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CIS March 2013 Exam Diet Examination Paper 2.1: Financial Accounting and Financial Statement Analysis Economics and Financial Markets Quantitative Analysis and Statistics Level 2 Financial Accounting and Financial Statement Analysis (1 - 18) 1. Which of the following statements is correct regarding a firm which has a total debt to total capital ratio greater than the industry average, while the long term debt to equity ratio is lower than the industry average? A. The firm has an equity base higher than the industry average. B. The firm has current liabilities higher than the industry average. C. The firm has current liabilities lower than the industry average. D. None of the above. 2. How would a firm’s quick ratio be affected if some of its creditors were paid in cash? A. It would increase. B. It would decrease. C. It would remain the same. D. Information is insufficient to answer this question. 3. What is the sales of a company with an economic profit margin (EBIT/Sales) of 10% and a 15% return on assets (ROA) of N1,000,000? A. N666,667 B. N1,500,000 C. N6,666,667 D. N10,000,000 4. Which of the following statements regarding accounting conventions is false? A. Assets may be valued at an amount higher than their liquidation value because the financial statements are prepared according to the going concern convention. B. Prepaid expenses and accrued liabilities are recognized in the financial statements due to the convention of accrual basis of accounting. C. Revenues are recognized as soon as probable and expenses are recognized when they are certain according to the prudence convention. D. Leased assets should be recognized in the balance sheet of the lessee according to the substance-over-form convention. 5. Domino Ltd has just redeemed N625,000 of 4% redeemable debentures. The funds for the redemption were raised by issuing ordinary shares. Which one of the following statements correctly describes the effect of these transactions on the company’s capital gearing ratio? A. Equity and debt have both increased, thus gearing has not changed. B. Equity and debt are unchanged, thus gearing has not changed. C. Equity has increased and debt has decreased, thus gearing has decreased. D. Equity has decreased and debt has increased, thus gearing has increased. 6. In the year to 31 October 2011 Cyanne Ltd acquired a fixed asset which cost N88,000. The company’s policy is to depreciate fixed assets at a rate of 25%, on the reducing balance basis. When preparing the financial statements for the year to 31 October 2012, the accountant calculated the depreciation charge on the straight line basis, using a nil residual value. How will the reported profit for the year to 31 October 2012 be affected when the depreciation charge is corrected? A. Reduced by N5,500 B. Increased by N5,500 C. Reduced by N16,500 D. Increased by N16,500 7. When reviewing the financial statements of a company in which you are a shareholder, you note that during the past year the company has: I. Raised a long term loan to finance the purchase of fixed assets. II. Reduced the value of closing stock. How will the current ratio and the gearing ratio be affected in comparison to last year? A. B. C. D. Current ratio Increased Decreased Decreased Increased Gearing Decreased Increased Decreased Increased 8. Which of the following methods of accounting for inventory will result in higher estimates for the cost of goods sold during an inflationary period? A. Average cost method. B. Specific identification method. C. LIFO. D. FIFO. 9. During the year to 30 April 2012 Jaunty Ltd had purchased fixed assets which cost N687,000. The company financed the purchases by taking out loans totalling N597,000, and paying the balance by cheque. In addition, fixed assets with a net book value of N75,000 were sold at a loss of N15,000. What figure will be reported as the outflow for Capital Expenditure in the company’s cash flow statement for the year to 30 April 2012? A. N30,000 B. N90,000 C. N627,000 D. N687,000 10. At 31 May 2012 and 2011 Dragon Co had the following balances: 2012 2011 N000 N000 Property, plant and equipment 2,110 1,945 1,200 800 Ordinary shares of N1 Share premium 760 500 Long-term loans 174 550 The depreciation charge for the year to 31 May 2012 was N270,000, and no noncurrent assets were sold during the year. What figure should be reported as the net cash flow from investing activities in the statement of cash flows for the year to 31 May 2012? A. N179,000 B. N435,000 C. N601,000 D. N719,000 11. One of the measures of long term solvency risk for a firm is the operating cash flow to total liabilities ratio: 2007 2008 Share capital 5,000 6,500 Bonds 4,500 3,500 Bank loans 2,500 3,000 Depreciation 850 950 Operating profit 1,000 1,000 Given the information in the table above, which one of the following statements is correct? A. B. C. D. In In In In 2008, 2008, 2008, 2008, the the the the ratio ratio ratio ratio increases to 30% decreases to 30% increases to 15% decreases to 15% 12. Creativity Limited has a number of intangible assets. The directors have asked for your advice on how to treat them in the financial statements. Which of the following items should be capitalized? A. Development cost that has met the specified criteria for capitalization. B. Positive purchased goodwill. C. A patent purchased separately from the business. D. All of the above. 13. IAS 20 deals with the treatment of government grants. Which of the following statements correctly describes the treatment of capital grants? A. The grant should be recognized in full when it is applied for. B. The grant can only be treated in the profit & loss account. C. The amount of grant should be recognized in the income statement and spread over a period of 3 years. D. None of the above. 14. On 7 November 2012, there was a fire in the storeroom of Chichi Limited, in which stock valued at N120,000 was destroyed. This represented 30% of the company's stock. Due to a clause in the insurance contract, the insurance company has stated that it will only pay out the first N60,000 of the claim. How should this be reported in the financial statements for the year to 31 October 2012? A. Nothing needs to be reported in the financial statements for the year to 31 October 2012 B. No charge in the profit and loss account and a note disclosing a loss of N90,000 C. Charge of N90,000 to the profit and loss account. D. No charge in the profit and loss account and a note disclosing a loss of N60,000 15. A company owns bonds with variable interest rate. These securities are held with the aim of realizing capital gains in the near future. According to IFRS, which of the following assertions is correct? A. These bonds are measured at fair value and any gain or loss arising from a change in fair value is recognized in the income statement. B. These bonds are measured at fair value and any gain or loss arising from a change in fair value is recognized directly in equity. C. These bonds are measured at amortized cost and any gain or loss arising from a change in amortized cost is recognized in the income statement. D. None of the above answers is correct. 16. On 1 February 2012, Huzzler Limited acquired 480,000 of the 600,000 ordinary shares of Steady Limited at a price of N4·28 per share. At that date the book value of the net assets of Steady Limited was N2,356,920, and the fair value of land owned by Steady Limited exceeded the book value by N110,000. Assuming that the full fair value method of valuation is used, what is the value of goodwill on acquisition? A. N168,864 B. N211,080 C. N101,080 D. N80,864 17. On the 1st of July 2012, XYZ Limited announces in the press that it is to close down one of its divisions in January 2013. A detailed closure plan is in place and the costs of closure are reliably estimated as follows: N Direct expenses of closure 8,000,000 Cost of retraining staff for new assignment 1,000,000 Future losses arising 4,000,000 Total 13,000,000 How should the above be treated in the financial statement of XYZ Limited for the year ended 31 July 2012? A. XYZ should neither provide for, nor disclose this event. B. XYZ should disclose a contingent liability of N13,000,000 C. XYZ should provide for N8,000,000 D. XYZ should provide for N9,000,000 18. Mojojo Ltd is in the process of finalizing it accounts for the year ended 31st of December 2012. You are given the information below in respect of an item of Plant and Machinery in the company’s books: Net book value Fair value less cost to sell Value in use N8,500,000 N7,500,000 N8,000,000 Which of the following statements is correct about the item of Plant and Machinery? A. It is impaired by N1,000,000 and should be valued at N7,500,000 B. It is not impaired and should be valued at N8,500,000 C. It is impaired by N500,000 and should be valued at N8,000,000 D. None of the above. Economics and Financial Markets (19 – 31) 19. What is the opportunity cost of greater capital formation? A. Greater consumption in the current period. B. Smaller consumption in the current period. C. Opportunity cost is zero for developed nations. D. Slower economic growth in the future. 20. Suppose that the supply of cameras increases due to an increase in foreign imports. Which of the following will most likely occur? A. The equilibrium price of cameras will increase. B. The equilibrium quantity of cameras exchanged will decrease. C. The equilibrium price of camera film will decrease. D. The equilibrium quantity of camera film exchanged will increase. 21. Suppose the market demand for good X is given by the equation: qd = 1000 – 20p, and market supply is given by the equation: qs = 500+ 30p. The equilibrium price of good X is: A. N8 B. N10 C. N12 D. N15 22. The difference between gross domestic product (GDP) and national income is: A. Equal to the difference between exports and imports. B. Equal to the difference between government purchases and investment. C. The sum of depreciation and indirect business taxes. D. The value of inventories accumulated during the year. 23. The aggregate demand curve is negatively sloped for which of the following reasons? A. As government purchases increase, aggregate demand increases. B. As taxes increase, aggregate demand decreases. C. As the price level rises, household real wealth falls. D. As the price level rises, real investment spending rises. Use the information below to answer questions 24 to 26: At the peak of the recent global economic crises, European governments, as well as the U.S. government, reacted to the massive economic downturn with ambitious expansionary fiscal policy programs including tax cuts as well as massive expenditure increases for infrastructure projects and for social programs. One effect of these policies was a massive increase in government deficits and in government debt to unprecedented levels, as the expenditures needed to be financed one way or the other. 24. Using the Aggregate Supply/Aggregate Demand framework, which of the following best illustrates the immediate impact of the large increase in government spending on the AS/AD curve? A. The AD curve shifts to the right. B. The AD curve shifts to the left. C. The AS curve shifts to the right. D. The AS curve shifts to the left. 25. In which of the following ways could governments finance budget deficits? I. II. III. IV. Borrowing from banks (loans). Borrowing from financial markets via issuing bills or government bonds. They could sell assets (privatization). Printing money, i.e. borrowing from the central bank. A. B. C. D. II only. I and II only. I, II, and IV only. All of the above. 26. Which of the following statements best describes the most likely impact of the massive increase in government borrowing on the financial markets? A. It will drive interest rates further down and encourage private investment. B. It will not have any impact on interest rates. C. It will drive up interest rates and ‘crowd out’ private corporate borrowers. D. The impact is unpredictable. 27. Suppose the government budget deficit increases due to a reduction in taxes. All of these will result, except: A. Disposable income will increase. B. Disposable income will fall. C. Household saving may increase. D. Household consumption may increase. 28. Which of the following is considered the most important function of the Central Bank? A. Supervising member banks. B. Supplying the economy with paper currency. C. Providing for the collection of cheques. D. Controlling the money supply through monetary policy. 29. Consumer surplus is defined as: A. The difference between what the consumer actually pays and what he is willing to pay. B. The difference between what the consumer is willing to pay and what he actually pays. C. The sum of what the consumer pays and what he is willing to pay. D. What the consumer is willing to pay divided by what he actually pays. 30. Suppose consumption is N10 million when disposable income is N10.5 million and consumption is N10.5 when disposable income is N11.5 million, the marginal propensity to consume is: A. 0.50 B. 0.75 C. 0.80 D. 0.90 31. An indifference curve is a curve which shows the different combinations of two products that: A. Give a consumer equal marginal utilities. B. Give a consumer equal total utilities. C. Cost a consumer equal amounts. D. Have the same prices. Quantitative Analysis and Statistics (32 – 40) 32. Which of the following statements most accurately describes a situation in which the regression coefficient between a security and the market index is 0.4? A. For every percent move in the market, the security's return is expected to change by 0.4% B. The relationship between the two securities is positive; however, the degree to which they move in the same direction is not perfect. C. This certainly implies that the portfolio has a high degree of unsystematic risk. D. Movements in the market explain 40% of the variation in the security's return. 33. A project requires an initial investment of N10,000 with a life span of 3 years. If the IRR from the project is projected to be 10% and the cash flow for the first two years are N3,000 and N5,000 respectively. What is the expected cash flow in year 3? A. N3,784 B. N3,826 C. N4,185 D. N4,329 34. The demand function for a manufacturers’ product T is: X = 70 – 5P, where X is the number of units and P is the price per unit. At what value of X will the maximum revenue be achieved, and what is the maximum revenue? A. B. C. D. X 70 10 7 30 Maximum revenue N625 N245 N245 N625 35. The economics department of the securities firm that you work for just released three possible growth rates for the economy: -3.4%, 2.3% and 5.3%. In addition, it indicated that the probability of each possibility occurring is 32%, 46% and 22%, respectively. Which of the following measures is accurate with respect to this situation? A. Variance equals zero. B. Standard deviation equals 3.32% C. Standard deviation equals 11.01 D. The mean equals 1.4% 36. Suppose that there is a 40% chance that the government will approve a new drug and a 70% chance that Drug Co.'s shares will double in price as a result. What is the probability that the drug will be approved and that Drug Co.'s shares will double in price? A. 72% B. 30% C. 28% D. 57% 37. Which of the following hypothesis statements would not entail a two-tailed test? A. The population average return equals 15.4%. B. The variance of a population is equal to 14.5%. C. The variance of two populations is equal. D. The mean difference of two populations is greater than 2.3%. 38. The correlation between Stock A and Stock B is 0.41. If Stock A has a variance of 0.015625 and Stock B had a standard deviation of 0.142, what must the covariance between these two stocks? A. 75.1584 B. 185.0848 C. 0.00727 D. 0.000908 39. For N800,000 invested today, an insurance company promises to start making perpetual payments to you beginning seven years from now. What must these perpetual payments be if the long-term savings rate is expected to remain constant at 5.5%? A. N166,249 B. N64,006 C. N60,669 D. Present value is infinite because payments continue into infinity. 40. Which of the following best explains the concept of “shadow price” in linear programming? A. The opportunity cost of a resource. B. The marginal cost of a resource. C. The marginal benefit of a resource. D. The excess benefit of a resource. Total = 40 marks Question 2 - Financial Accounting and Financial Statement Analysis Explain the differences between proportionate consolidation and equity method of consolidation. (3 marks) Question 3 - Economics and Financial Markets 3(a) What is the relationship between the real GDP produced in any year and the quantity of labour employed and labour productivity? (2 marks) 3(b) Explain what is meant by discretionary fiscal policy. (1 mark) Question 4 - Quantitative Analysis and Statistics 4(a) Give two practical examples of index numbers used in the Nigerian capital market and explain their uses. (2 marks) 4(b) Briefly explain the concept of “systematic sampling”. (2 marks) Question 5 - Financial Accounting and Financial Statement Analysis 5(a) Given the financial ratios below: Gross margin 40% Current ratio 1.6 Asset turnover ratio 1.6 Inventory outstanding period 73 days Collection period 36.5 days Capital structure ratio Total debt Total asset Long term debt to equity ratio 50% 40% Required: Complete the information in the balance sheet below (labelled A to G) based on the information above. (Note: Use 365 days = 1 year convention) Assets Amount (in N) A Cash Accounts receivable Inventories Fixed Assets Total Assets Liabilities & Equity Accounts payable B Long term debt C Equity Amount (in N) E F G D 1,000,000 Total Liabilities & Equity 1,000,000 (7 marks) 5(b) You are an analyst with ABC Investment Bank saddled with the responsibility of analyzing the Brewery Industry. From your research, you have obtained the following information. Frontline Breweries Limited is the leading Brewer in Nigeria. The company had enjoyed appreciable growth and profitability over the years. However, the industry in recent times has witnessed intense competitive pressure arising from the entry of formidable global players. This has created the need for existing players to reposition themselves by increasing capacity and developing other strategies to consolidate their presence. In 2011, Frontline Breweries strategically acquired two breweries for N65 billion (fully paid in cash) as a means of expanding its operating capacity and increasing its market share. Operating cash flow during the year 2011 was N56 billion. You have the following ratios for the last three years and are worried about the recent fall in Frontline Breweries’ ROE (return on equity). ROE (%) Net margin (%) Asset turnover Equity turnover Total gearing (%) Current ratio 2009 60% 17% 1.54 2.28 0% 0.89 2010 60% 16% 1.64 2.28 0% 0.90 2011 49% 17% 1.15 2.53 28% 0.84 Required: Analyse the ROE of Frontline Breweries, giving detailed explanations for the observed trend. Your analysis should be grounded in the business context. (Hint: Break ROE down to its constituent secondary ratios). (11 marks) 5(c) A company is considering changing accounting policies. Comment on how each of the following will directly affect cash and/or profit for the coming year: Item Comment I. Increasing estimated useful lives of noncurrent asset. II. Reducing provision for environmental damages. III. Reducing the write-down for obsolete and damaged stocks. IV. Paying a dividend to shareholders. (4 marks) Question 6 - Economics and Financial Markets 6(a) Suppose the Central Bank of Nigeria decides to engage in a contractionary monetary policy as a way of reducing demand-pull inflation. Use the aggregate demand – aggregate supply model to show what this policy is intended to accomplish in a closed economy (Note: Illustrate with appropriate graphs). (9 marks) 6(b) Now introduce the open economy and explain how changes in the international value of the Naira might affect the location of the aggregate demand curve (Note: Illustrate with appropriate graphs). (8 marks) Question 7 - Quantitative Analysis and Statistics The table below shows the amount spent by a certain Local Government on Road Construction and rehabilitation for the period 2003 and 2012: No. of Roads Constructed and Rehabilitated Year Amount Spent (N million) 2003 103 55 2004 41 67 2005 52 7 2006 45 38 2007 30 44 2008 29 66 2009 71 543 2010 83 618 2011 22 1,552 2012 24 729 Required: 7(a) Compute the Product Moment Correlation Coefficient between the numbers of roads constructed and rehabilitated and the amount spent. (9 marks) 7(b) React to the statement that “the amount of money spent does not justify the number of roads constructed and rehabilitated”. (2 marks) FORMULAE Regression Analysis: Y = a+bx b= n∑xy-∑x∑y n∑x2-(∑x)2 a= ∑y _ b∑x n n