WorksheetsFINMA 2 CHAPTERS 7-14
Total questions: 120
Worksheet time: 3600secs
What is the general principle of accounting for common equity issues?
a) Recording at historical cost
b) Recording at present value
c) Recording at fair value
d) Recording at adjusted historical cost value
What are dividends?
a) Payments made by shareholders to the company
b) Payments made by the company to its shareholders
c) Investments made by the company in other businesses
d) Rewards given to employees
It is a type of stock where the shareholders usually have voting rights in company decisions. Dividends here also fluctuate
Preferred Stock
Income Stock
Dividend Stock
Common Stock
The companies conduct share repurchase due to the following reasons except:
a) To increase the voting power of existing shareholders.
b) To manage the finance of the company
c) To protect how much voting power each share has
d) To have enough stock available for employee stock options
Which of the following is not a classification of a derivatives?
a) Cash Flow Hedges
b) Speculative Investments
c) Hedge Interest Rate Risk
d) Fair Value Hedges
When lessor bears most of the risk, the lease is an operating lease. When the lessee bears most of the risk, the lease is a capital lease
True, True
False, True
True, False
False, False
"Firms must disclose the ______ value and the _____ value of financial instruments."
fair, book
present, fair
fair, present
book, fair
In converting operating leases to capital leases, you must eliminate the following except:
Utility Expense
Rent Expense
Interest Expense
Depreciation Expense
Which of the following statements is the benefit of the lease?
a) Ability to not shift the tax benefits from depreciation and other deductions
b) Ability to finance the acquisition of an asset
c) Ability to increase the risk of technological obsolescence
d) None of the choices
Which among the following is not an element of a derivatives?
a) A derivative has an underlying
b) A derivative has a notional amount
c) A derivative may require an initial investment
d) Derivatives typically require, or permit, net settlement
The general principle of accounting for common equity issues is to not record the equity claim on the balance sheet at the fair value of what the corporation initially receives from the investor.
True
False
To make sure everyone gets their dividend properly, there are two important dates companies follow, date of record and date of payment
True
False
Stock Options is where the companies permit employees to purchase shares of common stock at a price usually equal or just above the market price of the stock the firm grants the option.
True
False
Stock dividends do not change total shareholder’s equity and investor wealth.
True
False
Debt financing increases solvency risk for companies.
True
False
Long-term debt must be reclassified as a current liability if funds are to be disbursed within one year of the balance sheet date.
True
False
Fair value disclosures rely solely on historical data from arm's-length transactions
True
False
Reducing debt is crucial for managing corporate liabilities but has no impact on financial performance
True
False
Settling troubled debt can result in an economic gain for the debtor if the creditor accepts less than the debt's book value
True
False
Transferring receivables through Special Purpose Entities (SPEs) does not raise any questions regarding accounting treatment.
True
False
It is reported as a significant noncash investing and financing activity in a separate schedule.
a. PPE purchased with cash
b. PPE purchased with noncash
c. None of the above
It is reported as a cash outflow in the investing activities section of the statement of cash flows.
a. PPE purchased with cash
b. PPE purchased with noncash
c. None of the above
It is the completion of a detailed program design or, in its absence, completion of a working model.
a. Technological Feasibility
b. Technological Development
c. Technological Innovation
Costs associated with returning the resource site to an acceptable condition after the resources have been obtained
a. Acquisition Costs
b. Development Costs
c. Restoration Costs
It is a residual and effectively represents all intangibles that are not specifically identifiable
a. Goodwill
b. Variable Interest Entity
c. Foreign Currency Translation
It is the process of converting the financial statements of a foreign branch or subsidiary into the U.S. dollars (or the home currency of the firm) for consolidated financial reporting.
a. Goodwill
b. Variable Interest Entity
c. Foreign Currency Translation
It is the estimated current price at which the asset can be purchased or sold on the open market.
a. Book Value
b. Market Value
c. Fair Value
It represents the asset's original purchase price less wear and tear.
a. Book Value
b. Market Value
c. Fair Value
Exploration costs of successful and unsuccessful wells are capitalized.
a. Successful Efforts
b. Unsuccessful Efforts
c. Full Costing
It is capitalized as part of the natural resource account.
a. Goodwill
b. Tangible Development Costs
c. Intangible Development Costs
Variable Interest Persons is a term used in accounting and finance to describe an entity in which control is not based on majority ownership of voting shares, but rather on contractual arrangements that give one party significant influence over the entity's operations.
True
False
If this VIE involvement is important for the company's financial reports, it needs to share details such as: What the VIE does and why it exists., The value of assets used as security for the VIE's debts., and If creditors of the VIE can claim assets of the main company
True
False
Foreign currency translation is the process of converting the financial statements of a foreign branch or subsidiary into the U.S. dollars (or the home currency of the firm) for consolidated financial reporting
True
False
An entity can be considered as the main beneficiary if: It's not responsible for the VIE's losses if they happen.
True
False
Choosing between using historical exchange rates or current exchange rates are considered to translate financial items.
True
False
Book value represents the asset's original purchase price less wear and tear. It is shown on the balance statement of the business.
True
False
Both the Generally Accepted Accounting Principles (GAAP) in the United States and the International Financial Reporting Standards (IFRS) require assessments for declines in asset value, also known as impairment.
True
False
IFRS can help identify when a long-lived asset loses value. It compares the asset's current value (recoverable amount) with its book value. If the book value is higher, an impairment loss is recognized, which lowers the book value to reflect reality
True
False
Competitors' development of new technologies, changes in government regulations, changes in demographic trends, and other external factors may reduce the future benefits expected from long-lived assets.
True
False
Minority Active Investments involve firms investing in debt securities, preferred stock, or common stock of another corporation for anticipated interest, dividends, and capital gains
True
False
Typically the single largest item on the income statement, and thus a major determinant of a firm’s profitability
Expense
Revenue
Pensions
Insurance
In this step, firms must estimate whether performance obligations are satisfied by transferring control of a good or service over time.
a) Recognize revenue when (or as) the entity satisfies a performance obligation
b) Determine the Transaction Price
c) Identify the Contract with a Customer
d) Identify the Separate Performance Obligations in the Contract
All are included in the examples of various revenue models in the application of the new revenue recognition method except for….
Retails Sales
Determine the transaction price
Sales with Warranties
Principal-Agent Relationships
The situation where one party (the principal) engages another party (the agent) to act on its behalf in transactions with third parties.
a) Sales with Variable Consideration
b) Sales with Delayed Delivery (Bill-and-Hold Arrangements)
c) Retail Sales
d) Principal-Agent Relationships
A method of recognizing revenue gradually over the duration of a contract rather than at a single point in time.
a) Identify the Contract with a Customer
b) Sales of Bundled Products
c) Revenue Recognition over Time (Long-Term Contracts)
d) Investment in Working Capital: Accounts Receivable and Deferred Revenues
When does expense recognition occur?
a) When expenses are incurred
b) When payment is received
c) At the time of revenue collection
d) At the end of the fiscal year
What does FIFO stand for in inventory costing?
a) Fast-In Fast-Out
b) First-In First-Out
c) Final-In Final-Out
d) First-In Fast-Ou
What does LIFO stand for?
a) Last-In, First-Out
b) Latest-In, Fast-Out
c) Last-In, Fast-Out
d) Latest-In, First-Out
What technique is used to address market value differences from acquisition costs?
FIFO
LIFO
Lower-of-cost-or-market
Weighted average
Companies with a presence in countries with lower corporate tax rates might have a...
a) Higher effective tax rate
b) Lower effective tax rate
c) Fixed effective tax rate
d) No effective tax rate
All are examples of Source of Income Taxable, except…
a) Inheritances
b) Pensions
c) Investments
d) Rental Properties
Deferred tax assets arise from temporary differences where..
a) We pay taxes before recognizing expenses
b) We recognize expenses before taxes
c) We prepay taxes for future income
d) We receive tax benefits before they occur
What do SG&A expenses cover?
Cost of goods sold
Operating functions like advertising and depreciation
Inventory valuation
Financing and Investing Activities
Firms must recognize valuation allowances for _________ not likely to be realized as ________
a) Deferred Tax Assets, Statutory Tax Rate
b) Actual Tax Rate, Federal Income Taxes
c) Deferred Tax Assets, Income Tax Expense
d) Deferred Tax Assets, Tax Benefits
Which of the following contributes to a company having a lower effective tax rate than the statutory rate?
Significant operations in countries with high corporate tax rates
State income taxes
Tax incentives offered by certain countries
Gains resulting from acquisitions
Formula for Pension Obligation:
a) Annual Benefits = Annual Credit X Years of Service X Salary at Retirement Date
b) Annual Benefits = Annual Credit + Years of Service + Salary at Retirement Date
c) Annual Benefits = Annual Credit X Years of Service ÷ Salary at Retirement Date
d) Annual Benefits = Annual Credit X Years of Service + Salary at Retirement Date
What are the key assumptions firms must disclose regarding pension accounting?
A) The expected rate of return on plan assets
B) The rate of compensation increase
C) The discount rate used to compute the pension benefit obligation
D) All of the above
What is the impact of a higher expected rate of return on pension investments on pension expense?
A) Increases pension expense and decreases earnings
B) Decreases pension expense and increases earnings
C) Has no impact on pension expense or earnings
D) Increases pension expense and increases earnings
Which of the following does not affect the PBO?
Service Cost
Prior Service Cost
Employer Contributions
Benefit Payment
What event may change the fair value (FV) of pension plan assets during a given period?
a)Changes in projected benefit obligation (PBO)
b) Changes in the discount rate
c) Actual returns on invested plan assets
d) Changes in the assumed rate of compensation increases
What is the primary objective of financial statement forecasts?
a. To maximize optimism
b. To provide biased predictions
c. To produce realistic expectations
d. To promote conservative estimates
What should financial statement forecasts avoid?
a. Wishful thinking
b. Conservative strategies
c. Overestimating future earnings
d.Ignoring past performance
It is a process of predicting what will happen in the future by considering events in the past and present.
Forcecasting
Cash Flow
Revenue
Balance Sheet
It allows them to make informed decisions based on certain economic conditions and trends affecting its sector
a. The economics of the industry
b. The competitive advantages and risks of the firm's strategy
c. The quality of the firm's accounting
d. The drivers of the firm's profitability and risk
What is the purpose of Step 6 in the seven-step forecasting game plan?
a. Forecasting revenues
b. Balancing the balance sheet
c. Projecting operating expenses
d. Analyzing financial leverage
Which step in the seven-step forecasting process involves forecasting revenues, which serve as the foundation for projecting other financial metrics?
a. Step 2: Project Operating Expenses
b. Step 4: Project Financial Leverage, Financial Assets, Common Equity Capital, and Financial Income and Expense Items
c. Step 6: Balance the Balance Sheet
d. Step 1: Project Revenues
In financial forecasting, what is the primary consideration when projecting operating expenses?
a. Assessing industry conditions
b. Evaluating the firm's growth strategies
c. Identifying fixed versus variable expense components
d. Analyzing changes in expense-to-sales ratios
What is the purpose of balancing the balance sheet in the financial forecasting process?
To project net income accurately
To align projected total assets with projected total liabilities and shareholders' equity
To determine the amount of dividends to be paid
Which statement characterizes the process of projecting the statement of cash flows
It involves deriving cash flows only from the projected changes in the cash account.
It is a complex and time-consuming task compared to other forecasting steps.
It requires analyzing changes in all balance sheet accounts except for cash to determine cash flows
It focuses solely on forecasting future revenue streams.
Which tool is recommended to aid in financial statement forecasting according to the provided information?
a. Financial Statement Analysis Package (FSAP)
b. Financial Forecasting Spreadsheet (FFS)
c. Corporate Forecasting Tool (CFT)
d. Strategic Planning Software (SPS)
Financial statement forecasts should focus solely on past performance to ensure accuracy. -
True
False
It is acceptable to create forecasts based on strategies the firm should pursue, even if they are not currently being executed.
True
False
A comprehensive financial statement forecast should consider all expected future operating, investing, and financing activities
True
False
Financial statement forecasts must be internally consistent, relying on additivity within financial statements and articulation across statements to avoid errors.
True
False
Forecast assumptions must undergo reality checks and have external validity to ensure they align with industry conditions and the firm's strategy
True
False
The income taxation will only reconcile with the projected income statement and balance sheets when the balance sheets balance and the income statement articulates with the balance sheets. -
True
False
Project Operating Assets and Liabilities on the Balance Sheet are one of the steps on forecasting game plans
True
False
The quality of the firm's accounting is a critical input that businesses must take into consideration when developing reliable financial forecasts. -
True
False
Attempting to project future statements of cash flows from historical statements of cash flows is one of the tips in forecasting statements of cash flows.
True
False
The quality of the firm's accounting enables businesses to proactively identify, analyze, and mitigate potential risks.
True
False
How does an earning-based valuation approach contribute to understanding wealth creation in firms?
A) By measuring the capital created for common shareholders each period
B) By predicting future stock prices accurately
C) By focusing solely on short-term gains
D) By ignoring the importance of dividends
How is the present value of projected future payoffs computed in financial valuation?
By using the risk-free rate as the discount rate
By using the Risk-adjusted expected rate of return on equity capital as the discount rate
By disregarding the discount rate
By using the historical stock price
How is the after-tax cost of debt calculated in financial valuation?
By adding the statutory tax rate to the yield to maturity on each type of debt
By subtracting the yield to maturity on each type of debt from the statutory tax rate
By multiplying the yield to maturity on each type of debt by the statutory tax rate
By multiplying the yield to maturity on each type of debt by one minus the statutory tax rate applicable to income tax deductions for interest
When is the weighted average cost of capital (WACC) used in financial analysis?
To determine the cost of equity for a firm
To calculate the cost of debt for a firm
To determine the present value of the payoffs from investing in the total assets of the firm
To calculate the cost of preferred equity for a firm
What does an approach that focuses on wealth distribution to shareholders determine share value as?
The present value of projected future payoffs
The historical stock price
The risk-adjusted expected rate of return on equity capital
The after-tax cost of debt
All of these are the advantages of rarionale cash-flow-based valuation except:
The projection of free-cash-flows can be time consuming.
Cash is a commom measure of payoffs for comparing future value benefits of alternative investment opportunity.
) Free-cash-flows valuation is widely used in practice.
Cash is the medium of exchange and therefore a fundamental source of value.
Which of the following is NOT a limitation of cash flow-based valuation methods?
Difficulty in accurately projecting future cash flows.
Sensitivity of the valuation to the chosen discount rate.
Inability to capture the impact of brand value or intangible assets
Reliance on historical financial data, which may not reflect future performance.
This section first presents a conceptual framework for measuring free cash flows.
A.) Free-Cash-Flows valuation
B.) Measuring Free Cash Flows
C.) Statement of Balance Sheet
D.) Rationale Cash-Flow-Based Valuation
Which of the following best describes Free Cash Flow to the Firm (FCFF)?
A.) Cash available for dividends after all expenses
B.) Cash available to pay off debt only.
C.) Cash available to all capital providers (debt & equity) after operating expenses, reinvestments, and interest payments
D.) Cash generated from selling company assets.
Why is FCFF a valuable metric for financial analysis?
It shows a company's profitability based on accounting measures.
It indicates a company's ability to generate cash for various purposes like debt repayment, dividends, or reinvestment.
It reflects the market value of a company's stock.
It's a simple calculation requiring minimal financial data.
Which statement accurately characterizes the key features of the discussed valuation approach?
A) It computes the value of common shareholders' equity and discounts future cash flows using the required rate of return on common equity.
B) It computes the value of net operating assets and includes expected future free cash flows to common equity shareholders.
C) It computes the value of debt only and focuses on future cash flows to debt stakeholders.
D) It computes the value of all financial claims on the firm's net assets and discounts future cash flows using the expected future weighted-average cost of capital.
Which of the following accurately describes the valuation approach discussed for Starbucks using free cash flows?
The valuation method focuses solely on projecting cash flows from operations for common equity shareholders, with adjustments made for liquidity requirements and capital expenditures.
B) The valuation method computes free cash flows for all debt and equity stakeholders, considering adjustments for cash flows related to debt, preferred stock, and noncontrolling interests.
C) The valuation method excludes projections beyond Year 5 and does not account for long-run growth rates or the computation of continuing value.
D) The valuation method uses a fixed discount rate of 3.0% to discount all future cash flows, regardless of the specific stakeholders involved.
What adjustments are necessary to compute the present value of Starbucks' common equity?
A.) Subtracting the present value of interest-earning financial assets and adding the market value of interest-bearing debt, preferred stock, and noncontrolling interests.
B) Subtracting the market value of interest-bearing debt, preferred stock, and noncontrolling interests, and adding the present value of interest-earning financial assets.
C) Adding the fair value of outstanding debt and assuming the retirement of any equity capital attributable to noncontrolling interests
D) Subtracting the fair value of outstanding debt and assuming the retirement of any equity capital attributable to noncontrolling interests
Plays a critical role in understanding the impact of these parameters, as well as other key forecast assumptions and valuation parameters, on share value estimate
A.) Necessary Adjustments
B.) Cash Flow
C.) Sensitivity Analysis
D.) Free Cash FLows to Common Equity
Which of the following accurately describes three key distinctions of the valuation approach discussed?
It computes the value of common shareholders' equity and focuses on future cash flows to common equity stakeholders.
It computes the value of net operating assets and includes expected future free cash flows to all debt and equity stakeholders.
It computes the value of preferred stock only and discounts future cash flows using the weighted-average cost of capital.
It computes the value of noncontrolling interests exclusively and discounts future cash flows using the required rate of return on common equity.
What are dividends?
Payments made by shareholders to a corporation.
Payments made by a corporation to its shareholders as a distribution of profits.
Payments made by a corporation to its creditors.
Payments made by a corporation to its employees as bonuses.
What is continuing value?
) The value of a business or investment only within a specific forecast period.
The value of a business or investment beyond a specific forecast period.
The value of a business or investment at its inception.
) The value of a business or investment based solely on historical performance.
Why is clean surplus accounting important?
It helps minimize taxes for corporations.
) It ensures that dividends are paid out to shareholders regularly.
It accurately reflects changes in shareholders' equity on the income statement
It simplifies the calculation of earnings per share.
Why is selecting a forecast horizon beneficial to shareholders?
It increases short-term profits.
It aligns expectations and facilitates strategic planning.
It reduces the need for financial reporting.
It guarantees a higher dividend payout.
What is the difference between nominal and real dividends?
A) Nominal dividends represent the actual dollar amount paid out to shareholders, while real dividends are adjusted for inflation.
B) Nominal dividends are adjusted for inflation, while real dividends represent the actual dollar amount paid out to shareholders.
C) Nominal dividends and real dividends are the same concept, just different terminologies.
D) Nominal dividends are paid in cash, while real dividends are paid in shares of stock.
Which of the following is the single most widely followed measure of firm performance the bottom line of the firm’s profitability each period?
A. Reported Earnings
B. Earnings
C. Firms
All of these are the Roles of Earnings except:
It is the primary measure of firm performance produced by the accrual accounting system.
The single most widely followed measure of firm performance the bottom line of the firm’s profitability each period.
It is used for internal capital allocation and for aligning the incentives of managers with shareholders.
Which describes benchmarking relative valuation using market multiples?
Comparing PE ratios of different industries.
Comparing PE ratios of similar companies, considering profitability, growth, and risk.
Comparing market capitalizations of firms.
Which statement accurately describes the impact of conservative accounting practices on Price-to-Earnings (PE) ratios?
A. Conservative accounting practices tend to inflate PE ratios consistently over time.
B. Conservative accounting practices have no significant effect on PE ratios.
C. Conservative accounting practices initially boost PE ratios by delaying earnings recognition, but may lower them later as investments are expensed.
A ratio that measures market value as a multiple of accounting book value at a point in time.
Price-Earnings Ratio
Market-to-Book Ratio
Value-to-Book Ratio
A practical tool used by analysts interested in valuation shortcuts.
Market-to-Book Ratio
Value-Earnings Ratio
Price-Earnings Ratio
Which of the following statements is true regarding risk and the cost of capital?
Firms with higher risk will have higher PE and VE ratios.
Firms with lower risk will have lower PE and VE ratios.
Firms with higher risk will have lower PE and VE ratios.
Which of the following is NOT a Residual Income Model Implementation Issues?
Portions of net income attributable to equity claimants other than common shareholders.
Sensitivity Analysis and Investment Decision Making
Negative book value of equity.
Which of the following is NOT a Starbucks’ common equity shares using Residual Income Model?
Determine the book value of common shareholders’ equity on Starbucks’ fiscal 2015 balance sheet
This method considers the overall risk of the market to estimate a discount rate.
Discount the expected future residual income to present value, including continuing value.
What does The Residual Income Model (RIM) mean?
This detailed process helps estimate the value of a company's shares by considering both the current book value and future growth in residual income.
It is a way to estimate the value of a company's stock for its shareholders.
It is often assumed that future other comprehensive income items will average to zero
Advantages - Economists sometimes express concern that earnings are not useful for valuation because earnings are not as reliable or as meaningful as cash or dividends for valuing investments
True
False
Classical Dividend Based Valuation Model:
True
False
Residual Income Valuation Model computes the value of common equity based on two parts.
True
False
Reverse engineering pertains to dissecting a product or system to understand its functionality, not analyzing a stock's price based on underlying assumptions.
True
False
Competitive advantages leading to a ROCE higher than the cost of equity (RE) do not necessarily guarantee higher PE ratios compared to similar firms lacking such advantages.
True
False
Market multiples can be useful long evaluation tools.
True
False
If the VB ratio is higher than the MB ratio, it may indicate that the stock is undervalued, and it might be a good investment opportunity.
True
False
In the long-run equilibrium, firms should not expect to earn a return equal to the cost of capital.
True
False
In theory, all three valuation models, when correctly implemented with internally consistent assumptions, will produce the same estimates of value.
True
False
A negative book value of common shareholders' equity signifies a situation where the total common shareholders' equity is in the negative, implying that a company's liabilities exceed its assets.
True
False
