INDEX NUMBER

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Open University of Mauritius

MSc FINANCIAL ANALYSIS [OUpm014]

EXAMINATIONS FOR: November/December 2018

MODULE: Financial Reporting and Analysis II [OUpm014113]

DATE: Saturday 15 December 2018

DURATION: 3 HOURS

READING TIME: 15 Minutes

INSTRUCTIONS TO CANDIDATES

1. This paper consists of NINETY (90) multiple choice questions.

2. Answer ALL questions on the question paper itself.

3. Total marks: 90

This question paper contains 90 questions and 27 pages.

Page 1 of 27
 ANSWER ALL QUESTIONS

CIRCLE THE CORRECT ANSWER

QUESTION 1

Throne's Party Palace had supplies on hand at the end of their first year of operations
of $200. If Throne's has one open (unpaid) supplies invoice for $150 at year-end and
they made cash payments of $1 ,200 for supplies throughout the year, what amount
should be recorded for supplies expense on their Year 1 income statement under the
accrual basis?

A. $850
B. $1,150
C. $1,250

QUESTION 2

The first expense deduction from sales on the multiple-step format of the income
statement is

A. cost of goods sold

B. advertising expense
C. depreciation and amortization

QUESTION 3

Under the completed contract method, revenue is recognized

A. when construction begins on the project

B. when the project is complete.
C. throughout the project, based upon the amount of work completed each year

Page 2 of 27
QUESTION 4

Freeda's Furniture Store records revenue under the instalment sales method. The
following information is available for the first year of business: Sales, $100,000; Cost
of goods sold, $75,000; Cash collections, $50,000. How much realized gross profit on
instalment sales will Freeda recognize in Year 1'?

A. $12,500
B. $0
C. $25,000

QUESTION 5
Cruise Builders Inc., begins building a new ship for Happiness Cruise Lines in 2015.
The project price is $12,000,000. The estimated total cost is $9,000,000 over three
years. Here is the information for 2015 only: costs incurred, $3,000,000; estimated
completion costs, $6,000,000; billings, $2,500,000; cash collected, $1,500,000. Which
one of the following is the correct cost ratio to use in computing the profit for 2015
under the percentage-of-completion method?

A. 33%
B. 42%
C. 50%

QUESTION 6

In the installment sales method, revenue is recognized

A. as production takes place.

B. at or after the time of the sale
C. after the cash is collected.

Page 3 of 27
QUESTION 7

The matching principle

A. applies only to situations in which a cash payment occurs before an expense is

recognized or a cash receipt occurs before revenue is recognized.
B. is used in accrual accounting to determine the proper period in which to
recognize revenue
C. is used in accrual accounting to determine the proper period for recognition of
expenses

QUESTION 8

The Converse Corporation uses the percentage of sales revenue approach to estimate
bad debts. Sales for 2015 are $600,000. The unadjusted balance in the allowance
account at year-end is $6,500. Converse estimates that 2% of sales will be
uncollectible. Which one of the following is the proper amount of bad debt expense to
recognize at 12/31/2015?

A. $5,500
B. $1,200
C. $12,000

QUESTION 9
When a company sells a major portion of its business, it reports the operating results
of the discontinued portion of the business on the income statement under

A. extraordinary items
B. cumulative effect of a change in accounting principle
C. discontinued operations

Page 4 of 27
QUESTION 10

Unusual or infrequent items are disclosed

A. together as part of income and reported pretax

B. separately as a component of income from continuing operations and are
reported pretax
C. separately as a component of income from continuing operations and are
reported after tax

QUESTION 11

Operating income from discontinued operations and any gains or losses from their
sale are

A. not segregated in the income statement

B. segregated in the income statement.
C. reported after extraordinary items on the income statement

QUESTION 12

By what must a company divide net earnings available to common shareholders in

computing earnings per common share?

A. Ending number of common shares issued

B. Average number of common shares issued
C. Average number of common shares outstanding

Page 5 of 27
QUESTION 13

The standard equation for computing basic earnings per share (EPS) is

A. Total Assets = Total Liabilities + Stockholder's Equity

B. Basis EPS = [Net Income - Preferred Dividends] / [Weighted Average Number
of Common Shares Outstanding]
C. [Net Income - Common Dividends] / [Weighted Average Number of Common
Shares Outstanding]

QUESTION 14

Last year, the AKB Company had net income equal to $5 million. Combined state and
local taxes were 45 percent. The firm paid $1 million to its 1 million common
shareholders and $250,000 to 100,000 preferred shareholders. What was AKB's
earnings per share (EPS) last year?

A. $2.25
B. $3.75
C. $4.75

QUESTION 15

Robinson Company had 1 million shares outstanding at the beginning of the year. On
April 1, Robinson issued an additional 300,000 shares. On July 1, Robinson issued
200,000 more shares. What is Robinson's weighted average number of shares
outstanding for the calculation of earnings per share?

A. 1,000,000 shares
B. 1,200,000 shares
C. 1,325,000 shares

Page 6 of 27
QUESTION 16

Sacho Company's balance sheet on December 31, 2014 included the following:

On October 1, 2015, Sacho issued a 25% stock dividend on its common shares and paid
$500,000 cash dividends on preferred shares. Net income for the year ending December
31, 2015 was $2,000,000. Sacho's 2015 basic EPS should be

A. $3.00
B. $3.53
C. $4.00

QUESTION 17

Which of the following statements is TRUE regarding the reporting of earnings per
share (EPS)?

A. Diluted EPS may be greater than basic EPS.

B. Diluted EPS must be less than or equal to basic EPS
C. Basic EPS must be less than diluted EPS.

QUESTION 18

Crimson Corporation had 3 million shares of common stock outstanding

throughout the year in 2015. During the year, it issued five thousand, $1,000
convertible bonds with an interest rate of 8%. These bonds were issued at par
on 1/1/2015. Each bond is convertible into 10 shares of common stock. Assuming
Crimson had a net income of 2.4 million for 2015 and has an effective tax rate of
40%, what is its diluted EPS (rounded)?

A. $0.87
B. $0.80
C. $0.88

Page 7 of 27
QUESTION 19

The consideration of convertible preferred stock requires that an adjustment be made

to which of the following components of the basic earnings per share (EPS) equation
if the security is dilutive?

A. The numerator and denominator

B. The numerator
C. The denominator

QUESTION 20

Which of the following statements regarding basic and diluted earnings per share
(EPS) is TRUE?

A. To calculate diluted EPS, use net income less preferred dividends in the
numerator.
B. If diluted EPS is less than basic EPS, the convertible securities are said to be
antidilutive
C. Neither basic nor diluted EPS considers antidilutive securities in its
computation.

QUESTION 21

Which of the following concerning the treasury stock method is true?

A. The number of shares used for the earnings per share adjustment is usually
equal to the number of actual shares exercised.
B. The assumption of exercise in the treasury stock method is not realistic.
C. Changes in market price do not affect the value of the conversion feature D.
The conversion or dilution will always occur.

Page 8 of 27
QUESTION 22

Which profitability ratio considers all revenues and expenses?

A. Gross profit margin

B. Operating profit margin
C. Net profit margin

QUESTION 23

Assume a company's beginning shareholders' equity is $100 million, its net income for the
year is $15 million, its cash dividends for the year are $7 million, and there was no issuance
or repurchases of common stock. The company's actual ending shareholders' equity is $115
million. What amount has bypassed the net income calculation by being classified as other
comprehensive income?

A. $0
B. $7 million
C. $15 million

QUESTION 24

Current assets are cash and other assets expected to be converted into cash, sold, or
consumed either in one year or in the operating cycle,

A. whichever is longer.
B. whichever the company wishes to.
C. One year is the maximum time period for current assets' expected life cycle

Page 9 of 27
QUESTION 25

Etown Bakery provides the following information from its accrual-basis financial statements

Year 2015 Salaries Expense $100,000

12/31/2014 Salaries Payable $9,000
12/31/2015 Salaries Payable $12,000

How much cash did the bakery pay out for salaries during 2015'?

A. $12,000
B. $97,000
C. $103,000

QUESTION 26

Each of the following should be classified as plant and equipment on the balance sheet
of Chin's Nursery except

A. the office building or a new machine

B. land on which the nursery is located
C. plants held for resale to customers

QUESTION 27

Expenditures capitalized as noncurrent assets generally include those expenditures

that are

A. made for normal repairs to maintain the usefulness of the asset over a
number of years
B. material and that have an economic benefit to the entity that extends beyond
the current year
C. material and that have an economic benefit to the entity only in the current
year

Page 10 of 27
QUESTION 28

Long-lived assets refer to

A. assets that are held by a company for more than one year
B. tangible fixed assets including plant and machinery
C. resources that are used to provide services to a company and are not bought
with the intention of resale

QUESTION 29

Which item among the following is not an intangible asset?

A. A trademark/patent
B. An account receivable
C. Goodwill

QUESTION 30

In what section of the balance sheet would one find patents and trademarks?

A. Property, plant, and equipment

B. Intangible assets
C. Long-term investments

QUESTION 31

Goodwill is an asset that arises because the present value of an acquired company's
estimated future earnings, discounted at the acquiring firm's ROI, is

A. more than the fair market value of the net assets of the acquiring company
B. less than the fair market value of the net assets of the acquiring company
C. more than the fair market value of the net assets of the acquired company

Page 11 of 27
QUESTION 32

Noncurrent, intangible assets such as leasehold improvements and patents are all
subject to

A. depreciation
B. amortization
C. depletion

QUESTION 33

__________ measures the premium paid over market value to acquire an asset

A. Reputed value
B. Goodwill
C. Patents

QUESTION 34

Under U.S. GAAP, internally created identifiable intangibles

A. must be expensed.
B. can be capitalized for costs incurred if certain criteria are met
C. should be tested annually for impairment.

QUESTION 35

Crosscreek Corporation bought shares of Royal Corporation's common stock with a

cost of $100,000 on July 15, 2016. On 12/31/2016 (year-end), the Royal stock was
worth $107,500. The stock is classified as a trading security. The income tax rate is
35%. Which one of the following reflects the proper treatment for Crosscreek's
investment for 2016?

A. $4,875 credit to stockholder's equity

B. $7,500 realized gain

C. $7,500 unrealized gain

Page 12 of 27
QUESTION 36

Unrealized holding gains and losses for securities to be held-to-maturity are

A. reported as a separate component of the shareholders' equity section of the

balance sheet
B. included in the determination of income from operations in the period of the
change.
C. neither reported in the income statement nor on the balance sheet.

QUESTION 37

Unrealized holding gains and losses for trading securities are

A. reported as a separate component of the shareholders' equity section of the

balance sheet
B. included in the determination of income from operations in the period of the
change.
C. reported as extraordinary items.

QUESTION 38

Fair value is used as the basis for valuation of a firm's investment securities when

A. management's intention is to dispose of the securities within one year.

B. the market value is less than the cost for each equity security in the portfolio
C. the investment security is not classified as held-to-maturity.

QUESTION 39

Unrealized holding gains and losses for securities available-for-sale are

A. reported as part of comprehensive income.

B. included in the determination of income from operations in the period of the
change
C. neither reported in the income statement nor on the balance sheet.

Page 13 of 27
QUESTION 40

Culpepper Corporation owns available-for-sale securities with a cost of $90,000.

Immediately before the year-end adjustment, the market adjustment account has a
$5,000 debit balance. The securities have a current value of $85,000 at the end of
2011. Which one of the following is the correct adjustment to the market adjustment
account?

A. $5,000 credit
B. $10,000 credit
C. $5,000 debit

QUESTION 41

Jason Corporation's statement of stockholders' equity reported net income of

$988,000, foreign currency translation adjustments of $26,000, and cash dividends on
preferred stock of $30,000 and on common stock of $65,000. Jason's comprehensive
income for the period was

A. $949,000
B. $962,000
C. $1,014,000

QUESTION 42

The statement of stockholders' equity

A. reports cash flows affecting stockholders' equity accounts.

B. reports the total number of shares of contributed capital.
C. may be used in place of the statement of retained earnings

QUESTION 43

The total debt ratio is equal to

A. long-term debt divided by total capitalization

B. total liabilities divided by stockholders' equity
C. total liabilities divided by total assets

Page 14 of 27
QUESTION 44

The least liquid current asset is

A. marketable securities
B. accounts receivable
C. inventory

QUESTION 45

Working capital is $45,000. If the firm gets $18,000 by issuing common stock, what
will happen to the current ratio?

A. It will decrease.
B. It will remain unchanged.
C. It will increase.

QUESTION 46

Which of the following is not a financing activity?

A. Payments on a mortgage note

B. Paying a bond issue at maturity
C. Paying an account payable

QUESTION 47

Which of the following transactions would increase the net cash flow from operating
activities?

A. The collection of an account receivable from a customer

B. The issuance of capital stock for cash at a price above par
C. The purchase of a delivery truck by issuing a note payable

Page 15 of 27
QUESTION 48

Which of the following is an investing activity?

A. Selling bonds at a price in excess of par value

B. Issuing common stock at a price in excess of stated value
C. Paying $45,000 down on a $250,000 building

QUESTION 49

Which one of the following would be classified as an investing activity?

A. Retirement of bonds payable

B. Selling equity investments
C. Issuing common stock

QUESTION 50

The three sections of the statement of cash flows are

A. operating activities, marketing activities, and financing activities

B. operating activities, investing activities, and financing activities
C. design activities, production activities, and marketing activities

QUESTION 51

Which one of the following is a financing activity?

A. Writing off an account receivable as uncollectible

B. Selling debt investments
C. Repaying a bank loan

Page 16 of 27
QUESTION 52

On 7/1/2016, Grove Company signed a 15-year building lease that is reported in

their financial statements as a capital lease. If Grove paid all monthly lease payments
when due, how should the company report the effects of this lease in the financing
activities section of their 2016 Statement of Cash Flows?

A. As outflow equal to the 2016 principal payments only

B. As outflow equal to the 2016 principal and interest payments on the lease
C. As inflow equal to the present value of the future minimum lease payments on
7/1/2016, less the principal and interest payments made in 2016

QUESTION 53

Which statement is CORRECT regarding presentation choices permitted in IAS 7?

A. Interest paid must be classified as operating cash flows.

B. Interest paid must be classified as financing cash flows.
C. Interest paid may be classified as either operating or financing cash flows

QUESTION 54

For purposes of preparing a cash flow statement, which of the following is not
considered a "cash equivalent"?

A. A money market fund

B. An investment in IBM bonds
C. Treasury bills

QUESTION 55

Which of the following would not be reported on a statement of cash flows?

A. Common stock was sold at a price in excess of its par value.

B. Bonds were issued at price less than their par or stated value.
C. Cash dividends were declared.

Page 17 of 27
QUESTION 56

In the statement of cash flows prepared under the indirect method, depreciation
expense is treated as an adjustment to net income because it

A. reduces net income but does not involve an outflow of cash

B. generally represents a small part of operating expenses.
C. is an inflow of cash used to replace aging plant assets.

QUESTION 57

Uses of cash do not include

A. dividend payments
B. increases in accounts receivable
C. increases in prepayments

QUESTION 58

The two alternative methods that a company can use to calculate and present cash
flow from operating activities are the

A. investing method and the financing method

B. direct method and the estimated method
C. direct method and the indirect method

QUESTION 59

The beginning balance of the prepaid insurance account was $3,200. The ending
balance of the account was $5,000. Insurance expense recognized for the period was
$4,000. The cash outflow from the purchase of insurance policies was

A. $4000
B. $5800
C. $9000

Page 18 of 27
QUESTION 60

Lakeview Company owns 30% of River Company and accounts for this investment
using the equity method. Lakeview's net income for the year is $20 million and River's
net income for the same period is $8 million. River paid no dividends during the year.
If Lakeview uses the indirect method for its cash flow statement, what amount will it
add to or subtract from its accrual-based net income in its statement of cash flows
related to this investment?

A. Add $2.4 million

B. Add $8 million
C. Subtract $2.4 million

QUESTION 61

The following information is available for Woods Corporation:

Accounts receivable, December 31, 2015, $22,800;

Accounts receivable, December 31, 2016, $23,200;
All of Wood's $300,000 in sales is on credit.

How should the company treat this information in the operating section of its 2016
statement of cash flows prepared under the indirect approach?

A. Increase accrual-based net income by $400

B. Decrease accrual-based net income by $400
C. Increase accrual-based net income by $23,200

QUESTION 62

Taloga Company has the following information for its accounts payable: Balance at
December 31, 2015, $40,000; Balance at December 31, 2016, $25,000. How should
Taloga treat this information when preparing its statement of cash flows under the
indirect approach for the year ending December 31, 2016?

A. Add $15,000 to cash flow from financing activities

B. Add $15,000 to cash flow from operations
C. Subtract $15,000 from cash flow from operations

Page 19 of 27
QUESTION 63

The president of the company you are working for needs some advice. She wants to
know how it is possible for a company to have incurred a net loss during the year
when the cash account balance increased! After reviewing the statement of cash
flows, which of the following would most likely be your explanation?

A. The company purchased a large amount of plant assets for cash.

B. Inventory levels increased significantly from the beginning to the end of the year
C. There were many December (year-end) expenses, which were paid in the
following month

QUESTION 64

Which of the following is not disclosed on the statement of cash flows prepared under
the direct method or on the required supplemental schedule?

A. The amount of income taxes paid during the year

B. The major classes of cash receipts and cash payments
C. Cash flow per share information

QUESTION 65

Which of the following items has become increasingly important as an analytical tool
to determine the financial health of a business?

A. Net income
B. Cash flow from operations
C. Cash flow from investing and financing activities

Page 20 of 27
QUESTION 66

The president of the company you plan to work for needs some advice. She wants to
know how it is possible for the company to make money (net income) during the year
and yet have the cash balance decline. After reviewing the statement of cash flows,
which of the following would most likely explain this situation?

A. The company incurred a significant amount of debt during the year.

B. Inventory levels decreased significantly from the beginning to the end of the
year.
C. The company purchased a significant amount of plant assets during the year.

QUESTION 67

In calculating total cash flow to a firm, which of the following is not included?

A. Cash dividends
B. Operating cash flow
C. Additions to net working capital

QUESTION 68

Common-size income statements display each item as a percentage of ______, while

common-size balance sheets display each item as a percentage of

A. net income; total equity

B. sales; total assets
C. sales; total equity

QUESTION 69

Sales in a common-size income statement are usually stated as

A. 100%
B. a percentage of net income
C. a percentage of gross profit

Page 21 of 27
QUESTION 70

The term cross-sectional analysis refers to comparing

A. inventory turnover to cost of goods sold

B. balance sheet items to income statement items
C. a firm's ratios to its industry's ratios

QUESTION 71

Which of the following statements DOES NOT represent a limitation of financial

ratios?

A. There are accounting differences across firms

B. They are hard for users to understand.
C. Many firms have divisions that are unlike one another with different accounting
ratios

QUESTION 72

Ratios for all companies following generally accepted accounting principles

A. will always be standardized.

B. can vary due to different accounting treatments
C. will always be correct.

QUESTION 73

Ratios are most useful in identifying

A. relationships
B. causes
C. problems

Page 22 of 27
QUESTION 74

Which of the following ratios evaluates the effectiveness with which a company uses
its assets?

(1) Receivables Turnover (2) Interest Coverage

A. (1) Yes (2) Yes

B. (1) Yes (2) No
C. (1) No (2) No

QUESTION 75

You are given the following information for Treetop Company for 2015

Net Sales: $30,000

Gross Profit: $12,000
Inventory, 1/1: $5,000
Year 2015 Purchases: $23,000
Accounts Receivable 12/31: $6,500

What was Treetop's inventory turnover for 2015?

A. 4.0 times
B. 2.4 times
C. 1.8 times

QUESTION 76

Which of the following is the formula for computing the times-interest-earned ratio?

A. Net income divided by interest expense

B. Interest expense divided by operating profit
C. Operating profit divided by interest expense

Page 23 of 27
QUESTION 77

Which of the following is another term for the net trade cycle?

A. Cash conversion cycle

B. Inventory cycle
C. Sales cycle

QUESTION 78

Which of the following is the formula for computing the average collection period for
accounts receivable?

A. Gross accounts receivable divided by average daily credit sales

B. Net accounts receivable divided by average daily credit sales
C. Total credit sales divided by 365 days

QUESTION 79

With an inventory turnover rate of 10.0, over how many days does inventory turnover?

A. 10 days
B. 36.5 days
C. 365 days

QUESTION 80

Which of the following is not a measure of profitability?

A. Return on equity
B. Interest coverage ratio
C. Operating income

Page 24 of 27
QUESTION 81

To compute the days to sell the average inventory, the numerator is 365 days and
the denominator is which of the following?

A. Inventory turnover rate

B. Average inventory
C. Net sales

QUESTION 82

Given the following data: Sales = 2000; Cost of goods sold = 1500; Average total
assets = 1600; Average inventory = 100, calculate the asset turnover ratio.

A. 1.25
B. 0.9375
C. 1.33

QUESTION 83

Receivable turnover measures

A. the time it takes to collect an average receivable

B. the amount of the average receivable account
C. how many times, on average, the accounts receivable was converted into cash
during the period

QUESTION 84

A company can determine if its ______ objective has been met by evaluating its
ability to pay bills when due and meet unexpected needs for cash.

A. profitability
B. liquidity
C. long-term solvency

Page 25 of 27
QUESTION 85

Which of the following financial ratios is NOT used in determining a company's return
on equity with the extended DuPont model?

A. Total asset turnover

B. Total debt ratio
C. Operating profit margin

QUESTION 86

You are given the following financial data: net income/sales = 4%; sales/total assets =
4.5; debt/total assets = 60%. What is the firm's return on equity?

A. .5%
B. 18%
C. 45%

QUESTION 87

If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35%
to 55%, and asset turnover falls by 20%, the effect on ROE is

A. +1 .6%
B. +0.24%
C. -0.8%

QUESTION 88

Two companies operating in the same industry achieved the same return on equity
with the same net sales; the two companies were different with respect to return on
total assets. Compared with the company that had the higher return on total assets,
the company with the lower return on total assets most likely had a higher

A. total asset turnover

B. financial leverage multiplier
C. proportion of common equity in its capital structure

Page 26 of 27
QUESTION 89

ABC Co. has the following segment reporting information for 2015'

Widgets have an operating profit margin of

A. 4.6%
B. 10.2%
C. 12.4%

QUESTION 90

A high price/earnings ratio indicates

A. investor confidence in high future earnings

B. that the stock is probably overvalued
C. that the stock is probably undervalued

Page 27 of 27