Maria Huffman is the Vice President of Human Resources for a large regional car rental company. Last year, she hired Graham Brickley as Manager of Employee Retention. Part of the compensation package was the chance to earn one of the following two bonuses: if Brickley can reduce turnover to less than 30 percent, he will receive a 25 percent bonus. If he can reduce turnover to less than 25 percent, he will receive a 50 percent bonus (using a significance level of 10 percent). The population of turnover rates is normally distributed. The population standard deviation of turnover rates is 1.5 percent. A recent sample of 100 branch offices resulted in an average turnover rate of 24.2 percent. Which of the following statements is TRUE? A) For the 50% bonus level, the test statistic is -5.33 and Huffman should give Brickley a 50% bonus. B) Brickley should not receive either bonus. C) For the 25% bonus level, the test statistic is -10.66. D) For the 50% bonus level, the critical value is -1.65 and Huffman should give Brickley a 50% bonus. Assuming high inflation in the short run and lower levels of inflation in the long run, the current ratio of a company using LIFO relative to a firm using FIFO, will be: A) lower, and the difference between the two firm’s current ratios will decrease as inflation decreases. B) higher, and the difference between the two firm’s current ratios will decrease as inflation decreases. C) lower, and the difference between the two firm’s current ratios will increase as inflation decreases. D) higher, and the difference between the two firm’s current ratios will increase as inflation decreases. 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) do not violate any Standards because she does not participate in the report preparation and does not know about the source of the info. C) violate the Standards because she trades on inside information. D) violate the Standard of Objectivity and Independence.

Taking a quick stab at it: A A D

Q2: I think D would be the answer Short Run: Rising prices, CR FIFO > CR LIFO LIFO: FIFO EI 20 COGS: 20 COGS 30 EI: 30 So CR Fifo > CF Lifo Long Run: Falling prices: CR LIFO > CR FIFO LIFO: FIFO EI 30 COGS: 30 COGS 20 EI: 20 So CR Lifo > CF Fifo So from the short run to the long run – The CR LIFO would rise. and this difference would continue to increase as Inv prices in the future would keep dropping. Am I wrong in the analysis somewhere?

The correct answers are: A/A/A Kevin even I got D for the third one here is the explanation of Schweser: “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.” Why it is not A? Also could you more explanation for your answer to question number 1. Thanks.

Hari, for Q#3, I would still stick with D. Not really sure why its A :S For Q1 this is what I did: So you essentially run two hypothesis tests: Note: Z table is used because you are given the population std deviation. Std error = 1.5 / 100^0.5 = 0.15 1) Avg turnover <30 -> Test statistic is equal to : (24.2-30)/0.15 = -38.666 This was not mentioned anywhere in the answers, so I moved on to the other test. 2) Avg turnover <25 -> Test statistic is = -5.3333 The critical value from the Z-table was 1.289 I believe… So since -5.3333 is < 1.289, Brickley achieves a turnover rate of less than 25% and gets the 50% bonus. Hope this helps.

On second thoughts the answer is definitely A. I totally missed the part of the question where it mentioned that Lang is also from the same firm. This totally rules out the question of independence and objectivity, since they are most likely on the same team. This only leaves out A as the most correct answer. cpk…I’m trying to figure out an easy way to explain Q2. You got the first part right for sure, but the second part is not exactly correct. I would see it like this: The rate at which FIFO ending inventory grows will be obviously slower, thus bringing down the FIFO Current Ratio, and the LIFO would actually climb slightly higher (or even possibly not change so much) since it will hold inventory at relatively higher prices than the current prices. So the GAP between the two different ratios are actually narrowing. I’m sure my explanation lacks clarity, but I hope it helps you -somewhat- to understand what’s happening.

For Q2, it says lower inflation and not falling prices. So prices are still increasing but at a lower rate. I think that A will be true assuming rising inventory levels. If the inventory levels are stable, it may not be true: For eg. Rising inventory levels: Assuming Sales Price of 200 BI Period 1: 1 unit @ 100: Period 1: Purchase 1 unit @104 Sell 1 unit LIFO FIFO COGS 104 100 EI 100 104 „»FIFO Inventory more by 4 For simplicity If you assume a liability of 104 (just purchase, which is probably a simplistic assumption) you get Cr of .96 and 1 Period 2: Purchase 2 unit at 105 Sell 1 unit LIFO FIFO COGS 105 104 EI 205 210 „»FIFO Inventory more by 5 Applying same logic from Step 1, you get CR of .97 and 1 „» gap is reducing Stable: Period 2: Purchase 1 unit at 105 (not 2) Sell 1 unit LIFO FIFO COGS 105 104 EI 100 105 „»FIFO Inventory more by 5 so gap is increasing not decreasing) Applying same logic from Step 1, you get CR of .95 and 1 „» gap is increasing Am I missing something?

Could someone explain why the answer is A for the Ethics question? Amanda might have violated fair dealing as she bought shares for her own account, but how did Lang. She bought shares for her client. If anything, I think Lang violated V (A): Diligence and reasonable basis, as she traded on the stocks without verifying the info. The source of the info is based on an analyst’s opinion, who formed the opinion based on a routine salon visit. hari Wrote: ------------------------------------------------------- > 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) do not violate any Standards because she does > not participate in the report preparation and does > not know about the source of the info. > C) violate the Standards because she trades on > inside information. > D) violate the Standard of Objectivity and > Independence.

delhirocks Wrote: ------------------------------------------------------- > Could someone explain why the answer is A for the > Ethics question? Amanda might have violated fair > dealing as she bought shares for her own account, > but how did Lang. She bought shares for her > client. If anything, I think Lang violated V (A): > Diligence and reasonable basis, as she traded on > the stocks without verifying the info. The source > of the info is based on an analyst’s opinion, who > formed the opinion based on a routine salon > visit. > > hari Wrote: > -------------------------------------------------- > ----- > > > 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) do not violate any Standards because she > does > > not participate in the report preparation and > does > > not know about the source of the info. > > C) violate the Standards because she trades on > > inside information. > > D) violate the Standard of Objectivity and > > Independence. This question seems kind of ambiguous, but i would say the only way Lang could have violated Fair dealing is if Brad’s report was not disseminated. Lang started trading as soon as she got a call from Brad, which does not leave any window for dissemination of the report.