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**** 10-day FSA Review ****

Just a reminder that tomorrow, Oct 11, we kick off our 10-day FSA review marathon on AF.

Bring your questions, comments and witty repartees, as always.

The schedule is as follows:

SS7 (Oct 11 and 12)

SS8 (Oct 13 and 14)

SS9 (Oct 15, 16, and 17)

SS10 (Oct 18, 19 and 20)

More info on this thread:

http://www.analystforum.com/phorums/read.php?11,612961,615126#msg-615126

Let’s crush FSA on Dec 1!

Begin your Level II studies with a FREE Schweser JumpStart Package. Available to December 2019 Level I CFA candidates only. Offer expires 1/29.

What a great idea, lola! I’ve been looking forward to the FSA review!

It was actually your idea :) I think it’s a really good way to drill on concepts and reinforce learning. So there.

Topline Construction was recently awarded the contract to construct a new Olympic-quality equestrian cross-country course just outside of La Crosse, Wisconsin. According to the project manager, projected revenues over the three years are $5.0 million and estimated costs are $3.5 million. The project has created an intra-company disagreement about what revenue recognition method to use. The company president believes that ultimate payment is assured and that the project manager’s cost estimates are reliable. The CFO agrees that ultimate payment is assured; he also knows that the project manager obtained his cost estimates from an unreliable source and thus would account for the contract revenue differently. The table below provides information on amount billed, cash received, and cost incurred for each year of the three year project (data are in $ millions).

Year 1
Year 2
Year 3

Amounts Billed
3.0
1.3
0.7

Cash Received
2.0
1.7
1.3

Cost Incurred
2.0
0.9
0.6

The following statements all relate to the cumulative balance sheets at year-end. Which of the statements is INCORRECT?

A) Using either revenue recognition method, the balance in the construction-in-progress account at the end of years 1 and 2 will be zero.

B) If the CFO’s viewpoint prevails, total assets at the end of year 2 will be $1.4 million.

C) If the president’s viewpoint prevails, the balance in the advance billings account at the end of year 1 will equal approximately $1.40 million.

D) If the President’s viewpoint prevails, the cash balance at the end of year 2 will be the same as if the CFO’s viewpoint prevails.

President’s viewpoint: % Completion

CFO –> is Completed Contract method.

Choice C is the incorrect one

President CFO

Rev 2.86 4.15 5.00 0 0 5.0
Cost 2.00 2.90 3.50 0 0 3.5
————————————————– —————————————
Income 0.86 1.25 1.50 0 0 1.5
————————————————– —————————————

AR
Billed 3 4.3 5.0
Cash Rec 2 3.7 5.0
————————————————
AR 1 0.6 0
————————————————
AR is same under both methods.

Cash position
Cash Rec 2 3.7 5.0
Cost inc. 2 2.9 3.5
————————————————
Cash 0 0.8 1.5
————————————————
Cash position is also same under both methods

Finding Net Adv Billing / Construction in Progress (Inv)
Cost Inc. 2 2.9 3.5 2 2.9 3.5
Income .86 1.25 1.5 0 0 1.5
————————————————- —————————————–
Total 2.86 4.15 5.0 2 2.9 5.0
Adv Bill 3.00 4.30 5.0 3 4.3 5.0
———————————————— —————————————–
Net AB 0.14 0.15 0 1 1.4 0
———————————————— ——————————————

Balance Sheet
Cash 0 0.8 1.5 0 0.8 1.5
AR 1 0.6 0 1 0.6 0
Net CIP 0 0 0 0 0 0
———————————————– ————————————–
TA 1 1.4 1.5 1 1.4 1.5
———————————————— —————————————
Net AB 0.14 0.15 0 1 1.4 0
Income(RE)0.86 1.25 1.5 0 0 1.5
———————————————— —————————————
TL 1.00 1.40 1.50 1 1.4 1.5
———————————————— —————————————

Based on this A is right
B is right
D is right

CP

This looked good when I previewed the post but is messed up on posting.

Can send solution that I have by mail if that will help any one.

CP

Judy Picoo, CFA, a portfolio manager for Hillcrest Mutual Funds, was evaluating Maui Macadamia Corporation for possible inclusion into her portfolio. During an analyst conference call, the management of the company publicly announced the following information for the year ended December 31, 2004:

Revenues for 2004 were expected to be up 44% for the year.

Net Income was expected to be up 50%.

Costs of revenues were up 36% and general expenses were up 20%.

Interest expenses were down because interest rates have dropped from 5.5% to 4.5%.

Maui Macadamia had been paying interest only on its long-term debt of $1,000,000, but it was delinquent on one monthly payment at year end.

Maui Macadamia had depreciation expenses of $100,000 per year. Maui Macadamia uses the straight-line method to depreciate its fixed assets.

Income taxes were fully paid during the year.

Maui Macadamia wrote down the value of its inventory by $20,000 for 2004.

Maui Macadamia paid dividends on its 10% preferred stock during the year. There were 1,000 preferred shares outstanding at a par value of $100.

Maui Macadamia’s net working capital increased by $200,000.

Since Maui Macadamia did not yet issue the financial statements for the 2004 year, Picoo had to use the results for the year ended 2003 for her analysis so that she could develop a reasonable basis for her investment in Maui Macadamia.

Using the following template, compute and prepare a projected income and cash flow statement for 2004 (using the indirect method) based on the information publicly disclosed by Maui Macadamia and the information from Maui Macadamia’s income statement for 2003. Use the results from the template to answer the questions below:

12/31/2003
12/31/2004

Revenues
10,000,000

Cost of revenues
3,500,000

Gross profit
6,500,000

General expenses
1,200,000

Depreciation
100,000

Inventory adjustment
50,000

Interest expenses
55,000

Pretax income
5,095,000

Income taxes
1,834,000

Net income
3,261,000

Maui Macadamia Corporation is expected to report respective estimated 2004 revenues and gross profits of:

Revenues Gross Profits

A) $14,400,000 $9,640,000

B) $14,400,000 $4,891,500

C) $10,000,000 $9,640,000

D) $10,000,000 $4,891,500

——————————————————————————–

Maui Macadamia is expected to report respective estimated 2004 cash flow from operations and net income available to common shareholders of:

Cash Flow from Operations Net Income
Available to Common

A) $4,805,250 $4,881,500

B) $4,815,250 $4,881,500

C) $4,815,250 $4,891,500

D) $5,215,250 $4,891,500

——————————————————————————–

If there were no further changes in cash flow for 2004, the expected net change in cash would be:

A) $5,805,250.

B) $4,802,000.

C) $4,785,250.

D) $4,805,250.

——————————————————————————–

Assuming that Maui Macadamia had a cash balance at the end of December 31, 2003, of $1,000,000, the estimated cash balance at the end of December 31, 2004, would be:

A) $4,805,250.

B) $5,805,250.

C) $4,802,000.

D) $4,785,250.

——————————————————————————–

Assuming that on January 1, 2005, (one day after the close of the 2004 year), Maui Macadamia does not conduct any business other than retire (pay-off) its debt in entirety, the expected net change in cash would be:

A) $3,805,250.

B) $3,821,500.

C) $3,801,500.

D) $3,825,250.

——————————————————————————–

Assuming the cash balance at the end of December 31, 2004 was $5,805,250 and Maui Macadamia subsequently redeemed its preferred stock at face value (assuming no accrued dividends to be paid) along with the retirement of its debt, the estimated new cash balance would be:

A) $2,801,500.

B) $3,805,250.

C) $3,701,500.

D) $4,701,500.

On December 1st, 2006, Delhirocks Corp. leased office space for 10 years at a monthly rental of $10,000. On that date Delhirocks paid the landlord the following amount

Rental Deposit: $10,000
1st Month’s rent: $10,000
Last month’s rent: $10,000
Installation of new walls & cubes: $54,000
Total: $84,000

The entire amount of $84,000 was charged to rent for the fiscal year 2006.

What amount should Delhirocks have charged for 2006
A: $10,000
B: $10,450
C: $20,450
D: $55,000

delhirocks – is the answer to your question 10450 – B
10000 Rent + 54000/120 (expense the amount over 120 months) = 450

CP

Thats correct..Answer is B

Maratikus – Judy Picoo Problem

Answers:
1. A. 14,400,000 9,640,000
2. C 4,812,250 4,891,500
3. D 4,805,250
4. B 5,805,250
5 C 3,801,500
6. D 4,701,500

CP

Looks like you guys are ploughing through SS7. Good stuff!!
I’ll be able to chime in later today. AM is pretty hectic today.

cpk123, your answer to the first problem was correct. i will get back to you on the second one a little later. FSA seems to be very easy for you … how did you study?

one time failure, then studying again now.
One thing I have seen though – it requires a lot of practice. And believe me, it is not easy for me.

CP

cpk123, could you explain the cash flow part of the question?

yea…I’m stuck in the C/F part as well…

any help on the breakdown would be much appreciated..

thanks

maratikus Wrote:
——————————————————-
> cpk123, could you explain the cash flow part of
> the question?

Actually, for part 2), the answer should be B) $4,815,250 $4,881,500, here is the calculation,

CFO = NI + delinquent interest payment + depreciation + drop in inventory - increase in net working capital

CFO = 4891500 + 3750 + 100000 + 20000 - 200000 = 4815250

NI to common equity = 4891500 - 10000 = 4881500

I got the same answers for the other parts as cpk123

Thanks, liaaba. That’s exactly what I was looking for …

Thanks – I had a typo while typing up the answer to 2 for the CF part, and had miscalculated the cash to the Common Shareholders.

Soln. key
1. New Rev: 10000*1.44=14400
New Cost: 3500*1.36 = 4760
New Gross Profit: 9640

2. NI = 3261 * 1.5 = 4891.5
+Depr 100
- Delta WC (200)
Non Cash Inv Write 20
Int exp delinquent 3.75
———————————–
CFO 4815.25
———————————–

NI = 4891.5
Pref Div = 10
——————————-
CFO to Common: 4881.5
——————————-

3. Net change in cash: 4815.25 - 10 (Pref Div) = 4805.25

4. Start Cash: 1000 + Delta Cash 4805.25 = 5805.25

5. 4805.25 - 1000 (pay off debt) - 3.75 (Int Exp delinquent) = 3801.5

6. Start Cash = 5805.25
- Pref Stock= 100
- Debt = 1000
—————————-
Final Cash = 4701.5
—————————-

CP

cpk123 Wrote:
——————————————————-
> Thanks – I had a typo while typing up the answer
> to 2 for the CF part, and had miscalculated the
> cash to the Common Shareholders.
>
> Soln. key
> 1. New Rev: 10000*1.44=14400
> New Cost: 3500*1.36 = 4760
> New Gross Profit: 9640
>
> 2. NI = 3261 * 1.5 = 4891.5
> +Depr 100
> - Delta WC (200)
> Non Cash Inv Write 20
> Int exp delinquent 3.75
> ———————————–
> CFO 4815.25
> ———————————–
>
> NI = 4891.5
> Pref Div = 10
> ——————————-
> CFO to Common: 4881.5
> ——————————-
>
> 3. Net change in cash: 4815.25 - 10 (Pref Div) =
> 4805.25
>
> 4. Start Cash: 1000 + Delta Cash 4805.25 =
> 5805.25
>
> 5. 4805.25 - 1000 (pay off debt) - 3.75 (Int Exp
> delinquent) = 3801.5
>
> 6. Start Cash = 5805.25
> - Pref Stock= 100
> - Debt = 1000
- Int Exp = 3.75 <— Forgot this…
> —————————-
> Final Cash = 4701.5
> —————————-

CP

cpk123, thanks for providing your solutions. Very helpful!

Nice question and solutions. Agree with the solutions.
I am just not sure where “delinquent interest payment” should appear in financial statement. Do not remember reading this.
Is it part of current portion of liability which is already counted in working capital change?

CFA level II Candidate.

Isn’t it something like Interest payable?
or expensed interest?

CP

CP

disptra Wrote:
——————————————————-
> Nice question and solutions. Agree with the
> solutions.
> I am just not sure where “delinquent interest
> payment” should appear in financial statement. Do
> not remember reading this.
> Is it part of current portion of liability which
> is already counted in working capital change?

–are you asking where to find it on the financial statements or how did we come up with that amount from the question?

I think cpk123 is right, whatever amount you still owe will be added to interest payable

just to clarify – interest expense and payable would not be under Working capital at all.

Working capital = CA - CL.

This is an FYI.

Increase in WC === means Net (CA - CL) has gone up. So must be deducted from CFO.
Decrease in WC === means Net (CA - CL) has gone down, added to CFO.

CP

I have 2 questions on the Judy Picoo problem:

1) To calculate CFO, why is the $200,000 increase in net working capital subtracted?

2) How did you know that the starting cash for 2004 was $1,000,000?

Thanks so much.

i agree with you cpk123 interest that was recorded as expense but not paid when it was due. so i guess there is a slight difference than interest payable because interest payable might not be due yet

Sorry, about that–now I see that the cash at end of 2003 was given. But I still do not understand why increase in working capital needs to be subtracted to get CFO.

the one million is given in the problem
increase in working capital means that there is an increase in current assets or decrease in current liabilities.decrease of liabilities would mean an outflow reducing the cash flow, and just the same an increase in current assets would probably mean increase in inventories, acc receivable etc which means a decrease of cash flow
am I wrong?

good job cpk123!

i remember the CA and CL part as

CA – reduce – means source of cash.
increase — means use of cash

This is opposite sign usage.

CL – increase – source of cash
— reduce – use of cash

This is same sign usage.

and WC = net (CA - CL) so if positive - means CA > CL
if -ve – CA < CL

Hope this helps.

CP