[SOLVED] CS Excel case study Preview Test: CCACCT7106 Semester One Final Examination 2020

Preview Test: CCACCT7106 Semester One Final Examination 2020
Test Information
Description ACCT7106 Financial Statement Analysis Semester One 2020 Final Exam
This is an open book exam all materials permitted
Instructions Instructions to students:
Timed Test
Multiple Attempts
Force Completion
Answer all questions. There are 52 questions in total worth 60 marks
All multiple-choice and numeric questions are worth 1 mark. All short answer questions are worth 5 marks
Please have a calculator available, as there will be calculation-based questions Unless otherwise stated, assume Australian Accounting Standards apply to all companies in all questions
Unless otherwise stated, answer questions based on the methods/theories taught in lectures
For multiple choice questions, select the best or closest answer
For numeric questions, answer to one decimal place, unless otherwise stated. Do not include units, dollar signs or percentage signs. Do not include workings
For short-answer questions, provide a thorough answer in your own words. Do not copy-and-paste content from anywhere
If you experience a technical error during the exam, you should do the following:
Contact the Library AskUs service for advice (https://web.library.uq.edu.au/contact- us)
Request an email from AskUs documenting the advice provided so you can forward it to your course coordinator
Inform the course coordinator: [email protected]
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QUESTION 1
Many companies use Microsoft Office programs (such as Word and Excel) on all of their computers and have all of their documents stored in Microsoft Office formats. From the office software industrys perspective, this is mainly an example of which barrier to entry?
A. Demand-side benets of scale B. Capital requirements
C. Restrictive government policy D. Supply-side economies of scale E. Customer switching costs
QUESTION 2
Which of the following pieces of information is NOT required to implement the residual operating income model?
A. Forecasts of the companys net operating assets
B. The companys weighted average cost of capital
C. The companys current net nancial obligations or net nancial assets
D. Forecasts of the companys operating income after-tax
E. Forecasts of the companys net transactions with shareholders
QUESTION 3
Where should dividends payable be classied in the reformulated Balance Sheet?
A. Financial assets
B. Operating liabilities
C. Operating assets
D. Financial obligations
E. Common shareholders equity
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QUESTION 4
Which of the following is NOT accurate about preparing a reformulated Balance Sheet?
A. Deferred tax asset should be classied as an operating asset
B. Every asset can be clearly classied as an operating asset or nancial asset. There is no judgement or uncertainty involved
C. A reformulated balance sheet separates operating and nancing activities
D. Bank loans should be classied as a nancial obligation
E. Cash and cash equivalents should be divided into operating cash and nancial cash
QUESTION 5
The capital asset price model (CAPM) implies that a rm can have lower cost of equity capital if:
A. It has higher cash ows
B. Its share price moves against the market
C. It has higher dividends
D. It reports higher earnings
E. Its share price reects all publicly available information
QUESTION 6
Which of the following is an unlevered gure? A. Net transactions with shareholders
B. Comprehensive income
C. Retained earnings
D. Common shareholders equity E. Sales
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QUESTION 7
Which of the following was NOT true about the Harnischfeger case study?
A. Harnischfeger reduced its provision for doubtful debts
B. Harnischfeger consolidated all its wholly-owned subsidiaries
C. Harnischfeger had recently appointed new senior executives
D. Harnischfeger had a long-term agreement with Kobe Steel
E. Harnischfeger had a dened benet pension plan for its employees
QUESTION 8
Which of the following was NOT true about the Harnischfeger case study?
A. Harnischfegers auditor raised concerns about earnings management
B. Harnischfeger was subject to debt covenants
C. Harnischfeger altered its depreciation policies
D. Harnischfeger launched a corporate recovery plan
E. Harnischfeger used LIFO for inventory costing
QUESTION 9
Under Australian accounting standards, interest received can appear in which section/s of the Statement of Cash Flows?
A. Cash Flow from Operations
B. Cash Flow from Operations or Cash Flow from Investing or Cash Flow from Financing
C. Cash Flow from Investing
D. Cash Flow from Operations or Cash Flow from Investing
E. Cash Flow from Financing
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QUESTION 10
Suppose you have been given the following nancial information for a company:
Sales
Operating assets:
Accounts receivable Inventory
PPE
Operating liabilities:
Accounts payable Provisions
2019 2020
5,000 6,500
2,500 3,250 3,000 4,000 1,000 1,500
2,000 2,000 1,500 3,000
You suspect the company might be deliberately understating its 2020 prot, because it is trying to convince the government it needs assistance by appearing to have a small return on common shareholders equity (ROCE).
Using account-level asset turnover as a diagnostic to detect earnings management, which account is the most suspicious?
A. Inventory
B. Accounts receivable C. Accounts payable D. Provisions
E. PPE
QUESTION 11
Which of the following is NOT true about accrual accounting?
A. Accruals changing the timing of when transactions are recognised
B. Prepaid expenses is an accrual account
C. Accruals usually involve estimates
D. Accruals ensure perfect matching of revenues and expenses
E. Provision for warranty expenses is an accrual account
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QUESTION 12
You value a company using the discounted free cash ow model and the residual operating income model. You are surprised that the valuations are dierent. Which of the following could be the cause?
A. You have forecasted that the companys leverage will stay constant
B. You have forecasted sales growth to converge to the long-run economic growth rate
C. You have assumed that weighted-average cost of capital (WACC) will be constant in the future
D. Your forecast horizon is too short
E. Your steady state forecast has net operating assets growing at the terminal growth rate
QUESTION 13
You are trying to value a company using comparable company analysis. There are only two good comparable companies available: Blue Co and Red Co. Blue Co has a large portfolio of investment securities on its balance sheet carried at fair value through prot and loss. You are worried that the company has overstated the value of these securities. You suspect that Red Co might be understating its warranty and pension expenses. These are your only concerns about the companies accounting.
Given your concerns about Blue Co and Red Co, which of the following multiples would be safest to use?
A. P/B
B. P/S
C. P/E
D. P/E or P/S E. P/B or P/S
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QUESTION 14
Which of the following statements about earnings management is FALSE?
A. If accruals are overstated by earnings management this year, they will be understated in future periods
B. A decline in total asset turnover always means accrual-based earnings management is occurring
C. Accrual-based earnings management is reected in unusual changes in net operating assets
D. Accruals are generally easier to manipulate than cash ows
E. Fear of violating a debt covenant can motivate earnings management

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QUESTION 15
Suppose you are given the following reformulated Balance Sheet for an ordinary industrial company:
$m
$m
Operating assets
Financial assets
Operating cash
20 Financial cash
50
Accounts receivable
100 Short-term investments
100
Inventory
100
150
Leased assets
150
PPE
370 Financial obligations
Intangibles
100 Borrowings
100
Other assets
30 Bonds payable
200
870 Preferred equity
80
Derivative financial liabilities
20
400
Operating liabilities
Net financial obligations
250
Accounts payable
100
Lease liability
200
Common shareholders equity
Deferred tax liability
20 Share capital
100
Provisions
50 Retained earnings
100
370 Non-controlling interest
50
250
Net operating assets
500 CSE+NFO
500
Which account has NOT been reclassied correctly? A. Lease liability
B. Preferred equity
C. Deferred tax liability
D. Non-controlling interest
E. Derivative nancial liabilities

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QUESTION 16
An equity analyst has proposed the following ratio: CI/Average NOA (comprehensive income over average net operating assets). What is the main problem with this ratio?
A. It does not reect protability
B. It mixes levered and unlevered gures
C. There is no problem with the ratio
D. It reects accrual accounting not cash accounting
E. It uses the average of net operating assets in the denominator
QUESTION 17
A company is involved in a lawsuit at the end of the reporting period. It expects to win the case and receive a substantial amount of cash from the other party to the lawsuit as damages next period. The company does not record an asset but provides details about the lawsuit in its annual report. This is example of which accounting issue?
A. Accrual accounting
B. Recognition vs. disclosure
C. Classication
D. Clean vs. dirty surplus accounting E. Fair value vs. historical cost
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QUESTION 18
Suppose you are valuing an Australian company using the residual income model. The company only operates in Australia and you expect it to remain that way. What can we say about a sensible terminal growth rate for valuing the company?
A. The terminal growth rate should be not be greater than the expected long-run Australian real GDP growth
B. The terminal growth rate must be greater than the cost of equity
C. The terminal growth rate must be positive
D. We cant say anything. The terminal growth rate could be anything
E. The terminal growth rate should be not be greater than the expected long-run Australian nominal GDP growth
QUESTION 19
Which of the following is most likely to result in price-based competition in an industry?
A. The industrys products become obsolete rapidly if not sold
B. Fixed costs in the industry are low
C. Most customers are more concerned about quality than price
D. Customers face substantial costs in changing from one supplier to another
E. Companies in the industry oer products with unique features
QUESTION 20
Which of the following would be a red ag that a company might be manipulating its accruals to inate earnings?
A. An unusual decrease in inventories
B. An unusual increase in provision for doubtful debts
C. An unusual decrease in deferred revenue
D. An unusual increase in nancial obligations
E. An unusual increase in provision for employee benets
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QUESTION 21
Which of the following is FALSE about valuation?
A. In a Scenario 1 valuation the terminal value is zero
B. The CAPM can be dicult to practically implement
C. Asset-based valuation usually undervalues a company
D. Valuation is only useful if the market is not semi-strong form ecient
E. We must know a companys current common shareholders equity to implement a residual income model
QUESTION 22
Harnischfeger was able to increase earnings in the year that the case is set (1984) by selling down inventory to a low level. Why did this work?
A. Harnischfeger used LIFO inventory costing and the cost of its inventory had increased over time
B. Harnischfeger used FIFO inventory costing and the cost of its inventory had increased over time
C. Harnischfeger used LIFO inventory costing and the cost of its inventory had decreased over time
D. Harnischfeger used FIFO inventory costing and the cost of its inventory had decreased over time
E. Harnischfeger impaired its inventory to lower of cost and net realisable value
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QUESTION 23
Australia is a geographically large country with major cities that are far apart. From the perspective of the Australian domestic passenger airline industry, this results in which of Porters Five Forces being especially weak?
A. Threat of new entry
B. Threat of substitutes
C. Bargaining power of suppliers
D. Rivalry between existing competitors E. Bargaining power of buyers
QUESTION 24
A company has a cost of equity of 10%, which is expected to remain constant. The company generated a return on common shareholders equity (ROCE) of 15% in its most recent nancial year. The market does not expect the companys ROCE to ever decline below this level. Assuming market eciency, what can we say with condence about the companys market capitalisation?
A. Its market capitalisation will be less than its current common shareholders equity
B. Its market capitalisation will be 1.5 times its current common shareholders equity
C. Its market capitalisation will equal its current common shareholders equity
D. We cannot say anything
E. Its market capitalisation will be greater than its current common shareholders equity
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QUESTION 25
A company XYZ owns 90% of a subsidiary ABC. ABC issues additional shares to shareholders other than XYZ. What eect does this have on reformulated nancial statements?
A. It will reduce common shareholders equity
B. It will reduce operating income (after-tax)
C. It will decrease net transactions with shareholders D. It will increase nancial obligations
E. It will have no eect
QUESTION 26
A company conducts an incremental (i.e. upwards) revaluation of PPE carried under the fair value model. The PPE is used in day-to-day operations. The incremental revaluation is not a reversal of a previous revaluation decrement or impairment. Which of the following is a correct statement about the eects on the reformulated nancial statements?
A. Increase in operating assets and increase in unusual operating income
B. Increase in common shareholders equity and increase in operating OCI
C. Increase in common shareholders equity and increase in net transactions with shareholders
D. Increase in common shareholders equity and increase in core other operating income
E. Increase in operating assets and increase in operating cash ow
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QUESTION 27
A company records a Gain on bargain purchase as a result of buying another company in the same industry for less than the fair value of its net assets. What would be the best classication in the reformulated Income Statement?
A. Core operating income from sales B. Financing OCI
C. Core other operating income
D. Unusual operating income
E. Financial income
QUESTION 28
Suppose you have been given the following extract from a Statement of Cash ows prepared under AASB standards:
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Proceeds from sale of government bonds Investment in marketable securities Interest received
Interest paid
Acquisition of operating subsidiary
Cash Flow from Investing
The company is an ordinary industrial company.
2020
1,000 (800) 50 (60) (500) (310)
Which of the following would NOT have to be adjusted for when preparing the reformulated Statement of Cash Flows?
A. Proceeds from sale of government bonds B. Interest paid
C. Acquisition of operating subsidiary
D. Investment in marketable securities
E. Interest received

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QUESTION 29
Which of the following types of companies is most likely to have a high asset turnover (ATO) and low prot margin (PM)?
A. A hospital
B. A utility company (e.g. an electricity generation company) C. A supermarket
D. A transportation company
E. A mining company
QUESTION 30
Which of the following relations must hold to mathematically derive the residual income model from the dividend discount model?
A. FCF = C I
B. Change in CSE = CI d
C. FCF = OI (after-tax) Change in NOA
D. Book value of NOA = market value of NOA E. Assets = Liabilities + Equity
QUESTION 31
The Australian company Treasury Wine Estates (TWE) generates revenue by growing and selling wine. It owns vines which grow grapes that are used to produce wine. TWE reports an account Agricultural Assets relating to these vines on its Balance Sheet. What is the best classication of this account in the reformulated Balance Sheet?
A. Non-current asset
B. Common shareholders equity C. Operating asset
D. Operating liability
E. Financial asset
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QUESTION 32
Which of the following is NOT an objective of reformulating the nancial statements?
A. Separate operating income based on whether it is recurring and whether it is driven by sales
B. Alter the classication of some items
C. Separate current and non-current operating assets
D. Separate operating and nancing activities
E. Show how free cash ow is generated and used on the cash ow statement
QUESTION 33
Harnischfeger may have reduced its research and development expense to inate earnings. This is an example of which form of earnings management?
A. Manipulation of accounting policies B. Transaction structuring
C. Manipulation of accrual estimates D. Changing the timing of transactions E. Manipulation of fair value estimates
QUESTION 34
Under Australian accounting standards, for what types of investments is the equity method of accounting used?
A. Investments in subsidiaries
B. Investments in associates and investments in joint ventures C. Investments in joint ventures
D. Investments in marketable securities held for trading
E. Investments in associates
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QUESTION 35
A company is trading at a market price per share of $12. The company has a cost of equity of 10% and current CSE of $1 per share. The market expects the company to generate residual income of $0.55 per share next year (t+1) and $0.75 per share the year after (t+2). The companys residual income will then grow at a constant terminal growth rate forever after year t+2.
To one decimal place, what is the terminal growth rate of residual income that the market must be using?
QUESTION 36
Suppose you have been given the following turnovers for individual operating assets and liabilities:
Turnover Accounts receivable turnover 4.0
Inventory turnover 10.0 PPE turnover 2.0 Accounts payable turnover 6.0 Provisions turnover 3.0 Deferred revenue turnover 5.0
To one decimal place, what is the companys overall asset turnover?
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QUESTION 37
A company reports the following nancial statements:
Balance Sheet
Operating assets
Financial assets
Total assets Income Statement
Operating revenues Operating expenses Operating income Financial revenue Financial expense Comprehensive income
2019 2020
232.4 245.8 12.3 10.0
Operating liabilities
Financial obligations
Total liabilities
Common shareholders equity
Total liabilities and equity
2019
495.8 (250.6) 245.2 2.0 (13.5) 233.7
2019
58.2 135.0 193.2
51.5
244.7
2020
34.6 140.5 175.1
80.7
255.8
2020
505.6 (320.1) 185.5 1.9 (14.0) 173.4
244.7 255.8
The company pays no tax. To one decimal place, what is free cash ow for 2020?
QUESTION 38
A companys draft financial statements show an operating income (after tax) of 600. The company calculates return on net operating assets (RNOA) using the opening balance of net operating assets (NOA) in the denominator. The CFO finds that the RNOA is 8%. The CEO complains that she needs to achieve a 10% RNOA to receive a bonus. The CFO decides to use accrual-based earnings management to meet the 10% RNOA goal.
To one decimal place, how much accruals must the CFO add to achieve the CEOs goal?
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QUESTION 39
Suppose you have been given the following reformulated nancials:
Reformulated Balance Sheet
2019
2020
2019
2020
Operating assets
300
350
Financial obligations
200
200
Operating liabilities
100
80
Financial assets
40
40
Net operating assets
200
280
Net financial obligations
160
160
Common shareholders equity
40
120
NFO + CSE
200
280
You have also been told that Operating income (after tax) for 2020 is 60 and the companys net borrowing cost is 10%.
Using averages of balance sheet gures when calculating ratios, what is the companys ROCE for 2020 to one decimal place?

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QUESTION 40
Suppose you have been given the following reformulated nancial information:
2019 2020
Income Statement
Sales 1,500 2,000
Operating expenses (including tax and operating OCI)
Operating income (after tax and including operating OCI)
Net financial expense (after tax and including financing OCI)
Comprehensive income
Balance Sheet
Operating assets Operating liabilities Net operating assets
Financial assets Financial obligations Net financial obligations
Common shareholders equity
(800) (900)
700 1,100 (100) (150)
600 950
500 600 (200) (200) 300 400
20 30 300 350 280 320
20 80
The company has a normal asset turnover (ATO) of 2.0. To one decimal place, what is normal change in NOA for 2020?
QUESTION 41
Suppose you have following nancial information about a company:
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CSE
Cash dividends Share repurchases Share issues
2019 2020
352.3 323.5 50.0 20.4 0.0 45.0 14.0 60.0
The company has no nancial obligations or nancial assets in both years. To one decimal place, what is free cash ow for 2020?

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QUESTION 42
You have the following information about a company:
Market data
Share price 10 Shares outstanding 100
Market capitalisation
Cost of equity 9% Cost of debt (before tax) 4%
Balance Sheet data
Net operating assets
Net financial obligations 500 CSE 500
The companys tax rate is 25%. What is the companys weighted- average cost of capital (WACC)?
QUESTION 43
A company with a 35% marginal tax rate reports the following gures in its reformulated Income Statement:
2020
Core operating income from sales (before tax)
Core other operating income (before tax) 300 Unusual operating income (before tax) 200 Net financial income (before tax) 150
1,000
1,000
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Profit before tax
1,200
1,850
Income tax expense 740
To one decimal place, what is the tax allocation to Core operating income from sales?

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QUESTION 44
Suppose you have been given the following Statement of Changes in Equity:
Share Capital
Treasury Shares
Retained Earnings
Total
Opening balance
500
0
100
600
NPAT
1,000
1,000
OCI
(200)
(200)
Cash dividends
(100)
(100)
Share-based payments
10
10
Sale of treasury shares
8
8
Purchase of treasury shares
(20)
(20)
Closing balance
510
(12)
800
1,298
What is total net transactions with shareholders?
QUESTION 45
A company paid 128 in income taxes during a year. Income taxes payable at the beginning of the year was 67 and 23 at the end of the year. There were no deferred taxes and no other comprehensive income items. What was the income tax expense on its income statement for the year?
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QUESTION 46
Suppose you have been given the following forecasts of net transactions with shareholders (d) for 2020-2022 and the forecasted terminal value as at 2022 for a company:
2020E 2021E
d 100 150
Terminal value (TV)
2022E
200 4,000
The company is in steady state at 2022. It has a cost of equity of 9%. To one decimal place, what is the dividend discount model valuation of the companys equity?
QUESTION 47
Suppose you have been given the following forecasts of free cash ow (FCF) for a company:
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Year
2021E 2022E 2023E
Forecast
1,500 2,000 2,200
Suppose 2023E is the steady state year, its WACC is 8.5% and its terminal growth rate is 3%. To the nearest dollar, what is the present value of the terminal value?
QUESTION 48
A company with a 30% marginal tax rate reports the following gures in its AASB Statement of Cash Flows:
2020
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Cash receipts from customers
Cash payments to suppliers and employees
Interest received 20 Interest paid (50)
Income tax paid
(200)
Cash Flow from Operations 20
To one decimal place, what is the tax shield from net interest paid for 2020?
1,000 (750)

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QUESTION 49
A company is trading at a P/E ratio of 10.0. The company has a prot margin of 15%. What must be the companys P/S ratio?
QUESTION 50
You are trying to value the equity of a company with total Sales of 200, Comprehensive income of 10, and Common shareholders equity of 100. You decide to conduct a comparable companies valuation using the following three comparable companies:
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Comparable X
Comparable Y Comparable Z
300 400 20 60
0 (50) 20 10
400 650 (100) (150) 300 500
Income Statement
Sales 500
Operating income (after tax)
Net financial expense (after tax)
Comprehensive income
Balance Sheet
Operating assets Operating liabilities Net operating assets
Financial obligations Financial assets
Net financial obligations
100 (30) 70
550 (100) 450
300 0 450 (50) 0 (50) 250 0 400
Common 200 300 100 shareholders equity
Market Data
Price 8 3 1 Shares outstanding 100 250 200 Market capitalisation 900 750 200
You include all three companies in your multiples calculation. What is the value of your company using the mean P/B multiple?

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QUESTION 51
Suppose I value an Australian company at $10 per share by using analyst-consensus forecasts of earnings per share and dividends per share for the next three years, and the companys current common shareholders equity. I assume a cost of equity of 8% and terminal growth rate of 3% in my valuation. The market price is $20. List and explain four dierent things that might have caused me to obtain a dierent valuation than the market.
QUESTION 52
The CFO of a company is proposing to boost his companys return on net operating assets (RNOA) by paying suppliers later because the CFO claims theres no interest charged on accounts payable. Using the concept of operating leverage, explain the CFOs strategy, and discuss the factors that might cause the CFOs strategy to succeed or fail.
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