Acct Test 1

Question 1

Compute ROE

Answer 1

ROE = Net income - preferred dividends / Avg. Shareholder Equity (%)

Question 2

Compute NOA

Answer 2

NOA = Operating Assets - Operating Liabilities

Question 3

Compute NOPAT

Answer 3

NOPAT = NOBT - (Tax Expense + [Interest Expense x Stautory Rate])

Question 4

Compute RNOA

Answer 4

RNOA = NOPAT / Avg. NOA (%)

Question 5

Find Non-operating return

Answer 5

ROE = RNOA - Non-operating return
Since we know the ROE & RNOA, it can be determined that
Non-operating return = ROE - RNOA

Question 6

What are passive investments? Describe the two types of passive investments.

Answer 6

< 50% ownership (non controlling & no influence)

• Available for sale - held for capital gains and dividends
• Trading - Firms seek to make money buying and selling stocks (think JP Morgan, et al)

Question 7

In the fair value method of accounting, how are purchases and sales recorded?

Answer 7

At purchase and sale, securities are listed at cost.
fair value = cost on purchase date.
Cash is credited for the amount,
Marketable Security account - a non-cash asset - is debited.

Question 8

Using the fair value method what is done at year end?

Answer 8

At year end, unrealized gains (losses) are recorded.
Available for sale > changes in fair value -unrealized gains (losses) - are recorded to Accumulated Other Comprehensive Income (AOCI) on the Stockholder’s Equity Statement.
Trading > fair value - unrealized gains (losses) - are recorded to Income on the Income Statement.

Question 9

How are dividends recorded for passive investments?

Answer 9

Dividends are recorded as Other Income on the Income Statement.

Question 10

How are passive investment sales recorded?

Answer 10

At sale, realized gains (losses) are recorded to Other Income on the Income Statement.

Question 11

When is the Equity Method used to account for marketable securities?

Answer 11

Equity Method is used when there is 20 - 50% ownership with significant influence.

Question 12

How are purchases recorded using the Equity Method?

Answer 12

Purchases are reported at cost and uses the Net Asset Method.

Cash is credited; non-cash asset is debited.

A - L = SE; cost is equal to SE%

Question 13

How are dividends recorded on the Equity Method?

Answer 13

Dividends are treated as a recovery of the investment, they reduce the investment account, therefore, they are not reported as income.

Cash account is debited; non-cash asset is credited.

Question 14

How is income reported when using the Equity Method?

Answer 14

The percentage of the investors share of the investees NI is reported on the Income Statement as revenue.

Revenue is listed as % of NI;
Earned Capital is credited; non-cash asset is debited.

Question 15

How are unrealized gains reported when using the Equity Method?

Answer 15

Unrealized gains are not reported if using the Equity Method.

Question 16

How is a consolidated balance sheet prepared for a company holding 100% of a subsidiary?

Answer 16

If, for example, a company invests $3,000 and holds 100% of the subsidiary:
Consldtng
Parent Subsidiary Adjuistment Cnsldt
Asset 5,000 1,000 6,000
Invest 3,000 (3.000) 0
PPE 10,000 4,000 14,000
Ttl Asset18,000 5,000 20,000

Liab. 5,000 2,000 7,000
Cnt cap 10,000 2,000 (2,000) 10,000
Rt earn 3,000 1,000 (1,000) 3,000
Ttl L & E 18,000 5,000 20,000

Question 17

How is a consolidated balance sheet prepared for a company holding <100% of a subsidiary?

Answer 17

Firm invest $2,400 for 80% ownership
Consldtng
Parent Subsidiary Adjuistment Cnsldt
Asset 5,000 1,000 6,000
Invest 2,400 (2,400) 0
PPE 10,000 4,000 14,000
Ttl Asset17,400 5,000 20,000

Liab. 5,000 2,000 7,000
Cnt cap 9,400 2,000 (2,000) 9,400
Rt earn 3,000 1,000 (1,000) 3,000
Non controlling interest 600 600
Ttl L & E 17,400 5,000 20,000

Question 18

How is consolidation achieved when purchase price exceeds the investee’s book value?

Answer 18

The purchase price is first allocated to the tangible and intangible assets of the acquired corporation. What is left over is considered ‘Goodwill.’

Goodwill = purchase price - tangible & intangible assets

Question 19

What is the percentage-of-completion method?

Answer 19

The percentage-of-completion method of accounting recognizes revenue by the proportion of costs incurred to date compared with the total estimated cost.

Question 20

Anaylisis of R&D Expenses

Answer 20

1. R&D costs for wages & generall purpose PPE are accounted for as normal. Only the expensing of PPE with no alternate use differs.
2. Capitalizing and depreciating/amortizing R&D costs is not advisable as the depreciation or amortization period is arbitrary
3. Recommendations:
   a. Compare R&D/Sales for comparable companies
   b. Evaluate discussion of $&D effectiveness in the MD&A, financial presss, and company communications.

Question 21

How do foreign currency translations affect financial statements?

Answer 21

Changes in foreign currency exchange rates are reported at the average exchange rate for the period.
Revenues - Expenses = Income
$ Loss increase - increase = increase
$ gain decrease - decrease = decrease

Question 22

Compute basic earnings per share.

Answer 22

EPS = Net Income - Preferred share dividends / Avg. number of common shares.

Question 23

Compute diluted earnings per share.

Answer 23

diluted EPS = Net Income - Preferred share dividends / Average Number of common shares + Effect of dillutive share options + Restricted stock + Assumed conversion of convertible notes