CFA level 1 Study Guide .

faithful representation, substance over form, prudence, neutrality, completeness - correct answer According to the IFRS what are the 5 qualities of financial information that improve reliability Costs can be reliably measured - correct answer According to IFRS what condition must be met for revenue recognition to occur? Current ratio will decrease. Accruing wages increases both current liabilities and expenses, but collecting receivables has no effect on current assets or sales therefore the current ratio and net income both decrease. - correct answer A company accrued wages of $2,000 and collected accounts receivable of $10,000. What best describes the effect of these two transactions on the company? 200,000 for both the stock split and the stock dividend. Stock dividends and splits are treated in the same way for purposes of determining weighted average number of shares outstanding the adj in the # of shares is made as if the stock split or dividend occurred at the beginning of the year. - correct answer A company had 100,000 shares outstanding on 1 Jan 2009. The company has no plans to issue additional shares or purchase treasury shares during the year, but is planning either a two-for-one stock split or a 100 percent stock dividend on 1 July. The number of shares used to determine eps at 31 Dec 2009 is general requirement for financial statements. - correct answer Under IFRS the preparation of a complete set of financial statements is best described as a: Amortized Cost Bonds payable issued by a company are financial liabilities that are measured at amortized cost. - correct answer A company issued bonds in 2009 that mature in 2019. The measurement basis that will most likely be used on the 2009 balance sheet for the bonds is: Noncurrent Assets and noncurrent liabilities are listed before current assets and current liabilities. Also, minority interest must be shown as a component of equity. - correct answer What features are unique to financial statements in IFRS Current assets and current liabilities are listed before noncurrent assets and noncurrent liabilities. Minority interest is listed separately from equity or liabilities. - correct answer What features are unique to financial statements in U.S. GAAP The debt to equity ratio but not the interest coverage ratio. The adjustments to convert operating leases would increase the amount of total debt in the debt-equity ratio thus increasing the ratio; the portion of the lease payments estimated to be lease interest expense would lower the interest coverage ratio. - correct answer An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for: debt to equity or interest coverage? the common-size balance sheets. because it expresses all data as a percentage of total assets. note: current ratio is a measure of a company's ability to repay its short term debt - correct answer To gain insight into what portion of a company's assets is liquid, an analyst will most likely use: Has a higher net profit margin Dupont Analysis: Sales/Total Assets (asset turnover) =1.71 for A and 2.14 for B equity(assets -liabilities)=45 for A and 100 for B financial leverage mult. (assets/equity)=1.56 for A and 1.4 for B ROE = profit mgn x asset turnover x financial leverage mult. thus prft mgn A = 5.6% prft mgn B = 5% - correct answer The following info is available Company A Company B Sales 120M 300M Assets 70M 140M liabilities 25M 40M If both companies achieve a ROE = 15%, company B compared to company A, regarding profit margin, total asset turnover, and financial leverage will have: Yes under IFRS but not under U.S. GAAP - correct answer Is the reversal of an inventory write-down permitted under U.S. GAAP and IFRS? $282 interest paid = 50,000x.09 = 4,500 interest expense = mkt rate at issue x bv = .1x47565 = 4757 amortization of discount expense = interest expense-interest paid: = 257 for yr 1 using cf keys, with n = 6, bv = 47,822.4x.1==282 - correct answer A company issued a $50,000 7-year bond for $47565. The bonds pay 9 percent per annum and the ytm at issue was 10%. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the 1st yr, the ytm on bonds is 9%. The amount of the bond discount amortization recorded in the second year is closest to: Inventory turnover=COGS/avg inventory=1969/(248+285/2) = 7.39 DOH = 365/inventory turnover = 365/7.39 = 49.4 Receivable turnover= sales/avg receivable=2801/(318+286/2) = 9.27 DSO (days sales outstanding)=365/receivable turn = 39.4 Payables turnover = COGS/avg payables = 1969/(361+346)/2 = 5.57 Days in payables = 365/payables turnover = 65.6 CCC = DOH +DSO - Days in Pay = 49.4+39.4-65.6=23.2 - correct answer find the cash conversion cycle sales COGS Interest 123 110 Cash 108 105 receivables 318 286 inventories 248 285 Payables 361 346 notes payable 50 99 the deferred tax liability equals the difference between the value for accounting and tax purposes times the new tax rate ()x .25 = 130 - correct answer A company purchased 2,000 million of a long-term asset in 2009 when the tax rate was 30% asset value yr end acct purposes 1800 tax purposes 1280 Adding independent members to the board of directors. A fraud triangle requires incentives such as managements ability to rationalize (blame on macro economy) and debt covenants. Adding independent members to the board will reduce fraud. - correct answer What is a condition not present in a fraud triangle? us the YTM rather than the CR to find the after tax cost of debt as it is what the firm effectively pays in the current interest rate environment. Using the cash flow keys, i=8%x.65 = 5.2% - correct answer A company is determining the cost of debt for usin in its weighted average cost of capital. It has recently issued a 10-year, 6% semi-annual coupon bond for 864. The marginal tax rate is 35%. What is the after tax cost of debt?