University of Alabama, Birmingham MBA 601 EXAM 2 Practice Questions MBA 601. 60 Questions, Answers and Rationale.

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1. ROE is computed as: A) Net income attributable to controlling interest / Average equity attributable to controlling interest B) Net income attributable to controlling interest / Net sales C) [RN... OA + (FLEV × Spread)] x NCI ratio D) A and B E) A and C Rationale: ROE = Net income attributable to controlling interest / Average equity attributable to controlling interest. This is the most straightforward way to calculate ROE, so A is correct. Answer C is a disaggregation of ROE into its operating and nonoperating components. Thus, the correct answer is E: A and C. 2. The 2013 balance sheet of E.I. du Pont de Nemours and Company shows average DuPont shareholders’ equity attributable to controlling interest of $13,219 million, net operating profit after tax of $3,145 million, net income attributable to DuPont of $4,848 million, and common shares issued of 1,014 million. Assume the company has no preferred shares issued. DuPont’s return on equity (ROE) for the year is: A) 20.9% B) 36.7% C) 23.8% D) 36.4% E) There is not enough information to calculate the ratio. Rationale: ROE = Net income/Average shareholders’ equity = $4,848 / $13,219 = 36.7% 3. The 2014 balance sheet of Staples, Inc. shows total assets of $11,174,876 thousand, operating assets of $10,682,344 thousand, operating liabilities of $3,929,854 thousand, and shareholders’ equity of $6,132,263 thousand. Staples’ 2014 net operating assets are: A) $ 7,245,022 thousand B) $ 10,682,344 thousand C) $ 6,752,490 thousand D) $ 6,132,263 thousand E) None of the above Rationale: NOA = Operating assets – Operating liabilities = $10,682,344 – $3,929,854 = $6,752,490 4. Mattel Inc.’s 2013 financial statements show operating profit before tax of $1,168,103 thousand, net income of $903,944 thousand, provision for income taxes of $195,184 thousand and net nonoperating expense before tax of $68,975 thousand. Assume Mattel’s statutory tax rate for 2013 is 37%. Mattel’s 2013 effective tax rate is: A) 17.8% B) 37.0% C) 19.4% D) 16.7% E) None of the above Answer: A ©Cambridge Business Publishers, 2015 Test Bank, Module 4 4-1 Rationale: Effective tax rate = Provision for income taxes / Income before tax = $195,184 / ($903,944 + $195,184) = 17.8% 5. The fiscal 2013 financial statements for Walgreen, Inc., report net sales of $72,217 million, net operating profit after tax of $2,478 million, net operating assets of $21,556 million. The 2012 balance sheet reports net operating assets of $21,465 million. Walgreen’s 2013 net operating asset turnover is: A) 11.5% B) 3.24 C) 3.43% D) 3.36 E) There is not enough information to calculate the ratio. Rationale: NOAT = Net sales / Average NOA = $72,217 / [($21,556 + $21,465) / 2] = 3.36 6. The 2013 balance sheet of Microsoft Corp. reports total assets of $142,431 million, operating liabilities of $47,242 million, and total shareholders’ equity of $78,944 million. Microsoft 2013 nonoperating liabilities are: A) $63,487 million B) $16,245 million C) $95,189 million D) $31,702 million E) There is not enough information to calculate the amount. Rationale: Total assets = Operating liabilities + Nonoperating liabilities + Shareholders’ equity Nonoperating liabilities = $142,431 million – $47,242 million – $78,944 million = $16,245 million 7. Liquidity refers to: A) The life cycle of the company B) The amount of receivables the company has in the balance sheet C) The amount of financial leverage D) None of the above Rationale: Liquidity refers to cash, the amount on hand, the amount generated from operating activities, and the amount that can be raised on relatively short notice. 8. Which of the following is a measure of liquidity? A) Liabilities-to-Equity Ratio = Total Liabilities / Stockholder’s Equity B) Times Interest Earned = Earnings before interest and taxes / Interest Expense C) Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities D) Return on net operating assets (RNOA) E) All of the above Rationale: The only measure of liquidity listed above is c (Quick Ratio) which is simply a variation of the Current Ratio (Current Ratio = Current Assets / Current Liabilities) to focus on quick assets (cash, securities, and receivables). EXAM 2 Practice Questions MBA 601 9. The fiscal 2013 balance sheet for Whole Foods Market reports the following data (in millions). What is the company’s quick ratio? Cash and cash equivalents Accounts receivable Merchandise inventories Current assets Current liabilities $290 $188 $414 $1,980 $1,088 A) 0.82 B) 1.55 C) 0.44 D) 1.82 E) None of the above Rationale: Quick ratio = (Cash + Accounts receivable) / Current liabilities = ($290 + $188) / $1,088 = 0.44 10. Selected income statement data follow for Harley Davidson, Inc., for the year ended December 31, 2013 (in thousands). What is the company’s times interest earned ratio? Income before provision for income taxes Interest expense Statutory tax rate Provision for income taxes Net income $1,114,305 $45,256 37% $380,312 $733,993 A) 16.2 B) 1.6 C) 17.2 D) 25.6 E) None of the above Rationale: Times interest earned = ($1,114,305 + $45,256) / $45,256 = 25.6 11. Selected ratios follow for Baker Hughes Inc. for the year ended December 31, 2013 (in millions). What is the company’s return on equity (ROE) for the year? Return on net operating assets (RNOA) Profit margin (PM) Net operating profit margin (NOPM) Asset turnover (AT) Financial leverage (FL) 5.94% 4.90% 5.59% 0.82 1.57 A) 7.20% B) 7.65% C) 6.31% D) 3.83% E) None of the above Rationale: ROE = PM × AT × FL = 4.90% × 0.82 × 1.57 = 6.31% ©Cambridge Business Publishers, 2015 Test Bank, Module 4 4-3 12. Boston Consulting Group (BCG) is a management consulting, technology services and outsourcing organization. Which of the following actions should managers take when there is evidence that a fixed-rate contract is over budget and will generate a loss for the firm? A) Use the percentage of completion method to recognize the loss over the remaining term of the engagement. B) Recognize the loss in the current period rather than over the remaining term of the engagement. C) Restate the financial statements and recognize the loss in the earliest period of the engagement. D) Use the percentage of completion method and pro rate the loss over the entire term of the engagement. E) None of the above is an appropriate action. Rationale: When contracts are over-budget, managers should estimate the new, revised, total engagement cost. If this results in a loss on the engagement, that loss should be recognized immediately rather than over the remaining term of the engagement. 13. On December 31, 2014, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years. The company’s accountants provide the following contract details relating to the project: Contract price $520 million $400 million $220 million Estimated construction costs Estimated total profit During the three-year construction period, State Construction incurred costs as follows: 2015 $ 40 million 2016 $240 million 2017 $120 million State Construction uses the percentage of completion method to recognize revenue. Which of the following represent the revenue recognized in 2015, 2016, and 2017? A) $150 million, $200 million, $170 million B) $40 million, $240 million, $120 million C) $22 million, $132 million, $66 million D) $52 million, $312 million, $156 million E) None of the above Rationale: ($ in millions) Construction costs incurred Percentage to total costs Revenue recognized Year 1 Year 2 Year 3 $40 $240 $120 $40 / $400 = 10% 10% × $520 = $52 $240 / $400 = 60% 60% × $520 = $312 $120 / $400 = 30% 30% × $520= $156 14. Sam’s Club (part of the WalMart consolidated operations) collects annual non-refundable membership fees from customers. When should Sam’s Club recognize revenue for these membership fees? A) Immediately when cash is received because the fees are nonrefundable B) Evenly over the membership year C) Evenly over the current fiscal year D) At the end of the membership year when Sam’s has discharged its obligation to the customer E) Pro rata over the customer’s actual purchasing pattern EXAM 2 Practice Questions MBA 601 Rationale: Sam’s should record membership fees evenly over the year even if the fee is nonrefundable because Sam’s has an obligation to stay open for business for a year to honor the customer’s membership. 15. Tickets Today contracts with the producer of Riverdance to sell tickets online. Tickets Today charges each customer a fee of $6 per ticket and receives $15 per ticket from the producer. Tickets Today does not take control of the ticket inventory. Average ticket price for the event is $150. How much revenue should Tickets Today recognize for each Riverdance ticket sold? A) $6 because the $15 from the producer is similar to a negative cost of goods sold B) $150 because the $135 is cost of goods sold paid to the Riverdance producer C) $21 because both the fee from the customer and the producer are earned D) $156 because the $135 is cost of goods sold paid to the Riverdance producer E) None of the above Rationale: Tickets Today should record $21 revenue each time it sells a ticket. Of that, $6 will be received in cash and $15 will be recorded as receivable from the Riverdance producers. 16. On its 2013 income statement, Yahoo! reported product development expense of $919,368,000. Which of the following statements must be true? A) Yahoo spent $919,368,000 in cash to develop new products and improve old products. B) Product development expense reduced Yahoo’s 2013 net income by $919,368,000. C) Yahoo capitalized at least $919,368,000 of product development costs in 2013. D) The $919,368,000 included amortized product development costs from prior years that were not previously expensed, because Yahoo incurs such expenses each year. E) None of the above Rationale: Yahoo included in product development expense certain non-cash expenses such as depreciation on related assets, thus (A) is not correct. Yahoo recorded deferred tax expense on the product development expense, thus net income was affected on an after-tax basis and (B) is therefore not correct. Under US GAAP, firms may not capitalize R&D costs, thus (C) is not correct. All R&D expenses must be included in the income statement in the period, thus (D) is wrong. 17. Life Technologies Corporation and Affymetrix Inc. are competitors in the life sciences and clinical healthcare industry. Following is a table of Total revenue and R&D expenses for both companies. (in thousands) Life Technologies Corporation Affymetrix Inc 2012 2011 2010 2012 2011 2010 Total revenue $3,798,510 $3,775,67 2 $3,588,09 4 $295,623 $267,474 $310,746 R&D expenses $341,892 $377,924 $375,465 $57,881 $63,591 $67,934 Which of the following is true? A) Life Technologies Corporation is the more R&D intensive company of the two. B) Life Technologies Corporation has become more R&D intensive over the three years. C) Affymetrix is more R&D intensive in 2012 than in 2011. D) Affymetrix is less R&D intensive in 2012 than in 2011. E) None of the above Rationale: To make comparisons, we need to common size the R&D expenditures of both firms by scaling by total revenues. Life Technologies Corporation Affymetrix Inc 2012 2011 2010 2012 2011 2010 Common sized R&D 9.0% 10.0% 10.5% 19.6% 23.8% 21.9% Affymetrix spends proportionately more on R&D than Life Technologies. Affymetrix is more R&D intensive thus, (A) is not true. Life Technologies has spent less on R&D in 2012 than in 2011 and 2010, thus, (B) is not true. Affymetrix decreased R&D from 23.8%% in 2011 to 19.6%% in 2012, thus (D) is true, but not (C). 18. Yahoo! reported the following in its 2013 financial statements (in millions): (in millions) Total assets Revenues Product development expense Net income December 31, 2013 $17,103.3 $4,984.2 $919.4 $1,048.8 December 31, 2012 $16,805.0 $4,986.6 $885.8 $3,945.5 What is Yahoo’s common-sized product development expense for 2013? A) 5.4% B) 20.2% C) 18.4% D) 87.7% E) None of the above Rationale: To common-size income statement items, we divide by current period sales. Commonsized product development expense for 2013 is therefore $919.4 / $4,984.2 = 18.4%. 19. Nickolas Imports recorded a restructuring charge of $21.6 million during fiscal 2014 related entirely to the closing of its California based operations in San Diego and in Tijuana, Mexico. The company’s financial statement footnotes indicated that expected employee separation payments amounted to $16.8 million and that fixed asset write-downs accounted for the remainder. Nickolas had never before incurred restructuring charges. At the end of the year, the company’s balance sheet included a restructuring accrual of $3,600,000. The cash flow effect of Nickolas’s restructuring during fiscal 2014 is: A) $0 (there was no cash flow effect in 2014) B) $13,200,000 C) $16,800,000 D) $ 3,600,000 E) $21,600,000 Rationale: The total restructuring charge accrued was $16.8 million because asset write-downs are not accrued. That is, there is no credit to a liability account for write-downs, the assets are credited EXAM 2 Practice Questions MBA 601 (reduced). Thus, the company must have paid $16,800,000 - $3,600,000 = $13,200,000 in cash during fiscal 2014. 20. Cranberry Chemical recorded pretax restructuring charges of $1,378 million in 2014. The charges consisted of asset write-downs of $908 million, costs associated with exit or disposal activities of $132 million, and employee severance costs of $338 million. The company paid $144 million cash to settle these restructuring charges during the year (2014). At year end, the restructuring accrual associated with these charges was: A) $ 1,378 million B) $ 326 million C) $ 1,234 million D) $ 194 million E) There is not enough information to determine the amount. Rationale: Of the $1,378 million total restructuring charge, only the exit costs and severance costs must eventually be settled in cash. The asset write downs are not accrued – they reduce the assets on the balance sheet. The company accrued $132 million + $338 million = $470 million as a liability. Thus, if the company paid $144 million cash, the remaining accrual is $326 million at year end. 21. In fiscal 2013, Microsoft Corp. reported a statutory tax rate of 35.00% and an effective tax rate of approximately 19.18 %. The tax rate on operating profit was 19.39%. The 2013 income statement reported income tax expense of $5,189 million. What did Microsoft report as income before income tax expense that year? A) $14,826 million B) $28,071 million C) $27,054 million D) $ 7,571 million E) None of the above Rationale: Income tax expense / Effective tax rate = $5,189 million / 0.1918 = $27,054 million. (Note actual income before tax expense was $27,052 million. The difference is due to rounding.) 22. The 2013 annual report of Computer Corporation included the following disclosure: During fiscal 2013, the U.S. dollar strengthened relative to the other principal currencies in which we transact business with the exception of the Japanese Yen. What effect did these currency fluctuations have on Computer Corporation’s 2013 consolidated income statement? A) Net profit of the Japanese subsidiary will be higher B) Net profit of the Japanese subsidiary will be lower C) Net assets of the subsidiaries that report in the other principal currencies will be higher D) Net assets of the subsidiaries that report in the other principal currencies will be lower E) Both A and D Answer: A Because the US dollar weakened during the year, each Yen will translate to more dollars. Thus, revenues, expenses, and net profit of the Japanese subsidiary will be higher than they would have been absent the foreign currency fluctuations. With respect to the other principal currencies, given that the US dollar strengthened during the year, the profits in these countries will translate to fewer ©Cambridge Business Publishers, 2015 Test Bank, Module 4 4-7 dollars. Thus, revenues, expenses, and net profits of these subsidiaries will be lower than they would have been absent the foreign currency fluctuations. However, D is not a correct answer because the question asked about the income statement, not the balance sheet. This render answer E incorrect too. 23. Oracle Corporation reported the following earnings per share information in its 2013 annual report. The company has only one class of stock outstanding. ($ in millions) Net income Dividends to common shareholders Weighted average common shares outstanding $10,925 $1,433 4,769 Weighted average dilutive shares from employee stock plans Basic and diluted earnings per share were, respectively: A) $0.30 and $0.30 75 B) $0.77 and $0.74 C) $1.08 and $1.06 D) $2.29 and $2.26 E) None of the above 24. The ability to generate future revenues and meet long-term obligations is referred to as: a. Liquidity and efficiency. b. Solvency. c. Profitability. d. Creditworthiness. 25. The ability to meet short-term obligations and to generate revenues using the least amount of resources is called: a. Liquidity and efficiency. b. Solvency. c. Profitability. d. Creditworthiness. 26. Net sales divided by average accounts receivable is equal to the: a. Days' sales uncollected b. Average accounts receivable ratio c. Profit margin d. Accounts receivable turnover ratio 27. The ability to provide financial rewards sufficient to attract and retain financing is called: a. Liquidity and efficiency. b. Solvency. c. Profitability. d. Creditworthiness. 28. Dividing accounts receivable by (net sales divided by 365) is equal to the: a. Profit margin b. Days' sales in accounts receivable c. Accounts receivable turnover ratio d. Average accounts receivable ratio 29. Net income divided by average total equity is equal to the: a. Profit margin b. Return on average assets c. Return on total assets d. Return on total equity 30. A company had a market price of $37.50 per share, earnings per share of $1.25, and dividends per share of $0.40. Its price-earnings ratio is equal to: a. 3.1 b. 30.0 c. 93.8 d. 32.0 31. Par value of a stock refers to the: a. Issue price of the stock. b. Value assigned to a share of stock by the corporate charter. c. Market value of the stock on the date of the financial statements. d. Maximum selling price of the stock. Use the financial statements for Ascension provided with the exam to answer the following: 32. Current assets minus current liabilities is equal to: A. Profit margin B. Financial leverage C. Current ratio D. Working capital E. Quick assets 33. Current assets divided by current liabilities is equal to the: A. Current ratio B. Quick ratio C. Debt ratio D. Liquidity ratio E. Solvency ratio 34. Net sales divided by average accounts receivable is equal to the: A. Days' sales uncollected C. Current ratio D. Profit margin E. Accounts receivable turnover ratio 35. Dividing accounts receivable by net sales and multiplying the result by 365 is equal to the: A. Profit margin B. Days' sales uncollected C. Accounts receivable turnover ratio D. Average accounts receivable ratio E. Current ratio 36. Net sales divided by average total assets is equal to the: A. Profit margin B. Total asset turnover C. Current ratio D. Sales return ratio E. Return on total assets 37. Net income divided by average total assets is equal to the: A. Profit margin B. Total asset turnover C. Return on total assets D. Days' income in assets E. Current ratio [Show More]

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