FRA 1.4 Test 2

Which of the following situations represents a motivation, rather than an opportunity, to issue low-quality financial reports?

• A. Poor internal controls
• B. Search for a personal bonus
• C. Inattentive board of directors

• A. lower.
• B. higher.
• C. the same.

Which of the following is least likely an advantage to the lessee in a leasing agreement?

• A. High residual value
• B. Low down payment required
• C. Lower financing costs than purchasing the asset

A company issues €1 million of bonds at face value. When the bonds are issued, the company will record a:

• A. cash inflow from investing activities.
• B. cash inflow from financing activities.
• C. cash inflow from operating activities.

One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies?

• A. Net income less than zero
• B. Debt-to-total assets ratio below a certain cutoff point
• C. Current-year sales growth lower than prior-year sales growth

A company issues €10,000,000 face value of 10-year bonds dated 1 January 2015 when the market interest rate on bonds of comparable risk and terms is 6%. The bonds pay 7% interest annually on 31 December. Based on the effective interest rate method, the interest expense on 31 December 2015 is closest to:

• A. €644,161.
• B. €700,000.
• C. €751,521.

• A. a loss of ARP 15,000.
• B. a gain of ARP 15,000.
• C. a gain of ARP 18,333.

Accounting choices within GAAP that decrease reported performance in the current period and may increase performance in later periods are most likely examples of:

• A. aggressive accounting.
• B. conservative accounting.
• C. earnings that are not sustainable.

For a bond issued at a premium, using the effective interest rate method, the:

• A. carrying amount increases each year.
• B. amortization of the premium increases each year.
• C. premium is evenly amortized over the life of the bond.

CROCO S.p.A sells an intangible asset with a historical acquisition cost of €12 million and an accumulated depreciation of €2 million and reports a loss on the sale of €3.2 million. Which of the following amounts is most likely the sale price of the asset?

• A. €6.8 million
• B. €8.8 million
• C. €13.2 million