Financial Statement Analysis - 3 - Free MCQ Practice Test with solutions,

An analyst reviews Harmon Capital's investment in Stride Technologies. Harmon acquired a 30% stake in Stride for $45 million. During the year, Stride reported net income of $20 million and paid dividends of $8 million.

Using the equity method, what is the carrying value of Harmon's investment in Stride at year-end?

A financial analyst is examining two companies. Apex Corp holds a 35% stake in Delta Ltd and a 75% stake in Gamma Inc.

Which of the following best describes the balance sheet treatment for each investment under US GAAP?

Brennan Holdings acquired a subsidiary two years ago, recording goodwill of $30 million. At year-end, the reporting unit's carrying value (including goodwill) is $120 million and its fair value is $105 million.

The goodwill impairment loss that Brennan Holdings should recognize under US GAAP is closest to:

Northgate Industries sponsors two pension arrangements. Plan I specifies that employees will receive monthly payments based on years of service and final salary upon retirement. Plan II specifies that Northgate contributes 5% of each employee's annual salary into individual retirement accounts.

Which of the following best characterizes the investment risk allocation for each plan?

An analyst extracts the following from Caldwell Corp's pension footnote ($ millions):

• Fair value of plan assets: $380
• Projected benefit obligation: $450
• Accumulated benefit obligation: $410

The funded status of Caldwell Corp's pension plan, as reported on the balance sheet under US GAAP, is closest to:

During the year, Solaris Group's defined benefit pension plan experienced an actuarial loss of $18 million due to a change in the discount rate assumption. Solaris reports under IFRS.

Under IFRS, how should Solaris Group report the $18 million actuarial loss?

Meridian Corp, a US company, has a German subsidiary whose functional currency is the euro. At year-end, the EUR/USD exchange rate is 1.10. The average rate for the year was 1.05. The subsidiary's total assets are €200 million.

Under the current rate method, Meridian Corp should translate the German subsidiary's total assets at:

Vanguard Analytics has a foreign subsidiary that is considered an integrated extension of the parent. The subsidiary's functional currency is the same as the parent's presentation currency (USD).

Under the temporal method, which of the following is correctly stated regarding inventory carried at historical cost?

Harrington Global uses the current rate method to translate its Mexican subsidiary's financial statements. During the year, the Mexican peso depreciated significantly against the USD. The subsidiary has net assets of MXN 500 million.

The translation effect of the peso depreciation on Harrington Global's consolidated financial statements is most likely to:

TechStar Solutions enters into a $500,000 contract to deliver software licenses and provide 2 years of post-sale support. The standalone selling price of the license is $400,000 and support is $100,000.

Under IFRS 15, TechStar Solutions should recognize revenue for the software license:

Under IFRS 16, a lessee recognizes a right-of-use asset and a corresponding lease liability at lease commencement.

Compared to treating a lease as an operating lease, recognizing it as a finance lease under IFRS 16 will most likely result in:

An analyst computes the following for Westfield Corp ($ millions):

• Net operating assets at beginning of year: $200
• Net operating assets at end of year: $260
• Average net operating assets: $230

The balance sheet-based accruals ratio for Westfield Corp is closest to:

A forensic analyst calculates a Beneish M-score of −1.85 for Torque Manufacturing. The analyst notes a significant increase in the Days Sales Receivable Index and a decline in the Asset Quality Index.

Based on the Beneish M-score result, the most appropriate conclusion is that Torque Manufacturing:

Falcon Group's pension footnote contains the following data ($ millions):

• Service cost: $15
• Interest cost: $22
• Expected return on plan assets: $18
• Amortization of prior service cost: $3

The net periodic pension cost reported in Falcon Group's income statement under US GAAP is closest to:

Orion Corp acquires 80% of Pulsar Inc for $160 million. Pulsar's identifiable net assets have a fair value of $180 million. Pulsar reports net income of $25 million for the year.

Under full consolidation, the minority interest share of Pulsar's net income attributable to non-controlling interests is closest to:

Summit Ventures holds a 25% stake in Crestline Corp using the equity method. The carrying value of the investment is $80 million. At year-end, the fair value of the investment is estimated at $62 million, and the decline is deemed other-than-temporary.

Summit Ventures should most likely:

Brightfield Inc., a company reporting under IFRS, holds a 50% interest in a joint venture. Under IFRS 11, joint ventures must be accounted for using the equity method.

Compared to proportionate consolidation, using the equity method for a joint venture will most likely result in:

Ridgeline Retail reports $50 million in annual operating lease payments. An analyst capitalizes these leases using a discount rate of 8%, arriving at a lease asset of $350 million.

After capitalizing operating leases, Ridgeline Retail's debt-to-equity ratio will most likely:

Crossroads Corp grants 100,000 stock options to employees on January 1, Year 1. The grant-date fair value is $6 per option. The options vest ratably over 3 years.

The stock-based compensation expense that Crossroads Corp should recognize in Year 1 is closest to:

During an earnings quality review, an analyst notes that Meridian Electronics reported a 40% increase in revenue while accounts receivable increased by 65%. Days sales outstanding rose from 42 days to 58 days.

The pattern of rising DSO and disproportionate growth in receivables relative to revenue most likely indicates:

Titan Group acquires 100% of Nexus Ltd for $280 million. The fair value of Nexus's identifiable net assets is $220 million.

The goodwill recognized by Titan Group at acquisition is closest to:

Thornwood Industries' pension actuary estimates that under the projected benefit obligation method, employees' future benefits are $95 million. If current salary levels are used instead, the present value of benefits is $78 million.

The projected benefit obligation (PBO) and accumulated benefit obligation (ABO) for Thornwood Industries are, respectively:

Cascade Holdings has two foreign subsidiaries. Subsidiary X operates independently and maintains its books in the local currency, which is also its functional currency. Subsidiary Y relies heavily on the parent for financing and pricing, and its functional currency is determined to be the USD (same as the parent's presentation currency).

The appropriate translation method for Subsidiary X and Subsidiary Y, respectively, is:

An analyst adjusts BioCore Inc.'s financial statements by capitalizing its R&D expenditures of $40 million annually. Prior to adjustment, BioCore's total equity was $200 million. Assume a 5-year straight-line amortization and this is Year 1 of the adjustment (no tax effect).

After capitalizing R&D, the adjusted total equity is closest to:

Landmark Corp reports under IFRS. Last year, it recognized a goodwill impairment of $25 million on a cash-generating unit (CGU). This year, the CGU has recovered and its recoverable amount now exceeds its carrying value.

Under IFRS, Landmark Corp should:

Ironwood Corp has total debt of $500 million, total equity of $300 million, and a net pension liability (underfunded status) of $60 million. An analyst adjusts the balance sheet to treat the pension underfunding as debt and reduces equity accordingly.

After adjusting for the pension underfunding, Ironwood Corp's debt-to-equity ratio is closest to:

For Paragon Corp ($ millions):

• Net income: $80
• Cash flow from operations: $55
• Cash flow from investing: −$30
• Average net operating assets: $400

The cash-flow-based accruals ratio for Paragon Corp is closest to:

Polaris Group owns 40% of Arcturus Inc. and uses the equity method. Polaris sells inventory to Arcturus for $10 million, recognizing a $4 million profit. At year-end, all of the inventory remains unsold at Arcturus.

In applying the equity method, Polaris Group should reduce its equity income from Arcturus by:

Vertex Corp transitions from treating a lease as an operating lease to a finance lease under IFRS 16. Annual lease payments total $12 million, of which $3 million represents interest and $9 million represents principal repayment.

Compared to operating lease treatment, reclassifying this lease as a finance lease under IFRS 16 will most likely:

Dalton International has two foreign subsidiaries. For one subsidiary, the temporal (remeasurement) method applies; for the other, the current rate method applies. Exchange rates have been highly volatile during the year.

Compared to the current rate method, the temporal (remeasurement) method most likely results in: