What is for lunch today? I have no preference.
F S A
Equity RI, FCF models baby. lord knows i need help there.
Anything that will allow maximum participation, as against driven by a single person. We learn the most by bouncing back ideas with like-minded people. I am not that far in the game to be confident with any one particular reading, It all will come from last years cells.
Econ!
swaptiongamma Wrote: ------------------------------------------------------- > Anything that will allow maximum participation, as > against driven by a single person. > > We learn the most by bouncing back ideas with > like-minded people. > > I am not that far in the game to be confident with > any one particular reading, It all will come from > last years cells. Agreed. I’m probably the least far through the material. However, the summary from Qbank and questions that follow helps me get started on a particular topic. We’ll see if this bouncing around through the curriculum comes back to bite me in Aug.
I am all for something from FSA… test is still pretty heavily weighted there so i can use the lunch crunch as a chance to see if i retained anything that i read from that book.
I’ll put FSA out today. I have not touched it for Level 2, so we’ll see if I lose my lunch afterwards.
I am heading out for a team party.
LOS Explanation With the cash basis of accounting, revenues are recognized when cash is collected, and expenses are recognized when cash is paid. With the accrual basis of accounting, revenues are recognized when earned, and expenses are recognized when incurred, regardless of the timing of cash flow. Accrual accounting provides more timely and relevant information to users. Accrual accounting necessitates the use of discretion because of the many estimates and judgments involved. Many of these estimates are subjective and can be “strategically” manipulated by management to achieve a desired result. LOS Explanation Disaggregating accrual based income into a cash component and an accrual component enhances its predictive ability. Because the accrual component is less persistent than the cash component, an investor should apply a lower weighting to the accrual component. Lower persistency is not always the result of strategic manipulation. Estimation errors can also be unintentional. However, if the investor fails to assign a lower weighting to the accrual component of the earnings, securities become mispriced. LOS Explanation Firms may engage in manipulative behavior to influence capital markets and to satisfy contractual provisions. There is an incentive for firms to meet or exceed the market’s expectations. Studies have shown that more firms report small profits as compared to firms that report small losses, and more firms report earnings that slightly exceed sell-side forecasts as compared to firms that just miss the forecasts. Satisfying contractual provisions: numerous contracts rely on accounting data. For example, many lenders require loan covenants based on financial statement results. Mechanisms designed to prevent manipulation: LOS Explanation Firms may engage in manipulative behavior to influence capital markets and to satisfy contractual provisions. There is an incentive for firms to meet or exceed the market’s expectations. Studies have shown that more firms report small profits as compared to firms that report small losses, and more firms report earnings that slightly exceed sell-side forecasts as compared to firms that just miss the forecasts. Satisfying contractual provisions: numerous contracts rely on accounting data. For example, many lenders require loan covenants based on financial statement results. Mechanisms designed to prevent manipulation: An independent audit. The board of directors. Certification by senior management. Class action litigation. Regulators. General market scrutiny. LOS Explanation Earnings quality usually refers to the persistence and sustainability of a firm’s earnings. The following ratios can be used to measure earnings quality (higher ratio, lower earnings quality): LOS Explanation Earnings at extreme levels tend to revert back to normal levels over time (mean reversion); thus, extreme earnings (high or low) should not be expected to continue indefinitely. When earnings are largely comprised of accruals, mean reversion will occur even faster. LOS Explanation Manipulation techniques can be classified into the following categories: Revenue recognition—misstating revenue, accelerating revenue, and misclassifying nonrecurring or nonoperating revenue. Expense recognition—understating expenses, delaying expenses, and misclassifying ordinary expenses as nonrecurring or nonoperating. Balance sheet manipulation—off-balance sheet financing and goodwill. Cash flow statement manipulation—misclassifying cash flows, ignoring cash flows, and managing cash flows. LOS Explanation Different detection techniques exist for each category of manipulation techniques. Revenue recognition: Look for large changes in receivables and unearned revenue. Look for increasing DSO. Compare revenue to actual cash collected. Expense recognition: Look for large changes in fixed assets and inventory. Look for increasing DOH. Look for LIFO liquidation. Compare depreciation expense (relative to gross plant and equipment) to other companies to determine the conservatism of the firm’s estimates. Calculate core operating margin = (sales – COGS – SG&A) / sales. Balance sheet: Capitalize operating leases. Look for lack of goodwill impairment. Cash flow statement: Compare the growth of operating leases with the firm’s asset growth. Be alert for a decrease in discretionary spending, especially near year-end. LOS Explanation Two problems encountered in the analysis of a firm’s balance sheet are: (1) some assets and liabilities are not recorded, and (2) the book values of assets and liabilities may differ significantly from their market values. For the exam, know the adjustments for the following: Variable interest entity: The appropriate adjustment for SPEs that are not consolidated is to increase the current and/or long-term assets and liabilities of the primary beneficiary by the amount of the current and/or long-term assets and liabilities held in the SPE. This effectively increases the primary beneficiary’s reported leverage. Leases: To adjust the balance sheet for operating leases (i.e., capitalize them), increase the assets and liabilities by the present value of the lease payments. This results in higher leverage and lower asset turnover. The interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease. Guarantees, commitments, and contingencies: The analyst should adjust the balance sheet by adding the present value of the transaction to both assets and liabilities if sufficient information is available in the footnotes.
Question 1 - 87628 Adjustments for off-balance-sheet items include all but which of the following? A) Capitalizing operating leases, including this amount as an asset and a liability. B) Using the equity method in place of the proportionate consolidation to reflect the investment in affiliates. C) Estimating the probable obligation for contingent liabilities. -------------------------------------------------------------------------------- Question 2 - 87625 Which of the following statements regarding problems that are commonly encountered in the analysis of a firm’s financial reports is FALSE? A) Cash flows may be affected by the exclusion of off-balance sheet obligations. B) Adjustments to the income statement that may not be recorded include operating leases, take-or-pay contracts and environmental obligations. C) Income statement items that may require adjustment include accounting changes, one-time charges and restructuring charges. -------------------------------------------------------------------------------- Question 3 - 87560 Short Haul Airlines reports a commitment to purchase 10 new aircraft at a total cost of $1.2 billion over the next 5 years in its footnotes. The present value of these purchases is estimated to be $780 million. What are the appropriate balance sheet adjustments need to adequately reflect the commitment? Increase long-term liabilities and: A) decrease equity by $780 million. B) long-term assets by $780 million. C) long-term assets by $1.2 billion. -------------------------------------------------------------------------------- Question 4 - 87564 Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term: A) assets and long-term liabilities by $9.22 million. B) assets and long-term liabilities by $9.27 million. C) liabilities by $9.27 million and decrease equity by $9.27 million.
I don’t have my calculator with me, so these are more conceptual than computatitive. Question 1 - 87619 Kevin Tupper, a junior accountant at Eight Guys Garbage Collection, is worried that his bosses are cooking the books. Tupper has been collecting information about the company for months, and he has written it all down. Here are five key observations: Operating cash flow has been negative in each of the last four quarters. Eight Guys is in danger of failing to meet stock-exchange listing requirements. Analysts have recently raised profit estimates for Eight Guys. Thirty percent of the firm’s debt comes due over the next year. Top executives have guaranteed about 10% of the firm’s debt. Which combination of factors is most indicative of third-party pressures on management? A) Listing requirements, profit estimates, debt repayment due. B) Cash flow, profit estimates, loan guarantees. C) Listing requirements, debt repayment due, loan guarantees. -------------------------------------------------------------------------------- Question 2 - 87591 Which of the follow characteristics is the least compelling evidence that a company has a conservative financial-reporting strategy? A) Earnings growth has been steady and dependable over the last few years. B) Fixed assets are carried at book value. C) The LIFO method is used. -------------------------------------------------------------------------------- Question 3 - 104103 The effects of misclassifying cash flow can be eliminated by including _______________ when assessing earnings quality. A) operating and investing cash flows. B) operating and financing cash flows. C) investing and financing cash flows. -------------------------------------------------------------------------------- Question 4 - 104106 Fero Inc. (Fero) is a successful computer consulting services firm that has an established policy of investing its excess cash in short-term, virtually riskless, and highly liquid money market securities. However, it has recently deviated from this policy by investing in commercial paper and medium-cap domestic equities. As well, Fero entered into a $1.0 million lease with Pasquale Inc. (Pasquale) for some specialized computer equipment on December 28, 2008 that will be shipped at the very start of its next fiscal period on January 1, 2009. In exchange for the lease, Fero agrees to provide consulting services to Pasquale. Which of the following activities is one in which Fero is least likely involved? A) Managing cash flow. B) Misclassifying cash flow. C) Ignoring cash flow. -------------------------------------------------------------------------------- Question 5 - 87634 Jill Brown, CFA, is preparing a research report on Kendall Koatings, a maker of paint and industrial insulators. She has learned that Kendall is trying to avert a strike. Contentious labor talks have been ongoing for months. The company is also lobbying the federal government for a tax break in an effort to fend off foreign competition. Most Kendall executives own substantial blocks of stock, and all of them receive at least half of their compensation in the form of stock options. Lastly, one of Kendall’s lines of credit is up for renewal, and the company is trying to negotiate better terms. Several of Kendall’s top managers have a history of manipulating financial results. Based on her observations, which action is Kendall most likely to take? A) Treat all leases as operating leases. B) Assume that equipment has a useful life of eight years, rather than the five years currently assumed. C) Recognize revenue early. -------------------------------------------------------------------------------- Question 6 - 87620 Professor Paula King teaches accounting at South Central Coastal Idaho Polytechnic. In her lecture this morning, she passes out sheets containing facts about Consolidated Industries. From those fact sheets, she identifies four signs that could indicate financial fraud: Executives have personally guaranteed some of the firm’s debt. The company’s organizational chart is complex. The company’s monopoly status allows it to charge any price it desires. Turnover is high in the information-technology department. After presenting those observations, King concludes that because of the four characteristics, executives at Consolidated have a greater opportunity than most to commit fraud. Student Mukesh Ghari believes one of King’s examples does not help her argument. Which of the four facts is least compelling in support of King’s argument? A) The company’s monopoly status allows it to charge any price it desires. B) Executives have personally guaranteed some of the firm’s debt. C) Turnover is high in the information-technology department. -------------------------------------------------------------------------------- Question 7 - 104104 De Freitas Inc. (De Freitas) is a conglomerate. Its computer division was very profitable in the current year because it launched a successful new lightweight laptop computer. Prices in the automobile division have been rising over the years but it is engaged in a LIFO liquidation in the current year. Which of the following best describes the effect on the long-run earnings of the computer division and the automobile division compared to the most recent year? Computer division earnings Automobile division earnings A) Decrease Increase B) Decrease Decrease C) Increase Decrease -------------------------------------------------------------------------------- Question 8 - 87627 Karl Decker, CFA, is analyzing Keystone Semiconductor to determine if the stock would be a good investment. He has determined the following: Management owns 15 percent of the outstanding shares. Internal growth targets are aggressive. In recent quarters, profit growth has been exceptionally high. The company’s debt covenants are quite lax. All of these characteristics are positives from the perspective of an investor looking for profit growth. But Decker is concerned about pressure on management to manipulate results. Which of the following should least concern Decker? A) Recent operating results. B) Debt covenants. C) Management’s share holdings. -------------------------------------------------------------------------------- Question 9 - 87599 Earlier this year, Barracuda Company issued 5,000 employee stock options. Recently, 2,000 options were exercised at a price of $10 per share. To avoid dilution, Barracuda purchased 2,000 shares at an average price of $12 per share. Barracuda reported both transactions as financing activities in its cash flow statement. For analytical purposes, what adjustment is necessary to better reflect the substance of the stock repurchase? Operating cash flow Financing cash flow A) Decrease $4,000 No adjustment B) Decrease $4,000 Increase $4,000 C) No adjustment Increase $4,000 -------------------------------------------------------------------------------- Question 10 - 104105 Costiuk Inc. (Costiuk) saw a large increase in its net operating assets (NOA) over the year. During the year, it also reported a number of nonoperating revenues and deferred revenues. Which of the following statements regarding Costiuk’s increase in NOA and the most likely item to self-correct is most accurate? Increase in NOA Most likely item to self-correct A) suggests lower earning quality deferred revenues B) suggests lower earning quality nonoperating revenues C) suggests higher earning quality nonoperating revenues
Question 1 - 87628 Adjustments for off-balance-sheet items include all but which of the following? A) Capitalizing operating leases, including this amount as an asset and a liability. B) Using the equity method in place of the proportionate consolidation to reflect the investment in affiliates. C) Estimating the probable obligation for contingent liabilities. 87268 - B) -------------------------------------------------------------------------------- Question 2 - 87625 Which of the following statements regarding problems that are commonly encountered in the analysis of a firm’s financial reports is FALSE? A) Cash flows may be affected by the exclusion of off-balance sheet obligations. B) Adjustments to the income statement that may not be recorded include operating leases, take-or-pay contracts and environmental obligations. C) Income statement items that may require adjustment include accounting changes, one-time charges and restructuring charges. B -------------------------------------------------------------------------------- Question 3 - 87560 Short Haul Airlines reports a commitment to purchase 10 new aircraft at a total cost of $1.2 billion over the next 5 years in its footnotes. The present value of these purchases is estimated to be $780 million. What are the appropriate balance sheet adjustments need to adequately reflect the commitment? Increase long-term liabilities and: A) decrease equity by $780 million. B) long-term assets by $780 million. C) long-term assets by $1.2 billion. A -------------------------------------------------------------------------------- Question 4 - 87564 Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term: A) assets and long-term liabilities by $9.22 million. B) assets and long-term liabilities by $9.27 million. C) liabilities by $9.27 million and decrease equity by $9.27 million. A
- B 2) B 3) B 4) A
CFAdreams Wrote: ------------------------------------------------------- > 1) B > 2) B > 3) B > 4) A Close, Exam ID: 98 Time Started: 2009-02-26 10:57:05 Time Ended: 2009-02-26 11:23:57 Total Time: 00:00:00 Questions: 4 Points Possible: 4 Points Correct: 3 4. Northern Bottling (NB) currently shows minimum expected operating leases over the next 5 years of $3 million, $2.5 million, $2 million, $2 million, and $1.5 million. The firm’s current financing rate is 6.75% and the rate implicit in the lease contract is 7%. What adjustments would an analyst make to modify the balance sheet of NB to include this off-balance sheet financing? Increase long-term: A) assets and long-term liabilities by $9.22 million. B) assets and long-term liabilities by $9.27 million. C) liabilities by $9.27 million and decrease equity by $9.27 million. Your answer: A was incorrect. The correct answer was B) assets and long-term liabilities by $9.27 million. Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease. Therefore, the PV (operating leases) is: = 3 / (1 + 0.0675) + 2.5 / (1 + 0.0675)2 + 2 / (1+ 0.0675)3 + 2 / (1 + 0.0675)4 + 1.5 / (1 + 0.0675)5 = 9.27 million The proper adjustment is to increase both long-term assets and liabilities by the same amount. Score: 75%
haha… i wanted B for #4 but didnt want to put 4 b’s in a row…
CFAdreams, don’t be p***y and just trust yourself. You can’t be scared to put 4 b’s in a row. It’s not the number of b’s in a row but that you wanted B for #4 that should count. Confidence in answer choice is very important.
for the second set: 1-c 2-a 3-b 4-c 5-a 6-a 7-c 8-b 9-b 10-a
tony2 Wrote: ------------------------------------------------------- > for the second set: > 1-c - X > 2-a > 3-b - X > 4-c - X > 5-a > 6-a - X > 7-c - X > 8-b > 9-b > 10-a Exam ID: 97 Questions: 10 Points Possible: 10 Points Correct: 5 Score: 50%
doseweisen, youire right… Shouldnt ever let the test mess with me with the same answer over and over…