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21 . A creditor most likely would consider a decrease in which of the following ratios to be positive news?
A . Interest coverage (times interest earned). B . Debt-to-total assets. C . Return on assets.
22 . When developing forecasts, analysts should most likely:
A . develop possibilities relying exclusively on the results of financial analysis. B . use the results of financial analysis, analysis of other information, and judgment.
C . aim to develop extremely precise forecasts using the results of financial analysis.
Reading 28. Financial Analysis Techniques 试题答案整理
1 . C is correct. Cross-sectional analysis involves the comparison of companies with each other for the same time period. Technical analysis uses price arid volume data as the basis for investment decisions. Time-series or trend analysis is the comparison of financial data across different time periods.
2 . C is correct. Solvency ratios are used to evaluate the ability of a company to meet its long-term obligations. An analyst is more likely to use activity ratios to evaluate how efficiently a company uses its assets. An analyst is more likely to use liquidity ratios to evaluate the ability of a company to meet its short-term obligations.
3 . A is correct. The current ratio is a liquidity ratio. It compares the net amount of current assets expected to be converted into cash within the year with liabilities falling due in the same period. A current ratio of l.0 would indicate that the company would have just enough current assets to pay current liabilities.
4 . C is correct. The fixed charge coverage ratio is a coverage ratio that relates known fixed charges or obligations Lo a measure of operating profit or cash flow generated by the company. Coverage ratios, a category of solvency ratios, measure the ability of a company to cover its payments related to debt and leases.
5 . C is correct. The analyst is unlikely to reach the conclusion given in Statement C because days of sales outstanding increased from 23 days in FYI to 25 days in FY2 to 28 days in FY3, indicating that the time required to collect receivables has increased over the period. This is a negative factor for Spherion's liquidity. By contrast, days of inventory on hand dropped over the period FY1 to FY3, a positive for liquidity.The company's increase in days payable, from 35 days to 40 days, shortened its cash conversion cycle, thus also contributing to improved liquidity.
6 . A is correct. The company is becoming increasingly less solvent, as evidenced by its debt-to-equity ratio increasing from 0.35 to 0.50 from FY3 to FY5. The amount of a company's debt and equity do not provide direct information about the company's liquidity position.
Debt to equity:
FY5: 2,000/4,000 = 0.5000 FY4; 1,900/4,500 = 0.4222 FY3: 1,750/5,000 = 0.3500
7 . C is correct. The decline in the company's equity indicates that the company may be incurring losses, paying dividends greater than income, or repurchasing shares. Recall that Beginning equity + New shares issuance - Shares repurchased + Comprehensive income - Dividends = Ending equity. The book value of a company 's equity is not affected by changes in the market value of its common stock. An increased amount of lending does not necessarily indicate that lenders view a company as increasingly
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creditworthy. Creditworthiness is not evaluated based on how much a company has increased its debt but rather on its willingness and ability to pay its obligations.(Its financial strength is indicated by its solvency, liquidity. profitability efficiency, and other aspects of credit analysis.)
8 . C is correct. The company's problems with its inventory management system causing duplicate orders would likely result in a higher amount of inventory and would, therefore, result in a decrease in inventory turnover. A more efficient inventory management system and a write off of inventory at the beginning of the period would both likely decrease the average inventory for the period (the denominator of the inventory turnover ratio), thus increasing the ratio rather than decreasing it. 9 . B is correct. A write off of receivables would decrease the average amount of accounts receivable (the denominator of the receivables turnover ratio), thus increasing this ratio. Customers with weaker credit are more likely to make payments more slowly or to pose collection difficulties. which would likely increase the average amount of accounts receivable and thus decrease receivables turnover. Longer payment terms would likely increase the average amount of accounts receivable and thus decrease receivables turnover.
10 . A is correct:.The average accounts receivable balances (actual and desired) must he calculated to determine the desired change. The average accounts receivable balance can be calculated as an average day's credit sales times the DSO. For the most recent fiscal year, the average accounts receivable balance is $15.62 million [= ($300,000,000/365) x 19]. The desired average accounts receivable balance for the next fiscal year is $16.03 million (=($390,000,000/365) x 15). This is an increase of $0.41 million (= 16.03 million - 15.62 million). An alternative approach is to calculate the turnover and divide sales by turnover to determine the average accounts receivable balance. Turnover equals 365 divided by DSO. Turnover is 19.21(= 365/19) for the most recent fiscal year and is targeted to be 24.33 (= 365/15) for the next fiscal year. The average accounts receivable balances are $15.62 million (= $300,000,000/19.21), and $16.03 million (= $390,000.000/24.33). The change is an increase in receivables of $0.41 million .
11 . A is correct. Company A's current ratio of 4.0(= $40,000/$10,000) indicates it is more liquid than Company B, whose current ratio is only l.2 (= $60,000/$50,000). Company B is more solvent, as indicated by its lower debt-to- equity ratio of 30 percent (= $150,000/$500,000) compared with Company A's debt-to-equity ratio of 200 percent (= $60,000/$30,000).
12 . C js correct. The company's efficiency deteriorated, as indicated by the decline in its total asset turnover ratio from l.1 {= 4,390/[(4,384 + 3,500) /2] } for FYl0 to 0.87 {= 11,366/[(12,250 + 13,799)}2]} for FY14. The decline in the total asset turnover ratio resulted From an increase in average total assets from GBP3,942 [= (4.384+ 3,500)/2] for FY10 to GBP13,024.5 for FY14, an increase of 230 percent, compared with an increase in revenue from GBP4,390 in FY10 to GBP11,366 in FY14, an increase of only 159 percent. The current ratio is not an indicator of efficiency.
13 . B is correct. Comparing FY14 with FYl0, the company's solvency deteriorated, as indicated by a decrease in interest coverage From 10.6(= 844/80) in FYl0 to 8.4 (= 1,579/188) in FY14. The debt-to-asset ratio increased from 0.14 (= 602/4,384) in FYl0 to 0.27 (= 3,707/13,799) in FY14. This is also indicative of deteriorating solvency. In isolation, the amount of' profits does not provide enough information to assess solvency.
14 . C is correct. Comparing FYl4 with FY10, the company's liquidity improved, as indicated by an increase in its current ratio from 0.71 [= (316+ 558)/1,223] in FYl0 to 0.75 [= (682 + 1,634)/3,108] in FY14. Note, however, comparing only current investments with the level of current liabilities shows a
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decline in liquidity from 0.26(= 316/1,223) in FY10 to 0.22 (= 682/3,108) in FY14. Debt- to-assets ratio and interest coverage are measures of solvency not liquidity.
15 . B is correct. Comparing FYl4 with FYl0, the company's profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent (= 484/4,390) to 5.7 percent (= 645/ll,366). Debt-to-assets ratio is a measure of solvency not an indicator of profitability. Growth in shareholders' equity, in isolation. does not provide enough information to assess profitability.
16 . C is correct. Assuming no changes in other variables, an increase in average assets (an increase in the denominator) would decrease ROA. A decrease in either the effective tax rate or interest expense, assuming no changes in other variables, would increase ROA.
17 . C is correct. The company's net profit margin has decreased and its financial leverage has increased. ROA = Net profit margin x Total asset turnover. ROA decreased over the period despite the increase in total asset turnover; therefore, the net profit margin must have decreased.
ROE = Return on assets × Financial leverage. ROE increased over the period despite the drop in ROA; therefore, financial leverage must have increased.
18 . C is correct. The increase in the average tax rate in FY12, as indicated by the decrease in the value of the tax burden (the tax burden equals one minus the average tax rate), offset the improvement in efficiency indicated by higher asset turnover) leaving ROE unchanged. The EBIT margin, measuring profitability, was unchanged in FY12 and no information is given on liquidity.
19 . C is correct. The difference between the two companies' ROE in 2010 is very small and is mainly the result of Company A's increase in its financial leverage, indicated by the increase in its Assets/Equity ratio from 2 to 4. The impact of efficiency on ROE is identical For the two companies. as indicate4cl by both companies' asset turnover ratios of l.5. Furthermore, if Company A had purchased newer equipment to replace older, depreciated equipment, then the company's asset turnover ratio (computed as sales/assets) would have declined, assuming constant sales. Company A has experienced a significant decline in its operating margin, from 10 percent to 7 percent which, all else equal would not suggest that it is selling more products with higher profit margins.
20 . A is correct. The P/E ratio measures the \EPS.
21 . B is correct. In general, a creditor would consider a decrease in debt to total assets as positive news. A higher level of debt in a company's capital structure increases the risk of default and will, in general, result in higher borrowing costs for the company to compensate lenders for assuming greater credit risk. A decrease in either interest coverage or return on assets is likely to be considered negative news. 22 . B is correct. The results of an analyst's financial analysis are integral to the process of developing forecasts, along with the analysis of other information and judgment of the analysts. Forecasts are not limited to a single point estimate but should involve a range of possibilities.
Study Session 9 Financial Reporting and Analysis
Inventories,Long-lived Assets,Income Taxes,and Non-current Liabilities Reading 29 Inventories 试题整理 1 . Inventory cost is least likely to include: A . production-related storage costs.
B . costs incurred as a result of normal waste of materials C . transportation costs of shipping inventory to customers.
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2 . Mustard Seed PLC adheres to IFRS. It recently purchased inventory for �100 million and spent �5 million for storage prior to selling the goods. The amount it charged to inventory expense(� millions) was closest to: A . �95.
B . �100. C . �105.
3 . Carrying inventory at a value above its historical cost would most likely be permitted if: A . the inventory was held by a producer of agricultural products. B . financial statements were prepared using U.S. GAAP C . the change resulted from a reversal of a previous write-down.
4 . Eric's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for ￡1 million and later marked down to ￡550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated ￡3 million. The inventory is most likely reported on the balance sheet at: A .￡550,000. B .￡l,000,000. C .￡3,000,000.
5 . Fernando's pasta purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. Fernando's inventory balance will most /ike母 be: A . higher if it complies with IFRS. B . higher if it complies with U.S. GAAP. C . the same under U.S. GAAP and IFRS.
For questions 6-17, assume the companies use a periodic inventory system.
6 . Cinnamon Corp. started business in 2007 and uses the weighted average cost method. During 2007, it purchased 45,000 units of inventory at �l0 each and sold 40,000 units for �20 each. In 2008, it purchased another 50,000 units at �11 each and sold 45,000 units for �22 each. Its 2008 cost of sales(E thousands) was closest to: A . �490.
B . �491. C . �495
7 . Zimt AG started business in 2007 and uses the FIFO method. During 2007, it purchased 45,000 units of inventory at �10 each and sold 40,000 units for �20 each. In 2008, it purchased another 50,000 units at �11 each and sold 45,000 units for �22 each. Its 2008 ending inventory balance(� thousands) was closest to: A . �105. B . �109. C . �110.
8 . Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by: A . Zimt is too low. B . Nutmeg is too low. C . Nutmeg is too high.
9 . Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by:
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