Investment Analysis

Question 1: MCQ [32% = 8 x 4%]

1. A firm acquires £1,000 of inventory on credit from its suppliers. This

transaction should affect the financial statements as follows:

a. Cash decreases by £1,000 and inventory increases by £1,000.

b. Cost of goods sold decreases by £1,000 and trade payables increase

by £1,000

c. Trade payables increase by £1,000 and inventory increases by £1,000.

d. Trade payables increase by £1,000 and cash from operations

increases by £1,000.

2. A payment of £1,000 is received from customers for services provided and

recognised in previous year’s financial statements. This payment should affect

the current year’s financial statements as follows (ignore the cost of the

services):

a. Sales (or, revenues) increase by £1,000 and cash increases by £1,000.

b. Trade receivables decrease by £1,000 and cash increases by £1,000.

c. Cash from operations decreases by £1,000.

d. Pre-tax profit increases by £1,000.

3. A firm buys back its own shares and pays £1,000 cash for this at the end of

the year. This will affect ROE and ROA as follows:

a. Both ROE and ROA will decrease.

b. Both ROE and ROA will increase.

c. ROE will decrease but ROA will increase.

d. ROE will increase but ROA will decrease.

4. A firm passes the entry to record tax expense for the year. This involves

recognising £1,000 in current tax expense and £500 in deferred tax income

(i.e., total tax expense of £500). This entry is consistent with:

a. Book depreciation expense > tax depreciation expense.

b. Book depreciation expense < tax depreciation expense.

c. An increase in the balance of deferred tax liability.

d. A decrease in the balance of deferred tax asset.

5. A firm considers increasing the book depreciation rate on its PPE (property,

plant & equipment). If the change takes place at the beginning of the year, this

will

a. Increase cash from operations.

b. Always reduce the amount of tax that the firm needs to pay the tax

authority.

c. Always increase the amount of tax that the firm needs to pay the tax

authority.

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BEAM032R Turn over

d. Increase the amount of gain (or reduce the amount of loss) recorded

on disposal of PPE during the second half of the year.

 

6. An analyst capitalises R&D expense for analytical purposes according to the

method shown in class. If the firm (s)he analyses is leveraged, this will affect

ratios as follows:

a. ROE always increases.

b. Debt-to-equity increases.

c. ROE always decreases.

d. Debt-to-equity decreases.

7. A firm enters into a finance lease contract. On the date of the inception of the

contract:

a. The amount of net assets remains the same.

b. The amount of net assets increases.

c. Interest expense is recorded at an amount equal to the finance liability

recorded x the relevant discount rate.

d. Debt-to-equity is unaffected.

8. A company issues a five-year bond with face value of £1,000 on 1.1.2011.

The bond pays 5% annual coupon at the end of each year. When it was

issued the market priced it employing 7% discount rate (annual). The

company has a 31 December year-end. In 2012 the company recorded with

respect to this bond (rounded to two decimal points):

a. Interest expense of £50.00.

b. Interest expense of £65.26.

c. Interest expense of £70.00.

d. None of the above answers is correct. 

Question 2 – statement of cash flows [36%]

Required:

a. Prepare statement of cash flows under IFRS, whereby interest expense is

reported as a financing activity. Use the indirect method for cash from

operations. [26%]

b. Explain what uses the statement of cash flows can help with. [10%]

Question 3 - Ratios for Cleveland Plc 2014 [32% = 8 x 4%]

Required:

a. Calculate the following ratios and show your working in the designated space

(round up to three decimal points). Clearly state any assumption you make:

1. Gross profit margin for 2014

2. Current ratio for 2014

3. Inventory turnover for 2014

4. Accounts (trade) receivable turnover for 2014

5. Fixed assets turnover ratio for 2014

6. Interest coverage ratio for 2014

7. Debt-to-equity for 2014

8. ROA (return on assets) for 2014


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