Ch9 Test Bank Docx Reorganizing The Financial Statements

Chapter: Chapter 09: Reorganizing the Financial Statements

Multiple Choice

1.Which of the following would result in a change in operating deferred-tax assets or liabilities?

I. State income taxes.

II. Changes in goodwill.

III. Accrued self-insurance liabilities.

IV. Accelerated inventory deduction.

a) I and II only.

b) I, III, and IV only.

c) II, III, and IV only.

d) III and IV only.

Response: [Changes in goodwill affect nonoperating deferred taxes.]

2. Which of the following are included in operating current assets?

I. Inventory.

II. Prepaid expenses.

III. Marketable securities.

IV. Accounts receivable.

a) I, II, and III only.

b) I, II, and IV only.

c) II, III, and IV only.

d) I, II, III, and IV.

Response: []

3. Which of the following are operating liabilities?

I. Accounts payable.

II. Accrued salaries.

III. Deferred revenue.

IV. Income taxes payable.

a) I and II only.

b) II and III only.

c) I, III, and IV only.

d) I, II, III, and IV.

Response: []

4. For a given leased asset using an operating lease, the rental expense will be $2,000 in the next period. The pretax cost of debt is 7.2 percent, and the asset has an expected life of six years. What is the estimated asset value in the current period?

a) $8,380

b) $8,640

c) $16,667

d) $21,127

Response: [

]

5. To measure a company’s ability to create value after paying acquisition premiums, which of the following adjustments should be made?

I. Adjust reported goodwill upward to recapture historical amortization and impairments.

II. Adjust acquired intangibles upward to recapture historical amortization and impairments.

III. Add the hypothetical accrued interest of the notional goodwill principle.

a) I and II only.

b) II and III only.

c) I and III only.

d) I, II, and III only.

Response: []

6. With respect to goodwill and acquired intangibles, which of the following is most accurate concerning their treatment in computing ROIC when measuring the competiveness of the underlying business of a company?

a) Remove goodwill but not acquired intangibles from the computation.

b) Remove acquired intangibles but not goodwill from the computation.

c) Remove neither goodwill nor acquired intangibles from the computation.

d) Remove both goodwill and acquired intangibles from the computation.

Response: [ROIC with goodwill and acquired intangibles measures the ability to create value. ROIC without goodwill and acquired intangibles measures competiveness.]

7. How will an increase in invested capital (IC) in a given year affect free cash flow (FCF) and ROIC if all other things are kept equal?

a) It will decrease both FCF and ROIC.

b) It will increase both FCF and ROIC.

c) It will increase FCF but decrease ROIC.

d) It will decrease FCF but increase ROIC.

Response: []

8. Which of the following are sources of financing?

I. Equity equivalents.

II. Debt equivalents.

III. Hybrid securities.

IV. Noncontrolling interest.

a) I and II only.

b) I, II, and III only.

c) III and IV only.

d) I, II, III, and IV.

Ans [d]

Response: []

9. In calculating free cash flows, which of the following is/are NOT an investment that should be subtracted from gross cash flows?

a) Change in operating working capital.

b) Change in debt outstanding.

c) Net capital expenditures.

d) Investment in goodwill and acquired intangibles.

Ans [b]

Response: []

True/False

10. In order to adjust for currency fluctuations, one should conduct a line-by-line removal of the currency effects.

Response: [This method is not feasible. The best method is to subtract the foreign currency translation, found in the statement of accumulated other comprehensive income.]

11. Nonconsolidated subsidiaries and equity investments should be measured and valued separately from invested capital.

Response: []

12. Pension assets are considered an operating asset and part of invested capital.

Response: [Pension assets are considered a nonoperating asset and not part of invested capital. Their value is important to the equity holder, so they will be valued later, but separately from core operations.]

13. In computing free cash flow, include investments in capitalized operating leases in gross investment.

Response: []

14. In computing return on invested capital, operating liabilities should be subtracted from operating assets to determine invested capital.

Response: []

15. If the company wants to capitalize R&D, it will deduct that period’s expense from revenue in order to get to NOPLAT.

Response: [When capitalizing R&D, you must deduct amortization associated with past R&D investments, using a reasonable amortization schedule.)

Short Answer

16. List the three components into which an analyst should reorganize financial statements to better assess economic performance and three common traps that the analyst wants to avoid in the assessment.

Multiple Choice

17. Based on the preceding table, what are the returns on assets (ROAs) for Companies A, B, and C, respectively?

a) 17 percent, 14 percent, 19 percent.

b) 15 percent, 14 percent, 18 percent.

c) 11 percent, 10 percent, 20 percent.

d) 16 percent, 13 percent, 18 percent.

Response: [ROA = Net income/Total assets. ROA_A = 90/525 = 17.1%; ROA_B = 90/425 = 13.6%; ROA_C = 98/515 = 19.0%]

18. Based on the same table, what are the returns on equity (ROEs) for Companies A, B, and C, respectively?

a) 15 percent, 14 percent, 31 percent.

b) 19 percent, 15 percent, 36 percent.

c) 17 percent, 15 percent, 35 percent.

d) 21 percent, 9 percent, 45 percent.

Response: [ROE = Net income/Equity. ROE_A = 90/475 = 19.0%; ROE_B = 90/500 = 18.0%; ROE_C = 98/275 = 35.6%]

19. Based on the same table, what are the ROICs for Companies A, B, and C, respectively?

a) 18 percent, 12 percent, 19 percent.

b) 19 percent, 17 percent, 21 percent.

c) 18 percent, 16 percent, 20 percent.

d) 19 percent, 17 percent, 24 percent.

Response: [ROIC = NOPLAT/IC = {Operating profit(1 – T)}/(Inventory + PPE – AP). ROIC_A = 120(1 – 0.25)/(125 + 400 – 50) = 19.0%; ROIC_B = 100(1 – 0.75)/(100 + 400 – 50) 500 = 16.7%; ROIC_C = 150(1 – 0.75)/(150 + 365 – 50) = 24.1%]

20. Which metric is the best indicator of a company’s operating performance?

a) ROE

b) ROA

c) ROIC

d) EPS

Response: [ROIC focuses on the operating cash flows and net operating assets, whereas the other measures have impacts of nonoperating assets and financing embedded in them.]

Refer to the preceding income statement and balances sheet for Dolphin, Inc. to answer the following questions. Dolphin is a $600 million event promotion company that operates with a 30 percent operating tax rate.

21. What is the average invested capital (IC) for Dolphin for the current year?

a) $609

b) $600

c) $667

d) $527

Response: [Sum of both years (Operating cash + Accounts receivable + Inventories + PP&E – Accounts payable – Accrued expenses)/2 = ½ * {(22 + 220 + 330 + 440 – 275 – 165) + (24 + 242 + 363 + 484 – 303 – 182)} = 600]

22. What are Dolphin’s NOPLAT and ROIC for the current year, using average invested capital?

a) $82, 13.6 percent.

b) $108.9, 18.1 percent.

c) $92, 15.4 percent.

d) $85, 14.1 percent.

Response: [NOPLAT = EBITA * (1 – T); ROIC = NOPLAT/Average IC. NOPLAT = 121 * 0.7 = 84.7; ROIC = 84.7/600 = 14.1%]