- For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option: A) can be worth less than the shorter-term option. B) can be worth more than the shorter-term option. C) can be worth at least as much as the shorter-term option. Your answer: C was incorrect. The correct answer was A) can be worth less than the shorter-term option. For European puts, it is possible that the longer term option can be less valuable than a shorter-term option. Q: Can anyone explain why the answer is not C? --------------------------------------------- 2) Amanda Brad, CFA, is a security analyst at UpTrend, Inc. During a routine visit to a beauty salon, she learns that a major cosmetic company, Lorean, is expected to present a revolutionary formula for facial cream. Brad buys Lorean stock for her portfolio and prepares a special report on the company. Brad also makes a call to Hillary Lang, another security analyst at UpTrend, to inform her about the news. Lang starts trading on her clients’ portfolios. Brad’s report states that given the on-going research activity at Lorean within the last months, investors can expect some successful new products and a sharp increase in the price of the stock. Lang’s actions: A) violate the Standard of Fair Dealing. B) violate the Standard of Objectivity and Independence. C) violate the Standards because she trades on inside information. Your answer: B was incorrect. The correct answer was A) violate the Standard of Fair Dealing. Lang violates Standard III(B), Fair Dealing, which imposes the requirement to start trading on the clients’ portfolios only after the information is disseminated to all clients. Q: How about answer C? Does that constitutes inside info? ---------------------------------------------- 3) Q: Normally when we want to calculate the CFO, we would not take dividend into play. How about the case where IFRS is assumed? Dividend paid/receive under IFRS can be classified under CFO. ---------------------------------------- 4) Given the following inventory information about the Buckner Company: Year-end last in, first out (LIFO) inventory of $6,500. Year-end LIFO reserve of $2,500. The current year’s LIFO cost of goods sold (COGS) is $15,000. After tax income is $1,600. The previous year’s LIFO reserve was $2,000. How much higher would the firm’s retained earnings be on a first in, first out (FIFO) basis if the firm’s tax rate is 40%? A) $2,100. B) $1,500. C) $1,800. Your answer: C was incorrect. The correct answer was B) $1,500. Adjustment to retained earnings = LIFO reserve (1 − t) = $2,500(1 − 0.4) = $1,500 Q: If I use COGS to work out the difference, I will get $500 pre-tax difference. Why can’t I use this way? ----------------------------------------- 5) During inflation, FIFO will generate higher earnings because cost of goods will be lower than if LIFO was used. However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO. Q: Can anyone explain the second sentence? -------------------------------------- 6) Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn’s assets and liabilities? Assets Liabilities A) Unchanged Unchanged B) Increase Unchanged C) Increase Increase Your answer: A was incorrect. The correct answer was C) Increase Increase The down payment will increase cash (an asset) and unearned revenue (a liability). Revenues (and thus retained earnings and owner’s equity) will not increase because the car has not been delivered. Q: This question confused me about accrual accounting. Shouldn’t we recognise the sales? ------------------------ Thanks all for your time. And hope others will benefit from it too.
" This question confused me about accrual accounting. Shouldn’t we recognise the sales? " No, because you haven’t delivered the product yet, so it’s not a sale, it is deferred revenue (a liability). This is the same as magazine subscriptions - take the money upfront, create a liability, and extinguish the liability as you send the magazines. " However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO. " If there is inflation, using LIFO will increase your COGS. These expenses are tax deductible, so your revenue will be lower. Lower revenue = lower tax liability. I’ll leave the rest for someone who can formulate a better response. Cheers
Hank Scorpio Wrote: ------------------------------------------------------- > " This question confused me about accrual > accounting. Shouldn’t we recognise the sales? " > > No, because you haven’t delivered the product yet, > so it’s not a sale, it is deferred revenue (a > liability). This is the same as magazine > subscriptions - take the money upfront, create a > liability, and extinguish the liability as you > send the magazines. > > " However, LIFO will generate higher cash flows > since cash outflows for taxes will be lower for > LIFO. " > > If there is inflation, using LIFO will increase > your COGS. These expenses are tax deductible, so > your revenue will be lower. Lower revenue = lower > tax liability. > > I’ll leave the rest for someone who can formulate > a better response. > > Cheers all explanations are spot on.
Q: How about answer C? Does that constitutes inside info? She learned about it a public salon, so it’s not insider information.
cfagoal2 Wrote: ------------------------------------------------------- > Q: How about answer C? Does that constitutes > inside info? > > She learned about it a public salon, so it’s not > insider information. So what constitutes insider information? Material nonpublic information out from the mouth of management or employees of company?
For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option: A) can be worth less than the shorter-term option. B) can be worth more than the shorter-term option. C) can be worth at least as much as the shorter-term option. Very tricky,(I also selected C) The answer is A, it could be all of them and most accurate is A because european options can not be excercised until the contact expiration date.
- During inflation, FIFO will generate higher earnings because cost of goods will be lower than if LIFO was used. However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO. LIFO Will generate higher cash flows because you pay less taxes. Imagine with FIFO when prices are rising with FIFO you pay less price yo buy inventory and profit more when you sell, so you pay more tax because of more gain. With LIFO you pay high price to buy inventory and profit less when you sell and you pay less taxes and retain more as earnings and more cash flow. when prices are descreasing opposite will apply.
CareerThruCFA Wrote: ------------------------------------------------------- > For two European put options that differ only in > their time to expiration, which of the following > is most accurate? The longer-term option: > > A) can be worth less than the shorter-term option. > > > B) can be worth more than the shorter-term option. > > > C) can be worth at least as much as the > shorter-term option. > > > Very tricky,(I also selected C) The answer is A, > it could be all of them and most accurate is A > because european options can not be excercised > until the contact expiration date. Sorry I still don’t get your explanation. Mind elaborating further? Thanks.
revenant Wrote: ------------------------------------------------------- > CareerThruCFA Wrote: > -------------------------------------------------- > ----- > > For two European put options that differ only > in > > their time to expiration, which of the > following > > is most accurate? The longer-term option: > > > > A) can be worth less than the shorter-term > option. > > > > > > B) can be worth more than the shorter-term > option. > > > > > > C) can be worth at least as much as the > > shorter-term option. > > > > > > Very tricky,(I also selected C) The answer is > A, > > it could be all of them and most accurate is A > > because european options can not be excercised > > until the contact expiration date. > > Sorry I still don’t get your explanation. Mind > elaborating further? > > Thanks. Please refer to LOS 70i (Schweser Book 5, Page 207).
European options can not be exercised til the expiration date, therefor they have a longer time to discount for. Think of it as a zero coupon bond with the exact same par value, the one that could be redeemed sooner will be worth more.
Thanks, the key words to understanding are actually the consideration of low volatility and high interest rate. Think I missed out this part. Anyone can help with question 3 and 4? Thanks.
- Given the following inventory information about the Buckner Company: Year-end last in, first out (LIFO) inventory of $6,500. Year-end LIFO reserve of $2,500. The current year’s LIFO cost of goods sold (COGS) is $15,000. After tax income is $1,600. The previous year’s LIFO reserve was $2,000. How much higher would the firm’s retained earnings be on a first in, first out (FIFO) basis if the firm’s tax rate is 40%? A) $2,100. B) $1,500. C) $1,800. Add back ending LIFO reserve adjusted for taxes. 2500*.6=1500 really simple question
You missed out my really simple question too. Q: If I use COGS to work out the difference, I will get $500 pre-tax difference. Why can’t I use this way?
how are you calculating it with COGS The difference of $500 only accounts for the current year addition to the LIFO reserve but not accounting for the $2000 already in there
Sorry, missed out something. Below is my whole working. LIFO COGS = $15000 FIFO COGS = $15000 - (2500 - 500) = $14500 LIFO CS = $6500 FIFO CS = $6500 + $2500 = $9000 Pre-tax income will be higher by $500 + $2500 = $3000. Therefore, increased in RE = $3000 * 0.6 = $1800. Why is COGS left out in the calculation? Thanks.
COGS is used in the calculation, net income is higher because COGS is reduced by $2500 when converted to FIFO method. The $500 difference is only for the current period, the question is asking for a total conversion.
I think I am missing out some concept about conversion to FIFO COGS here. Shouldn’t we compare current year LIFO’s COGS ($14,500) to FIFO’s COGS ($15,000) and work out the difference it made to current year’s RE?
Reg your 1st question on Put Option. For value of Call and Put options, always start with 1) S - X for Call Options (replace ‘-’ by ‘e’ and you will never forget it. I remember it even 3 months after Jun 
) 2) and opposite X - S for Put Options. For Europian Options, since they can only be exercised on strike date, to get their present value, you need to discount X. Now, with this in mind, value of (X - S) is going to be less for longer term option than it is for shorter term option. As for longer term option, discounted value of X is going to be less than that for shorter term option. Hence the answer is A. Hope this clarifies.
revenant Wrote: ------------------------------------------------------- > I think I am missing out some concept about > conversion to FIFO COGS here. > > Shouldn’t we compare current year LIFO’s COGS > ($14,500) to FIFO’s COGS ($15,000) and work out > the difference it made to current year’s RE? Yes, usually you use only current year’s figures. But not in this case. This is because, you cannot have your RE based on FIFO this year and based on LIFO for last year. Also remember, Retained Earnings is a cumulative figure and not a yearly figure. Hope this clarifies.