FSA 3321 – Fall (2004)Exam 1Moore

First Examination – Finance 3321

Fall 2004 (Moore) – Version A

Name:______Registered Time:______

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Student’s Signature:______

1.Which of the following statements is correct?

  1. The FASB has the legal authority to proscribe GAAP.
  2. Transparent financial reporting allows users to get a true and fair picture of the firm.
  3. Conservatism of financial reporting standards may increase valuation relevance.
  4. Prospective analysis involves assessing the past performance of the firm.
  5. The external auditor certifies the financial statements are correct.

2.Which of the following is not an element of the “Five-Forces” model?

  1. Potential and Actual Competition
  2. Maintaining Competitive Advantage(s)
  3. Bargaining Power of Customers
  4. Threat of New Entrants
  5. Threat of Substitute Products

3.Which of the following combinations would lead to the lowest degree of industry price competition?

  1. Low Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation
  2. Few Exit Barriers, Low First mover advantage, High Product Differentiation
  3. High Industry Concentration, Low Distribution Access, High Switching Costs
  4. High Industry Concentration, High Fixed-Variable Cost Ratio, Low Switching Costs
  5. Supply > Demand, Low Supplier Switching Costs, Steep Industry Learning Curves

4.Which of the following strategies would not lead to a mixture of cost leadership and product differentiation?

  1. Economies of scale and scope, high R&D investment, tight cost control
  2. Superior product variety, lower input costs, High investment in R&D
  3. Lower input costs, flexible distribution, low investment in R&D
  4. High investment in brand image, High investment in R&D, Focus on Creativity
  5. Simpler product designs, Tight cost control, superior product quality

5.Determining whether the firm currently has the resources and capabilities to deal with the identified key success factors is an example of:

  1. Competitive Strategy Analysis
  2. Differentiation Analysis
  3. Analysis of the Degree of Actual and Potential Competition
  4. Analysis of the Threat of Substitute Products
  5. Analysis of the Bargaining Power in Input and Output Markets

6.Which of the following companies (cited in class) is suspected of managing earnings through the use of questionable accounting practices related to franchises?

  1. QWEST
  2. Enron.
  3. Fannie Mae.
  4. Regina Vacuum.
  5. Krispy Kreme.

Use the following information for problems 7 and 8

ABC Company is a startup company in an industry that exclusively uses capital leases for it’s expensive medical testing and diagnostic equipment. ABC, however, used operating lease accounting in its first year of operations. Assume the average lifespan of ABC’s leased equipment is 15 years and that their annual cost of debt is 8.114%. The annual lease payments are $4,000,000. The present value of the future lease payments is $34,000,000 (rounded). ABC’s industry commonly uses straight-line depreciation for a 20 year useful life on these types of assets. Assume the effective tax rate is 30%.

7.Adjust ABC’s books to reflect the lease as being capitalized. The straight-line depreciation expense that should have been charged against income in the second year is:

  1. $200,000
  2. $4,000,000
  3. $1,700,000
  4. $3,000,000
  5. $2,266,667

8.Adjust ABC’s books to reflect the lease as being capitalized. The appropriate charge for interest expense in the second year would be:

  1. $4,000,000
  2. $1,700,000
  3. $3,000,000
  4. $2,758,760
  5. $1,931,132

9.Which of the following will result in overstated asset balances?

  1. Off-Balance Sheet financing with operating lease accounting.
  2. Channel stuffing
  3. Overstated amortization of goodwill
  4. Overstating reserves
  5. Delaying the write-down of obsolete factory equipment

10.Which of the following ratios would be used in the diagnostic analysis of the quality of financial statements as it relates to the detection of manipulated expenses?

  1. (Net sales)/(Cash from sales)
  2. (Net sales)/(Net accounts receivable)
  3. (CFFO)/(Operating Income)
  4. (Net sales)/(Unearned revenue)
  5. (Net sales)/(Warranty Liabilities)

11.Which of the following would be indicative of manipulated core expenses for the purpose of overstating income?

  1. Unexpected (unexplained) increases in asset turnover
  2. Unexpected (unexplained) declines in (Depreciation expense)/(Capital Expenditures)
  3. Unexpected (unexplained) increases in (Pension expense)/(SG&A expense)
  4. Unexpected (unexplained) declines in (Net sales)/(Warranty liabilities)
  5. Unexpected (unexplained) increases in (Operating Cash Flow)/(Operating Income)

12.The suspect accounting practice for Lucent Technologies involved:

  1. Operating leases
  2. Overstating accounts receivable
  3. Executive stock options
  4. Overstating inventory
  5. Understating pension liabilities

13.During class, we have discussed many examples of companies that have employed suspect applications of accounting methods. Which of the following is suspected of earnings management for the purpose of smoothing their periodic income over time in order to reduce the volatility of earnings?

a.Krispy Kreme

b.Qwest

c.Enron

d.Gateway Computers

e.Fannie Mae

14.Which of the following is not a factor that affects managers’ accounting choices?

  1. Regulatory concerns
  2. Compensation
  3. Capital Market perceptions
  4. Inaccurate estimates
  5. Debt Covenants

15.What is the last step of the method for a structured accounting analysis (per text)

  1. Identify potential “red flags”
  2. Undo Accounting Distortions
  3. Evaluate the actual accounting strategy
  4. Evaluate the quality of disclosure
  5. Identify key accounting policies

Short Problem (Show all work to receive full credit) – 25 Points

In 2002, MyGene Inc., a Biotech Company, acquired a R&D firm in its industry at what would be considered very high values. The justification was that the acquired company had promising results in the area of cholesterol lowering medications. As a result of the acquisitions, MyGene reported $400 million on the Balance Sheet of Goodwill (an asset which reflects the difference between acquisition price and fair market value of tangible assets acquired). Footnotes in the 2002 financial report show that MyGene is amortizing (depreciating) the goodwill asset on a straight-line basis over 20 years. In 2003, another company obtained patent protection on a similar medicine using a similar process to that being developed for MyGene. In the 2003 financial statements, MyGene continued to amortize the original goodwill associated with the acquisition. In analyzing MyGene, you feel that one-half of the remaining goodwill should have been written off in 2003. Make the necessary adjustments to the financial statements and accounts to reflect writing down the goodwill in the 2003 financial statements. Assume a 35% tax rate.

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