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Transcript
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