FPA test/staff/2017-001

Answer (On Text Hightlight )

1. In periods of rising prices and stable or increasing inventory

quantities, compared with companies that use LIFO inventory
accounting, companies that use the FIFO method will have:
a. Higher COGS and lower taxes
b. Higher net income and higher taxes
c. Lower inventory balances and lower working capital

2. In the early years of an asset’s life, a firm that chooses an

accelerated depreciation method instead of using straight-line
depreciation will tend to have:
a. Lower net income and lower equity
b. Higher return on equity and higher return on assets
c. Lower depreciation expense and lower turnover ratios

3. In general, as compared to companies with operating leases,

companies with finance leases report:
a. Lower working capital and asset turnover
b. Higher debt-to-equity ratios and return on equity in the
early years
c. Higher expenses in the early years and over the life of the
lease
4. How will a firm’s operating cash flow be affected by a decrease in
accounts receivable and by an increase in accounts payable?
a. Both will increase operating cash flow
b. Both will decrease operating cashflow
c. One will decrease operating cashflow and one will decrease
operating cash flow

5. The ratio of operating cash flow to net income (the cash flow
earnings index) is least likely be an “accounting red flag” when it
is:
a. Less than one
b. Declining over time
c. Highly variable

6. Consider a manufacturing company and a financial services

company. Interest expense is most likely classified as a non-
operating component of income for:
a. Both of these companies
b. Neither of these companies
c. Only one of these companies
7. A firm’s statement of changes in equity shows an increase in
shareholders’ equity of $ 7 million. Retained earnings were $ 6
million over the reporting period. The difference of $ 1 million
most likely results from:
a. Receiving dividends
b. Issuing common stock
c. Realizing a gain on available-for-sale securities

8. At the end of last year, Manhattan Corporation had a quick ratio

of 1.2. If Manhattan reduces its accounts payable with a cash
payment of $2 million, its quick ratio will:
a. Be unchanged
b. Increase
c. Decrease

9. Balance sheet changes most likely to be consistent with a

decrease in cash of $ 10,000 are a(n):
a. Increase in accounts payable of $3,000 and an increase in
inventories of $13,000
b. Decrease in notes payable of $ 12,000 and an increase in
marketable securities of $ 2,000
c. Increase in accounts receivable of $ 14,000 and a decrease
in retained earnings of $ 4,000
10. 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-off

11. An analyst is responsible for evaluating the inventory accounting

of companies in the finished lumber industry. The analyst is
interest in two companies, Harrelson Lumber and Wilson
Company. Harrelson and Wilson are identical in all respects
except that Harrelson uses FIFO and Wilson uses LIFO. Inventory
information for both companies is presented below:

Units Cost per unit

Beginning inventory 100 $10

First purchase 20 $8
Second purchase 30 $12
Third purchase 10 $6
Ending inventory 50

Which of the following statements is most accurate?

a. Harrelson’s cost of goods sold is lower than Wilson’s

b. Wilson’s ending inventory is higher than Harrelson’s
c. Harrelson’s and Wilson’s cost of goods sold are the same
12. Peney, Inc., is building a new office tower for its administrative
personnel. The construction costs are funded using a
combination of debt and equity. As compared to expensing the
construction costs immediately, capitalizing the construction
costs will result in:
a. A higher interest coverage ratio and lower operating cash
flow
b. Higher total assets and higher financing cash flow
c. A lower fixed asset turnover ratio and lower investing cash
flow

13. GreenCo, a US based manufacturing firm, reports a deferred tax

liability on its balance sheet. The deferred tax liability most likely
results from GreenCo’s:
a. Use of the LIFO inventory accounting method for its
financial statements
b. Use of straight line depreciation for financial reporting and
accelerated depreciation for tax purposes
c. Decision to expense restructuring costs on its income
statement even though the funds have not been paid

14. Inventory cost is most likely to include:

a. Storage costs for finished goods until they are actually sold
b. Shipping cost for delivery to the customer
c. An allocation of fixed production overhead
15. Forman Inc. and Swoft Inc. both operate within the same
industry. Forman’s stated strategy is to differentiate its premium
products relative to its competitors, while Swoft is a low-cost
producer. Given the companies’ stated strategies, Forman most
likely has:
a. Higher gross margins relative to Swoft
b. Lower advertising expenses relative to Swoft
c. Lower research and development expenses relative to
Swoft

16. 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 sales will produce a:
a. $15,000 inflow from investing activities
b. $20,000 inflow from operating activities
c. $35,000 inflow from investing activities

17. An analyst would most likely suspect that the quality of a

company’s earnings is deteriorating if the company:
a. Has a cash flow earnings index greater than one
b. Increases the estimated useful lives and salvage values of
several physical assets
c. Classifies the lease of a machine the company will employ
for 50% of its estimated useful life as an operating lease
18. RGB, Inc. has a gross profit of $45,000 on sales of $150,000. The
balance sheet shows average total assets of $75,000 with an
average inventory balance of $15,000. RGB’s total assets
turnover and inventory turnover are closest to:
a. Asset turnover: 7.00x Inventory turnover: 2.00x
b. Asset turnover: 2.00x Inventory turnover: 7.00x
c. Asset turnover: 0.50x Inventory turnover: 0.33x

19. A firm recently recognized a $15,000 loss on the sale of

machinery used in its manufacturing operation. The original cost
of the machinery was $100,000 and the accumulated
depreciation at the date was $60,000. What amount did the firm
receive from the sale?
a. $25,000
b. $45,000
c. $85,000

20. Jiffy Co’s tax rate is 40%. JiffyCo purchases a $200 asset with no
salvage value which is depreciated on a straight-line basis for four
years for tax purposes and five years for financial reporting. At
the end of the second year:
a. JiffyCo’s effective tax rate has decreased
b. The asset’s carrying value is greater than its tax base
c. The deferred tax asset has a balance of $8
21. Assume the exchange rate between the Bucas (BCS) and the
Leider (LDR) is 1LDR=1.70BCS, and the exchange rate between
the Bucas and the Passoa (PAS) is 1PAS=3.2BCS. What is the
exchange rate for 1LDR=....PAS?
a. 1LDR = 0.5313 PAS
b. 1LDR = 1.8824 PAS
c. 1LDR = 5.4400 PAS

22. When a used delivery truck is sold, the gain or loss on disposal is
most accurately stated as:
a. Original cost – accumulated depreciation + selling price
b. Selling price – original cost – accumulated depreciation
c. Selling price – original cost + accumulated depreciation

23. Continental Corporation reported sales revenue of $150,000 for

the current year. If accounts receivable decreased $10,000 during
the year and accounts payable increased $4,000 during the year,
cash collections were:
a. $154,000
b. $160,000
c. $164,000

24. The write-off of obsolete equipment would be classified as:

a. Operating cash flow
b. Investing cash flow
c. No cash flow impact
25. At the end of last year, Maui corporation’s assets and liabilities
were as follows:

Total assets $98,500

Accrued liabilities $ 5,000

Short-term debt $12,000

Bonds payable $39,000

Maui’s debt-to-equity ratio is closest to:

a. 1.2
b. 1.3
c. 1.4

26. Miller Corporation has 160,000 shares of common stock

authorized. There are 92,000 shares issued and 84,000 shares
outstanding. How many years of treasury stock does Miller own?
a. 8,000
b. 68,000
c. 76,000

27. Which of the following ratios are used to measure a firm’s

liquidity and solvency?
Liquidity Solvency
a. Current ratio Quick ratio
b. Debt-to-equity ratio Financial leverage ratio
c. Cash ratio Total debt ratio
28. How should the proceeds received from the advance sales of
tickets to a sporting event be treated by the seller, assuming the
tickets are nonrefundable?
a. Unearned revenue is recognized to the extent that costs
have been incurred
b. Revenue is recognized to the extent that costs have been
incurred
c. Revenue is deferred until the sporting event is held

29. From the lessee’s perspective, compared to an operating lease, a

finance lease results in:
a. Higher asset turnover
b. A higher debt-to-equity ratio
c. Lower operating cash flow

30. Which of the following would least likely increase pretax income?
a. Decreasing the bad debt expense estimate
b. Increasing the useful life of an intangible asset
c. Decreasing the residual value of a depreciable tangible
asset