[Level 1] Revision Phase with SAPP

Buổi 8 - FRA - Reading 22: Understanding Balance Sheets & Reading 23: Understanding Cashflow Statements




READING 22: UNDERSTANDING BALANCE SHEETS

Question 22.1: Liabilities are best described as:
A) obligations that are expected to require a future outflow of resources.
B) residual ownership interest.
C) resources that are expected to provide future benefits.
Explanation
A is correct. Liabilities are obligations resulting from past events that are expected to require a future outow of resources.
(Reading 22, LOS 22.a)

Question 22.2: A classified balance sheet categorizes assets and liabilities based on whether they are:
A) current or non-current items.
B) measured at cost or fair value.
C) internally generated or acquired.
Explanation
A is correct. Classified balance sheets have  categories for current assets, non-current assets, current liabilities, and non-current liabilities.
(Reading 22, LOS 22.c)

Question 22.3: One of a firm's assets is 270-day commercial paper that the firm intends to hold to maturity. One of its liabilities is a short position in a common stock, which the firm holds for trading purposes. How should this asset and this liability be classified on the firm's balance sheet?
A) One should be classified as current and one should be classified as non-current.
B) Both should be classified as non-current.
C) Both should be classified as current.
Explanation
C is correct.The commercial paper should be classfiied as current because it will be converted to cash in less than a year. A liability that is held primarily for trading purposes, such as this short position, should also be classified as current.
(Reading 22, LOS 22.d)

Question 22.4: Under IFRS, firms may report an investment in the equity securities of other companies at fair value through:
A) profit and loss only.
B) other comprehensive income only.
C) either profit and loss, or other comprehensive income.
Explanation
C is correct. Under IFRS, firms have an irrevocable choice at the time of purchase to report equity securities at fair value through other comprehensive income. If they do not make this election, equity securities are reported at fair value through profit and loss.
(Reading 22, LOS 22.e)

Question 22.5: Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at:
A) historical cost.
B) fair market value minus selling costs.
C) historical cost less accumulated depreciation.
Explanation
A is correct. Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S. GAAP.
(Reading 22, LOS 22.e)
LOS 22.e: Describe different types of assets and liabilities and the measurement bases of
each
Under the cost model, PP&E other than land is reported at amortized cost (historical cost
minus accumulated depreciation, amortization, depletion, and impairment losses). Land is not depreciated because it has an indefinite life. Historical cost includes the purchase price plus any cost necessary to get the asset ready for use, such as delivery and installation costs.

Question 22.6: Jansen Co., a manufacturer of high-end sports equipment, earned $45 million in net income for the year. The company paid out $1.30 per share in dividends. Jansen issued 500,000 shares at the beginning of the year at $20 (1 million shares were outstanding before the issuance). The market value of Jansen's trading securities decreased by $2.4 million. The increase in Jansen's stockholders' equity is closest to:
A) $43 million.
B) $51 million.
C) $53 million.
Explanation
C is correct. The unrealized loss on trading securities is reflected in net income. The total change in stockholder's equity is: $45,000,000 − [(1,000,000 + 500,000 shares) × $1.3/share] + (500,000 × $20/share) = $53,050,000.
LOS 22.f: Describe the components of shareholders’ equity.
The statement of changes in stockholders’ equity summarizes all transactions that increase or decrease the equity accounts for the period. The statement includes transactions with shareholders and reconciles the beginning and ending balance of each equity account, including capital stock, additional paid-in-capital, retained earnings, and accumulated other
comprehensive income. In addition, the components of accumulated other comprehensive
income are disclosed.

Question 22.7: Time-series analysis of a firm's common-size balance sheets reveals the following data:
                                     20X3            20X4           20X5
Current assets               20%             22%            25%
Inventory                         8%               9%             11%
Short-term debt              10%              11%           12%
Long-term debt               24%              21%           18%
Based only on the data provided, an analyst can conclude that the firm's:
A) debt ratio is decreasing.
B) quick ratio is decreasing.
C) inventory/sales ratio is increasing.
Explanation
The debt ratio is total debt to total assets. Because common-size balance sheet data are stated as percentages of total assets, the debt ratio can be determined from the data given.
20X3: 10% + 24% = 34%
20X4: 11% + 21% = 32%
20X5: 12% + 18% = 30%
The debt ratio is decreasing over the period shown. Neither the inventory/sales ratio nor the quick ratio can be determined from the data given because the data do not include sales or current liabilities.
(Reading 22, LOS 22.g, 22.h)

Question 22.8: A company's investments in marketable securities include a 3-year tax-exempt bond measured at amortized cost and a 5-year government bond measured at fair value through other comprehensive income. On its income statement, the company should report the coupon interest received from:
A) both of these securities.
B) neither of these securities.
C) only one of these securities.
Explanation
A is correct. Interest and dividends received are reported as income, regardless of the balance sheet classification of marketable securities.
(Reading 22, LOS 22.e) 

 

READING 23: UNDERSTANDING CASH FLOW STATEMENTS

LOS 23.a: compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items

Question 23.1: During 20X1, Tusa Company sold machinery with an original cost of $100,000, and recognized a $15,000 gain from the sale. At the time of the sale, the accumulated depreciation of the machinery was $80,000. Ignoring taxes, the machinery sale will produce a:
A) $15,000 inflow from investing activities.
B) $20,000 inflow from operating activities.
C) $35,000 inflow from investing activities.
Explanation
C is correct. Ignoring taxes, the cash flow for 20X1 consists of the sale proceeds. The sale proceeds equal $35,000, or the $20,000 book value ($100,000 cost – $80,000 accumulated depreciation) plus the $15,000 gain. The proceeds are reported as an inflow from investing
activities.
Schweser note
Cash from asset sold = book value of the asset + gain (or − loss) on sale

Question 23.2: Interest paid is reported as an operating cash outflow under:
A) U.S. GAAP, but may be reported as a financing cash flow under IFRS.
B) IFRS, but may be reported as an investing cash flow under U.S. GAAP.
C) U.S. GAAP, but must be reported as either an investing or financing cash flow under IFRS.
Explanation
A is correct. Interest paid is an operating cash  flow under U.S. GAAP but may be reported as either an operating or financing cash flow under IFRS.

LOS 23.b: describe how non-cash investing and financing activities are reported.
Question 23.3: Maritza, Inc., is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Maritza record this transaction?
A) Investing activities section.
B) Financing activities section.
C) Footnotes to the cash flow statement.
Explanation
C is correct. This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

LOS 23.e: describe how the cash flow statement is linked to the income statement and the balance sheet
Question 23.4: The direct method of reporting operating cash flow :
A) is preferred by analysts and commercial lenders.
B) is the most frequently used method under both U.S. GAAP and IFRS.
C) shows the reasons for differences between net income and operating cash flows.
Explanation
A is correct. The direct method is preferred by analysts and commercial lenders because it gives information about specific types of operating cash flows that is useful in determining a company's future financing needs and ability to repay debt. The indirect method shows the reasons for differences between net income and operating cash flows.

LOS 23.f:  describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
Question 23.5: An analyst gathers the following information:
Net income                                         $100
Decreased in accounts receivable         30
Depreciation                                           25
Increase in inventory                              17
Increase in accounts payable                 10
Decrease in wages payable                     5
Increase in deferred taxes                      17
Sale of fixed assets                               150
Purchase of fixed assets                       340
Profit from sale of fixed assets                  5
Dividends paid out                                   35
Sale of new common stock                    120
Based on the above information, the company's cash flow from operations under U.S. GAAP is:
A) $155.
B) $165.
C) $182.
Explanation
A is correct. Profit from sale of equipment is not included in CFO but it does contribute to net income, because of that it needs to be deducted when calculating CFO.



LOS 23.g: convert cash flows from the indirect to direct method.
Question 23.6: To compute cash collections from customers when converting a statement of cash flows from the indirect to the direct method, an analyst begins with:
A) net income and adds back non-cash expenses.
B) sales, subtracts any increase in accounts receivable, and adds any increase in unearned revenue.
C) cost of goods sold, subtracts any increase in accounts payable, adds any increase in inventory, and subtracts any inventory write-offs.
Explanation
B is correct. To compute cash collections from customers, begin with net sales from the income statement, subtract (add) any increase (decrease) in accounts receivable, and add (subtract) any increase (decrease) in unearned revenue.

LOS 23.h: analyze and interpret both reported and common-size cash flow statements
Question 23.7: A common-size cash flow statement is least likely to provide payments to employees as a percentage of:
A) revenues for the period.
B) operating cash flow for the period.
C) total cash outflows for the period
Explanation
B is correct. There are two formats for a common-size cash flow statement, expressing each type of outflow as a percentage of total cash outflows or as a percentage of total revenue for the period. Operating cash flow for the period mixes inflows and outflows and is not used to calculate percentage flows for payment made.

LOS 23.i: calculate and interpret free cash flow to the firm, free cash flow to equity, and
performance and coverage cash flow ratios.
Question 23.8: David Chance, CFA, is analyzing Grow Corporation. Chance gathers the following information:
Net cash provided by operating activities           $3,500
Net cash used for fixed capital investments          $727
Cash paid for interest                                            $195
Income before tax                                               $4,400
Income tax expense                                            $1,540
Net income                                                          $2,860
Grow's free cash flow to the firm (FCFF) is closest to:
A) $2,260.
B) $2,640.
C) $2,900.
Explanation
C is correct. 



Question 23.9: An analyst gathered the following data about a company:

Net sales $4,000
Dividends declared 170
Cost of goods sold 2,000
Inventory increased by 100
Accounts payable increased by 300
Cash expenses for other inputs 500
Long-term debt principal replayment 250
Cash tax payments 200
Purchase of new equipment 300 .The company's cash flow from operations, based on these data only, is:
A) $1,200.
B) $1,500.
C) $1,575.
Explanation
B is correct.

Question 23.10: Which of the following best describes a ratio that measures a firm’s ability to acquire long-term assets with cash flows from operations, and a performance ratio, respectively ?
             Acquire assets with CFO                Performance ratio
A)       Investing and financing ratio         Cash-to-income ratio
B)       Reinvestment ratio                          Debt payment ratio
C)       Reinvestment ratio                         Cash-to-income ratio
Explanation
C is correct. The reinvestment ratio measures a firm's ability to acquire long-term assets with cash flows from operations. In contrast, the investing and financing ratio, which is more comprehensive, measures the firm's ability to purchase assets, satisfy debts, and pay dividends. The cash-to-income ratio measures the ability to generate cash from a firm's operations and is a performance ratio for cash flow analysis purposes. The debt payment ratio measures the firm's ability to satisfy long-term debt with cash ow from operations but it is more of a coverage ratio than a performance ratio.