I’ll provide the answers after 5 responses. 1) According to the Management Discussion and Analysis section of Frankfurt Supply Company’s annual report, Frankfurt recently decreased the sales prices of its products in order to increase market share. In additioon, Frankfurt recently lowered its requirements for credit customers and increased the credit limits of some customers. What is the most likely impact on Frankurt’s accounts receivable turnover and inventory turnover as a result of these changes? A) Both will decrease B) Only one will decrease C) Both will increase 2) Which of the following reasons is least likely a valid limitation of ration analysis? A) Calculation of rations involves a large degree of subjectivity B) It is difficult to find comparable industry ratios C) Determining the target or comparison value for a ratio is difficult 3) Which of the following ratios would not be used to evaluate how efficiently management is utilizing the firm’s assets? A) Fixed Asset turnover B) Payables turnover C) Gross profit margin 4) During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was $10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the purchase price. According to the International Financial Reporting Standards, should Big 4 recognize an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its balance sheet due to the acquisition? Extraordinary Loss Negative goodwill A) YES NO B) NO YES C) NO NO 5) The Statement on Accounting Standards No. 99, Consideration of Fraud in a Financial Statement Audit, identified nine risk factors related to attitudes and rationalizations that can lead to fradulent accounting. The risk factors include: A) management obsession with a rising stock price, high management turnover, frequent use of materiality to justify leaving items off the books B) commitments to third parties regarding operational results, high management turnover, obsession with minimizing taxes C) management obsession with a rising stock price, failing to fix problems promptly, strained relationships with auditors 6) Given the following income statement: Net Sales - 200 COGS - 55 GP - 145 Operating Expenses - 30 Operating Profit - 115 Interest - 15 Earnings Before Taxes - 100 Taxes - 40 Earnings After Taxes - 60 What are the interest coverage ratio and the net profit margin? Interest Coverage Ratio Net Profit Margin A) 2.63 0.30 B) 7.67 0.30 C) 0.57 0.56
- B 2. B 3. B 4. C 5. A 6. B ?
- B 2. A 3. C 4. C 5. B 6. B
B B (not sure…) C C C B
B A B C C B
B B B C A B
No one got 100%. Nice try anyways. Answers below: 1) B Only one will decrease 2) A Calculation of rations involves a large degree of subjectivity 3) C Gross profit margin 4) C NO NO (No recognition of Extraordinary Loss under IFRS) 5) C management obsession with a rising stock price, failing to fix problems promptly, strained relationships with auditors 6) B 7.67 0.30