. If the company equally reported a $20 million increase in its accounts receivables, the
cash received from its customers for that fiscal year is most likely:
A. $ 100 Million
B. $ 120 Million
C. $ 140 Million
Q.3805 In 2019, a Company reported a gross profit of $ 300,000. T he company's cost of goods sold
was $139,400. If the company paid rent of $10,000, interest expenses equal to $3,000, and assuming
there are no taxes, operating profit is closest to?
A. 147,600
B. 150,600
C. 290,000
72
Q.3806 T he table below summarizes a company’s major cash flows for the year 2019.
Source Cashf lowAmount

Cash received from issuing stock $10, 000, 000
Cash received from the sale of goods $5, 000, 000
Sale of investment securities 4, 500, 000
Proceeds from issuing debt 1, 500, 000
Salaries paid to employees 2, 500, 000
Payments for acquiring a new branch 1, 500, 000
Cash spent on share repurchase 3, 500, 000
T he company's cash flow from financing activities is closest to:
A. 2,500,000
B. 3,000,000
C. 8,000,000
Q.3807 Below is a company’s financial performance for the year 2018. Revenue $235,000,000
Revenue $235, 000, 000

Operating Expenses $35, 000, 000
Other Expenses $10, 000, 000
T he company maintained its revenue and operating costs in 2019 due to long-term contracts with its
suppliers and customers. Its other expenses, however, increased by 15%. T he company's gross
profit for the year 2019 is closest to:
A. $88,500,000
B. $100,000,000
C. $135,000,000
73
Q.3808 A company that is compliant with the US GAAP reports its cash flows using the indirect
method. In 2019, the company reported a net income of $300,000 and revenue of $700,000. T he
company's income tax payable decreased by $70,000, while its interest expenses payable increased
by $80,000. If the company reported using the direct method, the amount of cash paid for operating
expenses is closest to:
A. $390,000
B. $410,000
C. $690,000
Q.3851 A provision for doubtful accounts was created by Alpha LLC for the year 2014. What is the
most appropriate treatment for doubtful accounts while preparing operating cash flows under the
indirect method?
A. Added to net income.
B. Deducted from net income.
C. Neither added nor deducted from net income.
74
Reading 20: Financial Analysis Techniques
Q.497 An analyst gathered the following information regarding two companies having the same
revenue, the same number of shares outstanding, and the same shares price:
Company Al pha
Net profit ratio: 36%
EPS: $167
Company Beta
Net profit ratio: 23%
EPS: $190
Which company is most likely more profitable for its shareholders?
A. Company Beta.
B. Company Alpha.
C. Both companies are profitable.
Q.499 Which of the following statements is most likely correct?
A. T he activity ratio indicates how efficiently a company performs its day-to-day tasks.
B. T he activity ratio is not relevant for a financial statement analysis as it indicates the
operation efficiency.
C. T he activity ratio measures the quantity of an asset or flow that is associated with the
ownership of a specified claim.
75
Q.500 An analyst gathered the following information for a small company reporting under IFRS:
Revenue $600,000
Cost of sales ($120,000)
Average inventory $40,000
Average T rade Receivables $60, 000
Assuming that the number of days in a year is to be assumed as 360, the days of sales outstanding
(DSO) is closest to:
A. 3.
B. 10
C. 36.
Q.501 Which of the following is least likely a possible root cause for a reduction in the inventory
turnover ratio?
A. Change in fashion.
B. Obsolescence of technology.
C. Increase in the number of distributors
Q.502 For a hypothetical company, the working capital turnover and fixed asset turnover ratios are 4
and 6, respectively. Moreover, the revenue for the company is estimated at $120,000. T he average
working capital for the company is closest to:
A. $20,000
B. $30,000
C. $45,000
76
Q.503 Which of the following is the most accurate representation of the net operating cycle?
A. Days of inventory in hand + Days of sales outstanding.
B. Days of sales outstanding - Number of days of payables.
C. Days of inventory in hand + Days of sales outstanding - Number of days of payables.
Q.504 Which of the following is the most accurate description of the defensive interval ratio?
A. T he defensive interval ratio measures the duration for which the daily cash requirements
can be met from the current liabilities.
B. T he defensive interval ratio measures the duration for which the daily cash requirements
of a period can be met from the existing liquid assets.
C. T he defensive interval ratio measures the duration for which the daily cash requirements
of a period can be met from the expected liquid assets at the end of the period.
Q.506 Calculate the leverage from the following data.
Return on equity 5.4%

Net profit margin 3.5%
Total asset turnover 1.1
A. 1.19
B. 1.40
C. 1.54
Q.507 Revenue per employee is an acceptable ratio for analysis in which of the following industries?
A. T he service industry.
B. T he banking industry.
C. T he manufacturing industry.
77
Q.2097 Which of the following is least likely a limitation of ratios?
A. Ratios evaluate changes in firms and industries over time.
B. Ratios are only useful when compared to other firms or to the company's historical
performance.
C. T he comparison of ratios with other firms is difficult due to accounting standards

differences.
Q.2098 Which of the following is the most appropriate statement regarding ratios?
A. Ratios are helpful for forecasting earnings and cash flows.
B. Conclusion based on ratios can be made by calculating a single ratio.
C. Ratios of firms operating in multiple industries are easily comparable.
Q.2099 Which of the following statements is least likely regarding the common-size analysis of
financial statements?
A. A vertical common-size balance sheet presents all the line items as a percentage of total
assets.
B. A vertical common-size income statement presents all the line items as a percentage of
net income.
C. A horizontal common-size income statement calculates all line items as a percentage of

the base year's income statement.
Q.2100 Which of the following is least likely use of the graphical analysis of financial data?
A. Analyze the trend in data.
B. Compare data across firms and time.
C. Identify the relationship between two variables.
78
Q.2101 An analyst analyzing a firm's ability to meet its long-term debt obligation is most likely to use
which of the following financial ratio?
A. Debt-to-assets ratio.
B. Defensive interval ratio.
C. Working capital turnover ratio.
Q.2102 Galactic Hyper is a chain of hypermarkets that sells most of its products for cash, which is
why its days of sales outstanding are as low as 22 days. Assuming that the firm's average receivables
are $234,000, and the cost of goods sold (COGS) for the one year is $1,245,000, the annual sales of
Galactic are closest to:
A. $1,410,400.
B. $3,882,000.
C. $4,880,200.
Q.2103 If the Cost of goods sold (COGS) decreases, what is the most likely effect on days of
inventory on hand?
A. Days of inventory on hand ratio will decrease.
B. Days of inventory on hand ratio will increase.
C. Days of inventory on hand ratio will remain unchanged.
Q.2104 T he working capital turnover ratio of a hypothetical firm is 12.5. Which of the following is
the most likely impact on the ratio if the firm utilized its cash to purchase inventory?
A. T he working capital turnover ratio will increase.
B. T he working capital turnover ratio will decrease.
C. T he working capital turnover ratio will remain unchanged.
79
Q.2105 A firm's number of days of payables is 69 days compared to an industry average of 45 days.
Which of the following is the most appropriate interpretation of this discrepancy?
A. T he firm might be taking too long to pay its payables.
B. T he firm's customers might be taking too long to pay the firm.
C. T he firm's payable turnover ratio is greater than the industry's payable turnover ratio.
Q.2106 Calculate the Number of days of payable ratio if Ending inventory is $5,000, Sales are
$12,000, COGS is $2,000, Average payables are $800, and Beginning inventory is $3,000.
A. 5 days
B. 42 Days
C. 73 days
Q.2107 Firm A and Firm B are two firms located in the same geographical location and serving the
same geographical markets. Assuming that Firm A's Asset T urnover ratio is 1.2 while the Asset
T urnover ratio of Firm B is 2.5, which of the following is an appropriate interpretation of the ratios?
A. Firm A is more capital-intensive than Firm B.
B. Firm A uses its assets more efficiently as compared to firm B.
C. Firm B has a greater portion of its capital invested in assets than Firm A.
Q.2109 Layout Works is a printing press, which takes an average of 25 days to pay its payables, and it
takes an average of 10 days for its customers to pay Layout. Given that the average cash conversion
cycle of the printing industry is 110 days, the firm's estimated days of inventory on hand is closest to:
A. 75 days.
B. 95 days.
C. 125 days.
80
Q.2110 Which of the following ratios can an analyst most likely use to measure the number of days
of average cash expenses a firm can pay with its liquid assets?
A. Cash ratio.
B. Defensive interval ratio.
C. Working capital turnover ratio.
Q.2111 T urks & Co. is a glass-manufacturing firm whose income statement is being analyzed by an
analyst at a local credit rating firm. Some relevant accounts for the year 2016 have been given in the
following table:
Income Statement
Sales 15,000
COGS 6,500
Gross Profit 8,500
Depreciation 800
SG&A 550
Lease Payments 350
EBIT 6,800
Interest Payment 250
EBT 6,550
Taxes 1,965
EAT 4,585
Using the given data, the fixed charge coverage ratio of the firm is closest to:
A. 11.92
B. 20.42
C. 28.60
81
Q.2112 T urks & Co. is a glass-manufacturing firm whose income statement is being analyzed by a
CFA member at a local credit rating firm. Using the data given in the following table, calculate the
interest coverage ratio.
Income Statement
Sales 15,000
COGS 6,500
Gross Profit 8,500
Depreciation 800
SG&A 550
Lease Payments 350
EBIT 6,800
EBT 6,550
Taxes 1,965
EAT 4,585
A. 19.70
B. 26.00
C. 27.20
82
Q.2113 T urks & Co. is a glass-manufacturing firm whose income statement is being analyzed by a
CFA member at a local credit rating firm. Using the data given in the following table, calculate the
operating profit margin.
Income Statement
Sales 15,000
COGS 6,500
Gross Profit 8,500
Depreciation 800
SG&A 550
Lease Payments 350
EBIT 6,800
EBT 6,550
Taxes 1,965
EAT 4,585
A. 43.67%
B. 45.33%
C. 56.67%
Q.2114 Company X, Y & Z are market leaders in the air cargo industry. Some ratios related to the
three firms for the year 2016 have been given to you in the following table:
Company X Company Y Company Z

Return on Assets 55% 34% 17%
Gross Profit Margin 35.00% 28.00% 11.30%
Quick Ratio 0.7 2.8 1.1
Financial Leverage 3.7 5.7 11.37
Assuming all three firms are identical in terms of size and revenue, the firm that has the most
significant proportion of the cost of goods sold (COGS) is most likely :
A. Company X.
B. Company Y.
C. Company Z.
83
Q.2115 Company X, Y & Z are market leaders in the air cargo industry. Some ratios of the three
companies are given in the following table:

Profit Margin 35.00% 28.00% 11.30%
Assuming all three firms are identical in terms of size and revenue, the company that uses the
greatest portion of debt in its capital structure is closest to:
A. Company X.
B. Company Y.
C. Company Z.
Q.2116 Company X, Y & Z are market leaders in the air cargo industry. Assuming all three firms are
identical in terms of size and revenue, identify which company is the most liquid.

Profit Margin 35.00% 28.00% 11.30%
A. Company X
B. Company Y
C. Company Z
Q.2117 Which of the following transactions will most likely increase the financial leverage ratio by
the largest amount?
A. Purchase of Land through debt financing.
B. Purchase of Plants by issuing new equity.
C. Purchase of Inventory using cash equivalents.
84
Q.2118 A highly leveraged company has sales of $1.5 million, a gross profit margin of 40%, and an
average inventory of $250,000 for the year 2015. T he firm's inventory turnover ratio for the year
2015 is closest to:
A. 2.4
B. 3.6
C. 6.0
Q.2119 If a company's debt-to-equity ratio is 2.5, which of the following transactions will least likely
increase the debt-to-equity ratio?
A. T he issuance of bonds to reacquire shares.
B. T he payment of dividends to common shareholders.
C. T he purchase of assets with 50% debt and 50% equity.
Q.2120 If a firm's current ratio increased from 1.1 to 1.7 due to an increase in inventory, what is the
most likely impact on the asset turnover ratio?
A. T he asset turnover ratio will increase.
B. T he asset turnover ratio will decrease.
C. T he asset turnover ratio will remain unchanged.
Q.2121 What is the most likely impact on a firm's return on equity ratio if the corporate tax rate
increases from 25% to 27%?
A. T he Return on equity ratio will increase.
B. T he Return on equity ratio will decrease.
C. T he Return on equity ratio will remain unchanged.
85
Q.2122 An analyst analyzes the last three years' balance sheets of Cosmo Inc. given in the following
table.
Balance Sheet
2017 2016 2015

Acc. Rec. 300 210 150
Inventory 500 540 450
Total Current Assets 800 750 600
Land 1,800 1,450 1,200
Total Assets 2,600 2,200 1,800
Acc. Payables 400 330 500
Long-term Debt 1,300 770 400
Common Equity 900 1,100 900
Total Liab. & Equity 2,600 2,200 1,800
T he value of short-term liabilities for the most recent year if an analyst converts the balance sheet
into a vertical common-size balance sheet is closest to:
A. 10.54%
B. 15.38%
C. 50%
86
Q.2123 An analyst analyzes the last three years' Balance sheets of Cosmo Inc. given in the following
table.
Balance Sheet
2017 2016 2015

Acc. Rec. 300 210 150
Land 1,800 1,450 1,200
Total Assets 2,600 2,200 1,800
If an analyst converts the balance sheet into a horizontal common-size balance sheet, the value of
accounts receivable in 2016 is closest to:
A. 10.54%
B. 70%
C. 140%
87
Q.2124 An analyst is trying to analyze the trend in the capital structure of Cosmo Inc.
Balance Sheet
2017 2016 2015

Acc. Rec. 300 210 150
Land 1,800 1,450 1,200
Total Assets 2,600 2,200 1,800
Based on the data provided in the following table, the trend for Cosmo Inc. using the debt-to-equity
ratio is most likely :
A. Cosmo Inc. has a decreasing trend in its use of debt financing.
B. Cosmo Inc. has an increasing trend in its use of debt financing.
C. Cosmo Inc. has an increasing trend in its use of equity financing.
Q.2125 Which of the following is the most appropriate equation for calculating the return on equity
ratio?
A. Return on Equity = Net Profit Margin × Asset T urnover × Financial Leverage.
B. Return on Equity = Net Profit Margin × Equity T urnover × Financial Leverage.
C. Return on Equity = Gross Profit Margin × Return on Assets × Financial Leverage.
88
Q.2126 A research analyst at Shark Investment Management is conducting a DuPont analysis for a
firm whose financial data for the year 2016 is provided in the following table:
Financial Data
Revenue 1,450,000
COGS 550,000
Gross Profit 900,000
SG&A 160,000
Wages Exp. 140,000
EBIT DA 600,000
Dep. Exp. 220,000
Operating Profit 380,000
Interest Payment 170,000
EBT 210,000
Taxes 63,000
EBT 210,000
Taxes 63,000
Net Income 147,000
Total Assets 3,400,000
Total Debt 1,500,000
Considering that the data provided is accurate, the firm's tax burden is closest to:
A. 0.25
B. 0.30
C. 0.70
89
firm whose financial data is provided in the following table. Considering that the data provided is
accurate, calculate the firm's debt-to-equity ratio.
Financial Data
Revenue 1,450,000
COGS 550,000
SG&A 160,000
Wages Exp. 140,000
EBIT DA 600,000
Dep. Exp. 220,000
EBT 210,000
Taxes 63,000
EBT 210,000
Taxes 63,000
Net Income 147,000
Considering that the data provided is accurate, the firm's debt-to-equity ratio is closest to:
A. 0.55
B. 0.79
C. 1.27
90
firm whose financial data is provided in the following table:
Financial Data
Revenue 1,450,000
COGS 550,000
SG&A 160,000
Wages Exp. 140,000
EBIT DA 600,000
Dep. Exp. 220,000
EBT 210,000
Taxes 63,000
EBT 210,000
Taxes 63,000
Net Income 147,000
Considering that the data provided is accurate, the firm's return on equity using the extended DuPont
ratio is closest to:
A. 7.7%
B. 10%
C. 43%
91
Q.2129 Armen Inc. and Bristol Corp. are market leaders in the construction industry. Some financial
information regarding the two firms is given in the following table:
Armen Inc. Bristol Corp.

Revenue 6,000,000 8,000,000
Gross Profit 3,400,000 5,500,000
EBIT 2,100,000 2,700,000
Net Income 1,500,000 1,800,000
Total Debt 6,400,000 7,200,000
Dividend per Share 1 2
Share Price 25 22
Number of Shares Outstanding 500,000 600,000
Assuming that each firm's market capitalization is approximately equal to the firm's total equity,
Armen Inc.'s return on equity ratio is closest to:
A. 12%.
B. 25%.
C. 56%.
Q.2130 Company A and B are market leaders in the construction industry. Some information
concerning the two firms is given below:

Revenue 6,000,000 8,000,000
Gross Profit 3,400,000 5,500,000
EBIT 2,100,000 2,700,000
Net Income 1,500,000 1,800,000
Total Debt 6,400,000 7,200,000
Share Price 25 22
Company B's growth rate is closest to:
A. 4.5%.
B. 13.6%.
C. 33.3%.
92
Q.2131 Company A and B are market leaders in the construction industry.

Revenue 6,000,000 8,000,000
Gross Profit 3,400,000 5,500,000
EBIT 2,100,000 2,700,000
Net Income 1,500,000 1,800,000
Total Debt 6,400,000 7,200,000
Share Price 25 22
which of the following statement is most likely correct?
A. Company A's growth is higher than Company B's growth rate.
B. Company B's growth rate is higher than Company A's growth rate.
C. Company A's growth rate is the same as Company B's growth rate.
Q.2132 Which of the following ratios can most likely be used to measure a firm's business risk?
A. Asset T urnover.
B. No. of Days of Payables.
C. Coefficient of Variation in Sales.
Q.2133 Which of the following is a risk metric that banks most likely use to measure and quantify the
level of financial risk within a firm over a specific time frame?
A. Value at Risk (VaR).
B. Reserve Requirement.
C. Liquid Asset Requirement.
93
Q.2134 Which of the following credit analysis metric is used to predict a firm's bankruptcy?
A. Altman's F-score.
B. Altman's t-score.
C. Altman's Z-score
Q.2135 Which of the following analysis methods examines the variability in financial outcome based
on a change in one specific variable?
A. Scenario analysis.
B. Sensitivity analysis.
C. Simulation analysis.
Q.2136 A company earned a net income of $500,000 with sales of $2,500,000 for the year 2016. If
the asset turnover ratio of the firm is 0.4, and the financial leverage is 1.3, then the return on equity
of the firm is closest to:
A. 8.0%
B. 10.4%
C. 20.0%
94
Q.3796 Consider the following information for a company:
Net income - $ 5,000
Income tax expense - $ 1,130
Interest Expense and Payments - $ 1,050
Lease Payments - $ 700
T he fixed coverage ratio for the company is closest to:
A. 2.9
B. 4.1
C. 4.5
Q.3797 Consider the information below; extracted from the financial statements of XYZ Company.
Earnings before interest and taxes (EBIT ) $80,000

Pretax profit (EBT ) $73,530
Net income $51,230
Sales $530,000
Total Assets $647,000
Total equity $304,000
ROE 16.5%
T he company’s tax burden ratio is closest to:
A. 0.697
B. 0.919
C. 2.128
95
Q.3798 T he following ratios have been selected from a company's financial statements.
Net Profit Margin 15%

Gross Profit Margin 27%
Operating Profit Margin 23%
Equity Multiplier 2.00
Asset T urnover 0.70×
T he company’s ROE is closest to:
A. 0.21
B. 0.322
C. 0.378
Q.3799 If the above company’s dividend payout ratio is 38.5% and the ROE is 21%. T he company’s
sustainable growth rate is most likely:
A. 0.081
B. 0.129
C. 0.211
Q.3800 T he select information (found below) was extracted from the financial statements of a
company.
Net Income $70,000

Pretax profits $95,000
Total Liabilities $123,000
Total Assets $535,000
T he company’s equity multiplier is most likely :
A. 0.7
B. 0.8
C. 1.3
96
Reading 21: Inventories
Q.279 Assuming that the oldest goods purchased are sold first and the newest goods purchased remain
in the ending inventory is an example of the:
A. Last-in, first-out method.
B. First-in, first-out method.
C. weighted average cost method.
Q.280 In which of the following accounting systems would an analyst write down inventories as the
lowest value between the cost of inventories and the market price?
A. IFRS
B. US GAAP
C. Both IFRS and US GAAP
Q.452 Mylcos Company uses a perpetual inventory system. Calculate the cost of the ending
inventory from the following data using the weighted average cost method, given that the
transactions took place in the order mentioned below.
Opening Inventory 7 Units @ $500 per Unit

Purchase 5 Units @ $600 per Unit
Sale 14 Units
Sale 1 Unit
A. $1,542
B. $1,609
C. $1,800
97
Q.460 A company recorded a depreciation expense of $5,000,000 for tax purposes and $3,500,000
for accounting purposes. Which of the following is the most appropriate accounting treatment if the
tax rate is 30%?
A. T he firm should create a deferred tax asset of $450,000.
B. T he firm should create a deferred tax liability of $450,000.
C. T he firm should create a reverse of a deferred tax liability of $450,000.
Q.463 Consider the following data of a particular sales company:
Investment value of $109,000 with a maturity period of 13 months.
Net sales of $900,000
Average debtors of $360,000
Cost of sales of $750,000
Average inventory of $375,000
Average payables of $75,000
T he correct classification for the investment is most likely :
A. Current asset
B. Current liability
C. Non-current asset
Q.508 An accountant is projecting the cost of inventory of a company following IFRS. If the budgeted
rent for the year 2017 is $2 million, and the company expects to produce 1 million units during the
year, then what rent cost should most likely be added to the inventory cost?
A. $0.
B. $2 per unit.
C. T he budgeted cost is irrelevant. T he actual cost will be allocated on the basis of the actual
production.
98
Q.509 T wix Chemicals is a company involved in the manufacture of active pharmaceutical

ingredients. It has a storage tank for methanol in the Tank Farm area. Methanol is transferred to the
production floor through a pipe attached to the top of the tank. T he management believes that LIFO
is a better method for valuing the inventory of Methanol. Under which of the following situation can
Methanol most likely valued using LIFO?
A. If the company follows IFRS.
B. If the company follows US GAAP.
C. T he company can adopt LIFO in all cases, resulting in better presentation and giving a true
and fair value of the inventory.
Q.510 Under which of the following economic conditions would the FIFO method's inventory value
most likely exceed the inventory value of the LIFO method?
A. Stagnation.
B. Rising prices.
C. Declining prices.
Q.511 Xing, a company engaged in the trade of mobile parts and accessories, reduced its inventory
value to its current replacement cost and recorded a write-off of $0.5 million in 2014. However, in
2015, the net realizable value is now $0.3 million higher than its carrying value. What would be the
most appropriate accounting treatment using the US GAAP?
A. No accounting treatment is required.
B. Increase inventory fluctuation allowance by $0.3 million.
C. Increase inventory value by $0.3 million and reduce the cost of sales.
99
Q.512 A company following the weighted-average method of inventory valuation decides to shift to
LIFO for the current year. Which of the following adjustment would least likely be made, assuming
that the company follows US GAAP?
A. T he company cannot shift to LIFO.
B. No adjustments have to be made to historical financials.
C. Historical financials have to be reinstated for the change in method to facilitate

comparison.
Q.513 Swissla, a pharmaceutical company, stores some of its finished goods under a temperature-
controlled environment. T he total cost incurred in maintaining the temperature regulated in
Swissla's warehouse is €1.2 million per year. What is the most appropriate method for accounting for
the cost under IFRS?
A. Capitalized as an asset.
B. Charged as an expense.
C. Added to the cost of inventory.
Q.514 T he standard yield loss in the production of a drug is 10%. Due to technical issues, the yield
loss was 15% during the year. Should the cost incurred on the account of additional raw material used
be included in the cost of finished goods if the company uses the standard cost method to value its
inventory?
A. Yes, it is directly related to production.
B. Yes, identifiable abnormal costs are charged to the inventory.
C. No, variations will be charged to the income statement as an expense.
100
Q.515 Company A entered into a contract with Company B to produce and supply a chemical product.
However, as per the contract, Company A had to bear the freight expense. T he total freight expense
estimated during the year for the contract was $0.8 million. What is the most appropriate method of
accounting for the freight cost for Company A?
(Note: Freight expense refers to the price charged by a carrier for sending out cargo from the
source location to the destination location. T he expense is paid by the person who wants the goods
transported from one location to another.)
A. T he freight expense should be added to the cost of the inventory.
B. T he freight expense has to be recorded as an expense in the income statement.
C. T he revenue has to be recorded at the net amount (after deducting the freight expense).
Q.516 Which of the following methods will most likely give a higher debt-to-equity ratio in the case
of rising prices?
A. LIFO.
B. FIFO.
C. Weighted average.
Q.517 Elonn's Cars produces financial statements in compliance with International Financial
Reporting Standards (IFRS). Inventory was bought for $5 million and written down to $600,000.
However, one of the cars was later found to be a valuable collectible, and the inventory is now
thought to be worth $7 million. On the balance sheet, inventory is most likely reported at:
A. $2,000,000
B. $5,000,000
C. $7,000,000
101
Q.518 An analyst has gathered the following information on a small-cap firm for the month of May
2016:
Opening inventory: $2 million

Closing inventory: $3 million
Cost of sales: $10 million
Given the information, the inventory turnover ratio is closest to:
A. 3.
B. 4.
C. 5.
Q.519 Which of the following businesses is expected to have the lowest inventory turnover ratio?
A. A bread manufacturer.
B. A luxury car manufacturer.
C. A supplier of electrical fittings.
Q.1940 Which of the following is least likely an inventory cost recognition method?
A. Straight-line method.
B. Last-in, first-out method.
C. Specific identification method.
Q.1941 Lux-Cars Inc. is a car dealership that sells luxury cars to high-net-worth individuals in Los
Angeles. T he most appropriate inventory cost recognition method for Lux-Cars is:
A. Last-in, First-out (LIFO).
B. First-in, First-out (FIFO).
102
Q.1943 Which of the following inventory cost methods will most likely result in the lowest net
income in an inflationary environment?
A. Last-in, first-out (LIFO).
B. First-in, first-out (FIFO).
C. Weighted average cost (WAC).
Q.1944 Which of the following inventory cost recognition method will most likely result in the
highest ending inventory in an inflationary environment?
A. LIFO
B. FIFO
C. Weighted average method
Q.1945 T urks Printers is a printer retailer that sells printers to large corporations. T he T urks use
the FIFO method of inventory.
Beginning Inventory 50 printers at $100 each

Purchased on January 1st 100 printers at $110 each
Purchased on March 1st 20 printers at $130 each
If T urks sell 130 printers to Hyper Corp. in April, the cost of goods sold is closest to:
A. $13,800
B. $14,224
C. $14,600
103
Q.1948 T urks Printers is a printer retailer that sells printers to large corporations. Assume that
T urks uses the weighted average cost method of inventory.
Beginning Inventory 50 printers at $100 each

Purchased on January 1st 100 printers at $110 each
Purchased on March 1st 20 printers at $130 each
If T urks sell 100 printers to Loop Corp. in April, the ending inventory for T urks is closest to:
A. $7,200
B. $7,658
C. $8,100
Q.1950 Which of the following inventory cost recognition method will result in the highest net
income in times of falling prices?
A. LIFO.
B. FIFO.
C. Weighted average method.
Q.1972 Core Corp., an agricultural company, reports under IFRS and its inventory was written down
to $6,500. T he original value of the inventory was $8,000. However, due to a shortage in supply, the
Net Realizable Value (NRV) of inventory recently increased to $8,000. Which of the following is
most likely the value of the write-up of inventory?
A. $0
B. $1,500
C. $2,000
104
Q.2169 NextT rend is an international garments company. If its ending inventory for the year ending
on August 31st, 2016, is $750 million, purchases for the year are $520 million, and beginning
inventory was $900 million on September 1st, 2015, then the cost of goods sold for the fiscal year is
closest to:
A. $370 million.
B. $670 million.
C. $1,130 million.
Q.2170 Which of the following is least likely a component of Product Cost under IFRS?
A. Conversion costs.
B. Purchase cost minus T rade discounts.
C. Selling, General & Administrative Expense (SG&A) costs.
Q.2171 Using the data given in the following table, calculate the total cost per unit to be capitalized.
No. of Units 6,000

Purchases $24,800
Discounts $800
Conversion Cost $12,000
Post-production Warehouse $17,000
Freight-in Cost $3,300
Selling Cost $1,800
Sales Commission $2,200
A. $6.55
B. $9.38
C. $10.75
105
Q.2174 Identify the most appropriate statement regarding the First-In, First-Out (FIFO) method.
A. In FIFO, the COGS is valued based on the most recently purchased inventory.
B. In FIFO, the ending inventory is valued based on the most recently purchased inventory.
C. T he beginning inventory is always the same under FIFO and the Specific identification
method.
Q.2175 Which of the following cost valuation methods will most likely result in the lowest tax
expenses during a period of inflation?
A. FIFO.
B. LIFO.
C. Weighted average cost.
Q.2176 Which of the following cost valuation methods is most likely to increase the current ratio
during a period of inflation?
A. FIFO.
B. LIFO.
Q.2177 Which of the following statements related to the weighted average cost method is most
accurate?
A. During inflationary periods, inventory values generated by the weighted average cost
method will be higher than last-in, first-out (LIFO) values but lower than first-in, first-out
(FIFO) values.
B. During inflationary periods, inventory values generated by the weighted average cost
method will be higher than first-in, first-out (FIFO) values but lower than last-in, first-out
(LIFO) values.
C. During inflationary periods, inventory values generated by the weighted average cost
method will be higher than first-in, first-out (FIFO), and last-in, first-out (LIFO) values.
106
Q.2178 A company reported the following transactions during April 2017:

1. Purchase of 800 units at $75/unit on April 2nd, 2017
2. Purchase of 470 units at $82/unit on April 10th, 2017
3. Purchase of 230 units at $78/unit on April 16th, 2017
If 550 units were sold during the month, the cost of goods sold (COGS), using the weighted average
cost method, is closest to:
A. $41,250.5
B. $42,707.5
C. $44,180.0
Q.2179 2179 An electronic appliances trading company acquires units of LCD T Vs on a monthly
basis. T he accountant of the firm is unsure whether to use the first-in, first-out (FIFO) method or
the last-in, first-out (LIFO) method. He has given you the following information:
Date No. of Units

1-Oct Buy LCD T Vs @ $300 600
30-Oct Sold LCD T Vs 800
Using the data given in the table, the difference between the values of FIFO ending inventory and
LIFO ending inventory is closest to:
A. $47,500.
B. $81,700.
C. $254,000.
107
Q.2180 An electronic appliances trading company acquires units of LCD T Vs on a monthly basis.
Using the data given in the following table, determine which valuation system will provide higher
Ending inventory.
Date No. of Units

30-Oct Sold LCD T Vs 800
A. FIFO Ending Inventory of $192,500
B. LIFO Ending Inventory of $150,000
C. FIFO Ending Inventory of $150,000
Q.2181 A toys company based in Dubai purchases its inventory weekly. On July 1st, the firm
purchased 100 units of goods for $120 and, on July 8th, the firm purchased another 80 units of goods
for $125. Assuming that the firm sold 120 units of goods for $130/unit, and its operating expenses are
$200, the gross profit under the FIFO inventory method is closest to?
A. $400
B. $1,100
C. $1,200
Q.2183 Details of inventory-related transactions of a company are given in the following table. Based
on the given information, the LIFO COGS under the Periodic and the Perpetual cost system is
closest to?
1-Mar Buy Units at @$90 20

14-Mar Sell Units 27
29-Mar Sell Units 15
A. Periodic COGS is $4,860 & Perpetual COGS is $4,860
B. Periodic COGS is $4,860 & Perpetual COGS is $4,455
C. Periodic COGS is $4,860 & Perpetual COGS is $4,860
108
Q.2184 After attending a seminar on the subject of inventory management, a student has summarized
some core points regarding the three main approaches. Which of the following is the least accurate
statement?
Statement I. During periods of inflation, the use of FIFO will result in the lowest estimate of the cost
of goods sold among the three approaches and the highest net income.
Statement II. During periods of deflation, the use of LIFO will result in the highest estimate of the
cost of goods sold among the three approaches and the lowest net income.
Statement III. During periods of inflation, the use of LIFO will result in the highest estimate of the
cost of goods sold among the three approaches and the lowest net income.
A. Statement I
B. Statement II
C. Statement II
Q.2185 A US-based firm supplies small quantities of fuel for generators of small businesses in remote
areas. Considering the recent increase in oil prices, the impact on the firm’s working capital, if the
firm uses the FIFO method, is most likely ?
A. Working capital will be lower.
B. Working capital will be higher.
C. Working capital will remain unchanged.
Q.2186 Which of the following conditions will most likely result in the highest net cash flow from
operating activities?
A. LIFO method during rising prices.
B. FIFO method during rising prices.
C. Cash flows will be the same under both methods.
109
Q.2187 Identify the relationships that are least likely to hold during deflationary periods.
I. LIFO COGS > FIFO COGS
II. LIFO Inventory > FIFO Inventory
III. LIFO Net Income > FIFO Net Income
IV. LIFO Taxes < FIFO Taxes
A. I & IV
B. II & III
C. III & IV
Q.2188 Avant-Gard Company is based in the US and reports under US GAAP. However, most of its
operations have recently shifted to the European market. T he company is now required to convert
its balance sheet from GAAP to IFRS. Given the following data, the FIFO inventory for 2016 is
closest to?
Balance Sheet
2017 2016 2015

LIFO Inventory $97,000 $89,000
Cash $276,000 $225,000
Current Liabilities $73,000 $84,000
Loans $100,000 $50,000
Equity $200,000 $180,000
Income Statement
2017 2016 2015

Sales $410,000 $375,000
COGS $230, 000 $215,000
Gross Profit $180,000 $160,000
Operating Exp. $80,000 $75,000
EBIT $100,000 $85,000
Taxes (30%) $30,000 $25,500
Net Income $70,000 $59,500
LIFO Reserves $19,500 $13,000 $10,500
A. $102,000
B. $108,500
C. $116,500
110
operations have recently shifted to the European market. T he company is now required to convert
its balance sheet from US GAAP to IFRS. Given the following data, determine the FIFO COGS for
2017.
Balance Sheet
2017 2016 2015

Cash $276,000 $225,000
Loans $100,000 $50,000
Equity $200,000 $180,000
Income Statement
2017 2016 2015

Sales $410,000 $375,000
COGS $230, 000 $215,000
Gross Profit $180,000 $160,000
EBIT $100,000 $85,000
Taxes (30%) $30,000 $25,500
Net Income $70,000 $59,500
LIFO Reserves $19,500 $13,000 $10,500
A. $208,500
B. $210,500
C. $223,500
111
operations have recently shifted to the European market. Assuming that the company has converted
from LIFO to FIFO, determine the changes in the cash balance for the fiscal year that ended in 2016.
Balance Sheet
2017 2016 2015

Cash $276,000 $225,000
Loans $100,000 $50,000
Equity $200,000 $180,000
Income Statement
2017 2016 2015

Sales $410,000 $375,000
COGS $230, 000 $215,000
Gross Profit $180,000 $160,000
EBIT $100,000 $85,000
Taxes (30%) $30,000 $25,500
Net Income $70,000 $59,500
LIFO Reserves $19,500 $13,000 $10,500
A. Cash will increase by $750.
B. Cash will decrease by $750.
C. Cash will remain unchanged.
112
from LIFO to FIFO, the current ratio for the fiscal year that ended in 2016 is most likely ?
Balance Sheet
2017 2016 2015

Cash $276,000 $225,000
Loans $100,000 $50,000
Equity $200,000 $180,000
Income Statement
2017 2016 2015

Sales $410,000 $375,000
COGS $230, 000 $215,000
Gross Profit $180,000 $160,000
EBIT $100,000 $85,000
Taxes (30%) $30,000 $25,500
Net Income $70,000 $59,500
LIFO Reserves $19,500 $13,000 $10,500
A. $3.7
B. $3.88
C. $4.14
113
from LIFO to FIFO, calculate the percentage change in net profit margin for the fiscal year that
ended in 2017.
Balance Sheet
2017 2016 2015

Cash $276,000 $225,000
Loans $100,000 $50,000
Equity $200,000 $180,000
Income Statement
2017 2016 2015

Sales $410,000 $375,000
COGS $230, 000 $215,000
Gross Profit $180,000 $160,000
EBIT $100,000 $85,000
Taxes (30%) $30,000 $25,500
Net Income $70,000 $59,500
LIFO Reserves $19,500 $13,000 $10,500
A. 1.11%
B. 6.5%
C. 17.07%
Q.2193 Estimate the impact on the inventory turnover ratio if a firm converts its inventory valuation
method from LIFO to the FIFO during a period of rising prices.
A. T he Inventory turnover ratio increases.
B. T he Inventory turnover ratio decreases.
C. T he Inventory turnover ratio remains unchanged.
114
Q.2194 In which of the following cost systems are the COGS values most likely to differ when
changing from a periodic cost system to a perpetual cost system?
A. FIFO.
B. LIFO.
Q.2195 Compare the fixed asset turnover ratio under the FIFO and the LIFO methods of inventory
valuation.
A. T he Fixed asset turnover ratio is lower under FIFO.
B. T he Fixed asset turnover ratio is higher under FIFO.
C. T he Fixed asset turnover ratio is the same under FIFO and LIFO.
Q.2196 Estimate the impact on the debt-to-equity ratio due to a conversion from the LIFO inventory
system to the FIFO inventory system in a period of rising prices.
A. T he Debt-to-equity ratio increases under FIFO.
B. T he Debt-to-equity ratio decreases under FIFO.
C. T he Debt-to-equity ratio remains unchanged under FIFO.
Q.2197 Which of the following conditions will least likely increase the LIFO reserve?
A. Increasing inventory prices.
B. Increasing inventory quantities.
C. Decreasing inventory quantities.
115
Q.2198 A steel manufacturing firm purchases its inventory on a monthly basis and uses the LIFO
inventory system. However, due to a strike, the firm couldn't receive the order that it placed for
5,000 units at the price of $12/unit. Based on the data given in the following table, calculate the
additional profit the firm earned due to the inventory liquidation.
Date Price/Unit Cost

Jan-16 Purchased 3,000 Units $8 $24,000
Feb-16 Purchased 4,000 Units $10 $40,000
Mar-16 Sold 5,000 Units
A. $10,000
B. $12,000
C. $16,000
Q.2199 A hypothetical firm that reports under IFRS has written down its Inventory balance of 1,000
units from $770/unit to $690/unit in 2015. In the subsequent year, the value of inventory increased
from $690/unit to $790/unit due to increasing demand. Considering that the company sold 200 units
during 2016, calculate the total amount of Inventory written-up.
A. $100,000
B. $80,000
C. $64,000
Q.3780 A US-based Company reports its financial statements as per the US GAAP. In 2019, the
company reported a net income of USD 100,000. Its cost of goods sold was $50,000 and its ending
inventory balance was $12,000. T he company applied an income tax rate of 15% for that year.
T he company's LIFO reserve in 2018 was $3,000 and $5,000 in 2019. Calculate the cost of goods sold
for 2019 if the company reported as per the FIFO and not the LIFO method.
A. 48,000
B. 50,000
C. 52,000
116
inventory balance was $12,000. T he company applied an income tax rate of 15% for that year. T he
company's LIFO reserve in 2018 was $3,000 and $5,000 in 2019. Determine the amount of inventory
the company would have reported if it had used the FIFO method instead of the LIFO method.
A. 10,000
B. 12,000
C. 17,000
inventory balance was $12,000. T he company applied an income tax rate of 15% for that year. T he
company's LIFO reserve in 2018 was $3,000 and $5,000 in 2019. Determine the net income of the
company if it had used FIFO in place of LIFO.
A. 98,300
B. 100,000
C. 101,700
Q.3783 An artifact collecting company wrote down the value of a pottery vessel from $ 220,000 to
$100,000. It later discovered that the pottery vessel was supposed to be valued at $ 1,000,000.
Determine the amount reported on the balance sheet if the company uses IFRS to report its
A. $100,000
B. $220,000
C. $1,000,000
117
Q.3784 Consider the table below.
Purchases Sales
1st January 4, 000 units at $5 per unit
2nd March 3, 700 units at $10 per unit
20th March 3, 000 units at $10 per unit
28th March 2, 700 units at $15 per unit
Total 7, 000 units 6, 400 units
Calculate the company’s cost of sales on 28th March if it uses the perpetual weighted average cost
method.
A. $18,500
B. $25, 785
C. $40,500
Q.3785 T he table below summarizes the purchases and sales of a company during the second quarter
of its current financial year.
1 May Purchased 43,000 units at $ 15 per unit

7 May Sold 30,000 units at $ 23 per unit
15 June Purchased 47,000 units at $ 17 per unit
3 July Sold 40,000 units at $ 25 per unit
Use Periodic LIFO to calculate the company’s cost of goods sold.
A. $300,000
B. $1,104,000
C. $1,144,000
118
Q.3786 T he table below summarizes the purchases and sales of a company during the second quarter
of its current financial year.
1 May Purchased 43,000 units at $ 15 per unit

7 May Sold 30,000 units at $ 23 per unit
15 June Purchased 47,000 units at $ 17 per unit
3 July Sold 40,000 units at $ 25 per unit
Based on the table above, determine the difference between the company's ending inventory under
FIFO and perpetual LIFO.
A. $26,000
B. $340,000
C. $300,000
Q.3787 ABC Company values its inventory using the LIFO method. In its 2018 financial statement,
ABC company had inventory worth $500 Million. T he company’s LIFO reserve for 2018 is 80
million. Suppose the company had used FIFO instead of LIFO, its reported inventory would have
been closest to:
A. $420,000,000
B. $500,000,000
C. $580,000,000
119
Q.3853 A company’s accountant has noted the following for the year 2016:
Accounts payable on January 1st, 2016 $5, 000

st
Accounts payable on December 31 , 2016 $5, 500
Payments made during the year $7, 000
st
Inventory on January 1 , 2016 $1, 000
st
Inventory on December 31 , 2016 $800
T he cost of goods sold for the year 2016 is closest to:
A. $7,200
B. $7,700
C. $8,200
Q.3855 Company A entered into a contract with Company B to produce and supply a chemical
product. T he 5-year contract indicates that Company B has to produce 15 tons of the chemical
product. However, as per the contract, Company A has to bear the freight expense. T he total freight
expense estimated during the year for the contract was $0.8 million. How should the freight cost be
accounted for by Company A?
A. T he freight expense should be added to the cost of the inventory.
B. T he freight expense should be capitalized because of the contract duration.
C. T he freight expense has to be recorded as an operating expense in the income statement.
120
Reading 22: Long Lived Assets
Q.281 What is another term that would least likely be used to refer to long-lived assets?
A. Fixed assets.
B. Current assets.
C. Non-current assets.
Q.520 Magma, a company following IFRS, borrowed $1 million to construct a building. T he funds
were borrowed at an interest cost of 6% p.a. T he repayment was due seven years after completing
the construction. T he construction was completed within two years. T he company earned $10,000
as interest income during the construction period. Which of the following is the most appropriate
accounting treatment for interest expense and interest income?
A. Capitalize a net interest expense of $110,000.
B. Record an interest expense of $120,000 and an income of $10,000 in income the

statement.
C. Capitalize an interest expense of $120,000 and record an interest income in the income
statement for $10,000.
Q.522 A business entity buys a piece of machinery for €100,000 on a piece of machinery. T he
machinery is estimated to have a 10-year useful life and will have no residual value. T he output units
are estimated to be 40% of the equipment's lifetime production potential in the first year of
operation, with the equipment expected to produce €10,000 in sales and incur €1,000 in cash
expenses.
T he depreciation expense in the first year using the double-declining method is closest to?
A. €4,000.
B. €10,000
C. €20,000.
121
Q.523 Which of the following statements is least likely accurate?
A. IFRS permits the use of the revaluation model for reporting long-lived assets.
B. Under the revaluation model, long-lived assets are reported at their fair value.
C. US GAAP permits the use of the revaluation model for reporting long-lived assets.
Q.524 Which of the following is least likely an accurate accounting treatment for recording a loss on
a revaluation of a long-lived asset?
A. Reversal of revaluation surplus.
B. Expense in the income statement.
C. Creation of revaluation deficit as an asset.
Q.525 Following are the details of a long-lived asset:

Carrying value: $30,000
Undiscounted future cash flows: $31,000
Discounted future cash flows: $29,000
Fair value less selling cost: $28,000
How would the company most likely report the value of this asset under IFRS as well as under US
GAAP?
A. Under IFRS: $30,000

Under US GAAP: $30,000
B. Under IFRS: $29,000

C. Under IFRS: Reduce the value to $29,000 and record an impairment of $1,000 as an
expense
122
Q.526 T he capitalization of interest expenses does not impact which of the following?
A. Cash flow from investing activities
B. Interest coverage ratio
C. Fair value of an asset
Q.528 Under which of the following cases is the capitalization of development cost most likely
prohibited? In the case of:
A. an IFRS compliant company.
B. software development by a company following US GAAP.
C. the development of a life-saving drug by a company following US GAAP.
Q.529 FinMotor paid $459 million to acquire CarWash, and the acquired company's net fair value
amounted to $387 million. If FinMotors reports under IFRS and CarWash reports under US GAAP,
how should the balance amount be accounted for by FinMotor?
A. $72 million to be transferred to the capital reserve
B. $72 million to be recorded as goodwill
C. $72 million to be transferred to the revaluation surplus account
Q.530 How would an acquired trademark having a specified expiration date most likely be classified if
it relates to a product which the company expects to sell in the foreseeable future? T he trademark
can be renewed on the payment of a nominal fee.
A. A current asset.
B. An intangible asset with a finite life.
C. An intangible asset with an indefinite life.
123
Q.531 Arithma Co. exchanged a spare forklift purchased one year ago in return for an ambulance to
be used in its factory. T he company reports under US GAAP and does not have any idea of the fair
value of the ambulance. Arithma Co. should most likely record the value of the ambulance in its
financial statements as:
A. T he fair value of the forklift.
B. T he historical cost of the forklift.
C. T he carrying value of the forklift.
Q.1952 A firm just bought new equipment for $10 million with a useful life of 10 years and a salvage
value of $2 million. Using the double-declining balance method of depreciation, the depreciation
expense at the end of the 1st year is closest to:
A. $800,000.
B. $1.6 million.
C. $2 million.
Q.2246 Cobra Inc. made the following expenditures during the year 2015:
I. Purchased machinery worth $500,000
II. Paid wages amounting to $70,000 to two security guards to secure the site of the machinery
III. Paid expenses to a third-party firm amounting to $23,000 to maintain the plant
Which of the mentioned expenditures will most likely be capitalized in the 2015 financial statements
of Cobra Inc.?
A. Expenditure I.
B. Expenditures II & III.
C. Expenditures I, II & III.
Q.2247 Which of the following items should most likely be depreciated or amortized over the life of
the asset?
A. Land.
B. Goodwill.
C. Property, Plant, & equipment.
124
Q.2248 Lex T rading Co. recently imported equipment from Austria. T he details related to expenses
are given in the following table:
UA811 Drilling Equipment $71, 500, 000

Import Duties $2, 300, 000
Freight-in $200, 000
Operators T raining $800, 000
Installation Cost $1, 000, 000
Maintenance Cost $600, 000
Using the provided data, the total cost to be capitalized for the equipment is closest to:
A. $75,000,000.
B. $76,600,000.
C. $78,900,000.
Q.2249 Lex T rading Co. recently imported equipment from Austria, whose details related to
expenses are given in the following table. Using the provided data, calculate the total cost to be
expensed out.
UA811 Drilling Equipment $71,500,000

Import Duties $2,300,000
Feight-in $200,000
Operators T raining $800,000
Installation Cost $1,000,000
Generator $2,500,000
Maintenance Cost $600,000
A. $2,300,000
B. $2,600,000
C. $3,900,000
125
Q.2250 Determine the change in a firm's current ratio if the firm chooses to capitalize equipment-
related costs.
A. An increase in the current ratio.
B. A decrease in the current ratio.
C. T he current ratio remains unchanged.
Q.2251 T he capitalization of interests accruing during the construction of an asset is allowed in

which of the following?
A. IFRS.
B. US GAAP.
C. IFRS & US GAAP.
Q.2252 Identify which of the following statements regarding intangible assets are most likely
correct.
I. An intangible asset with a finite life is amortized over its useful life.
II. An intangible asset with an indefinite life is tested for impairment.
III. If an indefinite-lived intangible asset is impaired, the loss is recognized in the income
statement.
A. Statement III.
B. Statements I & II.
C. Statements I, II & III.
Q.2253 Which of the following is most likely an unidentifiable intangible asset?
A. Patent.
B. Goodwill.
C. Copyrights.
126
Q.2254 A German tech firm reporting under IFRS has incurred the following expenditures during the
year 2016:
SG&A $1,200
Research Cost $400
Depreciation $300
Interest Expense $600
Development Cost $800
Given the information presented, the total operating expenses of the firm is closest to:
A. $1,900.
B. $2,700.
C. $3,300.
Q.2255 Smart-Sun Corp. purchased a solar panel plant from Solar World Inc. in a business transaction
of $700 million. Assuming that the fair value of the identifiable assets related to the solar panel plant
of Solar World is $1,500 million with liabilities of $830 million, the goodwill to be reported on Smart
Sun's balance sheet is closest to:
A. $30 million.
B. $130 million.
C. $800 million.
Q.2256 If a hypothetical firm capitalizes its expenditures rather than expensing them, then
determine the most likely impact on its net income in subsequent years compared to a firm that
expenses out its expenditures.
A. T he capitalizing firm will have a lower net income in subsequent years.
B. T he capitalizing firm will have a higher net income in subsequent years.
C. T he capitalizing firm will have an equal net income as the expensing firm in subsequent
years.
127
Q.2257 Which of the following statements is most appropriate regarding the capitalization of
expenditures? Over the life of an asset, the total net income is:
A. Identical whether the cost is expensed or capitalized.
B. higher if the cost is capitalized instead of expensed.
C. Higher if the cost is expensed instead of capitalized.
Q.2258 Compared to a firm that capitalizes the cost of assets, a firm that expenses the cost of assets
will report total equity for the first years that will be:
A. Lower than the capitalizing firm.
B. Higher than the capitalizing firm.
C. T he same as the capitalizing firm.
Q.2259 Identify the most appropriate allocation of capitalized and expensed costs of assets in the
cash flow statement.
A. Capitalized costs are reported as an outflow from investing activities while expensed costs
are reported as an outflow from operating activities.
B. Capitalized costs are reported as an outflow from financing activities while expensed costs
are reported as an outflow from operating activities.
C. Capitalized costs are reported as an outflow from financing activities while expensed costs
are reported as an outflow from investing activities.
128
Q.2260 An analyst has gathered last year's financial data of an aviation firm that has purchased two
second-hand airplanes for $4.5 million in the current year. T he analyst's job is to evaluate if
capitalizing or expensing the costs of the airplanes will produce a lower Debt-to-equity ratio (in the
first year), assuming there are no taxes. If the $4.5 million are not included in the financial data he
gathered, what is the analyst most likely to conclude?
Sales $24,000,000
COGS $15,000,000
Operating Exp. $3,000,000
Assets $33,000,000
Debt $20,000,000
Equity $13,000,000
A. Expensing will produce a lower Debt-to-equity ratio.
B. Capitalizing will produce a lower Debt-to-equity ratio.
C. T he Debt-to-equity ratio will be the same under both methods.
Q.2261 An analyst has gathered last year's financial data of an aviation firm that has purchased two
second-hand airplanes for $4.5 million in the current year. If the $4.5 million are not included in the
financial data he gathered, then compare the return on assets ratio under both the capitalized and
expensed cost methods, assuming there are no taxes.
Sales $24,000,000
COGS $15,000,000
Operating Exp. $3,000,000
Assets $33,000,000
Debt $20,000,000
Equity $13,000,000
A. RoA is higher under the capitalized cost method.
B. RoA is higher under the expensed cost method.
C. RoA is the same under the capitalized and the expensed cost methods.
129
Q.2262 An artificial intelligent start-up in Silicon Valley is working on software for robot babysitters.
Assuming that the firm follows US GAAP, how will the firm's accountant allocate the Research and
Development costs most appropriately?
A. Expense both Research and Development costs.
B. Expense the Research cost and capitalize the Development cost.
C. Capitalize the Research cost and expense the Development cost.
Q.2263 Identify the most likely effects on ratios of a firm that capitalizes the cost of assets.
A. Higher Interest coverage, higher Equity and lower Income variability
B. Lower Interest coverage, higher Equity and lower Income variability
C. Higher Interest coverage, lower Equity and lower Income variability
Q.2264 Which of the following is least likely a criterion of identifiable intangible assets under IFRS?
A. T he assets should provide future economic benefits.
B. T he firm should have control and legal rights over the asset.
C. T he assets should be capable of being inseparable from the firm.
Q.2265 A small business with annual revenues of $170,000 and costs of sales of $80,000 has recently
acquired its first fixed asset for the cost of $100,000, which will be fully depreciated in 8 years.
Assuming that the only operating cost of the business is this depreciation expense, the net income of
the firm using the straight-line depreciation method is closest to:
A. $77,500.
B. $84,500.
C. $90,000.
130
Q.2266 Calculate the Net income of a firm with $5 million in Revenues, $2.77 million in COGS and
$0.6 million in SG&A. Assume that the firm uses the double-declining depreciation method and its
only fixed asset was purchased two years ago for $2.5 million with a useful life of 6 years.
A. $0.63 million
B. $1.21 million
C. $1.26 million
Q.2267 T wo hypothetical firms in the same industry are using two different methods of depreciation.
Assuming that Firm A uses the straight-line depreciation method and Firm B uses the double-declining
method of depreciation, determine which firm will most likely report higher Profit margins in the
early years.
A. Firm A will have higher Profit margins in the early years.
B. Firm B will have higher Profit margins in the early years.
C. Both the firms will have the same Profit margins in the early years.
Q.2268 For the past year, Firm X -- an Austrian high-tech firm that follows IFRS -- has spent $5
million on research costs and $5 million on development costs on a staff management software
whose feasibility has been established. Firm Z -- an American space-tech firm that reports under US
GAAP is in the early stages of a similar whose completion is still in question, but the firm has also
spent $5 million on research costs and $5 million on development costs over the same period. If both
firms have had the same revenue, which firm will most likely report the highest net income?
A. Firm X will report a higher net income than Firm Z.
B. Firm Z will report a higher net income than Firm X.
C. Firm X and Firm Z will report the same net income.
131
Q.2269 A water purification firm has purchased a water filtering plant for $450,000 with a salvage
value of $50,000 and a useful life of 6 years. T he maximum filtering capacity of the plant is 500,000
litres of water, but the firm is expected to filter 150,000 litres of water in the first two years,
80,000 litres in the third year, and 40,000 litres/year for the next three years. T he depreciation
expense of the firm in the 3rd year under the units-of-production method is closest to:
A. $64,000.
B. $66,667.
C. $72,000.
Q.2270 A water purification firm has purchased a water filtering plant for $450,000 with a salvage
value of $50,000 and a useful life of 6 years. T he maximum filtering capacity of the plant is 500,000
litres of water, but the firm is expected to filter 150,000 litres of water in the first two years,
80,000 litres in the third year, and 40,000 litres/year for the next three years. T he net-book value of
the filtering plant at the beginning of the 5th year under the units-of-production method is closest to:
A. $32,000.
B. $64,000.
C. $114,000.
Q.2271 Bill T uckerman purchased a business for $50 million, which included a new building worth
$40 million and four trucks with the book value for each truck of $2.5 million and a salvage value of
$500,000 each. Calculate the depreciation expense at the end of the first year using the component
method of depreciation if the useful life of the building is 20 years and the useful life of the trucks is
five years.
A. $2.5 million
B. $3.6 million
C. $4.0 million
132
Q.2272 Bill T uckerman purchased a business for $50 million which included a new building worth
$40 million and 4 trucks, each with a book value of $2.5 million and a salvage value of $500,000.
Calculate the depreciation expense at the end of the first year if the useful life of the building is 10
years and is depreciated using the Straight-line method while the trucks are depreciated using the
double-declining balance method over 10 years.
A. $5 million
B. $6 million
C. $8 million
Q.2273 Identify which of the following statements are most likely correct?
1. Under accelerated depreciation, the Net income is higher in subsequent years.
2. T he total depreciation is higher under accelerated depreciation and lower under straight-line
depreciation.
3. T he asset turnover ratio is lower under straight-line depreciation.
A. Statements 1 & 2.
B. Statements 1 & 3.
C. Statements 1, 2 & 3.
Q.2274 Which of the following conditions will most likely result in the lowest depreciation expense?
A. Increase in useful life and increase in salvage value.
B. Increase in useful life and decrease in salvage value.
C. Decrease in useful life and decrease in salvage value.
Q.2275 York Corp. purchased a plant for $45 million with a useful life of 8 years and a salvage value
of $5 million. At the beginning of the 4th year, York decided to decrease the salvage value to $3.2
million. T he depreciation expense for the 4th year if York uses the Straight-line method of
depreciation is closest to:
A. $4.36 million.
B. $5.00 million.
C. $5.36 million.
133
Q.2276 Intangible assets with finite useful lives mostly differ from intangible assets with infinite
useful lives with respect to the accounting treatment of:
A. Costs.
B. Revaluation.
C. Amortization.
Q.2277 Identify the least appropriate statement regarding the revaluation of long-lived assets.
A. IFRS allows long-lived assets to be revaluated at their fair value, but US GAAP does not.
B. Under US GAAP, long-lived assets are reported at either their depreciated cost or the fair
value of the asset.
C. Any subsequent upward revaluation in the fair value of long-lived assets is reported as a
revaluation surplus in net income.
Q.2278 A long-lived asset was revalued downward from its historical cost of $1,700 to $1,300. In the
subsequent year, the value of the asset increased from $1,300 to $1,900. T he gain to be reported in
the income statement is closest to:
A. $200
B. $400
C. $600
134
Q.2279 An accountant is analyzing the accounts of a Belgian chocolate firm. T he information

regarding the cost of its ice cream plant is given in the following table. Calculate the amount of
impairment loss if the Belgian firm reports under IFRS.
Book Value of Plant $400,000

Acc. Depreciation $25,000
Fair Value $370,000
Selling Cost $15,000
Value in Use $360,000
Expected Future Cash Flow $350,000
A. $15,000
B. $25,000
C. $40,000
Q.2280 An accountant is analyzing the financial reports of an American chocolate firm. T he

information regarding the cost of its ice cream plant is given in the following table:

Fair Value $370,000
If the American firm reports under US GAAP, the new balance sheet value of the asset is closest to:
A. $350,000.
B. $360,000.
C. $370,000.
135
Q.2281 An accountant is analyzing the accounts of a Belgian chocolate firm. T he information

regarding the cost of its ice cream plant is given in the following table. Assuming that the firm
abandoned the plant, calculate the value of the loss recognized in the Income statement.

Fair Value $370,000
A. $370,000
B. $375,000
C. $400,000
Q.2282 Identify the most appropriate impact of impairment.
A. If an asset is impaired, the Return on Asset, Return on Equity, and Profit margins
decrease.
B. If an asset is impaired, the Return on Asset and Return on Equity increase, but the Profit
margins decrease.
C. If an asset is impaired, the Return on Asset ratio and Profit margins decrease, but the
Return on Equity increases.
Q.2283 Which of the following is the most likely impact of an impairment loss on a firm's cash flow
statement?
A. Total cash flow increases.
B. Total cash flow decreases.
C. Total cash flow remains unchanged.
136
Q.2284 An asset has a gross book value of $60 million and accumulated depreciation of $22 million.
Calculate the approximate remaining life of the asset if the depreciation expense is $3.8 million.
A. 6 years.
B. 10 years.
C. 16 years.
Q.2285 T wo hypothetical firms in the same industry are using two different methods of depreciation.
Assuming that Firm A uses the straight-line depreciation method and Firm B uses the double-declining
depreciation method, determine which firm will report a lower debt-to-asset ratio in the later years
of an asset's useful life.
A. Both firms will have equal Debt-to-Assets ratios at every point in time.
B. Firm A will report a lower Debt-to-Assets ratio in the later years of an asset's useful life.
C. Firm B will report a lower Debt-to-Assets ratio in the later years of an asset's useful life.
Q.3842 A local investor has recently acquired a franchise of an online ticketing website, whose
components and useful lives are given in the following table:
Assets Value Useful life

Patent $25, 000 20
Copyrights $12, 000 12
T rademark $8, 800 5
Goodwill $7, 000 −
Physical servers $15, 000 15
Assuming that the salvage value of the patent is $3,000 and that the trademark can be renewed every
5th year for $1,500, the total amortization expense for the first year using the straight-line method is
closest to:
A. 2100
B. 3860
C. 4860
137
Q.3845 A firm’s financial statements show that the value of plant, property & equipment is $4.5
million, land is $2.5 million, and accumulated depreciation is $1.8 million. If the depreciation expense
for the year is $0.15 million, then the average age of the firm's PPE is closest to:
A. 12 years.
B. 18 years.
C. 34.67 years.
138
Reading 23: Income Taxes
Q.282 Unused tax losses expected to be used in future periods will:
A. increase deferred tax assets.
B. increase deferred tax liabilities.
C. have no impact on tax assets nor liabilities.
Q.284 Deferred tax liabilities (DT L) mostly arise when:
A. the income tax expense is the same as the payable taxes.
B. the income tax expense is temporarily smaller than the payable taxes.
C. the income tax expense is temporarily greater than the payable taxes.
Q.285 A company has the following:
Income Tax Expense $60,000

Change in Deferred Tax Assets +$2,500
Change in Deferred Tax Liabilities +$3,000
What is the company's income tax payable?
A. $59,500
B. $60,000
C. $60,500
139
Q.532 A company engaged in organizing corporate parties acquired another company engaged in the
supply of electrical fittings. T he company acquired assets having a carrying value of $4 million but
recorded it at its fair value of $5 million.
Assuming that the tax base of the assets was not revalued, which of the following statements best
describes the correct accounting treatment of the deferred tax under IFRS, as well as under US
GAAP?
A. A deferred tax will be created under IFRS but not under US GAAP.
B. A deferred tax will be created under IFRS as well as under US GAAP.
C. A deferred tax will neither be created under IFRS nor under US GAAP.
Q.533 Which of the following is recorded in the books of account if the deferred tax asset cannot be
reversed in the foreseeable future under US GAAP?
A. Tax provision.
B. Revaluation surplus.
C. Valuation allowance.
Q.534 Which of the following does not result in a temporary timing difference?
A. T he expenses disallowed under income tax.
B. T he difference in depreciation method adopted for the financial books and income tax
purpose.
C. T he expenses recorded on an accrual basis in the financial books but the deduction is
allowed for income tax purposes only on the payment of the expense.
Q.535 Which of the following may least likely result in a change in the carrying value of the deferred
tax?
A. Increase in COGS.
B. A change in the tax rate.
C. A redetermination of recoverability of the deferred tax asset.
140
Q.536 An analyst gathered the details of an asset's depreciation methodology:

Depreciation (income tax): 10% Written Down Value (WDV)
Depreciation (financial books): 8% Straight-Line Depreciation (SLM)
Assume that nine years of useful life have lapsed and the total useful life is ten years. What is the
least appropriate accounting treatment for the deferred taxes?
A. No change.
B. Reversal of deferred tax liability.
C. Creation of deferred tax liability.
Q.537 Choose the correct accounting treatment for a deferred tax in the case of a revaluation of
property, plant, and equipment (PPE) if the company follows US GAAP?
A. To be charged to equity.
B. No revaluation is allowed.
C. To be charged on the income statement.
Q.538 Under which of the following would tax assets most likely (which do not correspond to any
underlying asset or liability) be classified under US GAAP?
A. Current asset.
B. Non-current asset.
C. Cannot be ascertained.
Q.539 Which of the following class of companies is most likely required to perform reconciliation
between actual and expected tax expenses under US GAAP?
A. All companies.
B. Public companies.
C. Private companies.
141
Q.540 If a deferred tax liability is not expected to be reversed in the future, how should it most likely
be classified?
A. Equity.
B. Income.
C. Liability.
Q.541 A company has net deferred tax assets amounting to $2,250,000. Which of the following
components of the financial statements would benefit from an increase in the statutory tax rate?
A. T he income statement will benefit, but not the balance sheet.
B. T he balance sheet will benefit, but not the income statement.
C. Both the income statement and the balance sheet will benefit.
Q.542 What would be the result if accounting standards require the capitalization of an expenditure,
whereas income tax laws require recording it as an expense?
A. Deferred tax asset.
B. Deferred tax liability.
C. No deferred tax asset or liability.
Q.543 Under which of the following accounting standards would a deferred tax be recognised on
temporary differences arising from undistributed profits of associates (investments) when the
investor controls the sharing of profit?
A. IFRS.
B. US GAAP.
C. Neither under IFRS nor under US GAAP.
142
Q.2286 T he tax-related expense that is recognized in a firm's income statement is most likely known
as:
A. Tax base.
B. Tax payable.
C. Tax expense.
Q.2287 Identify the most appropriate difference between accounting income and taxable income.
A. T here is no difference between accounting income and taxable income.
B. Accounting profit does not subtract interest income while taxable income is calculated
after subtracting interest expenses.
C. Accounting income is pre-tax financial income that is reported on the income statement
based on accounting standards, while taxable income is pre-tax income subject to being taxed.
Q.2288 Which of the following is most likely the definition of a deferred tax liability? A balance sheet
account that results in the excess of:
A. tax payable over tax expense that a firm is liable to pay in the future.
B. tax expense over tax payable that a firm is liable to pay in the future.
C. tax expense over tax payable that a firm is expected to receive in the future.
Q.2289 T he reduction in deferred tax assets due to the expectation that the deferred tax asset will
not be recovered is called a:
A. Valuation allowance.
B. Permanent difference.
C. Tax loss carry forward.
143
Q.2290 Identify the condition that will most likely create a deferred tax liability (DT L).
A. Revenue is recognized in the tax return for taxable income before it is recognized in the
income statement.
B. Expenses or tax-deductible charges are recognized for tax purposes before they are
deducted from the income statement.
C. Expenses or tax-deductible charges are recognized in the income statement before they
are deducted from taxable income for tax purposes.
Q.2291 Which of the following statements is/are inaccurate?

I. Post-employment benefits and warranty expenses result in a deferred tax liability.
II. Deferred tax liabilities provide future tax savings.
III. If a deferred tax liability is not expected to reverse, a valuation allowance is created.
A. I
B. II & III
C. I, II & III
Q.2293 A firm uses straight-line depreciation in its income statement for accounting purposes and
uses double-declining depreciation for tax purposes. Determine the most likely result due to the
difference in depreciation methods.
A. A deferred tax asset is created.
B. A deferred tax liability is created.
C. Since the differences are in depreciation methods, no deferred tax assets or deferred tax
liabilities are created.
144
Q.2294 A firm purchased equipment for $35,000 and expensed it from the income statement,
whereas for tax purposes, the firm capitalized the $35,000 and depreciated it over five years.
Determine if a Deferred Tax Asset or a Deferred Tax Liability is created.
A. A deferred tax asset is created.
B. A deferred tax liability is created.
C. No deferred tax assets or deferred tax liabilities are created as the differences are
temporary.
Q.2295 Lex Corp uses straight-line depreciation to depreciate the $550,000 cost of one of its assets
for tax purposes. For reporting purposes, Lex Corp depreciates the same asset using the accelerated
depreciation method. Calculate the tax base of the asset for the first year if its useful life is ten
years.
A. $55,000
B. $440,000
C. $495,000
Q.2296 In the income statement, a firm depreciates its assets of $900,000 over five years using the
straight-line method. If, for tax reporting purposes, the company depreciates the same asset over ten
years using double-declining depreciation, which of the following best describes the accounting
treatment for the first year?
A. A deferred tax asset of $180,000 is created.
B. A deferred tax liability of $180,000 is created.
C. No deferred tax asset or deferred tax liability is created as there is no difference between
tax expense and tax payable.
145
Q.2297 A textile company in T urkey purchased a T-shirt printing machine for $1,200,000 with a
salvage value of $150,000. For reporting purposes, the textile company depreciates the asset over 6
years using the straight-line method and, for tax purposes, the company depreciates the printer over
8 years using accelerated depreciation. Assuming that the tax rate is 40%, and EBIT DA is $670,000
each year, which of the following is most likely the deferred tax asset or liability to be created in the
first year?
A. A deferred tax asset of $40,000 is created.
B. A deferred tax liability of $50,000 is created.
C. A deferred tax liability of $125,000 is created.
years using the straight-line method and, for tax purposes, the company depreciates the printer over
8 years using accelerated depreciation. Assuming that the tax rate is 40% and EBIT is $670,000 each
year, calculate the tax base at the end of the 3rd year.
A. $506,250
B. $675,000
C. $693,750
years using the straight-line method. For tax purposes, the company depreciates the printer over 8
years using double accelerated depreciation. Assuming a tax rate of 40% and EBIT DA of $670,000
each year, calculate the taxable income in the 4th year.
A. $326,100
B. $495,000
C. $543,438
146
salvage value of $150,000. For reporting purposes, the textile company depreciates the asset over
six years using the straight-line method. For tax purposes, the company depreciates the printer over
eight years using accelerated depreciation. Assuming a tax rate of 40% and EBIT DA of $670,000 each
year, calculate the pre-tax income for the 2nd year.
A. $320,000
B. $445,000
C. $495,000
Q.2301 Q.2301 A textile company in T urkey purchased a T-shirt printing machine for $1,200,000
with a salvage value of $150,000. For reporting purposes, the textile company depreciates the asset
over six years using the straight-line method. For tax purposes, the company depreciates the printer
over eight years using accelerated depreciation. Assuming a tax rate of 40% and EBIT DA of $670,000
each year, the deferred tax asset or deferred tax liability created in the 6th year is closest to:
A. a deferred tax asset of $41,500 is created.
B. a deferred tax asset of $71,500 is created.
C. a deferred tax liability of $41,500 is created.
Q.2302 A Mexican supplier of copper sold 200 tons of copper wire for $400,000 on credit. Due to
uncertain market conditions, the supplier recorded receivables of $400,000 and $80,000 of
allowance for bad debt expenses in its income statements. T he tax rules of Mexico do not allow the
deduction of bad debt expenses until the creditors default and receivables are deemed worthless. If
the tax rate in Mexico is 28%, then the deferred tax asset or liability based on the tax base of
receivables is most likely a:
A. deferred tax asset (DTA) of $22,400.
B. deferred tax liability (DT L) of $89,600.
C. deferred tax asset (DTA) of $112,000.
147
Q.2303 Marcus Inc. owned an asset with a carrying value of $100,000 and a tax base of $80,000,
resulting in deferred tax liability for 2015 of $8,000 at a 40% tax rate. T he firm also reported
warranty expenses of $10,000, which are not deductible for tax purposes, resulting in a deferred tax
asset of $4,000. If the tax rate has increased from 40% to 45% in 2016, the net change in income tax
expense is closest to:
A. $500.
B. $1,000.
C. $4,000.
Q.2304 A firm owned a plant with the carrying value given in the table below and a tax base asset of
80% of carrying value. T he firm also reported non-deductible bad debt expenses of $40,000 for the
year 2016, which resulted in a deferred tax asset.
Asset's Carrying Value $400,000

Asset's Tax Base $320,000
Bad-debt Expenses $40,000
DT L $20,000
DTA $10,000
Tax Payable $80,000
Assuming that the tax rate has increased from 25% to 40% in the jurisdiction the firm operates in,
the change in the deferred tax account (Change in DT L-Change in DTA) firm for the year is closest
to:
A. $6,000.
B. $10,000.
C. $18,000.
Q.2305 Identify the most appropriate condition related to deferred taxes.
A. Both permanent and temporary differences between pre-tax income and taxable income
create deferred tax assets or deferred tax liabilities.
B. Permanent differences between pre-tax income and taxable income do not result in
deferred tax assets or deferred tax liabilities, but temporary differences do.
C. Temporary differences between pre-tax income and taxable income do not result in
deferred tax assets or deferred tax liabilities, but permanent differences do.
148
Q.2306 T he changes in deferred taxes for a company due to a change in tax rate from 45% to 35% in
a specific jurisdiction are provided in the following table:
Change DT L $14,000
Change DTA $3,500
Tax Payable $15,000
Pretax Income $100,000
Given the information, the effective tax rate for the firm is closest to:
A. 10.5%.
B. 25.5%.
C. 32.5%.
Q.2307 Which of the following will most likely result in a permanent difference between taxable
income and pre-tax income?
A. A firm enjoys tax credits on the imports of certain medicines.
B. A firm uses different methods of depreciation for reporting purposes and tax purposes.
C. A firm deducts warranty expenses from its income statement but does not deduct them
from its tax statements until the receivables are deemed worthless.
Q.2308 A microfinance bank in India has reported a deferred tax asset (DTA) of $1.2 million on its
balance sheet. Due to new banking reforms and tight monetary policies, the bank has consistently
reported declining earnings. After the most recent taxable income of $200,000, the firm believes it
will have a further decline of 35% in its taxable income consistently. Assuming that the firm also
believes that its tax assets will not be realized at the same rate, then the amount of valuation
allowance is closest to:
A. $70,000.
B. $420,000.
C. $780,000.
149
Q.2309 Which of the following statements regarding the effects of the Valuation allowance on
Deferred taxes is most likely correct?
A. A decrease in future taxable income to recover tax assets will increase the Valuation
allowance and decrease Deferred Tax Assets.
B. A decrease in future taxable income to recover tax assets will decrease the Valuation
allowance and increase Deferred Tax Assets.
C. An increase in future taxable income to recover tax assets will increase the Valuation
allowance and increase Deferred Tax Assets.
Q.2310 A newly incorporated construction company reported revenue of $690,000, cost of goods
sold (COGS) of $550,000, and operating expenses of $210,000. Assuming a tax rate of 25%, the firm's
should most likely report a:
A. deferred tax assets of $17,500.
B. deferred tax assets of $70,000.
C. deferred tax liabilities of $17,500.
Q.2311 If the carrying value of an asset is greater than the tax base of the asset and a reversal of
difference is not expected, then the deferred tax is treated as:
A. asset.
B. equity.
C. liability.
Q.2312 Which of the following is the requirement related to the presentation of deferred taxes
under US GAAP? Under US GAAP:
A. It is required to present the net effect of DTA and DT L on the balance sheet.
B. It is required to present DTA and DT L in separate accounts of the balance sheet
C. DTA and DT L can be presented either in separate accounts or as the net off DTA and
DT L.
150
Q.2313 Which of the following will result in a taxable temporary difference?
A. Using double-declining depreciation for tax purposes and straight-line depreciation for
reporting purposes.
B. Delaying warranty expenses for tax purposes but expensing them immediately in the
income statement.
C. Capitalizing Research & Development for tax return purposes and expensing it in the
income statement.
Q.2314 A highly cyclical British company reports warranty expenses of $30,000 in anticipation
every year. However, during the current year, none of the customers claimed their 5-year
warranties. Assuming a tax rate of 20%, the tax base of the warranty expense for the year is closest
to:
A. $0
B. $6,000
C. $30,000
Q.2315 Which of the following will least likely result in a difference between a firm's income tax
expense and the tax amount calculated by its statutory income tax rate?
A. Tax credits.
B. Different tax jurisdictions.
C. Different depreciation methods.
Q.2316 ABC Company had a loss of $100,000 in 2015. In 2016, the firm managed to earn a taxable
income of $180,000. If the tax rate is 26%, then calculate the firm's income tax expense for 2016.
A. $20,800
B. $26,000
C. $46,800
151
Q.2317 Assuming inflationary environment, which of the following accounting activities will most
likely result in a deferred tax liability?
A. A firm receives payments in advance for goods to be delivered in two years.
B. A firm expenses software development costs in its income statement but capitalizes
software development costs for tax purposes.
C. A firm uses the last-in, first-out (LIFO) inventory valuation method for tax purposes and
the first-in, first-out (FIFO) method for reporting purposes.
Q.2318 Which of the following is least likely an effect of an increase in tax rates?
A. An increase in tax rates will increase Tax payable.
B. An increase in tax rates will decrease the EBIT margin.
C. An increase in tax rates will increase Deferred Tax Liabilities.
Q.2319 Hussey Associates reported earnings after taxes of $119,000 for the year 2016. T he firm
carries assets of $1,050,000, liabilities of $700,000, including a deferred tax liability of $250,000, and
equity of $350,000. Assuming that the deferred tax liability is not expected to reverse in the future,
the return on equity ratio after taking into account the effect of the deferred tax liability is closest
to:
A. 19.8%.
B. 34.1%.
C. 47.6%.
Q.2320 Under IFRS, the deferred taxes created due to the revaluation of assets are most likely
reported as:
A. asset.
B. equity.
C. liability.
152
Q.2321 Which of the following is most likely the definition of Deferred Tax Assets?
A. A balance sheet account that results in the excess of Tax expense over Tax payable that a
firm is liable to pay in the future.
B. A balance sheet account that results in the excess of Tax payable over Tax expense that a
firm is expected to recover in the future.
C. An income statement account that results in the excess of Tax payable over Tax expense
that a firm is expected to recover in the future.
Q.2322 Which of the following accounting treatments will most likely result in a Deferred Tax Asset
(DTA)?
A. Revenue is recognized in the tax return for taxable income before it is recognized in the
income statement.
B. Revenue is recognized in the income statement before it is recognized in the tax return
for taxable income purposes.
C. Expenses or tax-deductible charges are recognized for tax purposes before they are
deducted from the income statement.
Q.2323 A small firm sells home-made vacuum cleaners which usually require after-sale services and
frequent warranty claims. Every year, the firm expenses out $10,000 from its gross profit in the
income statement, while under tax accounting, the warranty claim is only deducted when the
warranty is actually claimed. In its financial statements, the firm should most likely :
A. create a deferred tax asset of $10,000.
B. create a deferred tax liability of $10,000.
C. not create any deferred tax asset/liability.
153
Q.2324 Which of the following is the most appropriate definition of a deductible temporary
difference?
A. It is a temporary difference that results in an expected increase in future taxable income.
B. It is a temporary difference that results in an expected decrease in future taxable income.
C. It is a temporary difference that will not increase nor decrease expected future taxable
income.
Q.2325 Which of the following statement is most likely correct?A valuation allowance is used to
reduce:
A. Deferred tax assets only.
B. Deferred tax liabilities only.
C. Both deferred tax assets and deferred tax liabilities.
Q.3791 T he table below contains information that was extracted from the financial statements of
XYZ Company. Use the information to determine the effective tax rate of the company for the year
2015.
Financial Years 2015 Financial Year 2014

(Amount in $) (Amount in $)
Income before taxes 88,000 75, 000
Tax Payable 10,500 7, 500
Deferred Tax Assets 65,000 50, 000
Deferred Tax Liabilities 35,000 25, 000
A. 0.0625
B. 0.1193
C. 0.233
154
Q.3792 T he following Exhibit will be used for questions 2 and 3.
EBIT Financial Year 2019

USA $73,456
Foreign $92,345
Provisions for Income Taxes
Current Income Taxes
Federal $5,610
Foreign $3,424
Deferred Income Taxes
Federal ($2345)
Foreign $340
T he provision for income taxes recorded for 2019 was closest to:
A. $2005
B. $7029
C. $9034
Q.3793 T he following Exhibit will be used for questions 2 and 3.
EBIT Financial Year 2019

USA $73,456
Foreign $92,345
Provisions for Income Taxes
Current Income Taxes
Federal $5,610
Foreign $3,424
Deferred Income Taxes
Federal ($2345)
Foreign $340
Determine the company’s effective tax rate for the year 2019.
A. 0.0408
B. 0.0424
C. 0.0444
155
Q.3794 Select information from a company’s financial statements is shown below.
Revenue $790, 000

Cost of goods sold $610, 000
Rent $100, 000
Salaries and wages $120, 000
If the company’s tax rate for that year was 20%, which of the below statements is most likely
correct?
A. T he firm reported a deferred tax asset of 8,000.
B. T he firm reported a deferred tax liability of 8,000.
C. T he firm reported a deferred tax asset of 40,000.
Q.3795 A company made profits of $52,300 in its first year of business. T he company earned a
taxable income of $ 150,000 in its second year of business. Assume the following:
I. the effective tax rate is 20%
II. no income taxes were paid in the first year
III. T he resulting DT L is paid off in the second year
Given the information above, the company’s income tax expense in its second year of business is
closest to:
A. 10,460
B. 35,000
C. 40,460
Q.3854 Lex Corp. uses straight-line depreciation to depreciate the $550,000 cost of one of its assets
for tax purposes. For reporting purposes, Lex Corp. depreciates the same asset using the
accelerated depreciation method. If the asset’s useful life is ten years, the tax base of the asset for
the first year is closest to:
A. $55,000
B. $440,000
C. $495,000
156
Reading 24: Non-Current (Long-Term) Liabilities
Q.286 All things being equal, if the coupon on a bond is greater than the market rate of interest, the
bond will be issued at:
A. Par.
B. A discount.
C. A premium.
Q.287 Proceeds from issuing a bond are recorded as an inflow in:
A. the investing portion of the statement of cash flows (CFI).
B. the financing portion of the statement of cash flows (CFF).
C. the operating portion of the statement of cash flows (CFO).
Q.288 A hypothetical high-tech industry is composed of three companies. Some notes regarding the
three companies are given below:
Company A: Low leverage, low coverage ratio
Company B: Low leverage, high coverage ratio
Company C: High leverage, high coverage ratio
Taking into account both ratios, the most solvent company is most likely :
A. Company A.
B. Company B.
C. Company C.
Q.544 T he equity multiplier represents the relationship between which of the following
components?
A. Equity and debt.
B. Equity and assets.
C. Equity and net profit available for equity shareholders.
157
Q.545 Which of the following cases would most likely result in the creation of a net pension asset?
A. Carrying value of the pension trust's assets: $240 million

Fair value of the pension trust's assets: $167 million
Present value of pension obligations: $196 million
B. Carrying value of the pension trust's assets: $240 million

C. Carrying value of the pension trust's assets: $240 million

Q.546 Michael Bay is currently analyzing the performance of a manufacturing company based in
Calgary. T he industry analysis performed by Bay (including a review of reports by recognized
agencies) indicates that the pension expense was roughly 2% of the total salary expenditure in
manufacturing companies of similar size operating in the same industry.
Bay divides the pension expense appearing in the income statement by the total salary expense and
notices that the result is only 0.3%. Bay concludes that the company has not reported the pension
expense accurately or that the assumptions taken by the company for calculating the pension
expense were incorrect.
Is Michael Bay's conclusion correct? Why?
A. No, Bay ignores that the entire pension expense is not charged as an expense.
B. Yes, Bay compared it with industry analysis and has made the right conclusion.
C. No, Bay is not an auditor and, hence, should not challenge the accounting standards
employed.
Q.547 According to US GAAP, interests incurred on a capital lease are most likely classified under:
A. cash flow from financing activities.
B. cash flow from operating activities.
C. either cash flow from operating or financing activities.
158
Q.548 Company A gives a car on a 'sales-type lease' to Company B. Company A is involved in the sale
and purchase of furniture. Under which would the lease principal be recognized by company A under
US GAAP?
A. Cash flow from investing activities.
B. Cash flow from operating activities.
C. Either operating or investing (management's choice).
Q.549 Under which of the following lease types would the lessee's profit most likely be higher in the
initial years?
A. Operating lease.
B. Sales-type lease.
C. Direct financing lease.
Q.550 Debt covenants impose restrictions that may be financial or operational in nature. T hey may,
however, still be beneficial to the borrower in some way. How would debt covenants most likely be
beneficial for the borrower?
A. T hey reduce the cost of equity.
B. Increase the cost of borrowing.
C. T hey reduce the cost of borrowing.
Q.551 T he disclosure in the notes to the accounts can help determine the future cash outflow of a
company on account of the long-term debt. Which of the following information is most likely
mentioned in the notes?
A. Effective interest rates.
B. Plans for repaying long-term debt.
C. Future plans for raising long-term debt.
159
Q.552 Flavo Inc. reports under IFRS and has outstanding bonds amounting to $150 million with five
years to maturity. T he company decides to redeem the bonds at the call price of $144 million. T he
correct accounting treatment for the gain on redemption is most likely :
A. $6 million to be adjusted from opening retained earnings.
B. $6 million to be recorded as a gain in the income statement.
C. $6 million to be recorded as a deferred expenditure in the balance sheet. T his will be

amortized over five years.
Q.553 Market interest rates are least likely inversely correlated with which of the following?
A. Default rate.
B. T he fair value of the bond.
C. T he economic liability of the company.
Q.554 T he effective interest rate at the time of the issuance of a 5% bond was 5.5%. T he bond was
most likely issued at:
A. par.
B. a discount.
C. a premium.
Q.555 Which of the following is not generally specified as a debt covenant?
A. A restriction on the issuance of additional debt.
B. A restriction on the issuance of additional equity.
C. Neither a restriction on the issuance of additional debt nor a restriction on the issuance of
additional equity.
160
Q.2326 A five-year corporate bond is trading for $960 and offers a coupon rate of $70 per year. If the
market interest rate is 8%, the face value of the bond is closest to :
A. $930
B. $960
C. $1,000
Q.2327 Which of the following statements is/are most likely accurate?

Statement I. T he coupon rate is stated in the bond contract.
Statement II. T he market rate of interest is used to calculate the periodic interest payment to the
bondholder
Statement III. T he coupon rate is always greater than the market interest rate.
A. Statement I.
B. Statements I and III.
C. Statements II and III.
Q.2328 A 3-year semi-annual pay bond with the coupon rate of 3% is trading at face value. T he
market interest rate is most likely :
A. Exactly 3%.
B. Lower than 3%.
C. Higher than 3%.
Q.2329 A 10-year coupon bond is trading at a discount. If the market interest rate is 10.5%, then the
coupon rate of the bond is closest to:
A. 10%.
B. 10.6%.
C. 11%.
161
Q.2330 If a firm issues a 6-year corporate bond worth $5 million at par, the effect on the bond
liability throughout the bond's life will most likely :
A. Increase.
B. Decrease.
C. Remain the same.
Q.2331 Which of the following is least likely the relationship between the coupon rate and the
market interest rate?
A. If the coupon rate is greater than the market interest rate, the bond will trade at a
discount.
B. If the market interest rate is greater than the coupon rate, the bond will trade at a
discount.
C. If the coupon rate is greater than the market interest rate, the bond will trade at a
premium.
Q.2332 A corporation issued a 5-year $100 million bond and recorded a bond liability of $115 million.
If the firm pays $7 million in coupons each year, then the amount of bond liability at the end of the
5th year will be closest to:
A. $80 million.
B. $100 million.
C. $115 million.
Q.2333 A 3-year corporate bond with a coupon rate of 7% and a face value of $10,000 was issued at
the market interest rate of 5%. Using the given assumptions, the amount of bond liability to be
reported on the balance sheet at the beginning of the 1st year is closest to:
A. Bond Liability of $9,475
B. Bond Liability of $10,000
C. Bond Liability of $10,545
162
the market interest rate of 5%. T he amount of amortization discount to be deducted from the bond
liability at the end of the 2nd year of the bond's life is closest to:
A. $181.
B. $519.
C. $700.
the market interest rate of 5%. Using the given assumptions, the interest expense in the 3rd year is
closest to:
A. $509
B. $590
C. $700
Q.2336 In which of the following bonds will the interest expense be greater than the coupon
payment?
A. Par bonds.
B. Discount bonds.
C. Premium bonds.
Q.2337 Which of the following statements is most accurate regarding the treatment of bond liabilities
under IFRS and US GAAP?
A. Under IFRS and US GAAP, the effective interest rate method of amortizing the discount or
premium is required.
B. Under IFRS, the straight-line method of amortizing is required and, under US GAAP, only
the effective interest rate method of amortizing the discount or premium is allowed.
C. Under IFRS, the effective interest rate method of amortizing the discount or premium is
required, but under US GAAP, both the effective interest rate method and the straight-line
method for amortizing the discount or premium are allowed.
163
Q.2338 Plato Airline Company recently issued a 3-year 10% coupon bond with a face value of $1,000
for $1,051.54. T he amount of interest expense in the first year is closest to:
A. $84.12.
B. $100.
C. $105.15.
Q.2339 Which of the following is most likely a discount bond?
A. A 3-year 5% coupon bond.
B. A 10-year zero-coupon bond.
C. A 30-year 11% coupon bond.
Q.2340 A Polish manufacturing firm that follows IFRS has recently issued a $1,000,000 bond for
$995,000. Assuming that the firm paid issuance costs of $80,000 to the investment bank, the amount
of bond liability on the balance sheet of the Polish firm will be closest to:
A. $915,000.
B. $920,000.
C. $995,000.
Q.2341 Determine the most appropriate effect of changes in bond yield on the fair value of the bond.
A. An increase in bond yield will decrease the fair value of the bond liability, and the loss will
be recognized in the income statement.
B. An increase in bond yield will decrease the fair value of the bond liability, and the gain will
C. A decrease in bond yield will decrease the fair value of the bond liability, and the gain will
164
Q.2342 T he most likely impact of a bond issued at a premium on the income statement is:
A. T he interest expense increases over the life of the bond.
B. T he interest expense is constant over the life of the bond.
C. T he interest expense decreases over the life of the bond.
Q.2343 A hypothetical firm with no equity has total assets of $900,000. T he firm plans to issue a 3-
year corporate bond with a face value of $10,000 and will pay coupon payments of $800 annually.
Assuming that the market interest rate is 9%, the approximate value of the firm's total liabilities is
closest to:
A. $909,750.
B. $910,000.
C. $913,235.
Q.2344 Five years ago, an automobile firm issued an 8-year bond with a face value of $1,000,000 at a
discount. As the firm has been profitable for the last four years, its management has decided to
redeem the bond at 101% of its face value. If the book value of the bond is $989,000 today, then the
gain or loss on the bond is closest to a:
A. loss of $9,890.
B. gain of $10,000.
C. loss of $21,000.
165
Q.2345 Identify the most appropriate presentation of the redemption of debt in the cash flow
statement.
A. T he redemption price of a bond is reported as a cash inflow from investing activities, and
any gain (loss) is subtracted (added) from net income for the calculation of operating cash
flows under the indirect method.
B. T he redemption price of a bond is reported as a cash inflow from financing activities, and
any gain (loss) is added (subtracted) from net income for the calculation of operating cash
C. T he redemption price of a bond is reported as a cash outflow from financing activities, and
any gain (loss) is subtracted (added) from net income for the calculation of operating cash
Q.2346 Which of the following is a negative debt covenant?
A. T he borrower must restrain from issuing new debt.
B. T he borrower must make timely interest and principal payments.
C. T he borrower must keep certain ratios above a predetermined level.
Q.2347 A luxury watch brand issued a 4-year 8% coupon bond with a face value of $100,000 at the
market interest rate of 7% three years ago. Since the interest rate has fallen to 6%, management has
decided to redeem the bond at 100% of face value. Using the given assumptions, the gain or loss, if
the firm redeems the bond today is closest to a:
A. loss of $935.
B. gain of $935.
C. gain/loss of $0.
166
Q.2348 Which of the following is most likely the correct treatment of finance leases in the lessee's
accounts?
A. A lessee will record the liability at the initiation of the lease and decrease the liability by
the amount of the periodic lease payment.
B. A lessee will not record any asset or liability; only the periodic lease payment will be
recognized in the income statement as a rental expense.
C. A lessee will record the asset and liability of the same amount at the initiation of the lease.
Over the time of the lease, the lessee will decrease the asset with depreciation expenses and
reduce the liability with interest expenses.
Q.2349 Which of the following benefits of a lease is least likely accurate?
A. A lease requires less restrictive provisions.
B. Usually, a lease does not require an initial down payment. A lease is a less costly way of
financing.
C. A financing lease does not increase the liability of the firm, so it provides off-balance-sheet
financing.
Q.2350 Which of the following best represents the difference between a finance lease and an
operating lease?
Difference Finance Lease Operating Lease

A Inceases Asset and Liability Does not Increase Asset or Liability
B Does not Increase Asset or Liability Increases Asset or Liability
C Inceases Asset and Liability Only Increases Liability
A. Difference A
B. Difference B
C. Difference C
167
Q.2351 Under US GAAP, which of the following leases will be recorded as a finance lease from the
lessee's perspective?
A. A firm leased equipment with the asset's present value of $81,575 while the asset's fair
value is $97,000.
B. A jet rental company leased a private jet from a leasing company for ten years. T he
economic life of similar jets is twelve years.
C. A firm leased machinery for $100,000 and promised that the machinery would be returned
to the lessor at the maturity of the lease.
Q.2352 Identify the most appropriate equation of interest expense on a discount bond.
A. Interest expense = Coupon rate × Face value of the bond
B. Interest expense = (Coupon rate × Face value of the bond) + Amortization of the discount
C. Interest expense = (Coupon rate × Face value of the bond) − Amortization of the discount
Q.2353 A lumber company leased lumber cutting equipment for five years with an end-yearly
payment of $20,000 at an interest rate of 7%. What are the nature and the beginning value of the
lease that the firm will report if the equipment's economic life is only five years?
A. T he firm will report the lease as an operating lease with no liability on its balance sheet.
B. T he firm will report the lease as a finance lease with a beginning lease liability of $67,744.
C. T he firm will report the lease as a finance lease with a beginning lease liability of $82,004.
Q.2354 A lumber company leased lumber cutting equipment for 5 years with the annual payment of
$20,000 at the interest rate of 7%. Determine the amount of interest or rent expense that the firm
will report in the first year if the leased asset is transferred to the lumber company at the end of the
lease.
A. Rent expense of $3,674.
B. Interest expense $5,740.
C. Interest expense of $4,752.
168
Q.2356 Which of the following statements is the most likely correct?
A. T he total lease expense over the life of an asset is greater under finance leases.
B. T he total lease expense over the life of an asset is greater under operating leases.
C. T he total lease expense over the life of an asset is the same under both operating and
finance leases.
Q.2357 A hypothetical firm, operating under IFRS, leased equipment for 5 years with a finance lease
that requires annual payments of $20,000 at the interest rate of 7%. T he lease schedule is given in
the following table:
Ending Lease Liability

Beginning Book Interest Annual Book Value Asset
(Beginning Lease
Year Value (Lease Expense Lease (Beginning Book
Liability + Int. Exp. -)
Liability) at 7% Payment Value - Dep. Exp)
Lease Payment
1 $82,003.90 $5,740.27 $20,000 $67,744.17 $65,603.12
2 $67,744.17 $4,742.09 $20,000 $52,486.27 $49,202.32
3 $52,486.27 $3,674.04 $20,000 $36,160.30 $32,801.52
4 $36,160.30 $2,531.22 $20,000 $18,691.51 $16,400.72
5 $18,691.52 $1,308.41 $20,000 -$0.07 -$0.08
Using the above-mentioned assumptions, which of the following best describes the impact on the
cash flow statement of the lessee (in the first year)?
A. Cash outflow of $14,260 from operating activities, and cash inflow of $5,740 from
financing activities.
B. Cash inflow of $5,740 from operating activities,/ and cash outflow of $14,260 from
C. Cash outflow of $5,740 from operating activities, and cash outflow of $14,260 from
Q.2358 Determine the most appropriate effect on the ratios of the lessee in an operating lease (as
compared to a finance lease).
A. In an operating lease, the lessee's current ratio and asset turnover are higher.
B. In an operating lease, the lessee's return on equity and debt-to-equity ratios are lower.
C. In an operating lease, the lessee's total net income and return on assets are higher.
169
Q.2359 A manufacturer of electric generators has sold a generator to Baltic Inc. based on a 5-year
lease contract. T he manufacturer will receive five annual payments of $10,000 at the rate of 9%.
Identify the nature of the lease if the cost of the asset is $35,000.
A. Operating lease.
B. Sales-type lease.
C. Direct finance lease.
Q.2360 A plastic moulding company promised its employee five years ago that it would provide
specific benefits upon retirement. . Today, the pension fund's assets are greater than the pension
obligations. Determine the most appropriate status of the fund.
A. Overfunded defined benefits pension plan.
B. Overfunded defined contribution pension plan.
C. Underfunded defined contribution pension plan.
Q.2361 Under IFRS, the actuarial gains and losses due to remeasurement are reported under:
A. the income statement.
B. liabilities on the balance sheet.
C. other comprehensive income on the balance sheet.
Q.2362 Which of the following will least likely increase the Debt-to-Assets ratio of the borrower?
A. A finance lease.
B. An operating lease.
C. T he issuance of bonds.
170
Q.3773 T he prevailing market interest rate on bonds is 5%. On the 1st of January 2011, a company-
issued four-year bonds with a face value of $ 8,000,000. T he amount of bonds payable that will be
reported on the company’s balance sheets, as of the issue date, if the bonds pay, on the 31st of
December, a 3% annual coupon rate is closest to:
A. $6,581,620
B. $7,432,648
C. $8,000,000
Q.3774 T he prevailing market interest rate on bonds is 2%. On the 1st of January 2011, a company
issues four-year, 3% annual bonds with a face value of $ 8,000,000.T he value of bonds payable will
then be closest to:
A. $7,390,763
B. $8,000,000
C. $8,304,618
Q.3775 A company has $ 100,000,000 in assets and $ 55,000,000 in liabilities. T he company's debt to
total capital ratio is closest to :
A. 0.43
B. 0.55
C. 0.63
Q.3776 On the 1st of January 2015, a company issued three-year bonds with a face value of $ 5,000.
Every 31st of December, the bonds pay an interest rate of 5%. T he prevailing market interest rate is
8%. Determine the carrying amount of the bonds after two years using the effective interest rate
method of amortization.
A. 4732.5
B. 4861.1
C. 4862.7
171
Q.3777 On the 1st of January 2015, a company issued three-year bonds with a face value of $ 5,000.
Every 31st of December, the bonds pay an interest rate of 5%. T he prevailing market interest rate is
4%. Determine the carrying amount of the bonds after two years using the effective interest rate
method of amortization.
A. 4622.8
B. 5048.0
C. 5094.2
Q.3778 An asset has a fair market value of $ 20,000,000. A company gets into an agreement to lease
the asset for five years. T he company will be making lease payments of $ 3,000,000 starting the
following year. If the present value of the lease payments is $ 17,534,560, determine the amount of
lease payable that will be reported on the company's balance sheet.
A. $15,000,000
B. $17,534,560
C. $20,000,000
Q.3779 A company issues five-year bonds with a face value of $5,000,000. T wo years later, the
company repurchases the bonds at $ 3,000,000. If the carrying value of the bonds as at the time of
repurchase is $ $ 4,500,000, the company most likely :
A. Made a gain of $3 million.
B. Made a loss of $ 1.5 million.
C. Made a gain of $ 1.5 million.
Q.3844 A hypothetical firm with no equity has total assets of $900,000. T he firm is planning to issue
a 3-year corporate bond with the face value of $10,000 that will pay coupon payments of $800
annually. Assuming that the market interest rate is 9%, the approximate value of the firm's total
liabilities is closest to:
A. $909,747
B. $910,000
C. $913,235
172
the market interest rate of 5%. T he amount of amortization discount to be deducted from the bond
liability at the end of the 2nd year of the bond’s life is closest to:
A. $181
B. $519
C. $700
Q.3848 Five years ago, a firm issued an 8-year bond with the face value of $1,000,000 at a discount.
As the firm has been profitable for the last four years, its management has decided to redeem the
bond at 101% of its face value. If the book value of the bond is $989,000 today, then the gain or loss
on the bond is closest to a:
A. loss of $9,890.
B. gain of $10,000.
C. loss of $21,000.
Q.3850 Which of the following cases would most likely result in the creation of a net pension asset?
A. Carrying value of the pension trust's assets: $240 million
B. Carrying value of the pension trust's assets: $240 million
C. Carrying value of the pension trust's assets: $240 million
173
Reading 25: Financial Reporting Quality
Q.289 Which of these is least likely a reason for a firm to overstate its net income?
A. To minimize incentive compensation.
B. To meet analysts' earnings expectations.
C. To remain in compliance with lending contracts.
Q.290 Which of these is a reason why a firm would UNDERSTATE its net income?
A. To maximize incentive compensation.
B. To negotiate tax breaks with the government.
C. T here is no reason why a firm would choose to understate their net income.
Q.292 You see that a large company is recording all of its finance (capital) leases as operating leases.
T his company is trying to reduce its:
A. leverage.
B. expenses.
C. capital expenditure.
Q.293 What condition of the fraud triangle would you most likely associate the following statement
with?
"I need to exceed investors' expectations to ensure stock prices increase"
A. Incentive.
B. Opportunity.
C. Attitude or rationalization.
174
Q.294 To which one of the three conditions of the fraud triangle would you most associate the
following statement with?
''ABC Corp has a strong history of ethical violations.''
A. Incentive.
B. Opportunity.
C. Attitude or rationalization.
Q.556 Which of the following may be considered a warning sign indicating the manipulation of
I. Excessive non-recurring costs classified in the income statement
II. Net profit of 2% in the first three quarters followed by net profit of 17% in the 4th quarter
III. T he number of days of sales outstanding was 15 days. T he same figure for the industry was 75
days. T he company is engaged in providing engineering consultancy services, and the customers
generally pay after the design submitted by the company has been approved by the customer's
construction team, which takes roughly 2-3 months.
A. III.
B. I & II.
C. I, II & III.
Q.557 Which of the following is applicable for a 'bill and hold' transaction?
A. T he inventory appears at its original value.
B. T he sale is not recognized until the product is delivered.
C. T he sale is recorded but the inventory value remains with the seller.
175
Q.558 Which of the following indicate accounting manipulations in the financial statements?
A. Company E's sales are 40% lower than the sales of Company F. Both are engaged in the
production of T V shows.
B. Company C operates in providing telecommunication services and does not show a

transmission cost, whereas Company D is engaged in the same industry and has substantial
transmission costs.
C. Company A does not show an increase in capital assets, whereas Company B operates in
the same industry and has increased its capital assets by 50%. Both companies are engaged in
financial consulting.
Q.560 Which of the following is an indicator of future profitability so that the Deferred Tax Asset
(DTA) is not required to be revalued lower?
A. Change in accounting policies.
B. High profit in previous years and growth in the economy.
C. A large amount of backorders that are capable of generating revenues.
Q.561 Which of the following inventory valuation methods result in higher profits in the case of
rising prices?
A. FIFO.
B. LIFO.
C. Weighted average.
Q.562 Which of the following statements is least likely to be correct?
A. Exceeding earnings benchmark help in building credibility with the market participants.
B. Compensation linked with stock prices may lure the management towards 'Window
Dressing'.
C. Exceeding earnings benchmark is a financial accomplishment and has no impact on

business trades.
176
Q.563 Which of the following has an impact on revenue recognition?
A. A change in credit limit.
B. A change in delivery terms.
C. A change in payment terms with the customers.
Q.564 Which of the following factors is least likely conducive to the issuance of low-quality financial
reports?
A. Weak internal controls.
B. Auditing requirements.
C. Less transparent financial disclosures.
Q.566 Financial reporting quality is the same as:
A. Earnings quality.
B. earnings sustainability.
C. Quality of information reported.
Q.567 A reduction in the days of sales outstanding (in comparison to competitors) may indicate:
A. No direct relation with revenue recognition.
B. An aggressive approach in recording revenue.
C. A conservative approach in recording revenue.
177
Q.2363 During a seminar, the speaker asked the attendees to give their understanding of high-quality
financial reporting. T he attendees gave the following key points:
I. High-quality financial reports must have consistent profit.
II. High-quality financial reports spend a good amount of time and energy on the presentation and
distribution of financial reports.
III. High-quality financial reports are decision-useful.
Which of the statements mentioned above is the most accurate justification of high-quality financial
reporting?
A. Statement I.
B. Statement II.
C. Statement III.
Q.2365 Which of the following is the most accurate statement regarding the quality of financial
reporting and financial earnings?
A. T he quality of financial reporting is judged by its profitability, while the quality of financial
earnings is judged by its decision-usefulness.
B. T he quality of financial reporting is judged by its sustainability, while the quality of

financial earnings is judged by relevance and faithful representation.
C. T he quality of financial reporting is judged by its adherence to generally accepted

accounting principles (GAAP), while the quality of financial earnings is judged by its
sustainability.
178
Q.2366 Firm A, Firm B, and Firm C are market leaders in the glass-manufacturing industry. Part of
the financial statements for the year 2016 is given in the following table:
Firm A Firm B Firm C

Gross Profit $1,200,000 $1,000,000 $1,600,000
Operating Profit $700,000 $760,000 $500,000
Gain on Sale of Assets $240,000 $0 $0
EBIT $940,000 $760,000 $500,000
Interest ($250,000) ($200,000) ($510,000)
Net Income $690,000 $460,000 ($10,000)
T he firm that has the highest quality of earnings for the year 2016 is:
A. Firm A.
B. Firm B.
C. Firm C.
Q.2368 Quick-Fit is a chain of fitness centers across Malta that does not comply with generally
accepted financial reporting standards from that jurisdiction, but it claims to follow the Accepted
Accounting Principles of T urkey. Due to the inefficiency and ignorance of the government, it is a
standard practice in Malta not to adhere to local reporting standards. However, the firm is
consistently profitable as it has a monopoly in many remote areas of Malta. T he firm has consistently
earned profit margins of 8% over the last 15 years. Based on the provided assumptions, which of the
following best describes the quality of financial reporting and the quality of earnings of Quick Fit?
A. Low financial reporting quality and low quality of earnings.
B. High financial reporting quality and low quality of earnings.
C. Low financial reporting quality and indeterminate quality of earnings.
Q.2369 Which of the following financial reports are considered of the lowest quality in the spectrum
of financial reporting quality?
A. Reporting is compliant with GAAP, but earnings quality is low.
B. Reporting is compliant with GAAP, and earnings are sustainable but inadequate.
C. Reporting is not compliant with GAAP, but earnings are based on the firm's actual
economic activities.
179
Q.2370 An analyst came across many doubtful activities while analyzing the firm's financial
statements compared to other firms in the same industry. Which of the following accounting choices
can most likely lead to the conclusion that the firm is engaged in aggressive accounting activities?
A. Using straight-line depreciation.
B. Expensing costs in the current period.
C. Decreasing the useful life of certain assets.
Q.2371 T he management's activity of using one set of accounting choices in one period to increase
the earning and using the other set of accounting choices to decrease the earning in another period is
known as:
A. earnings smoothing.
B. aggressive accounting.
C. low financial reporting quality.
Q.2372 Which of the following accounting treatments most likely represents a set of conservative
accounting activities?
A. Increasing estimates of salvage value, decreasing accrual of reserves for bad debts, and
early recognition of impairments.
B. Using accelerated depreciation, decreasing valuation allowances on deferred tax assets,

and expensing current period costs.
C. Early recognition of impairment, increasing valuation allowances on deferred tax assets,

and using accelerated depreciation.
Q.2373 Which of the following is least likely a motive of managers to make aggressive accounting
choices?
A. To exercise employees' put options on the company's shares.
B. To improve future career options by beating a specific benchmark.
C. To report earnings greater than the consensus expectations of analysts.
180
Q.2374 T wo firms in the hypothetical sector of hydro-cars are similar in all aspects but use different
accounting practices. Some accounts for the year 2016 are given in the following table:
Alpha Co. Gama Co.

Revenue $5,400,000 $5,400,000
Gross Profit $2,200,000 $2,200,000
Depreciation Expense $140,000 $280,000
Bad Debt Expense $100,000 $210,000
Research Expense - $300,000
EBIT $1,960,000 $1,410,000
Gain on Assets $130,000 -
Disregarding depreciation expenses, which of the following firm(s) use(s) conservative accounting
practices?
A. Only Alpha Co. uses conservative accounting.
B. Only Gama Co. uses conservative accounting.
C. Both Alpha Co. and Gama Co. use conservative accounting.
Q.2375 Alpha Co. and Gama Co. are similar in all aspects but use different accounting practices, as
shown in the following table:
Alpha Co. Gama Co.

Revenue $5,400,000 $5,400,000
Gross Profit $2,200,000 $2,200,000
Depreciation Expense $140,000 $280,000
Bad Debt Expense $100,000 $210,000
Research Expense - $300,000
EBIT $1,960,000 $1,410,000
Gain on Assets $130,000 -
Which of the following firms most likely has sustainable earnings?
A. Gama Co.
B. Alpha Co.
C. Gama and Alpha.
181
Q.2376 Adam Geller is the CFO of Cube Corp. and is also the chairman of the board. T he board does
not have sufficient control over management because it does not consist of a majority of independent
outsiders. Cube's shareholders recently accused the firm of misrepresenting its financial reports.
Which of the following factors is most likely responsible for management's action of providing low-
quality financial reporting?
A. Motivation.
B. Opportunity.
C. Rationalization.
Q.2377 Akash Prakash is the CEO of Pandora Drum Co., which is headquartered in the middle of the
Bermuda Islands. Pandora is currently under a lawsuit related to presenting low-quality financial
reports by overestimating the assets of Pandora by more than 500%. During a recent conference
call, Prakash stated ''I thought that another company operating in the Bermuda Islands might be
interest in acquiring Pandora. T herefore, it was important for Pandora to over-estimate its assets to
make the firm look expensive to the acquirer. It is common in the Bermuda Islands to overestimate
its assets. All of the firms do it.''
T he main cause for Pandora's low-quality reporting is most likely related to:
A. motivation.
B. opportunity.
C. rationalization.
Q.2378 Sonic Loop is a startup that focuses on providing private jet experiences at the cost of the
commercial airline. Sonic Loop has adopted a unique compensation plan for its senior management, in
which 70% of the compensation of senior management depends on the firm's profit margin. Startup
Insider, a whistleblower corporate magazine, printed an article in its latest issue, which reveals that
the management of Sonic is involved in fraudulent financial reporting. Based on the given case, which
of the following factors is most likely responsible for Sonic's potential fraudulent financial reporting?
A. Motivation.
B. Opportunity.
C. Rationalization
182
Q.2379 Which of the following is least likely a requirement of the securities regulators?
A. A qualified audit opinion.
B. An independent audit of financial reports.
C. A registration process for the issuance of new publicly traded securities.
Q.2380 Texas Coal is a coal supplier to thermal power plants in Texas, USA, and its profitability has
been stable for the past five years. However, for the current fiscal year, the profitability has
increased as Texas Coal sold some of the coal reserves it had been keeping for eight years. Under US
GAAP, which of the following conditions is required to analyze Texas Coal’s financial reports?
A. No adjustment is required.
B. Exclude the gains from the sale of the assets (coal reserves).
C. Compare the firm's financial reports with a firm that recently sold its assets.
Q.2381 Max Speed is a supplier of Chinese bicycles. Assuming that Max Speed uses an aggressive
revenue recognition strategy, which of the following shipping terms will most likely be selected by
Max Speed?
A. FOB destination
B. FOB shipping
C. FOB transit
Q.2382 If a firm that reports under IFRS uses some non-IFRS measures in its financial reports, then
the firm is least likely required to:
A. Define and explain the relevance of the non-IFRS measure in financial reporting.
B. Not use the non-IFRS measure if the firm reports its financial reports in compliance with
IFRS.
C. Reconcile the difference between the non-IFRS measure and the most comparable IFRS
measure.
183
Q.2383 Identify the most appropriate explanation of ''channel stuffing''.
A. Channel stuffing is an aggressive revenue recognition strategy in which the firm

oversupplies goods to the distribution channel.
B. Channel stuffing is a conservative revenue recognition strategy in which the firm holds
goods and delays the supply of goods to the distribution channel.
C. Channel stuffing is an aggressive revenue recognition strategy in which the firm increases
the supplier's orders and recognizes the expense before the goods are received.
Q.2384 T he information related to the revenue recognition policies of Firm X, Y & Z are given in the
following table:
Firm X Uses 'FOB destination' for all of its shipment orders.

Bills its customers when the goods are ordered and the sale is
Firm Y
recognized while the firm still holds the goods.
Provides Cash-on-delivery service to the buyers of custom-made
Firm Z
furniture
T he firm that most likely has the most aggressive revenue recognition strategy is:
A. Firm X.
B. Firm Y.
C. Firm Z.
Q.2385 Which of the following statement is most appropriate regarding the allowance for
uncollectible debt?
A. If a firm increases the probability that the accounts receivable will be collected, it will
increase the reserve for uncollectible debt and decrease Net income.
B. If a firm decreases the probability that the accounts receivable will be uncollected, it will
C. If a firm increases the probability that the accounts receivable will be uncollected, it will
184
Q.2386 Which of the following adjustments will most likely result in the lowest operating income?
A. Decrease in allowance for uncollectible debt, decrease in the useful life of assets and
increase in the applicable tax rates.
B. Increase in allowance for uncollectible debt, increase in salvage value of assets, increase
in long-term liability's interest rate.
C. Increase in allowance for uncollectible debt, increase in expected warranty expense, and
decrease in the useful life of assets.
Q.2387 Only taking into account the balance sheet impact, which of the following options will most
likely increase the financial leverage ratio?
A. A decrease in the valuation allowance.
B. An increase in the valuation allowance.
C. A valuation allowance has no impact on the financial leverage ratio.
Q.2388 If goodwill is an intangible asset and cannot be depreciated, then which of the following
assumptions can the management use to increase the earnings in a specific period?
A. Delaying the impairment charge for goodwill.
B. Delaying the amortization charge on goodwill.
C. Recognizing the amortization charge on goodwill.
Q.2389 Which of the following is most likely the best choice of inventory system for a firm that
operates in a deflationary environment, and which intends to decrease its earnings in the current
period?
A. FIFO.
B. LIFO.
185
Q.2390 T he strategy of deferring reported earnings through choosing conservative financial

reporting standards so that earnings can be utilized later, is most likely known as:
A. Earnings smoothing.
B. Putting earnings in a cookie jar.
C. Putting earnings in restrictive reserves.
Q.2391 Which of the following are inaccurate statement(s) regarding auditors?

Statement I. An auditor’s unqualified opinion can provide reasonable assurance that financial
statements are fairly presented.
Statement II. An auditor’s unqualified opinion can assure that the firm is GAAP compliant or not.
Statement III. An auditor’s unqualified opinion can assure that the firm is not engaged in fraud.
A. Statement I.
B. Statement III.
C. Statements II and III.
186
Q.2392 An analyst at a German research firm analyzes the reports of a home appliances firm, Arab
Appliances, for his emerging markets income fund. As mentioned in Note-1, the firm did not increase
its number of units sold or selling price. Determine which of the following is most likely the reason
for the decrease in Gross profit in 2016 after analyzing the information given in the following table.
Note Income Statement 2015 2016

1 Revenue $3,000,000 $3,000,000
2 COGS $1,900,000 $2,500,000
Gross Profit $1,100,000 $500,000
3 Research Cost - $120,000
Depreciation Exp. $90,000 $90,000
EBIT $1,010,000 $290,000
4 Interest $150,000 -
Net Income $860,000 $290,000
Note 1 - Arab Oven consistently sold 20,000 units of Smart Oven at the price of $150, in 2015 and
2016, because the country has hypothetically zero inflation which means there was no increase or
decrease in input prices.
Note 2 - Arab Oven's supplier is a private company owned by the management of the Arab Oven.
Arab only uses the FIFO inventory method.
Note 3 - Arab Oven is continuously engaged in the research for innovations in smart appliances. T he
firm capitalized the research cost in 2015 but decided to expense it in 2016. T his capitalization
increased the depreciation cost which was $80,000 originally.
Note 4 - T he firm expensed the interest cost in 2015 but resolved to capitalize the interest on the
funds used for the construction of new technology. T he capitalization of interest increased the
depreciation for the year which was $80,000 originally.
A. Gross profit decreased due to related-party transactions.
B. Gross profit decreased due to a decline in prices (deflationary period).
C. Gross profit decreased due to the use of different inventory costing methods.
187
Appliances, for his emerging markets income fund. Which of the following is the most conservative
accounting choice for 2016 after analyzing the information given in the following tables?

1 Revenue $3,000,000 $3,000,000
2 COGS $1,900,000 $2,500,000
Gross Profit $1,100,000 $500,000
EBIT $1,010,000 $290,000
4 Interest $150,000 -
Net Income $860,000 $290,000
Note 2 - Arab Oven's supplier is a private company that is owned by the management of the Arab
Oven. Arab only uses the FIFO inventory method.
firm capitalized on the research cost in 2015 but decided to expense it in 2016. T his capitalization
A. Interest.
B. Research Cost.
C. Depreciation Expense.
188
Appliances, for his emerging markets income fund. Some of the information from his analysis is given
in the following table and notes:

1 Revenue $3,000,000 $3,000,000
2 COGS $1,900,000 $2,500,000
Gross Profit $1,100,000 $500,000
EBIT $1,010,000 $290,000
4 Interest $150,000 -
Net Income $860,000 $290,000
Note 2 - Arab Oven's supplier is a private company that is owned by the management of the Arab
Oven. Arab only uses the FIFO inventory method.
firm capitalized on the research cost in 2015 but decided to expense it in 2016. T his capitalization
After analyzing the information given in the table and notes, which of the following is the most
accurate statement regarding the change in the asset turnover ratio of Arab Oven?
A. T he asset turnover ratio is lower in 2015.
B. T he asset turnover ratio is lower in 2016.
C. T he asset turnover ratio is the same in 2015 and in 2016.
Q.2395 Which of the following is least likely a warning sign in the revenue recognition activity of a
firm?
A. Use of credit sales.
B. Use of barter transactions.
C. Decreasing trend in receivables turnover.
189
Q.2396 Which of the following is viewed as the warning sign for fraud or low-quality earnings?
A. A firm's net income is greater than the amount of operating cash flow.
B. A firm's amount of operating cash flow is greater than the net income.
C. A firm's net income is greater than the amount of cash flow from investing activities.
Q.2397 Which of the following inventory-related activities is of the least concern to an analyst?
A. LIFO liquidation.
B. Declining inventory turnover ratio.
C. Change in inventory costing method.
Q.2398 An analyst gathered the following information regarding the accounting practices of the Sun
Corp., Moon Corp., and Star Corp. Using his analysis provided in the following table, where will Moon
Corp. stand on the quality spectrum?
Adheres to US GAAP
Sun Corp. Accounting choices show no bias
Provides adequate earnings
Adheres to US GAAP with some deviations
Moon Corp. Accounting choices show an aggressive bias
Adheres to US GAAP
Star Corp. Accounting choices show a conservative bias
Provides inadequate earnings
A. Moon Corp. stands at the lowest place in the quality spectrum of financial reporting.
B. Moon Corp. stands at the highest place in the quality spectrum of financial reporting.
C. Moon Corp. stands in the middle of Sun Corp. and Star Corp. in the quality spectrum of
financial reporting.
190
Q.2399 An analyst gathered the following information regarding the accounting practices of the Sun
Corp., Moon Corp., and Star Corp. Using his analysis provided in the following table, determine which
firm has the highest quality of earnings.
Adheres to US GAAP
Sun Corp. Accounting choices show no bias
Adheres to US GAAP with some deviations
Moon Corp. Accounting choices show an aggressive bias
Adheres to US GAAP
Star Corp. Accounting choices show a conservative bias
Provides inadequate earnings
A. Sun Corp.
B. Star Corp.
C. Moon Corp.
Q.2400 Which of the following is least likely a warning sign of fraudulent accounting practices?
A. Declining the amount of goodwill for impairment.
B. Recognizing a greater portion of earnings in the fourth quarter.
C. Growing the business by acquiring a large number of businesses.
191
Reading 26: Applications of Financial Statement Analysis
Q.568 Which of the following ratios will give a better understanding of the financial performance of a
company as a whole?
A. Earnings per share.
B. Enterprise value/EBIT DA.
C. Price-earnings ratio (P/E ratio).
Q.569 An analyst has gathered the following information regarding a company following the US GAAP:
Total debt (including capital lease): $20 million
Total equity: $40 million
Present value of future payments of the operating lease (shown in the footnotes): $4 million
T he debt-to-equity ratio of the firm is closest to:
A. 20%.
B. 50%.
C. 60%.
192
Q.570 An analyst is looking to calculate the debt-to-equity ratio by including the present value of
operating lease obligations under debt. He has gathered the following relevant information:
Total debt (including the capital lease): $20 million
Total equity: $40 million
T he present value of future capital lease obligations: $2 million
T he payment schedule of operating lease:
2016 - $2 million
2017 - $2 million
2018 - $2 million
2019 - $2 million
2020 (last payment) - $2 million
T he payment schedule of capital lease:
2016 - $0.6 million
2017 - $0.5 million
2018 - $0.8 million
2019 - $0.3 million
2020 (last payment) - $0.5 million
Using the given information, the analyst would conclude that the adjusted debt-to-equity ratio is
closest to:
A. 68.19%.
B. 68.23%.
C. 70.34%.
193
Q.571 Dividing the net plant, property, and equipment (PPE) by the annual depreciation expense
most likely gives us:
A. the estimated useful life.
B. the historical cost of an asset.
C. the average life at the installation.
Q.572 Which of the following would least likely be adjusted by an analyst while comparing the
performance of two or more companies?
A. Goodwill.
B. Investments.
C. Shares outstanding.
Q.573 Which of the following would least likely be reduced from stockholders' equity while
calculating the tangible book value?
A. PPE.
B. Copyright.
C. Goodwill from a business acquisition.
Q.574 If a company wants to reduce its debt, which of the following technique would the company
most likely adopt?
A. Impairment of goodwill.
B. Operating lease financing.
C. Change its inventory valuation method to LIFO.
194
Q.575 Unrealized gains or losses on held-for-trading securities are most likely recorded in (on):
A. the balance sheet.
B. the income statement.
C. the cash flow statement.
Q.576 Which of the following is most likely an example of first-hand information gained by the
analyst?
A. On-site visits.
B. Industry reports.
C. Customer satisfaction survey reports.
Q.577 Which of the following is least likely one of the four groups of quantitative factors used in
credit analysis?
A. Margin stability.
B. Positive net income.
C. Scale and diversification.
Q.578 An analyst decides to forecast the revenue of the automobile industry and estimates the
revenue share of the target company based on historical data. Which technique did the analyst most
likely adopt?
A. Screening.
B. Top-down approach.
C. Bottom-up approach.
195
Q.579 An analyst decides to perform backtesting to evaluate the performance of a portfolio by

adopting different strategies. If a few companies have ceased to exist and backtesting eliminates such
companies, which of the following limitations would most likely exist?
A. Look-ahead bias.
B. Survivorship bias.
C. Data snooping bias.
Q.2401 An analyst is analyzing the financial accounts of a fiber optic cable manufacturer who claimed
in the Management Discussion and Analysis (MD&A) portion of its recent statements that the firm's
earnings grew at the approximated compounded annual growth rate (CAGR) of 42.3% from 2015 to
2017. Some important financial statement accounts are shown in the following table:
2015 2016 2017

Revenue $6,000,000 $7,500,000 $9,000,000
COGS $1,800,000 $2,625,000 $3,600,000
Gross Profit $4,200,000 $4,875,000 $5,400,000
SG&A $1,000,000 $1,600,000 $1,900,000
Depreciation Expense $800,000 $550,000 $670,000
EBIT $2,400,000 $2,725,000 $2,830,000
Interest $1,200,000 $850,000 $400,000
Net Income $1,200,000 $1,875,000 $2,430,000
Using the given data, which of the following statements is most accurate?
A. T he claim is valid; earnings grew at approximately 42.3%.
B. T he claim is invalid; earnings grew at a rate lower than 42.3%.
C. T he claim is invalid; earnings grew at a rate higher than 42.3%.
196
Q.2402 An analyst is analyzing financial accounts of a fiber optic cable manufacturer who claimed in
the Management Discussion and Analysis (MD&A) portion of its recent statements that the increase
in earnings is due to a cost reduction strategy. Some important financial statement accounts are
shown in the following table:
2015 2016 2017

Revenue $6,000,000 $7,500,000 $9,000,000
COGS $1,800,000 $2,625,000 $3,600,000
Gross Profit $4,200,000 $4,875,000 $5,400,000
SG&A $1,000,000 $1,600,000 $1,900,000
EBIT $2,400,000 $2,725,000 $2,830,000
Interest $1,200,000 $850,000 $400,000
Net Income $1,200,000 $1,875,000 $2,430,000
Using the given data, which of the following statements is the most accurate regarding the claim that
the increase in earnings is due to a cost reduction strategy?
A. T he claim is valid because the increase in earnings is due to a cost reduction strategy.
B. T he claim is invalid because the increase in earnings is not due to a cost reduction
strategy.
C. T he claim that the earnings have increased due to a cost reduction strategy can not be
verified using the given data.
197
Q.2403 An analyst is analyzing financial accounts of a fiber optic cable manufacturer whose accounts
are given in the following table:
2015 2016 2017

Revenue $6,000,000 $7,500,000 $9,000,000
COGS $1,800,000 $2,625,000 $3,600,000
Gross Profit $4,200,000 $4,875,000 $5,400,000
SG&A $1,000,000 $1,600,000 $1,900,000
EBIT $2,400,000 $2,725,000 $2,830,000
Interest $1,200,000 $850,000 $400,000
Net Income $1,200,000 $1,875,000 $2,430,000
Assuming that the sales in 2018 will grow at the same rate as they grew in 2017 and that the profit
margin in 2018 will be the same as it was in 2015, the forecasted net income for 2018 is closest to:
A. $2.7 million.
B. $2.16 million.
C. $4.536 million.
Q.2404 Jet Cars' is the market leader in the automotive industry in Malaysia with a market share of
33%. T he latest earnings of $440 million attracted the attention of an analyst from HK Investment
Co., who is trying to forecast the earnings of Jet for the coming year. An economist at HK has
predicted the expected GDP growth rate of 9%. T he automotive industry should grow at the rate of
the GDP. Using the given assumptions, what is the approach HK is most likely using to predict Jet
Cars' earnings for next year?
A. Market approach.
B. Top-down approach.
C. Bottom-up approach.
198
Q.2405 An analyst assumes that the gross profit of a hypothetical firm for the current year will be
60% of its sales, its depreciation 10% of sales, interest expense 5% of sales, and the salaries
expense 4% of sales. T he analyst also believes the firm will sell a plant for $40 million, recording a
gain of $4 million. If the tax rate in the firm's jurisdiction is 25%, and the firm's expected sales are
$100 million, then the net income for the year is closest to:
A. $18.75 million.
B. $33.75 million.
C. $40.75 million.
$100 million, then the cash flow from operating activities is closest to:
A. $39.75 million.
B. $42.75 million.
C. $51.00 million.
$100 million, then most accurate estimate the quality of earnings by comparing net income with the
cash flow from operations.
A. T he firm's earnings are of low quality because the cash flow from operations to net
income lower is less than 1.
B. T he firm's earnings are of low quality because the cash flow from operations to net
income ratio is greater than 1.
C. T he firm's earnings are of high quality because the cash flow from operations to net
income ratio is greater than 1.
199
Q.2408 Which of the following is most likely the definition of character with reference to the "Four
C's" of credit analysis?
A. It refers to the specifics of any credit transactions.
B. It refers to the assets that can back or act as the security for a loan.
C. It refers to the company's management's professional reputation and its history of timely
debt repayment.
Q.2410 An analyst at a rating agency evaluates the credit quality of three firms in the retail sector.
Some of the ratios of these firms are given in the following table. Using the given information, which
firm most likely has the lowest credit quality?
Industry Chain Stores Hyper Stores Fast Stores

Average Co. Co. Co.
Debt-to-assets 0.4 0.8 0.6 0.5
Debt-to-equity 0.67 4 1.5 1
Interest Coverage 1.8 1.1 1.3 1.6
Return on Asset 14.50% 7.00% 11.75% 12.00%
A. Fast Stores Co.
B. Hyper Stores Co.
C. Chain Stores Co.
Q.2411 An investment manager is evaluating the stocks of two companies to be included in his
clients' portfolios. Some information regarding the two stocks is given in the following table:
Stock A Stock B Stock C

Fundamental P/E 5.5 13.7 8.4
EPS $2.80 $3.40 $3.30
Market Price $16 $43 $29
Using the information provided by the manager, which stock ismost likely undervalued?
A. Stock A.
B. Stock B.
C. Stock C.
200
Q.2412 A portfolio manager has picked three stocks to potentially invest in, as shown in the
following table:
Stock X Stock Y Stock Z

Retention Ratio 30% 60% 45%
EPS $2.20 $3.40 $4.10
Price $16 $48 $39
Assuming that the portfolio manager has been advised by his superior to invest only in income
stocks, then he should most likely invest in:
A. Stock X.
B. Stock Y.
C. Stock Z.
Q.2413 Identify the most appropriate definition of backtesting.
A. A process that uses specific variables like fundamental P/E, DCF, FCFF to analyze which
stock will perform better over time.
B. An evaluation process that uses charts and diagrams to analyze historical trends in stock
prices that are expected to repeat.
C. A process that uses specific criteria to screen historical data to identify how the selected
portfolio based on those criteria would have performed.
201
Q.2414 Fuel-Up Corp. is an American company that reports its accounts under US GAAP while Gas-
In Inc. is headquartered in the UK and adheres to IFRS. Both firms are market leaders in the oil
distribution sector in their respective countries which can be judged from the financial statements
provided in the following table:
Fuel-Up Corp. Gas-In Inc.

Cash $3,000,000 $2,500,000
Receivables $2,700,000 $2,200,000
Inventory $1,800,000 $2,800,000
P&E $4,500,000 $4,500,000
Payables $1,900,000 $2,100,000
Long-term Debt $3,700,000 $2,800,000
Com. Equity $5,000,000 $4,500,000
Retained Earnings $1,400,000 $2,600,000
Sales $7,000,000 $6,800,000
COGS $5,500,000 $4,800,000
Dep. Exp. $100,000 $200,000
SG&A $500,000 $750,000
Interest Expense $600,000 $400,000
Net Income $300,000 $650,000
Ending LIFO Reserve $700,000
Beginning LIFO Reserve $200,000
Using the given information, which of the following accounts is most likely to be adjusted for
comparison purposes?
A. Inventory.
B. Receivables.
C. Long-term debt.
202
provided in the following table. After making the necessary adjustments for comparison purposes,
identify which firm most likely has the highest inventory turnover ratio.

Cash $3,000,000 $2,500,000
Receivables $2,700,000 $2,200,000
Inventory $1,800,000 $2,800,000
P&E $4,500,000 $4,500,000
Payables $1,900,000 $2,100,000
Long-term Debt $3,700,000 $2,800,000
Com. Equity $5,000,000 $4,500,000
Sales $7,000,000 $6,800,000
COGS $5,500,000 $4,800,000
Dep. Exp. $100,000 $200,000
SG&A $500,000 $750,000
Net Income $300,000 $650,000
A. Gas-Inc has a higher inventory turnover ratio of 1.7.
B. Fuel-Up has a higher inventory turnover ratio of 1.7.
C. Fuel-Up has a higher inventory turnover ratio of 2.0.
203
provided in the following table. Using the given information, identify which of the following accounts
would most likely be adjusted for comparing both companies' gross profit margin.

Cash $3,000,000 $2,500,000
Receivables $2,700,000 $2,200,000
Inventory $1,800,000 $2,800,000
P&E $4,500,000 $4,500,000
Payables $1,900,000 $2,100,000
Long-term Debt $3,700,000 $2,800,000
Com. Equity $5,000,000 $4,500,000
Sales $7,000,000 $6,800,000
COGS $5,500,000 $4,800,000
Dep. Exp. $100,000 $200,000
SG&A $500,000 $750,000
Net Income $300,000 $650,000
A. COGS.
B. Depreciation.
C. Ending Inventory.
204
provided in the following table. Ignoring the tax effect, calculate the net profit margin of Fuel-up for
comparison purposes.

Cash $3,000,000 $2,500,000
Receivables $2,700,000 $2,200,000
Inventory $1,800,000 $2,800,000
P&E $4,500,000 $4,500,000
Payables $1,900,000 $2,100,000
Long-term Debt $3,700,000 $2,800,000
Com. Equity $5,000,000 $4,500,000
Sales $7,000,000 $6,800,000
COGS $5,500,000 $4,800,000
Dep. Exp. $100,000 $200,000
SG&A $500,000 $750,000
Net Income $300,000 $650,000
A. 4.28%
B. 9.55%
C. 11.42%
Q.2420 Which of the following statements is the least likely appropriate (in an inflationary
economy)?
A. T he current ratio is higher under FIFO.
B. T he inventory turnover is higher under LIFO.
C. T he asset turnover ratio is lower under LIFO.
205
Q.2421 Which of the following is most likely appropriate for a firm that uses lower estimates for
useful life and the salvage value of assets?
A. T he firm will report lower depreciation and higher earnings.
B. T he firm will report higher depreciation and higher earnings.
C. T he firm will report higher depreciation and lower earnings.
Q.2422 What will most likely be the impact on the debt-to-asset ratio of a US GAAP-compliant firm if
it revalues its Property, Plant, and Equipment (PPE) upward?
A. T he debt-to-asset ratio will increase.
B. T he debt-to-asset ratio will decrease.
C. T he debt-to-asset ratio will remain unchanged.
Q.2423 A firm's financial statements show that the value of plant, property & equipment is $4.5
million, land is $2.5 million, and accumulated depreciation is $1.8 million. If the depreciation expense
for the year is $0.15 million, then the average age of a firm's assets is closest to:
A. 12 years.
B. 18 years.
C. 34.67 years.
Q.2424 Which of the following is the most appropriate impact on ratios if a firm uses capital leases
instead of operating leases?
A. T he asset turnover ratio will be lower and EBIT will be higher.
B. T he asset turnover ratio will be higher and EBIT will be higher.
C. T he asset turnover ratio will be higher and EBIT will be lower.
206
Q.2425 An equity analyst is valuing a company's stock by analyzing its financial statements. T he
company uses both a capital lease and an operating lease to fund its expansion, as shown in the
following table:
Years Capital Lease Payment Operating Lease Payment

2017 $1,200,000 $900,000
2018 $1,200,000 $900,000
2019 $1,200,000 $900,000
2020 $1,500,000 $900,000
2021 $1,500,000 $900,000
2022 $1,500,000 $900,000
Present Value in 2016 $5,366,354
Given that the lease-related data provided is accurate, then the discount rate for the capital lease is
closest to:
A. 10.5%.
B. 12.5%.
C. 13%.
Q.2426 An equity analyst is valuing a company's stock by analyzing its financial statements. T he
company uses both a capital lease and an operating lease to fund its expansion, as shown in the
following table:
Years Capital Lease Operating Lease

Payment Payment
2017 $1,200,000 $900,000
2018 $1,200,000 $900,000
2019 $1,200,000 $900,000
2020 $1,500,000 $900,000
2021 $1,500,000 $900,000
2022 $1,500,000 $900,000
Present Value in 2016 $5,366,354
Given that the lease-related data provided is accurate, then the present value of the operating lease is
closest to:
A. $2,663,658.
B. $3,648,454.
C. $5,366,354.
207
Q.2427 Compared to a firm that has grown internally, a firm that has grown through corporate
takeovers will have which of the following in its accounts?
A. Goodwill.
B. Tangible assets are reported at historical costs.
C. Fixed assets, like Land, recorded at their amortized costs
Q.2428 Which of the following is the least accurate analysis of a firm that increased its numbers of
days of payables?
A. T he firm is delaying its payables.
B. T he firm is increasing its cash purchases.
C. T he firm is decreasing its purchases compared to payables.
Q.2429 Which of the following is most likely to happen if a firm converts its operating lease to a
capital lease?
A. An increase in equity.
B. A decrease in assets.
C. An increase in liabilities.
Q.2430 Which of the following would most likely increase the quick ratio?
A. An increase in inventories.
B. An increase in credit purchases.
C. An increase in investments in marketable securities.
208
Q.2431 Which of the following formula will an analyst most accurately use to determine the financial
leverage of a company?
A. Total Debt/Total Assets.
B. Average Total Debt/Average Total Assets.
C. Average Total Assets/Average Total Equity.
Q.2432 Which of the following is the most accurate statement regarding Free Cash Flow to the Firm
(FCFF)?
A. An increase in Debt in the capital structure of a company will increase FCFF.
B. An increase in Equity in the capital structure of a company will increase FCFF.
C. An increase in Debt or Equity in the capital structure of a company does not affect FCFF.
Q.2433 Which of the following conditions will lead most likely to better ratings and lower interest
costs?
A. A lower profit margin and higher-margin instability.
B. A higher profit margin and higher-margin variability.
C. A moderate profit margin and lower-margin variability.
209
Q.2434 An analyst at a rating agency evaluates the credit quality of three firms in the retail sector.
Some of the ratios of these firms are given in the following table:
Industry Average Chain Stores Co. Hyper Stores Co. Fast Stores Co.
Debt-to-assets 0.4 0.8 0.6 0.5
Debt-to-equity 0.67 4 1.5 1
Interest Coverage 1.8 1.1 1.3 1.6
Return on Asset 14.50% 7.00% 11.75% 12.00%
Using the given information, the firm with the highest credit quality is most likely :
A. Fast Stores Co.
B. Hyper Stores Co.
C. Chain Stores Co.
Q.2435 Which of the following investment securities is most likely recorded at their amortized cost
on the balance sheet?
B. Held-to-maturity securities.
C. Available-for-sale securities.
Q.2436 Which of the following is the most appropriate formula for identifying an asset's average
useful life?
A. Asset's gross value/Depreciation expense.
B. Asset's net book value/Depreciation expense.
C. Asset's accumulated depreciation/Depreciation expense
210
Q.2437 Which of the following adjustments is an analyst most likely to make for comparing a firm
that grew through the acquisition of business units and a firm that has grown internally?
A. Goodwill should be added to the assets of the firm that grew internally.
B. T he impairment expense on Goodwill in the current period should be subtracted from the
income statement of the firm that grew through the acquisition of business units.
C. T he impairment expense on Goodwill in the current period should be added back to the
income statement of the firm that grew through the acquisition of business units.
Q.2438 Which of the following investment securities will most likely have the impact of unrealized
gains and losses in the income statement?
B. Available-for-sale securities.
C. Both held-for-trading and available-for-sale securities.
211

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Questions - Financial Reporting & Analysis

Last Updated: Nov 16, 2021

prohibited. Infringers will be prosecuted in their local jurisdictions. ”

15 - Introduction to Financial Statement Analysis 3

Reading 15: Introduction to Financial Statement Analysis

B. cash flow statement.

C. statement of change in owners' equity.

B. financial statement footnotes.

C. management discussions and analysis.

C. financial statement footnotes.

A. assurance that financial statements are fairly presented.

B. no assurance that financial statements are fairly presented.

C. reasonable assurance that financial statements are fairly presented.

A. T here will be no changes in gross profit.

B. T he gross profits will be 10% less than the previous year.

C. T he gross profits will be $2,600 less than the previous year.

A. Cash flow hedges.

B. Issuance of equity shares.

C. Exchange differences on translating foreign operations.

A. T he follow-up of the investment report is part of the financial statement analysis

A. T he collection of input data.

B. T he interpretation of the processed data.

C. Developing and communicating conclusions and recommendations.

C. Statement of changes in equity.

C. T he notes to the financial statements.

C. T he management's discussion and analysis.

Q.346 T he following information is available on a company for the current year.

Total assets $5, 480 million

T he value of owner's equity is closest to:

C. notes to the financial statements.

Q.348 A company's ability to meet short-term obligations is most likely termed as

C. Financial analyses of peer companies.

A. Relative performance can be measured through the preparation of common-size financial

Q.354 An equity analyst's report will least likely include

A. the historical performance.

B. the industry and competitive analysis.

C. the opinion on the fairness of financial statements.

Q.355 T he payment of commission to selling agents can be classified as a(an):

C. Cash flow statement.

C. Gains on available-for-sales securities.

C. Cash flow statement.

Q.1790 An analyst is reviewing the consolidated income statement of a company. He is unable to

B. Financial statement notes.

A. Generally accepted principles were followed, thus providing reasonable assurance.

B. Whereas we prepared the financial statements, the managers have performed an

C. Both IFRS and US GAAP.

C. Cash flow statement.

A. Office supplies expense.

B. Prepaid transportation rent.

C. Salaries paid to the sales team.

B. qualified audit opinion.

C. unqualified audit opinion.

C. Management Discussion and Analysis (MD&A).

A. Corporate press releases.

B. Internal controls of a company.

C. Management Discussion and Analysis (MD&A).

B. State objective and context.

C. Share the analysis with regulators.