Mock Exam 2 Flashcards

Question

An investor has long exposure to the risk of the asset underlying an option when taking: A) a short position in a put option. Correct Answer B) a short position in a call option. Incorrect Answer C) a long position in a put option. Incorrect Answer

Answer 1

looking for the combination that would benefit from a increase of asset value By taking a short position in a put option, the investor has long exposure to the risk in the underlying asset. Because the value of a put option decreases when the price of the underlying asset increases, the value of a short position in a put increases when the price of the underlying increases. Both a short position in a call option and a long position in a put option increase in value when the price of the underlying asset decreases; that is, these option positions have short exposure to the risk of the underlying asset. (Module 36.2, LOS 36.e)

Answer 2

Sales of newly issued securities take place in the primary market. Registration of shares sold in private placements of securities is not required. The secondary market refers to the markets in which previously issued securities are traded. (Module 36.3, LOS 36.i)

Answer 3

Unlike alternative asset classes that produce income streams, commodities only generate returns from price changes. Most alternative investments have low return correlations with traditional investments. Specialized investment vehicles are available for many categories of alternative investments. (Module 60.2, LOS 60.e)

Answer 4

36.5 1. Calculate the dividend of each year using the growth rate 2. Calculate the price 3. use the calculator to find the NPV

Answer 5

Compared to the other answer choices, a privately held metal fabrication company will likely have a larger proportion of physical assets relative to intangible assets, and market values for its physical assets should be relatively easier to obtain. Asset based model: Equity value = Market value of asset - Market value of liabilities

Answer 6

Recapitalization is when the company issues debt to fund a dividend distribution to equity holders (the fund). It is not an exit, in that the fund still controls the company, but often is an intermediate step toward an exit. (Module 60.1, LOS 60.a) one of the exit strategy for private equities

Answer 7

A soft lockup period describes a provision that allows redemptions during the lockup period, but with significant additional fees for such redemptions. (Module 60.3, LOS 60.f) A notice period (typically between 30 and 90 days) is the amount of time a fund has to fulfill a redemption request made after the lockup period has passed.

Answer 8

Weak: TA doesnt work Semi Strong: TA, FA doesnt work Strong: TA, FA, and insider info doesnt work

Answer 9

Capital asset pricing model (CAPM): ki = Rf + βi[E(Rmkt) − Rf] The expected growth rate in dividends is an input into the dividend discount model, but the real risk-free rate, the expected inflation rate, and the risk premium are the components of the required rate of return. (Module 41.2, LOS 41.e)

Answer 10

Matrix pricing for untraded or infrequently traded bonds should be based on yields of more frequently traded bonds with similar credit ratings. (Module 44.2, LOS 44.e)

Answer 11

BBB- or higher (BBB,A,AA,AAA) Baa3 or better until Moodie rating

Answer 12

Any type of call protection structured into the loan itself (in this case, yield maintenance charges) increases the overall call protection of the CMBS. Agency MBS do not provide call protection at the individual loan level. (Module 45.2, LOS 45.g)

Answer 13

The value of a forward contract at initiation is typically zero. (Module 52.1, LOS 52.a)

Answer 14

Consumers buy fewer durable goods, such as furniture, during recessions and buy more during expansions. As a result, producers of these goods tend to have cyclical demand, revenues, and earnings. Operating leverage (high fixed costs as a proportion of total costs) also contributes to cyclicality of earnings. (Module 40.1, LOS 40.c) B) Entertainment producer (is cyclical) with high variable costs as a proportion of total costs (non-cyclical). Incorrect Answer

Answer 15

When the foreign currency appreciates, each foreign currency-denominated cash flow buys more domestic currency units—increasing the domestic currency return from the investment. The appreciation of the foreign asset benefits the investor as well. (Module 42.1, LOS 42.d) "If you buy something, no matter what asset you want it to appreciate."

Answer 16

Under cumulative voting, shareholders receive one vote per share for each board position election but can vote them for any board candidate or spread them over multiple candidates. This allows, for example, a holder of 20% of the shares to elect one of five board members. Under statutory voting, a minority shareholder could not elect any board members based only on their share voting rights. (Module 39.1, LOS 39.b)

Answer 17

The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF. (Module 60.3, LOS 60.f)

Answer 18

be careful with the spread of 40 bps spot rate for year 1 is 4.4%, year 2 is 4.9%, and year 3 is 5.15%

Answer 19

The shakeout phase of the industry life cycle is characterized by slowing growth, intense competition, and declining profitability. The mature phase is characterized by industry consolidation and little or no growth. In the decline phase of the industry lifecycle, growth is negative and excess capacity results. (Module 40.2, LOS 40.i)

Answer 20

Derivatives pricing is based on no-arbitrage pricing and replication, and therefore assumes the law of one price holds (i.e., two assets or portfolios with the same future payoffs must have the same price). Derivatives pricing does not assume long and short investors are net risk-neutral; rather, it determines no-arbitrage derivative prices using risk-neutral pricing. (Module 51.1, LOS 51.a)

Answer 21

The member must inform clients about any benefit given or received for the recommendation of services provided by the member.

Answer 22

Standard IV(C) Responsibilities of Supervisors explicitly states that speaking to the employee to determine the extent of the violations and receiving assurances that it will not be repeated is not enough. Finley must take positive steps to ensure that the violation will not be repeated, including promptly launching an investigation and limiting the employee's activities and/or increasing supervision of the employee until the results of the investigation are known. (Module 71.6, LOS 71.b)

Answer 23

Stein violated Standard I(C) Misrepresentation by presenting material developed by another to her supervisor without disclosing that the work was not her own. (Module 71.2, LOS 71.b) Even though she got the recourse for free, she still have the disclose the source.

Answer 24

Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion has a reasonable basis, a member or candidate who disagrees with it does not have to dissociate from it but should document the difference of opinion. (Module 71.7, LOS 71.b)

Answer 25

Under Standard IV(C) Responsibilities of Supervisors, if Klein clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, he should decline in writing to accept the supervisory responsibility until the firm adopts reasonable procedures to allow him to adequately exercise such responsibility. (Module 71.6, LOS 71.b)

Answer 26

According to Standard III(A) Loyalty, Prudence, and Care, Crocker may pay higher fees without violating her fiduciary duty as long as the research benefits the firm's clients and the commission paid is reasonable in relation to the research and execution of services received. ( Module 71.4, LOS 71.b)

Answer 27

Standard IV(A) Loyalty does not prohibit former employees from contacting clients of their previous firm so long as the contact information does not come from the records of the previous employer or violate a noncompete agreement. (Module 71.6, LOS 71.b)

Answer 28

Houser has not violated the Code and Standards. Guidance for Standard II(A) Material Nonpublic Information states that an analyst does not need to make his recommendations public just because investors would want to know about them, and is free to issue recommendations only to his clients. The guideline about what makes information material (i.e., investors would want to have the information before making an investment decision) applies to nonpublic information from the issuer of a security. An analyst covering the security, however, is not an insider with the issuing firm. (Module 71.3, LOS 71.b) There is fair dealing (didn't discriminate any client) Analyst doesn't have to have the research public.

Answer 29

According to Standard IV(B) Additional Compensation Arrangements, members and candidates must obtain written permission from their employer before accepting an offer of compensation (for the performance of work done for their employer) in addition to what they receive from their employer and that is contingent on future performance. (Module 71.6, LOS 71.b) Has to be written consent

Answer 30

The Standards do not require that members put their employment ahead of their personal lives; these are issues between White and his employer. However, Standard IV(A) Loyalty states that a member who engages in independent practice must notify his employer. (Module 71.6, LOS 71.b)

Answer 31

The eight major sections of the GIPS standards for firms are: Fundamentals of Compliance Input Data and Calculation Methodology Composite and Pooled Fund Maintenance Composite Time-Weighted Return Report Composite Money-Weighted Return Report Pooled Fund Time-Weighted Return Report Pooled Fund Money-Weighted Return Report GIPS Advertising Guidelines (Module 72.1, LOS 72.b)

Answer 32

Standard I(A) Knowledge of the Law requires candidates and members comply with all applicable rules and regulations, including the CFA Institute Standards of Practice. Further, Standard I(A) requires that members and candidates must not knowingly participate in violations of applicable laws and Standards. Even though local law permits purchasing shares for personal accounts before purchasing IPO shares for client accounts, Standard VI(B) Priority of Transactions does not. The analyst knowingly violated the Code and Standards and, thus, violated Standard I(A). Since the analyst was unaware of the deceit in the valuation of the IPO stock [a violation of Standard I(D) Misconduct], his participation in publishing the IPO valuation did not constitute a violation. (Module 71.8, LOS 71.b)

Answer 33

Double negative The chief financial officer and the portfolio manager are in violation of Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program because they have improperly referenced the CFA designation or exaggerated its meaning (e.g., "group of the most qualified"). The marketing brochure is only stating factual information regarding the portfolio managers' success at passing the CFA exams on their first attempts. (Module 71.9, LOS 71.b)

Answer 34

There is no need of getting written communication Standard V(B) Communication with Clients and Prospective Clients requires prompt disclosure of any change that might significantly affect the manager's investment processes. The disclosure need not be in writing. (Module 71.7, LOS 71.b)

Answer 35

According to Standard II(A) Material Nonpublic Information, how specific the information is, how different it is from public information, and its nature are key factors in determining whether a particular piece of information fits the definition of material. An additional factor is reliability, which is often a function of the source of the information. While the liquidity of a security may be a factor in determining the materiality of advance knowledge of a large buy or sell order, in most cases, it would not be a factor in determining materiality. (Module 71.3, LOS 71.b)

Answer 36

There is no requirement that a firm publicly release ratings changes by its analysts. Individuals outside the firm acting on this information after it is released to clients are not in violation of the Standard concerning nonpublic information. Purchases in a member's personal account are not subject to the requirements of the Standard concerning diligence and reasonable basis, so there is no violation indicated here. (Module 71.7, LOS 71.b) The asset was purchased after the information has been distributed to the clients.

Answer 37

Standard I(B) Independence and Objectivity allows investor-paid research but requires that members and candidates limit the type of compensation they accept for writing a research report so that it is not dependent on the conclusions of the research report. Best practice is for analysts to only accept a flat fee for such company-paid research reports. Such research should also include complete disclosure of the nature of the compensation received for writing such a report so that investors will not be misled as to the relationship between the analyst and the company. Important: Paying for one's own transportation and lodging when the analyst is not employed by the subject firm is a recommended procedure for complying with Standard I(B), but it is not a requirement. (Module 71.1, LOS 71.b)

Answer 38

In the absence of regulatory requirements, Standard V(C) Record Retention recommends maintaining records supporting investment recommendations and actions and records of investment-related communications with clients for at least seven years. Important: Here, there is regulatory guidance, and 7 years is a recommendation, not a requirement, in any case. Records can be maintained in electronic or hard copy format. (Module 71.7, LOS 71.b)

Answer 39

James is not in violation of the Standards. To comply with Standard VI(B) Priority of Transactions, members and candidates must give transactions for clients and employers priority over their personal transactions. In this instance, James did not adversely affect the client's interest because the client's trades were executed before James copied them. He has not acted fraudulently or deceitfully and, thus, has not violated Standard I(D) Misconduct. (Module 71.8, LOS 71.b)

Answer 40

Marshall has an obligation to disclose that she receives special compensation based on the amount of client trading volume. Standard VI(A) Disclosure of Conflicts requires members to disclose to clients and prospects all matters that could potentially impair the member's ability to make investment decisions that are (and to give investment advice that is) objective and unbiased. The Standard on communications with clients addresses issues that involve clearly communicating investment recommendations and analysis. The Standard on additional compensation arrangements is concerned with accepting benefits that may create a conflict between a member's interests and her employer's interests. (Module 73.1, LOS 73.b)

Answer 41

Lunar may claim compliance as long as it has met the reporting requirements necessary and is held out to clients (advertised) as a distinct business entity. Lunar may only claim compliance with GIPS if it complies fully and on a firmwide basis. (Module 72.1, LOS 72.d)

Answer 42

Of the choices given, seeking the advice of outside counsel about what actions Reilly may be required to take is the most appropriate. Under Standard III(E) Preservation of Confidentiality, members and candidates should maintain the confidentiality of information received in the course of their professional service relating to both current and former clients. In the case of illegal activity, however, Reilly may have a legal obligation to report the activity or, on the other hand, may have a legal obligation to maintain the client's confidentiality even if he suspects illegal activity. (Module 73.1, LOS 73.b)

Answer 43

In the case of trusts or endowments, the member must be aware that his fiduciary responsibility is not necessarily to the client (who hired him) but to the beneficiaries of the investment account. By routinely executing trades directed by Ross without making a determination that the securities transactions are consistent with the investment goals and constraints of Ross's mother, the account beneficiary, Ross has violated Standard III(A) Loyalty, Prudence, and Care. Ross has likely also violated other Standards (e.g., Standard III(C) Suitability and Standard V(A) Diligence and Reasonable Basis). Standard I(B) Independence and Objectivity deals primarily with conflicts resulting from gifts, compensation, or benefits that may compromise the member's independence and objectivity. (Module 73.1, LOS 73.b)

Answer 44

What would make the demand more elastic? Under the elasticities approach, a currency depreciation will lead to a greater reduction in a trade deficit when export demand and/or import demand are more elastic. The demand for luxury goods is relatively elastic, while the demand for goods without good substitutes or for goods that represent only a small portion of consumer expenditures is relatively inelastic. (Module 15.3, LOS 15.j)

Answer 45

Paying off accounts payable from cash lowers current assets and current liabilities by the same amount. Because the current ratio started off above 1, the current ratio will increase. Because the quick ratio started off less than 1, it will decrease further. The other choices are incorrect. Buying fixed assets on credit decreases both ratios because the denominator increases, with no change to the numerator. Using cash to purchase inventory would result in no change in the current ratio but would decrease the quick ratio by decreasing the numerator. (Module 21.2, LOS 21.b)

Answer 46

The height of each bar in a histogram represents the absolute frequency for each return interval. To construct a frequency polygon, the analyst would plot the midpoint of the return intervals on the x-axis and the absolute frequency for that interval on the y-axis. (Module 2.2, LOS 2.e)

Answer 47

Estimated: Revenue - Cost = 220-200=20mi Year 1 revenue = 70/200 * 220 = 77mi

Answer 48

Low inventory turnover and declining revenue growth may be signs that a firm has obsolete or slow-moving inventory. High turnover and low revenue growth may indicate too little inventory, while high turnover and high revenue growth may indicate efficient inventory management. (Module 22.5, LOS 22.l)

Answer 49

A Spearman rank correlation test is appropriate in this scenario. This is a nonparametric test.(Module 6.4, LOS 6.l)

Answer 50

Average life - Remaining useful life Sammco has PP&E with the highest average age and lowest remaining useful life, and therefore appears more likely to need new equipment in the near future than the other firms. Average age Robbco: $6,000,000 / $800,000 = 7.5 years Sammco: $8,000,000 / $1,000,000 = 8.0 years Teddco: $9,000,000 / $1,500,000 = 6.0 years Remaining useful life Robbco: $4,000,000 / $800,000 = 5 years Sammco: $4,000,000 / $1,000,000 = 4 years Teddco: $9,000,000 / $1,500,000 = 6 years (Module 23.4, LOS 23.m)

Answer 51

For operating leases under U.S. GAAP, the principal reduction in the lease liability and the amortization of the right-to-use asset are equal each period so that the values of the lease liability and right-to-use asset will be equal over the term of the lease. This is not the case under IFRS. (Module 25.4, LOS 25.g)

Answer 52

The central limit theorem holds for any distribution as long as the sample size is large (i.e., n > 30). (Module 5.1, LOS 5.d)

Answer 53

Depreciation methods are an example of a difference that may require an analyst to adjust financial statements to make them comparable. Acquisition goodwill is treated the same way under IFRS and U.S. GAAP: it is not amortized but is tested for impairment at least annually. Securities held for trading are reported at fair value with unrealized gains and losses reported on the income statement. (Module 27.2, LOS 27.e)

Answer 54

Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders' equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 million. (Module 18.5, LOS 18.l) Both of them will increase Equity For held to maturity, unrealized gain or loss would go to I/S -> will decrease by 2mi For available for sale, unrealized gain or loss would go to OCI -> will increase by 3mi

Answer 55

This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement. (Module 20.1, LOS 20.b)

Answer 56

Student's t-distribution is symmetric regardless of its degrees of freedom. The chi-square and F-distributions are asymmetric but approach the shape of a normal distribution as their degrees of freedom become large. (Module 4.3, LOS 4.o)

Answer 57

The t-test must be used when the sample size is small, the population is normal, and the population variance is unknown. If the population is non-normal and the variance is unknown, there is no valid test statistic when the sample is small. (Module 6.2, LOS 6.g)

Answer 58

If the domestic government collects the full value of the import license, a quota can have the same economic result as a tariff. Quota rents are the gains to those foreign exporters who receive import licenses under a quota if the domestic government does not charge for the import licenses. With respect to the importing country, import quotas, tariffs, and voluntary export restraints all decrease consumer surplus and increase producer surplus. (Module 14.2, LOS 14.e)

Answer 59

Under IFRS, inventory values are revalued upward only to the extent they were previously written down. In this case, that is from €25,000 back up to the original value of €28,000. The increase is reported as gain for the period. (Module 22.4, LOS 22.g) In IFRS, always get the lowest of the costs and NRV - write down goes to I/S as an expense - If it reverse, it would get the lowest of the cost, so 25000 in B/S and increase of 3000 in I/S (US GAAP doesnt allow reversal) Under IFRS, inventory is reported on the balance sheet at the lower of cost or net realizable value. Net realizable value (NRV) is equal to the expected sales price less the estimated selling costs and completion costs. If net realizable value is less than the balance sheet value of inventory, the inventory is "written down" to net realizable value and the loss is recognized in the income statement. If there is a subsequent recovery in value, the inventory can be "written up" and the gain is recognized in the income statement by reducing COGS by the amount of the recovery. Because inventory is valued at the lower of cost or net realizable value, inventory cannot be written up by more than it was previously written down. The write-down, or subsequent write-up, of inventory is usually accomplished through the use of a valuation allowance account.

Answer 60

To calculate the cross price elasticity of the quantity demanded of gasoline with respect to the price of bus travel, we must first calculate the quantity of gas demanded: 300 − 14(1.5) + 2(12) = 303 The cross elasticity is:

Answer 61

About 68% of all observations fall within ±1 standard deviation of the mean. Thus, about 68% of the values fall between 5 and 25. (Module 4.2, LOS 4.h)

Answer 62

About 68% of all observations fall within ±1 standard deviation of the mean. Thus, about 68% of the values fall between 5 and 25. (Module 4.2, LOS 4.h) Z = (X - u) / s "have to test for all the answer choices"

Answer 63

Thematic risks are known factors that have long-term (i.e., low-velocity) effects. (Module 13.1, LOS 13.d) Types of risks: - Event risk: know when the event will occur, but doesn't know the impact (elections) - Exogenous risk: not predicted that it would happen (war) - Thematic risk: expected factors that have impact for a long-period (climate change, immigration) Each risk can be analyzed based on: - Probability - Impact - Velocity (how quickly to have the impact)

Answer 64

A specific explanatory paragraph that makes reference to (questions) the going concern assumption may be a signal of serious problems and call for close examination by the analyst. Therefore, in the absence of such a paragraph, there is no need for a close examination of the going concern assumption by the analyst. The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy. The auditor generally only provides reasonable assurance that there are no material errors in the financial statements, not an opinion about their numerical accuracy. An external auditor is appointed by the audit committee of the company's board of directors, not by its management. (Module 29.1, LOS 29.c)

Answer 65

For growing firms, capitalizing results in higher net income compared to expensing. A capitalizing company classifies the costs of the capitalized assets as CFI outflows, while a company that expenses these costs classifies them as CFO outflows. Thus, Alfred's CFO will be higher and his CFI will be lower than Canute's. Working capital is unaffected by the decision to capitalize or expense because the decision does not affect current assets or current liabilities. (Module 23.1, LOS 23.c)

Answer 66

have to calculate for 4 and 5 Prob(4) + Prob(5)

Answer 67

Common size balance sheet is based on the total asset. For this reason, you cannot calculate the quick ratio and inventory/sales ratio based on the given information.

Answer 68

The HHI is more sensitive to the effects of mergers compared to the N-firm concentration ratio. Neither measure accounts for elasticity of demand or barriers to entry. (Module 9.4, LOS 9.g) The HHI is calculated as the sum of the squares of the market shares of the largest firms in the market.

Answer 69

Unemployment insurance is an example of an automatic stabilizer that is not subject to the action lag of discretionary fiscal policy tools. " there wont be action lag" One reason why the unemployment rate is a lagging indicator is the fact that employers are slow to lay off employees early in recessions and slow to add employees early in expansions, because frequent hiring and firing has high costs. Another reason is that early in expansions, more discouraged workers (who are not counted as unemployed because they are out of the labor force) may begin seeking work (thereby re-entering the labor force) than the number of new jobs that are available, which increases the unemployment rate. (Module 12.3, LOS 12.q)

Answer 70

Options are derivatives (trading), which are reported at fair value on the balance sheet with unrealized gains and losses recognized on the income statement. Available-for-sale securities are marked to market on the balance sheet, but unrealized gains and losses are reported in owners' equity as other comprehensive income. Bonds (held to maturity) purchased in a private placement cannot be resold to the public and therefore are likely to be classified as held-to-maturity, in which case the firm does not recognize unrealized gains or losses. (Module 19.6, LOS 19.e) - Since they are held as amortized cost (not fair value), there is no unrealized gain or loss to record.

Answer 71

Financial instruments are measured at historical cost, amortized cost, or fair value. Financial assets measured at fair value, also known as mark-to-market accounting, include trading securities, available-for-sale securities, and derivatives.

Answer 72

Accrual accounting means that financial statements should reflect transactions at the time they actually occur, not necessarily when cash is paid. Going concern assumes the company will continue to exist for the foreseeable future.

Answer 73

Be careful: interest rate is always presented as annual rate. Arbitrage-free forward = 2.875 WSC/BDR × [(1 + 0.015 / 2) / (1 + 0.03 / 2)] = 2.8538 WSC/BDR. (Module 15.2, LOS 15.h)

Answer 74

Subjective probability is based on personal judgment. A joint probability is a probability that two or more events happen concurrently. An a priori probability is one based on logical analysis rather than on observation or personal judgment. An empirical probability is calculated using historical data (based on observations). A conditional probability is the probability of one event happening on the condition that another event is certain to occur. (Module 3.1, LOS 3.d)

Answer 75

Corporate press releases are written by management and are often viewed as public relations or sales materials because of the great possibility of inherent management bias in such documents. Often, little or none of the material is independently reviewed by outside auditors. Such documents are not mandated by the securities regulators. Form 10-Q (quarterly financial statements) and proxy statements are mandatory SEC filings in the United States, which inherently increases their reliability given the penalties that can be imposed by the SEC if any serious irregularities are subsequently found. (Module 16.2, LOS 16.e)

Answer 76

The very short run aggregate supply curve is perfectly elastic because firms can adjust output by increasing or decreasing labor hours and capacity use without affecting input prices. (change in output will not change the prices) The short-run aggregate supply curve is upward sloping. The long-run aggregate supply curve is perfectly inelastic and represents potential GDP, the full-employment output level of an economy. (it is not influenced by aggregate demand) (Module 10.2, LOS 10.g)

Answer 77

A test of whether an independent variable explains a significant amount of the variation in the dependent variable uses the null hypothesis that the slope coefficient is equal to zero. Rejecting the null hypothesis indicates the slope coefficient is statistically significant. (Module 7.2, LOS 7.f) The coefficient of determination (R2) is defined as the percentage of the total variation in the dependent variable explained by the independent variable. For example, an R2 of 0.63 indicates that the variation of the independent variable explains 63% of the variation in the dependent variable. R2 = SSR/SST

Answer 78

Important Impairment has no impact on the tax payable. Consequently, the cash flow won't change. The impairment writedown in 20X3 will reduce depreciation expense in 20X4, which will increase 20X4 EBIT and net income. Operating cash flow and taxes payable are not affected because an impairment cannot be deducted from income for tax reporting purposes until the asset is sold or otherwise disposed of. (Module 23.3, LOS 23.j)

Answer 79

In this case, there are no clear potential benefits from trade because the countries' opportunity costs of production are equal. Colfax's opportunity cost of rice = 10 / 15 = 0.67 units of plastic, and Birklund's opportunity cost of rice = 12 / 18 = 0.67 units of plastic. Colfax's opportunity cost of plastic = 15 / 10 = 1.5 units of rice, and Birklund's opportunity cost of plastic = 18 / 12 = 1.5 units of rice. (Module 14.1, LOS 14.c)

Answer 80

Free Trade Areas All barriers to import and export of goods and services among member countries are removed. Customs Union All barriers to import and export of goods and services among member countries are removed. All countries adopt a common set of trade restrictions with non-members. Common Market All barriers to import and export of goods and services among the countries are removed. All countries adopt a common set of trade restrictions with non-members. All barriers to the movement of labor and capital goods among member countries are removed. Economic Union All barriers to import and export of goods and services among the countries are removed. All countries adopt a common set of trade restrictions with non-members. All barriers to the movement of labor and capital goods among member countries are removed. Member countries establish common institutions and economic policy for the union. Monetary Union All barriers to import and export of goods and services among the countries are removed. All countries adopt a common set of trade restrictions with non-members. All barriers to the movement of labor and capital goods among member countries are removed. Member countries establish common institutions and economic policy for the union. Member countries adopt a single currency. e.g., The North American Free Trade Agreement (NAFTA) is an example of a free trade area, the European Union (EU) is an example of an economic union, and the euro zone is an example of a monetary union.

Answer 81

There is a 20% reduction in the tax rate [(40% − 50%) / 50% = –0.2]. Hence, the deferred tax asset will be 800 = 1,000(1 − 0.2), the deferred tax liability will be 4,000 = 5,000(1 − 0.2), and the income tax expense will fall by the net amount of the decline in the asset and liability balances (1,000 – 200 = 800). (Module 24.3, LOS 24.e)

Answer 82

Operating cash flow that is less than net income (ratio less than one) or declining over time may indicate low-quality earnings from aggressive accounting or accounting irregularities. A ratio of operating cash flow to net income that is highly variable, but consistently greater than one, is not necessarily indicative of low-quality earnings. (Module 26.3, LOS 26.i)