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Description
A current Code of Ethics principle reads in full, “Promote the integrity :
Comment
One of the principles in the Code of Ethics reflects the role that the capital markets have in society as a whole. A is incorrect because it is incomplete, missing the additional language to reflect the role that the capital markets have in society as a whole. B is incorrect because the principle as written in the Code of Ethics reflects the role of the capital markets in society as a whole.
Section
Learning Module 1 The Firm and Market Structures
Learning Module 2 Understanding Business Cycles
Learning Module 3 Fiscal Policy
Learning Module 4 Monetary Policy
Learning Module 5 Introduction to Geopolitics
Learning Module 6 International Trade
Learning Module 7 Capital Flows and the FX Market
Learning Module 8 Exchange Rate Calculations
Learning Module 1 Market Organization and Structure
Learning Module 2 Security Market Indexes
Learning Module 3 Market Efficiency
Learning Module 4 Overview of Equity Securities
Learning Module 5 Company Analysis: Past and Present
Learning Module 6 Industry and Competitive Analysis
Learning Module 7 Company Analysis: Forecasting
Learning Module 8 Equity Valuation: Concepts and Basic Tools
Learning Module 1 Ethics and Trust in the Investment Profession
Learning Module 2 Code of Ethics and Standards of Professional Conduct
Learning Module 3 Guidance for Standards I–VII
Learning Module 4 Introduction to the Global Investment Performance Standards (GIPS)
Learning Module 1 Derivative Instrument and Derivative Market Features
Learning Module 10 Valuing a Derivative Using a One-Period Binomial Model
Learning Module 2 Forward Commitment and Contingent Claim Features and Instruments
Learning Module 3 Derivative Benefits, Risks, and Issuer and Investor Uses
Learning Module 5 Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
Learning Module 6 Pricing and Valuation of Futures Contracts
Learning Module 7 Pricing and Valuation of Interest Rates and Other Swaps
Learning Module 8 Pricing and Valuation of Options
Learning Module 9 Option Replication Using Put–Call Parity
Learning Module 1 Introduction to Financial Statement Analysis
Learning Module 10 Financial Reporting Quality
Learning Module 11 Financial Analysis Techniques
Learning Module 12 Introduction to Financial Statement Modeling
Learning Module 2 Analyzing Income Statements
Learning Module 3 Analyzing Balance Sheets
Learning Module 4 Analyzing Statements of Cash Flows I
Learning Module 5 Analyzing Statements of Cash Flows II
Learning Module 6 Analysis of Inventories
Learning Module 7 Analysis of Long-Term Assets
Learning Module 8 Topics in Long-Term Liabilities and Equity
Learning Module 9 Analysis of Income Taxes
Answer
Intro
<p>A dealer provides spot rate quotes for the following currencies</p> <table style="width:80%;text-align:center"> <tr> <th>Currency</th> <th>Spot rate</th> </tr> <tr> <td>CNY/HKD</td> <td>0.8422</td> </tr> <tr> <td>CNY/ZAR</td> <td>0.9149</td> </tr> <tr> <td>CNY/SEK</td> <td>1.0218</td> </tr> </table>
<p>A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds</p> <table style="width:80%;text-align:center"> <tr> <th>Bid Size</th> <th>Limit Price (€)</th> <th>Offer Size</th> </tr> <tr> <td>5</td> <td>9.73</td> <td></td> </tr> <tr> <td>12</td> <td>9.81</td> <td></td> </tr> <tr> <td>4</td> <td>9.84</td> <td></td> </tr> <tr> <td>6</td> <td>9.95</td> <td></td> </tr> <tr> <td></td> <td>10.02</td> <td>5</td> </tr> <tr> <td></td> <td>10.10</td> <td>12</td> </tr> <tr> <td></td> <td>10.14</td> <td>8</td> </tr> </table>
<p>Consider the following limit order book for a stock. The bid and ask sizes are number of shares in hundreds.</p> <table style="width:80%;text-align:center"> <tr> <th>Bid Size</th> <th>Limit Price (¥)</th> <th>Offer Size</th> </tr> <tr> <td>3</td> <td>122.80</td> <td></td> </tr> <tr> <td>8</td> <td>123.00</td> <td></td> </tr> <tr> <td>4</td> <td>123.35</td> <td></td> </tr> <tr> <td></td> <td>123.80</td> <td>7</td> </tr> <tr> <td></td> <td>124.10</td> <td>6</td> </tr> <tr> <td></td> <td>124.50/td> <td>7</td> </tr> </table>
<table style="width:80%;text-align:center"> <tr> <th>Order</th> <th>Time of Arrival (HH:MM:SS)</th> <th>Limit Price (€)</th> <th>Special Instruction (If any)</th> </tr> <tr> <td>I</td> <td>9:52:01</td> <td>20.33</td><td></td> </tr> <tr> <td>II</td> <td>9:52:08</td> <td>20.29</td><td>Hidden order</td> </tr> <tr> <td>III</td> <td>9:53:04</td> <td>9:53:04</td><td></td> </tr> <tr> <td>IV</td> <td>9:53:49</td> <td>20.29</td><td></td> </tr> </table>
<p>A market has the following limit orders standing on its book for a particular stock:</p> <table style="width:90%;text-align:right"> <tr> <th>Buyer</th> <th>Bid Size (Number of Shares)</th> <th>Limit Price (£)</th> <th>Offer Size (Number of Shares)</th> <th>Seller</th> </tr> <tr> <td>Keith</td> <td>1,000</td> <td>19.70</td><td></td><td></td> </tr> <tr> <td>Paul</td> <td>200</td> <td>19.84</td><td></td><td></td> </tr> <tr> <td>Ann</td> <td>400</td> <td>19.89</td><td></td><td></td> </tr> <tr> <td>Mary</td> <td>300</td> <td>20.02</td><td></td><td></td> </tr> <tr> <td></td> <td></td> <td>20.03</td><td>800</td><td>Jack</td> </tr> <tr> <td></td> <td></td> <td>20.11</td><td>1,100</td><td>Margaret</td> </tr> <tr> <td></td> <td></td> <td>20.16</td><td>400</td><td>Jeff</td> </tr> </table>
<p>An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie</p> <table style="width:80%;text-align:center"> <tr> <th>Security</th> <th>Beginning of Period Price (€)</th> <th>End of Period Price (€)</th> <th>Total Dividends (€)</th> </tr> <tr> <td>Able</td> <td>10.00</td> <td>12.00</td><td>0.75</td> </tr> <tr> <td>Baker</td> <td>20.00</td> <td>19.00</td><td>1.00</td> </tr> <tr> <td>Charlie</td> <td>30.00</td> <td>30.00</td><td>2.00</td> </tr> </table>
<p>An analyst gathers the following information for an equal-weighted index comprised of assets Able, Baker, and Charlie</p> <table style="width:80%;text-align:center"> <tr> <th>Security</th> <th>Beginning of Period Price (€)</th> <th>End of Period Price (€)</th> <th>Total Dividends (€)</th> </tr> <tr> <td>Able</td> <td>10.00</td> <td>12.00</td><td>0.75</td> </tr> <tr> <td>Baker</td> <td>20.00</td> <td>19.00</td><td>1.00</td> </tr> <tr> <td>Charlie</td> <td>30.00</td> <td>30.00</td><td>2.00</td> </tr> </table>
<p>An analyst gathers the following information for a price-weighted index comprised of securities ABC, DEF, and GHI:</p> <table style="width:80%;text-align:center"> <tr> <th>Security</th> <th>Beginning of Period Price (€)</th> <th>End of Period Price (€)</th> <th>Total Dividends (€)</th> </tr> <tr> <td>ABC</td> <td>25.00</td> <td>27.00</td><td>1.00</td> </tr> <tr> <td>DEF</td> <td>35.00</td> <td>25.00</td><td>1.50</td> </tr> <tr> <td>GHI</td> <td>15.00</td> <td>16.00</td><td>1.00</td> </tr> </table>
<p>An analyst gathers the following information for a market-capitalization-weighted index comprised of securities MNO, QRS, and XYZ:</p> <table style="width:80%;text-align:center"> <tr> <th>Security</th> <th>Beginning of Period Price (¥)</th> <th>End of Period Price (¥)</th> <th>Dividends per Share (¥)</th> <th>Shares Outstanding</th> </tr> <tr> <td>MNO</td> <td>2,500</td> <td>2,700</td><td>100</td><td>5,000</td> </tr> <tr> <td>QRS</td> <td>3,500</td> <td>2,500</td><td>150</td><td>7,500</td> </tr> <tr> <td>XYZ</td> <td>1,500</td> <td>1,600</td><td>100</td><td>10,000</td> </tr> </table>
<p>An analyst gathers the following data for a price-weighted index:</p> <table style="width:80%;text-align:center"> <tr> <th></th> <th colspan="2">Beginning of Period</th> <th colspan="2">End of Period</th> </tr> <tr> <th>Security</th> <th>Price (€)</th> <th>Shares Outstanding</th> <th>Price (€)</th> <th>Shares Outstanding</th> </tr> <tr> <td>A</td> <td>20.00</td> <td>300</td><td>22.00</td><td>300</td> </tr> <tr> <td>B</td> <td>50.00</td> <td>300</td><td>48.00</td><td>300</td> </tr> <tr> <td>C</td> <td>26.00</td> <td>2,000</td><td>30.00</td><td>2,000</td> </tr> </table>
<p>An analyst gathers the following data for a value-weighted index:</p> <table style="width:80%;text-align:center"> <tr> <th></th> <th colspan="2" >Beginning of Period</th> <th colspan="2" >End of Period</th> </tr> <tr> <th>Security</th> <th>Price (£)</th> <th>Shares Outstanding</th> <th>Price (£)</th> <th>Shares Outstanding</th> </tr> <tr> <td>A</td> <td>20.00</td> <td>300</td><td>22.00</td><td>300</td> </tr> <tr> <td>B</td> <td>50.00</td> <td>300</td><td>48.00</td><td>300</td> </tr> <tr> <td>C</td> <td>26.00</td> <td>2,000</td><td>30.00</td><td>2,000</td> </tr> </table>
<p>An analyst gathers the following data for an equally-weighted index:</p> <table style="width:80%;text-align:center"> <tr> <th></th> <th colspan="2" >Beginning of Period</th> <th colspan="2" >End of Period</th> </tr> <tr> <th>Security</th> <th>Price (¥)</th> <th>Shares Outstanding</th> <th>Price (¥)</th> <th>Shares Outstanding</th> </tr> <tr> <td>A</td> <td>20.00</td> <td>300</td><td>22.00</td><td>300</td> </tr> <tr> <td>B</td> <td>50.00</td> <td>300</td><td>48.00</td><td>300</td> </tr> <tr> <td>C</td> <td>26.00</td> <td>2,000</td><td>30.00</td><td>2,000</td> </tr> </table>
<p>Joshua Hu, a research analyst, is initiating coverage on several companies in the ocean freight shipping industry. OldShips is a mature company with high fixed costs and a high capital expenditure to sales ratio because it owns and operates its own fleet of ships. CleanYards is a technologically advanced, sustainable shipyard with a focus on specialized repairs and ship construction. Hu has compiled the following data for the two companies:</p> <table style="width:80%;text-align:center"> <tr> <th></th> <th>OldShips</th> <th>CleanYards</th> </tr> <tr> <td class="left">Degree of Financial Leverage (DFL)</td> <td>2.0</td> <td>2.0</td> </tr> <tr> <td class="left">Degree of Operating Leverage (DOL)</td> <td>1.0</td> <td>2.0</td> </tr> <tr> <td class="left">Asset turnover ratio</td> <td>0.84×</td> <td>0.42×</td> </tr> <tr> <td class="left">DSO</td> <td>27</td> <td>98</td> </tr> <tr> <td class="left">DOH</td> <td>12</td> <td>46</td> </tr> <tr> <td class="left">DPO</td> <td>55</td> <td>40</td> </tr> </table> <p>NewShips, a third company, is a web-based shipping technology platform that connects ship operators such as OldShips with customers in a wide variety of industries who need ocean freight shipping. NewShips’ customers place orders online and pay for freight to be placed on a container to any destination in the world. NewShips’ partners, like OldShips, provide vessels on both long- and short-term charters. </p> <p>In 2X19, NewShips’ platform brokered orders for 900,000 twenty-foot equivalent unit (TEU) containers in aggregate, with an average gross freight rate of USD3,848 per TEU. On average, NewShips’ commission, which it receives as a broker from the customer, was 5% of the freight rate. </p>
<p>Calculate the book value of a company using the following information:</p> <table style="width:80%;text-align:center"> <tr> <td class="left">Number of shares outstanding</td> <td class="right">100,000</td> </tr> <tr> <td class="left">Price per share</td> <td class="right">€52</td> </tr> <tr> <td class="left">Total assets</td> <td class="right">€12,000,000</td> </tr> <tr> <td class="left">Total liabilities</td> <td class="right">€7,500,000</td> </tr> <tr> <td class="left">Net Income</td> <td class="right">€2,000,000</td> </tr> </table>
<p>Calculate the return on equity (ROE) of a stable company using the following data:</p> <table style="width:80%;text-align:center"> <tr> <td class="left">Total sales</td> <td class="right">£2,500,000</td> </tr> <tr> <td class="left">Net income</td> <td class="right">£2,000,000</td> </tr> <tr> <td class="left">Beginning of year total assets</td> <td class="right">£50,000,000</td> </tr> <tr> <td class="left">Beginning of year total liabilitiess</td > <td class="right">£35,000,000</td> </tr> <tr> <td class="left">Number of shares outstanding at the end of the year</td> <td class="right">1,000,000</td> </tr> <tr> <td class="left">Price per share at the end of the year</td> <td class="right">£20</td> </tr> </table>
<p>An analyst gathers or estimates the following information about a stock:</p> </br>   <table style="width:80%;text-align:center"> <tr> <td class="left">Current price per share</td> <td class="right">€22.56</td> </tr> <tr> <td class="left">Current annual dividend per share</td> <td class="right">€1.60</td> </tr> <tr> <td class="left">Annual dividend growth rate for Years 1–4</td> <td class="right">9.00%</td> </tr> <tr> <td class="left">Annual dividend growth rate for Years 5+</td > <td class="right">4.00%</td> </tr> <tr> <td class="left">Required rate of return</td> <td class="right">12%</td> </tr> </table>
<p>Unless otherwise stated in the question, all individuals in the following questions are CFA Institute members or candidates in the CFA Program and, therefore, are subject to the CFA Institute Code of Ethics and Standards of Professional Conduct.</p>
<p>Montau AG is a German capital goods producer that manufactures its products domestically and delivers its products to clients globally. Montau’s global sales manager shares the following draft commercial contract with his Treasury team:</p> </br>   <table style="width:80%;text-align:left"> <caption>Montau AG Commercial Export Contract</caption> <tr> <th>Contract Date:</th> <td>[Today]</td> </tr> <tr> <th>Goods Seller:</th> <td>Montau AG, Frankfurt, Germany</td> </tr> <tr> <th>Goods Buyer:</th> <td>Jeon Inc., Seoul, Korea</td> </tr> <tr> <th>Description of Goods</th> <td>A-Series Laser Cutting Machine</td> </tr> <tr> <th>Quantity:</th> <td>One</td> </tr> <tr> <th>Delivery Terms:</th> <td>Freight on Board (FOB), Busan Korea with all shipping, tax and delivery costs payable by Goods Buyer</td> </tr> <tr><th>Delivery Date:</th> <td>[75 Days from Contract Date]</td> </tr> <tr><th>Payment Terms:</th> <td>100% of Contract Price payable by Goods Buyer to Good Seller on Delivery Date</td> </tr> <tr><th>Contract Price:</th> <td>KRW650,000,000</td> </tr> </table> <p>Montau AG’s Treasury manager is tasked with addressing the financial risk of this prospective transaction. </p>
Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months.
<p>Privatbank Kleinert KGaA, a private wealth manager in Munich, has a number of clients with large holdings in the German fintech firm SparCoin AG. Kleinert’s analyst is concerned about a drop in SparCoin’s share price in the next year and is recommending to clients that they consider purchasing a one-year put with an exercise price of €100. SparCoin’s spot price (S<sub>0</sub>) is €105.25, and it pays no dividends. The risk-free rate is 0.37%. </p>
<p>Consider the following structured note offered by Baywhite Financial</p> </br>   <table style="width:80%;text-align:left"> <caption>Baywhite Financial LLC 80% Principal Protected Structured Note</caption> <tr> <th>Description:</th> <td>The Baywhite Financial LLC 80% Principal Protected Structured Note (“the Note”) is linked to the performance of the S&P 500 Health Care Select Sector Index (SIXV).</td> </tr> <tr> <th>Issuer:</th> <td>Baywhite Financial LLC</td> </tr> <tr> <th>Start Date:</th> <td>[Today]</td> </tr> <tr> <th>Maturity Date:</th> <td>[Six months from Start Date]</td> </tr> <tr> <th>Issuance Price:</th> <td>102% of Face Value</td> </tr> <tr> <th>Face Value</th> <td>Sold in a minimum denomination of USD1,000 and multiple units thereo</td> </tr> <tr><th>Payment at Maturity:</th> <td>At maturity, you will receive a cash payment, for each USD1,000 principal amount note, of USD800 plus the Additional Amount, which may be zero.</td> </tr> <tr><th>Partial Principal Protection Percentage:</th> <td>80% Principal Protection (20% Principal at Risk)</td> </tr> <tr><th>Additional Amount:</th> <td>At maturity, you will receive the greater of 100% of the returns on the S&P 500 Health Care Select Sector Index (SIXV) in excess of 5% above the current spot price of the SIXV or zero</td> </tr> </table> <p>As a financial analyst for a wealth management advisory firm, you have been tasked with comparing the features of the Baywhite Financial LLC Structured Note with those of a similar exchange-traded, stand-alone derivative instrument alternative in order to make a recommendation to the firm’s clients. </p>
<p><i>Baywhite Financial is a broker-dealer and wealth management firm that helps its clients manage their portfolios using stand-alone derivative strategies. A new Baywhite analyst is asked to evaluate the following client situations.</i></p>
<p><i>Ace Limited is a financial intermediary active in both futures and forward markets. You have been hired as an investment consultant and asked to review Ace’s activities and answer the following questions</i><p>
<p><i>Ace Limited is a financial intermediary that is active in forward and swap markets with its issuer and investor clients. You have been asked to consult on a number of client situations to determine the best course of action. </i></p>
<p><i>The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that are currently priced (S<sub>0</sub>) at INR 295 per share. VFO’s CIO is considering an offer to sell shares at a forward price (F<sub>0</sub>(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You have been asked to advise on the purchase of a put option or the sale of a call option with an exercise price (X) equal to the forward price (F<sub>0</sub>(T)) as alternatives to a forward share sale.</i></p>
<i> <strong><p>South China Sprintwyck Investments (SCSI)</p></strong> <p>South China Sprintwyck Investments (SCSI) has a Chinese equity portfolio that has outperformed in the first half of the year due to an overweight position in health care industry shares. SCSI is considering option-based alternatives for one of its current overweight positions, ChinaWell Inc. (CWI). CWI has a current price (S<sub>0</sub>) of CNY127.50 and pays no dividends. The current risk-free rate is 4%. You are a new SCSI analyst hired to evaluate several alternatives for CWI stock.</p></i>
<p>An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the data in Exhibit 1 for Spherion:</p> </br> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Spherion Data</caption> <tr><th class="left"></th><th>FY3</th><th>FY2</th><th>FY1</th></tr> <tr><td class="left">Days of inventory on hand</td><td>32</td><td>34</td><td>40</td></tr> <tr><td class="left">Days sales outstanding</td><td>28</td><td>25</td><td>23</td></tr> <tr><td class="left">Number of days of payables</td><td>40</td><td>35</td><td>35</td></tr> </table>
<p>An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the data in Exhibit 1:</p> </br> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Solvency and Liquidity of Apex Manufacturing (euro millions)</caption> <tr><th class="left"></th><th>FY5</th><th>FY4</th><th>FY3</th></tr> <tr><td class="left">Total debt</td><td>2,000</td><td>1,900</td><td>1,750</td></tr> <tr><td class="left">Total equity</td><td>4,000</td><td>4,500</td><td>5,000</td></tr> </table>
<p>An analyst observes the data in Exhibit 1 for two companies:</p> </br> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Data Comparison (US dollars)</caption> <tr><th class="left"></th><th>Company A</th><th>Company B</th></tr> <tr><td class="left">Revenue</td><td>4,500</td><td>6,000</td></tr> <tr><td class="left">Net income</td><td>50</td><td>1,000</td></tr> <tr><td class="left">Current assets</td><td>40,000</td><td>60,000</td></tr> <tr><td class="left">Total assets</td><td>100,000</td><td>700,000</td></tr> <tr><td class="left">Current liabilities</td><td>10,000</td><td>50,000</td></tr> <tr><td class="left">Total debt</td><td>60,000</td><td>150,000</td></tr> <tr><td class="left">Shareholders’ equity</td><td>30,000</td><td>500,000</td></tr> </table>
<p>The following data appear in the five-year summary of a major international company. A business combination with another major manufacturer took place in FY13.</p> <table style="width:90%;text-align:center"> <captionExhibit 1: Five-Year Summary of a Major International Company</caption> <tr><th class="left"></th><th>FY10</th><th>FY11</th><th>FY12</th><th>FY13</th><th>FY14</th></tr> <tr><td class="left">Financial statements</td><td>GBP millions</td><td>GBP millions</td><td>GBP millions</td><td>GBP millions</td><td>GBP millions</td></tr> <tr><td class="left"><b>Income statements</b></td><td></td><td></td><td></td><td></td><td></td></tr> <tr><td class="left">Revenue</td><td>4,390</td><td>3,624</td><td>3,717</td><td>8,167</td><td>11,366</td></tr> <tr><td class="left">Profit before interest and taxation (EBIT)</td><td>844</td><td>700</td><td>704</td><td>933</td><td>1,579</td></tr> <tr><td class="left">Net interest expense</td><td>–80</td><td>–54</td><td>–98</td><td>–163</td><td>–188</td></tr> <tr><td class="left">Taxation</td><td>–186</td><td>–195</td><td>–208</td><td>–349</td><td>–579</td></tr> <tr><td class="left">Minorities</td><td>–94</td><td>–99</td><td>–105</td><td>–125</td><td>–167</td></tr> <tr><td class="left">Profit for the year</td><td>484</td><td>352</td><td>293</td><td>296</td><td>645</td></tr> <tr><td class="left"><b>Balance sheets</b></td><td></td><td></td><td></td><td></td><td></td></tr> <tr><td class="left">Fixed assets</td><td>3,510</td><td>3,667</td><td>4,758</td><td>10,431</td><td>11,483</td></tr> <tr><td class="left">Current asset investments, cash at bank and in hand</td><td>316</td><td>218</td><td>290</td><td>561</td><td>682</td></tr> <tr><td class="left">Other current assets</td><td>558</td><td>514</td><td>643</td><td>1,258</td><td>1,634</td></tr> <tr><td class="left">Total assets</td><td>4,384</td><td>4,399</td><td>5,691</td><td>12,250</td><td>13,799</td></tr> <tr><td class="left">Interest bearing debt (long term)</td> <td>–602</td> <td>–1,053</td> <td>–1,535</td> <td>–3,523</td> <td>–3,707</td> </tr> <tr><td class="left">Other creditors and provisions (current)</td><td>–1,223</td><td>–1,054</td><td>–1,102</td><td>–2,377</td><td>–3,108</td></tr> <tr><td class="left">Total liabilities</td><td>–1,825</td><td>–2,107</td><td>–2,637</td><td>–5,900</td><td>–6,815</td></tr> <tr><td class="left">Net assets</td><td>2,559</td><td>2,292</td><td>3,054</td><td>6,350</td><td>6,984</td></tr> <tr><td class="left">Shareholders’ funds</td><td>2,161</td><td>2,006</td><td>2,309</td><td>5,572</td><td>6,165</td></tr> <tr><td class="left">Equity minority interests</td><td>398</td><td>286</td><td>745</td><td>778</td><td>819</td></tr> <tr><td class="left">Capital employed</td><td>2,559 </td><td>2,292</td><td>3,054</td><td>6,350</td><td>6,984</td></tr> <tr><td class="left"><b>Cash flow</b></td><td></td><td></td><td></td><td></td><td></td></tr> <tr><td class="left">Working capital movements</td><td>–53</td><td>5</td><td>71</td><td>85</td><td>107</td></tr> <tr><td class="left">Net cash inflow from operating activities</td><td>864</td><td>859</td><td>975</td><td>1,568</td><td>2,292</td></tr> </table>
<p>An analyst compiles the data in Exhibit 1 for a company:</p> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Net Profit Margin</caption> <tr><th class="left"></th><th>FY13</th><th>FY14</th><th>FY15</th></tr> <tr><td class="left"><b>ROE</b></td><td>19.8%</td><td>20.0%</td><td>22.0%</td></tr> <tr><td class="left"><b>Return on total assets</b></td><td>8.1%</td><td>8.0%</td><td>7.9%</td></tr> <tr><td class="left"><b>Total asset turnover</b></td><td>2.0%</td><td>2.0%</td><td>2.1%</td></tr> </table>
<p>A decomposition of ROE for Integra SA is as follows:</p> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Integra SA ROE</caption> <tr><th class="left"></th><th>FY12</th><th>FY11</th></tr> <tr><td class="left">ROE</td><td>18.90%</td><td>18.90%</td></tr> <tr><td class="left">Tax burden</td><td>0.70</td><td>0.75</td></tr> <tr><td class="left">Interest burden</td><td>0.90</td><td>0.90</td></tr> <tr><td class="left">EBIT margin</td><td>10.00% </td><td>10.00% </td></tr> <tr><td class="left">Asset turnover </td><td>1.50</td><td>1.40</td></tr> <tr><td class="left">Leverage</td><td>2.00</td><td>2.00</td></tr> </table>
<p>A decomposition of ROE for Company A and Company B is as follows:</p> <table style="width:90%;text-align:center"> <caption>Exhibit 1: ROE for Company A and Company B</caption> <tr><th class="left"></th><th colspan="2">Company A</th><th colspan="2">Company 2</th></tr> <tr><th class="left"></th><th>FY15</th><th>FY14</th><th>FY15</th><th>FY14</th></tr> <tr><td class="left">ROE</td><td>26.46%</td><td>18.90%</td><td>26.33%</td><td>18.90%</td></tr> <tr><td class="left">Tax burden</td><td>0.70</td><td>0.75</td><td>0.75</td><td>0.75</td></tr> <tr><td class="left">Interest burden</td><td>0.90</td><td>0.90</td><td>0.90</td><td>0.90</td></tr> <tr><td class="left">EBIT margin</td><td>7.00% </td><td>10.00% </td><td>13.00% </td><td>10.00% </td></tr> <tr><td class="left">Asset turnover </td><td>1.50</td><td>1.40</td><td>1.50</td><td>1.40</td></tr> <tr><td class="left">Leverage</td><td>4.00</td><td>2.00</td><td>2.00</td><td>2.00</td></tr> </table>
<p>Nigel French, an analyst at Taurus Investment Management, is analyzing Archway Technologies, a manufacturer of luxury electronic auto equipment, at the request of his supervisor, Lukas Wright. French is asked to evaluate Archway’s profitability over the past five years relative to its two main competitors, which are located in different countries with significantly different tax structures. French begins by assessing Archway’s competitive position within the luxury electronic auto equipment industry using Porter’s five forces framework. A summary of French’s industry analysis is presented in Exhibit 1.</p> <table style="width:90%;text-align:center"> <caption><b>Exhibit 1: Analysis of Luxury Electronic Auto Equipment Industry Using Porter’s Five Forces Framework</b></caption> <tr><th class="left">Force</th><th class="left">Factors to Consider</th></tr> <tr><td class="left">Threat of substitutes</td><td class="left">Customer switching costs are high</td></tr> <tr><td class="left">Rivalry </td><td class="left">Archway holds 60 percent of world market share; each of its two main competitors holds 15 percent</td></tr> <tr><td class="left">Bargaining power of suppliers</td><td class="left">Primary inputs are considered basic commodities, and there are a large number of suppliers</td></tr> <tr><td class="left">Bargaining power of buyers </td><td class="left">Luxury electronic auto equipment is very specialized (non-standardized)</td></tr> <tr><td class="left">Threat of new entrants </td><td class="left">High fixed costs to enter industry</td></tr> </table> <p> French notes that for the year just ended (2019), Archway’s COGS was 30 percent of sales. To forecast Archway’s income statement for 2020, French assumes that all companies in the industry will experience an inflation rate of 8 percent on the COGS. Exhibit 2 shows French’s forecasts relating to Archway’s price and volume changes. </p> <table style="width:90%;text-align:center"> <caption><b>Exhibit 2: Archway’s 2020 Forecasted Price and Volume Changes</b></caption> <tr><td class="left">Average price increase per unit</td><td>5.00</td></tr> <tr><td class="left">Volume growth </td><td>–3.00%</td></tr> </table> <p> After putting together income statement projections for Archway, French forecasts Archway’s balance sheet items. He uses Archway’s historical efficiency ratios to forecast the company’s working capital accounts. Based on his financial forecast for Archway, French estimates a terminal value using a valuation multiple based on the company’s average price-to-earnings multiple (P/E) over the past five years. Wright discusses with French how the terminal value estimate is sensitive to key assumptions about the company’s future prospects. Wright asks French: “What change in the calculation of the terminal value would you make if a technological development that would adversely affect Archway was forecast to occur sometime beyond your financial forecast horizon?”</p>
<p>Gertrude Fromm is a transportation sector analyst at Tucana Investments. She is conducting an analysis of Omikroon, N.V., a hypothetical European engineering company that manufactures and sells scooters and commercial trucks. Omikroon’s petrol scooter division is the market leader in its sector and has two competitors. Omikroon’s petrol scooters have a strong brand name and a well-established distribution network. Given the strong branding established by the market leaders, the cost of entering the industry is high. But Fromm anticipates that small, inexpensive, imported petrol-fueled motorcycles could become substitutes for Omikroon’s petrol scooters.</p> <p>Fromm uses ROIC as the metric to assess Omikroon’s performance. Omikroon has just introduced the first electric scooter to the market at year-end 2019. The company’s expectations are as follows:</p><br> ■ Competing electric scooters will reach the market in 2021.<br> ■ Electric scooters will not be a substitute for petrol scooters.<br> ■ The important research costs in 2020 and 2021 will lead to more efficient electric scooters.<br> <p> Fromm decides to use a five-year forecast horizon for Omikroon after considering the following three factors:</p> <dl> <dt>Factor 1</dt><dd> The annual portfolio turnover at Tucana Investments is 30 percent.</dd> <dt>Factor 2 </dt><dd>The electronic scooter industry is expected to grow rapidly over the next 10 years.</dd> <dt>Factor 3 </dt><dd> Omikroon has announced it would acquire a light truck manufacturer that will be fully integrated into its truck division by 2021 and will add 2 percent to the company’s total revenues</dd></dl> <p>Fromm uses the base case forecast for 2020 shown in Exhibit 1 to perform the following sensitivity analysis:<br> ■ The price of an imported specialty metal used for engine parts increases by 20 percent.<br> ■ This metal constitutes 4 percent of Omikroon’s cost of sales.<br> ■ Omikroon will not be able to pass on the higher metal expense to its customers.<br> </p> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Omikroon’s Selected Financial Forecasts for 2020 Base Case (euro millions)</caption> <tr><th class="left"></th><th>Petrol Scooter Division </th> <th>Commercial Truck Division</th><th> Electric Scooter Division </th><th>Total</th></tr> <tr><td class="left">Sales</td><td>99.05</td><td>45.71 </td><td>7.62</td><td>152.38</td></tr> <tr><td class="left">Cost of sales</td><td> </td><td> </td><td> </td><td> 105.38</td></tr> <tr><td class="left">Gross profit</td><td> </td><td> </td><td> </td><td> 47.00 </td></tr> <tr><td class="left">Operating profit </td><td> </td><td> </td><td> </td><td>9.20 </td></tr> </table> Omikroon will initially outsource its electric scooter parts. But manufacturing these parts in-house beginning in 2021 will imply changes to an existing factory. This factory cost EUR7 million three years ago and had an estimated useful life of 10 years. Fromm is evaluating two scenarios: <dl> <dt>Scenario 1</dt> <dd>Refit the existing factory for EUR27 million.</dd> <dt>Scenario 2</dt> <dd>Sell the existing factory for EUR5 million. Build a new factory costing EUR30 million with a useful life of 10 years.</dd></dl>
<p>Angela Green, an investment manager at Horizon Investments, intends to hire a new investment analyst. After conducting initial interviews, Green has narrowed the pool to three candidates. She plans to conduct second interviews to further assess the candidates’ knowledge of industry and company analysis. Prior to the second interviews, Green asks the candidates to analyze Chrome Network Systems, a company that manufactures internet networking products. Each candidate is provided Chrome’s financial information presented in Exhibit 1.</p> <table style="width:90%;text-align:center"> <caption>Exhibit 1: Chrome Network Systems Selected Financial Information (US dollar millions)</caption> <tr><td class="left"></td><th colspan="3">Year-End</th></tr> <tr><td class="left"></td><th>2017</th><th>2018</th><th>2019</th></tr> <tr><td class="left">Net sales</td><td>46.8</td><td>50.5</td><td>53.9</td></tr> <tr><td class="left">Cost of sales</td><td>18.2</td><td>18.4</td><td>18.8</td></tr> <tr><td class="left">Gross profit</td><td>28.6</td><td>32.1</td><td>35.1</td></tr> <tr><td class="left">SG&A expenses</td><td>19.3</td><td>22.5</td><td>25.1</td></tr> <tr><td class="left">Operating income</td><td>9.3</td><td>9.6</td><td>10.0</td></tr> <tr><td class="left">Interest expense</td><td>0.5</td><td>0.7</td><td>0.6</td></tr> <tr><td class="left">Income before provision for income tax</td><td> 8.8</td><td> 8.9</td><td> 9.4</td></tr> <tr><td class="left">Provision for income taxes</td><td>2.8</td><td>2.8</td><td>3.1</td></tr> <tr><td class="left">Net income</td><td>6.0</td><td>6.1</td><td>6.3</td></tr> </table> <p>Green asks each candidate to forecast the 2020 income statement for Chrome and to outline the key assumptions used in their analysis. The job candidates are told to include Horizon’s economic outlook for 2020 in their analysis, which assumes nominal GDP growth of 3.6 percent, based on expectations of real GDP growth of 1.6 percent and inflation of 2.0 percent. Green receives the models from each of the candidates and schedules second interviews. To prepare for the interviews, Green compiles a summary of the candidates’ key assumptions in Exhibit 2.</p> <table style="width:90%;text-align:center"> <caption>Exhibit 2: Summary of Key Assumptions Used in Candidates’ Models</caption> <tr><th class="left">Metric</th><th> Candidate A</th><th>Candidate B</th><th>Candidate C</th></tr> <tr><td class="left">Net sales</td><td> Net sales will grow at the average annual growth rate in net sales over the 2017–19 time period.</td><td> Industry sales will grow at the same rate as nominal GDP, but Chrome will have a two-percentage-point decline in market share.</td><td> Net sales will grow 50 bps slower than nominal GDP.</td></tr> <tr><td class="left">Cost of sales</td><td> The 2020 gross margin will be the same as the average annual gross margin over the 2017–19 time period.</td><td> The 2020 gross margin will decline as costs increase by expected inflation.</td><td> The 2020 gross margin will increase by 20 bps from 2019.</td></tr> <tr><td class="left">SG&A expenses</td><td> The 2020 SG&A/net sales ratio will be the same as the average ratio over the 2017–19 time period.</td><td> The 2020 SG&A will grow at the rate of inflation.</td><td> The 2020 SG&A/net sales ratio will be the same as the 2019 ratio.</td></tr> <tr><td class="left">Interest expense</td><td> The 2020 interest expense assumes the effective interest rate will be the same as the 2019 rate.</td><td> The 2020 interest expense will be the same as the 2019 interest expense.</td><td> The 2020 interest expense will be the same as the average expense over the 2017–19 time period.</td></tr> <tr><td class="left">Income taxes</td><td> The 2020 effective tax rate will be the same as the 2019 rate.</td><td> The 2020 effective tax rate will equal the blended statutory rate of 30%.</td><td> The 2020 effective tax rate will be the same as the average effective tax rate over the 2017–19 time period</td></tr> </table>
Fairplay reported the information shown in Exhibit 1 related to the sale of its products during 2009, which was its first year of business: <table style="width:90%;text-align:center"> <caption>Exhibit 1: Fairplay</caption> <tr><td>Revenue </td><td>USD1,000,000</td></tr> <tr><td>Returns of goods sold </td><td>USD100,000</td></tr> <tr><td>Cash collected </td><td>USD800,000</td></tr> <tr><td>Cost of goods sold </td><td>USD700,000</td></tr> </table>
Laurelli Builders (LB) reported the financial data shown in Exhibit 1 for year-end 31 December: <table style="width:90%;text-align:center"> <caption>Exhibit 1: Laurelli Builders</caption> <tr><td class="left">Common shares outstanding, 1 January </td><td>2,020,000</td></tr> <tr><td class="left">Common shares issued as stock dividend, 1 June </td><td>380,000</td></tr> <tr><td class="left">Warrants outstanding, 1 January </td><td>500,000</td></tr> <tr><td class="left">Net income </td><td>USD3,350,000</td></tr> <tr><td class="left">Preferred stock dividends paid </td><td>USD430,000</td></tr> <tr><td class="left">Common stock dividends paid </td><td>USD240,000</td></tr> </table>
Consider the common-size balance sheets in Exhibit 1 for Company A, Company B, as well as the industry average. <table style="width:90%;text-align:center"> <caption>Exhibit 1: Balance Sheet and Industry Average</caption> <tr><td class="left"> </td><th>Company A</th><th> Company B</th><th> Industry Average</th></tr> <tr><td class="left">ASSETS </td><td colspan="3"></td></tr> <tr><td class="left">Current assets</td><td colspan="3"></td></tr> <tr><td class="left"> Cash and cash equivalents </td><td>5 </td><td>5 </td><td>7</td></tr> <tr><td class="left"> Marketable securities</td><td> 5</td><td> 0</td><td> 2</td></tr> <tr><td class="left"> Accounts receivable, net </td><td>5</td><td> 15 </td><td>12</td></tr> <tr><td class="left"> Inventories </td><td>15 </td><td>20 </td><td>16</td></tr> <tr><td class="left"> Prepaid expenses </td><td>5 </td><td>15 </td><td>11</td></tr> <tr><td class="left">Total current assets </td><td>35</td><td> 55</td><td> 48</td></tr> <tr><td class="left"> Property, plant, and equipment, net</td><td> 40 </td><td>35</td><td> 37</td></tr> <tr><td class="left"> Goodwill </td><td>25</td><td> 0</td><td> 8</td></tr> <tr><td class="left"> Other assets </td><td>0 </td><td>10 </td><td>7</td></tr> <tr><td class="left">Total assets </td><td>100 </td><td>100 </td><td>100</td></tr> <tr><td class="left">LIABILITIES AND SHAREHOLDERS’ EQUITY </td><td colspan="3"></td></tr> <tr><td class="left">Current liabilities </td><td colspan="3"></td></tr> <tr><td class="left"> Accounts payable </td><td>10</td><td> 10</td><td> 10</td></tr> <tr><td class="left"> Short-term debt </td><td>25 </td><td>10 </td><td>15</td></tr> <tr><td class="left"> Accrued expenses </td><td>0 </td><td>5 </td><td>3</td></tr> <tr><td class="left">Total current liabilities </td><td>35 </td><td>25 </td><td>28</td></tr> <tr><td class="left"> Long-term debt </td><td>45 </td><td>20 </td><td>28</td></tr> <tr><td class="left"> Other non-current liabilities </td><td>0 </td><td>10 </td><td>7</td></tr> <tr><td class="left">Total liabilities </td><td>80 </td><td>55 </td><td>63</td></tr> <tr><td class="left"> Total shareholders’ equity </td><td>20 </td><td>45 </td><td>37</td></tr> <tr><td class="left"><b>Total liabilities and shareholders’ equity</b></td><td> 100 </td><td>100 </td><td>100</td></tr> </table>
<p> Please use the selected disclosure data in Exhibit 1 and Exhibit 2 for the Marcy Corporation.<br> <b>Note I: Income Taxes</b><br> The components of earnings before income taxes are as shown in Exhibit 1: </p> <table style="width:95%;text-align:center;border-spacing:5px;"> <caption>Exhibit 1: Earnings before Income Taxes (US dollars thousands)</caption> <tr><td class="left"></td> <th>Year 3 </th> <th>Year 2</th><th> Year 1</th></tr> <tr><td>Earnings before income taxes:</td><td></td><td></td><td></td></tr> <tr><td class="left">United States</td> <td class="right">USD117,758</td><td class="right">USD107,053</td><td class="right">USD97,321</td></tr> <tr><td class="left">Foreign</td><td class="right">57,526</td><td class="right">52,296</td><td class="right">47,542</td></tr> <tr><td class="left">Total</td><td class="right">USD175,284</td><td class="right">USD159,349</td><td class="right">USD144,863</td></tr> </table> <p> The components of the provision for income taxes are as shown in Exhibit 2:</p><br> <table style="width:95%;text-align:center;border-spacing:5px;"> <caption>Exhibit 2: Provision for Income Taxes (US dollars thousands)</caption> <tr><td class="left"></td> <th>Year 3 </th> <th>Year 2</th><th> Year 1</th></tr> <tr><td>Income taxes Current:</td><td></td><td></td><td></td></tr> <tr><td class="left">Federal</td> <td class="right">USD34,739</td><td class="right">USD34,257</td><td class="right">USD31,143</td></tr> <tr><td class="left">Foreign</td><td class="right">14,382</td><td class="right">13,074</td><td class="right">17,591</td></tr> <tr><td class="left">Foreign</td><td class="right">USD49,121</td><td class="right">USD47,331</td><td class="right">USD48,734</td></tr> <tr><td>Deferred:</td><td></td><td></td><td></td></tr> <tr><td class="left">Federal</td> <td class="right">(USD6,524)</td><td class="right">(USD6,002)</td><td class="right">(USD5,325)</td></tr> <tr><td class="left">Foreign</td><td class="right">389</td><td class="right">305</td><td class="right">262</td></tr> <tr><td class="left"> </td> <td class="right">(6,135)</td> <td class="right">(5,697)</td><td class="right">(5,063)</td></tr> <tr><td class="left">Total</td> <td class="right">USD42,986</td> <td class="right">USD41,634</td><td class="right">USD43,671</td></tr> </table>
<p> An analyst is studying the impairment of the manufacturing equipment of WLP Corp., a UK-based corporation that reports under IFRS. He gathers the following information about the equipment:</p><br> <table style="width:95%;text-align:center"> <tr><td class="left">Fair value </td><td class="right">GBP16,800,000</td></tr> <tr><td class="left">Costs to sell </td><td class="right">GBP800,000</td></tr> <tr><td class="left">Value in use </td><td class="right">GBP14,500,000</td></tr> <tr><td class="left">Net carrying amount </td><td class="right">GBP19,100,000</td></tr> </table>
<p>Hans Annan, CFA, a food and beverage analyst, is reviewing Century Chocolate’s inventory policies as part of his evaluation of the company. Century Chocolate, based in Switzerland, manufactures chocolate products and purchases and resells other confectionery products to complement its chocolate line. Annan visited Century Chocolate’s manufacturing facility last year. He learned that cacao beans, imported from Brazil, represent the most significant raw material and that the work-in-progress inventory consists primarily of three items: roasted cacao beans, a thick paste produced from the beans (called chocolate liquor), and a sweetened mixture that needs to be “conched” to produce chocolate. On the tour, Annan learned that the conching process ranges from a few hours for lower-quality products to six days for the highest-quality chocolates. While there, Annan saw the facility’s climate-controlled area where manufactured finished products (cocoa and chocolate) and purchased finished goods are stored prior to shipment to customers. After touring the facility, Annan had a discussion with Century Chocolate’s CFO regarding the types of costs that were included in each inventory category.</p><p> Annan has asked his assistant, Joanna Kern, to gather some preliminary information regarding Century Chocolate’s financial statements and inventories. He also asked Kern to calculate the inventory turnover ratios for Century Chocolate and another chocolate manufacturer for the most recent five years. Annan does not know Century Chocolate’s most direct competitor, so he asks Kern to do some research and select the most appropriate company for the ratio comparison. Kern reports back that Century Chocolate prepares its financial statements in accordance with IFRS. She tells Annan that the policy footnote states that raw materials and purchased finished goods are valued at purchase cost, whereas work in progress and manufactured finished goods are valued at production cost. Raw material inventories and purchased finished goods are accounted for using the FIFO method, and the weighted average cost method is used for other inventories. An allowance is established when the net realizable value of any inventory item is lower than the value calculated previously.</p> <p>Kern provides Annan with the selected financial statements and inventory data for Century Chocolate. The ratio exhibit Kern prepared compares Century Chocolate’s inventory turnover ratios to those of Gordon’s Goodies, a US-based company. Annan returns the exhibit and tells Kern to select a different competitor that reports using IFRS rather than US GAAP. During this initial review, Annan asks Kern why she has not indicated whether Century Chocolate uses a perpetual or a periodic inventory system. Kern replies that she learned that Century Chocolate uses a perpetual system but did not include this information in her report because inventory values would be the same under either a perpetual or periodic inventory system. Annan tells Kern she is wrong and directs her to research the matter.</p> <p>While Kern is revising her analysis, Annan reviews the most recent month’s Cocoa Market Review from the International Cocoa Organization. He is drawn to the statement that “the ICCO daily price, averaging prices in both futures markets, reached a 29-year high in US dollar terms and a 23-year high in special drawing rights (SDRs) terms (the SDR unit comprises a basket of major currencies used in international trade: US dollar, euro, pound sterling, and yen).” Annan makes a note that he will need to factor the potential continuation of this trend into his analysis.</p> <table style="width:95%;text-align:center"> <caption>Exhibit 1: Century Chocolate Financial Statements</caption> <tr><th colspan="4"><b>A. Century Chocolate Income Statements (millions of Swiss francs)</b></th></tr> <tr><th colspan="2"><b>For Years Ended 31 December</b></th><th class="right"><b>2018</b></th><th class="right"><b>2017</b></th></tr> <tr><td colspan="2" class="left">Sales</td><td class="right">95,290</td><td class="right">93,248</td></tr> <tr><td colspan="2" class="left">Cost of sales</td><td class="right">–41,043</td><td class="right">–39,047</td></tr> <tr><td colspan="2" class="left">Marketing, administration, and other expenses</td><td class="right">–35,318</td><td class="right">–42,481</td></tr> <tr><td colspan="2" class="left"><b>Profit before taxes</b></td><td class="right"><b>18,929</b></td><td class="right"><b>11,720</b></td></tr> <tr><td colspan="2" class="left">Taxes</td><td class="right">–3,283</td><td class="right">–2,962</td></tr> <tr><td colspan="2" class="left"><b>Profit for the period</b></td><td class="right"><b>15,646</b></td><td class="right"><b>8,758</b></td></tr> <tr style="borde 1px solid;"><th colspan="4"><b></b></th></tr> <tr><th colspan="4"><b>B. Century Chocolate Balance Sheets (millions of Swiss francs)</b></th></tr> <tr><th colspan="2"><b>For 31 December</b></th><th class="right"><b>2018</b></th><th><b> </b></th></tr> <tr><td colspan="2" class="left">Cash, cash equivalents, and short-term investments</td><td class="right">6,190</td><td class="right">8,252</td></tr> <tr><td colspan="2" class="left">Trade receivables and related accounts, net</td><td class="right">11,654</td><td class="right">12,910</td></tr> <tr><td colspan="2" class="left">Inventories, net</td><td class="right">8,100</td><td class="right">7,039</td></tr> <tr><td colspan="2" class="left">Other current assets</td><td class="right">2,709</td><td class="right">2,812</td></tr> <tr><td colspan="2" class="left"><b>Total current assets</b></td><td class="right"><b>28,653</b></td><td class="right"><b>31,013</b></td></tr> <tr><td colspan="2" class="left">Property, plant, and equipment, net</td><td class="right">18,291</td><td class="right">19,130</td></tr> <tr><td colspan="2" class="left">Other current assets</td><td class="right">45,144</td><td class="right">49,875</td></tr> <tr><td colspan="2" class="left"><b>Total assets</b></td><td class="right"><b>92,088</b></td><td class="right"><b>100,018</b></td></tr> <tr><th colspan="4"><b></b></th></tr> <tr><td colspan="2" class="left">Trade and other payables</td><td class="right">10,931</td><td class="right">12,299</td></tr> <tr><td colspan="2" class="left">Other current liabilities</td><td class="right">17,873</td><td class="right">25,265</td></tr> <tr><td colspan="2" class="left"><b>Total current liabilities</b></td><td class="right"><b>28,804</b></td><td class="right"><b>37,564</b></td></tr> <tr><td colspan="2" class="left">Non-current liabilities</td><td class="right">15,672</td><td class="right">14,963</td></tr> <tr><td colspan="2" class="left"><b>Total liabilities</b></td><td class="right"><b>44,476</b></td><td class="right"><b>52,527</b></td></tr> <tr><th colspan="4"><b></b></th></tr> <tr><td colspan="2" class="left">Equity Share capital</td><td class="right">332</td><td class="right">341</td></tr> <tr><td colspan="2" class="left">Retained earnings and other reserves</td><td class="right">47,280</td><td class="right">47,150</td></tr> <tr><td colspan="2" class="left"><b>Total equity</b></td><td class="right"><b>47,612</b></td><td class="right"><b>47,491</b></td></tr> <tr><td colspan="2" class="left"><b>Total liabilities and shareholders’ equity</b></td><td class="right"><b>92,088</b></td><td class="right"><b>100,018</b></td></tr> <tr style="borde 1px solid;"><th colspan="4"><b></b></th></tr> <tr><th colspan="4"><b>C. Century Chocolate Supplementary Footnote Disclosures: Inventories (millions of Swiss francs)</b></th></tr> <tr><th colspan="2" ><b>For 31 December</b></th><th class="right"><b>2018</b></th><th class="right"><b>2017</b></th></tr> <tr><td colspan="2" class="left">Raw Materials</td><td class="right">2,154</td><td class="right">1,585</td></tr> <tr><td colspan="2" class="left">Work in Progress</td><td class="right">1,061</td><td class="right">1,027</td></tr> <tr><td colspan="2" class="left">Finished Goods</td><td class="right">5,116</td><td class="right">4,665</td></tr> <tr><td colspan="2" class="left">Total inventories before allowance</td><td class="right">8,331</td><td class="right">7,277</td></tr> <tr><td colspan="2" class="left">Allowance for write-downs to net realizable value</td><td class="right">–231</td><td class="right">–238</td></tr> <tr><td colspan="2" class="left">Total inventories net of allowance</td><td class="right">8,100</td><td class="right">7,039</td></tr> <tr style="borde 1px solid;"><th colspan="4"><b></b></th></tr> <tr><th colspan="4"><b>D. Century Chocolate Inventory Record for Purchased Lemon Drops</b></th></tr> <tr><th><b>Date</b></th><th><b> </b></th><th><b>Cartons</b></th><th><b>Per Unit Amount (Swiss francs)</b></th></tr> <tr><td class="left"> </td><td><i>Beginning inventory</i></td><td>100</td><td>22</td></tr> <tr><td class="left">4 Feb 2018</td><td><i>Purchase</i></td><td>40</td><td>25</td></tr> <tr><td class="left">3 Apr 2018</td><td><i>Sale</i></td><td>50</td><td>32</td></tr> <tr><td class="left">23 Jul 2018</td><td><i>Purchase</i></td><td>70</td><td>30</td></tr> <tr><td class="left">16 Aug 2018</td><td><i>Sale</i></td><td>100</td><td>32</td></tr> <tr><td class="left">9 Sep 2018</td><td><i>Sale</i></td><td>35</td><td>32</td></tr> <tr><td class="left">15 Nov 2018</td><td><i>Purchase</i></td><td>100</td><td>28</td></tr> <tr style="borde 1px solid;"><th colspan="4"><b></b></th></tr> <tr><th colspan="4"><b>E. Century Chocolate Net Realizable Value Information for Black Licorice Jelly Beans</b></th></tr> <tr><th colspan="2"><b> </b></th><th class="right"><b>2018</b></th><th class="right"><b>2017</b></th></tr> <tr><td colspan="2" class="left">FIFO cost of inventory at 31 December (Swiss francs)</td><td class="right">314,890</td><td class="right">374,870</td></tr> <tr><td colspan="2" class="left">Ending inventory at 31 December (kilograms)</td><td class="right">77,750</td><td class="right">92,560</td></tr> <tr><td colspan="2" class="left">Cost per unit (Swiss francs)</td><td class="right">4.05</td><td class="right">4.05</td></tr> <tr><td colspan="2" class="left">Net Realizable Value (Swiss francs per kilograms)</td><td class="right">4.20</td><td class="right">3.95</td></tr> </table>
<p> Robert Groff, an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a comparative financial analysis between Crux and its two main competitors, Rolby Corp. and Mikko Inc. Crux and Mikko report under US GAAP and Rolby reports under IFRS.</p><p> Groff gathers information on Crux, Rolby, and Mikko. The relevant financial information on the three companies, and on the industry, is provided in Exhibit 1. </p> <table style="width:95%;text-align:center"> <caption>Exhibit 1: Selected Financial Information (millions of US dollars)</caption> <tr><th colspan="4"><b>A. Balance Sheets and Income Statements</b></th></tr> <tr><th><b> </b></th><th><b>Crux</b></th><th><b>Rolby</b></th><th><b>Mikko</b></th></tr> <tr><td class="left">Inventory valuation method</td><td class="right">LIFO</td><td class="right">FIFO</td><td class="right">LIFO</td></tr> <tr><td class="left" style=" border-bottom: 2px solid black;">From the Balance Sheets</td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left"><b>As of 31 December 2018</b></td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left">Inventory, gross</td><td class="right">480</td><td class="right">620</td><td class="right">510</td></tr> <tr><td class="left">Valuation allowance</td><td class="right">20</td><td class="right">25</td><td class="right">14</td></tr> <tr><td class="left">Inventory, net</td><td class="right">460</td><td class="right">595</td><td class="right">496</td></tr> <tr><td class="left">Total debt</td><td class="right">1,122</td><td class="right">850</td><td class="right">732</td></tr> <tr><td class="left">Total shareholders’ equity</td><td class="right">2,543</td><td class="right">2,403</td><td class="right">2,091</td></tr> <tr><td class="left"><b>As of 31 December 2017</b></td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left">Inventory, gross</td><td class="right">465</td><td class="right">602</td><td class="right">401</td></tr> <tr><td class="left">Valuation allowance</td><td class="right">23</td><td class="right">15</td><td class="right">12</td></tr> <tr><td class="left">Inventory, net</td><td class="right">442</td><td class="right">587</td><td class="right">389</td></tr> <tr><td class="left" style="border-bottom: 2px solid black;">From the Income Statements</td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left"><b>Year Ended 31 December 2018</b></td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left">Revenues</td><td class="right">4,609</td><td class="right">5,442</td><td class="right">3,503</td></tr> <tr><td class="left">Cost of goods sold<sup>a</sup></td><td class="right">3,120</td><td class="right">3,782</td><td class="right">2,550</td></tr> <tr><td class="left">Net income</td><td class="right">229</td><td class="right">327</td><td class="right">205</td></tr> <tr><td class="left"><sup>a</sup>Charges included in cost of goods sold for inventory write-downs*</td><td class="right">13</td><td class="right">15</td><td class="right">15</td></tr> <tr><th colspan="4"><b> B. LIFO Reserve</b></th></tr> <tr style="border-bottom: 2px solid black;"><td class="left">LIFO Reserve </td><th><b> </b></th><th><b> </b></th><th><b> </b></th></tr> <tr><td class="left">As of 31 December 2018</td><td class="right">55</td><td class="right">0</td><td class="right">77</td></tr> <tr><td class="left">As of 31 December 2017</td><td class="right">72</td><td class="right">0</td><td class="right">50</td></tr> <tr><td class="left">As of 31 December 2016</td><td class="right">96</td><td class="right">0</td><td class="right">43</td></tr> <tr><td class="left" style="border-bottom: 2px solid black;">Tax Rate</td><td class="right"></td><td class="right"></td><td class="right"></td></tr> <tr><td class="left">Effective tax rate</td><td class="right">30%</td><td class="right">30%</td><td class="right">30%</td></tr> <tr><th colspan="4"><b>C. Industry Information</b></th></tr> <tr><th><b> </b></th><th><b>2018</b></th><th><b>2017</b></th><th><b>2016</b></th></tr> <tr><td class="left">Raw materials price index</td><td class="right">112</td><td class="right">105</td><td class="right">100</td></tr> <tr><td class="left">Finished goods price index</td><td class="right">114</td><td class="right">106</td><td class="right">100</td></tr> </table> <p><i>*This does not match the change in the inventory valuation allowance because the valuation allowance is reduced to reflect the valuation allowance attached to items sold and increased for additional necessary write-downs.</i></p> <p>To compare the financial performance of the three companies, Groff decides to convert LIFO figures into FIFO figures, and adjust figures to assume no valuation allowance is recognized by any company.</p>
<p style="text-align: justify;">ZP Corporation is a (hypothetical) multinational corporation headquartered in Japan that trades on numerous stock exchanges. ZP prepares its consolidated financial statements in accordance with US GAAP. Excerpts from ZP’s 2018 annual report are presented below.</p> <table style="width:95%;text-align:center"> <caption>Exhibit 1: ZP Corporation Financial Statements</caption> <tr><th colspan="4"><b>A. Consolidated Balance Sheets (millions in Japanese yen)</b></th></tr> <tr><th colspan="2"><b> 31 December</b></th><th><b>2017</b></th><th><b>2018</b></th></tr> <tr><td colspan="2" class="left"><b>Current Assets</b></td><td></td><td></td></tr> <tr><td colspan="2" class="left">Cash and cash equivalents</td><td>JPY542,849</td><td>JPY814,760</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Inventories</td><td>608,572</td><td>486,465</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total current assets</td><td>4,028,742</td><td>3,766,309</td></tr> <tr><td colspan="2" class="left">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td></tr> <tr><td colspan="2" class="left"><b>Total assets</b></td><td><b>JPY10,819,440</b></td><td><b>JPY9,687,346</b></td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total current liabilities</td><td>JPY3,980,247</td><td>JPY3,529,765</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total long-term liabilities</td><td>2,663,795</td><td>2,624,002</td></tr> <tr><td colspan="2" class="left">Minority interest in consolidated subsidiaries</td><td>218,889</td><td>179,843</td></tr> <tr><td colspan="2" class="left">Total shareholders’ equity</td><td style="border-bottom: 2px solid black;">3,956,509</td><td style="border-bottom: 2px solid black;">3,353,736</td></tr> <tr><td colspan="2" class="left"><b>Total liabilities and shareholders’ equity</b></td><td><b>JPY10,819,440</b></td><td><b>JPY9,687,346</b></td></tr> <tr><th colspan="4"><b>B. Consolidated Statements of Income (millions in Japanese yen)</b></th></tr> <tr><th><b>For the years ended 31 December</b></th><th><b>2016</b></th><th><b>2017</b></th><th><b>2018</b></th></tr> <tr><td class="left"><b>Net revenues</b></td><td></td><td></td><td></td></tr> <tr><td class="left">Sales of products</td><td>JPY7,556,699</td><td>JPY8,273,503</td><td>JPY6,391,240</td></tr> <tr><td class="left">Financing operations</td><td style="border-bottom: 2px solid black;">425,998</td><td style="border-bottom: 2px solid black;">489,577</td><td style="border-bottom: 2px solid black;">489,577</td></tr> <tr><td class="left"></td><td>7,982,697</td><td>8,763,080</td><td>8,763,080</td></tr> <tr><td class="left"><b>Cost and expenses</b></td><td></td><td></td><td></td></tr> <tr><td class="left">Cost of products sold</td><td>6,118,742</td><td>6,817,446</td><td>5,822,805</td></tr> <tr><td class="left">Cost of financing operations</td><td>290,713</td><td>356,005</td><td>329,128</td></tr> <tr><td class="left">Selling, general and administrative</td><td>827,005</td><td>832,837</td><td>844,927</td></tr> <tr><td class="left">⁝</td><td>⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td class="left"><b>Operating income (loss)</b></td><td>746,237</td><td>756,792</td><td>–153,670</td></tr> <tr><td class="left">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td></tr> <tr><td class="left"><b>Net income</b></td><td>JPY548,011</td><td>JPY572,626</td><td>–JPY145,646</td></tr> </table> <br> <table style="width:95%;text-align:center"> <caption>Exhibit 2: Excerpt from the 2018 Annual Report, Selected Disclosures</caption> <tr><th colspan="3"><b>Management Discussion and Analysis of Financial Condition and Results of Operations</b></th></tr> <tr><td colspan="3"><p style="text-align: justify;">Cost reduction efforts were offset by increased prices of raw materials, other production materials and parts. Inventories decreased during fiscal 2018 by JPY122.1 billion, or 20.1 percent, to JPY486.5 billion. This reflects the impacts of decreased sales volumes and fluctuations in foreign currency translation rates.</p></td></tr> <tr><th colspan="3"><b>Management and Corporate Information</b></th></tr> <tr><td colspan="3"><b>Risk Factors Industry and Business Risks</b> <p style="text-align: justify;">The worldwide market for our products is highly competitive. ZP faces intense competition from other manufacturers in the respective markets in which it operates. Competition has intensified due to the worldwide deterioration in economic conditions. In addition, competition is likely to further intensify because of continuing globalization, possibly resulting in industry reorganization. Factors affecting competition include product quality and features, the amount of time required for innovation and development, pricing, reliability, safety, economy in use, customer service and financing terms. Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward price pressure.</p> <p style="text-align: justify;">ZP’s ability to adequately respond to the recent rapid changes in the industry and to maintain its competitiveness will be fundamental to its future success in maintaining and expanding its market share in existing and new markets.</p></td></tr> <tr><th colspan="3"><b>Notes to Consolidated Financial Statements</b></th></tr> <tr><td colspan="3"><b>2. Summary of significant accounting policies: Inventories</b> <p style="text-align: justify;">Inventories are valued at cost, not in excess of market. Cost is determined on the “average-cost” basis, except for the cost of finished products carried by certain subsidiary companies, which is determined on a last-in, first-out (LIFO) basis. Inventories valued on the LIFO basis totaled JPY94,578 million and JPY50,037 million at 31 December 2017 and 2018, respectively. Had the FIFO basis been used for those companies using the LIFO basis, inventories would have been JPY10,120 million and JPY19,660 million higher than reported at 31 December 2017 and 2018, respectively.</p> <b>9. Inventories: Inventories consist of the following:</b></td></tr> <tr><th class="left">31 December (millions in Japanese yen)</th> <th>2017</th> <th>2018</th></tr> <tr><td class="left">Finished goods</td><td>JPY 403,856</td><td>JPY 291,977</td></tr> <tr><td class="left">Raw materials</td><td>99,869</td><td>85,966</td></tr> <tr><td class="left">Work in process</td><td>79,979</td><td>83,890</td></tr> <tr><td class="left">Supplies and other</td><td>24,868</td><td>24,632</td></tr> <tr><td class="left"></td><th>JPY 608,572</th><th>JPY 486,465</th></tr> </table>
<p>Melanie Hart, CFA, is a transportation analyst. Hart has been asked to write a research report on Altai Mountain Rail Company (AMRC). Like other companies in the railroad industry, AMRC’s operations are capital intensive, with significant investments in long-lived tangible assets as property, plant, and equipment. In November of 2021, AMRC’s board of directors hired a new team to manage thecompany. In reviewing the company’s 2022 annual report, Hart is concerned about some of the accounting choices that the new management has made. These choices differ from those of the previous management and from common industry practice. Hart has highlighted the following statements from the company’s annual report:</p> <dl style=" display: grid; grid-template-columns: 150px 1fr; gap: 8px 16px;"> <dt>Statement 1</dt> <dd>“In 2022, AMRC spent significant amounts on track replacement and similar improvements. AMRC expensed rather than capitalized a significant proportion of these expenditures.”</dd> <dt>Statement 2</dt> <dd>“AMRC uses the straight-line method of depreciation for both financial and tax reporting purposes to account for plant and equipment.”</dd> <dt>Statement 3 </dt> <dd>““In 2022, AMRC recognized an impairment loss of €50 million on a fleet of locomotives. The impairment loss was reported as ‘other income’ in the income statement and reduced the carrying amount of the assets on the balance sheet.”</dd> </dl> <p>Exhibit 1 and Exhibit 2 contain AMRC’s 2022 consolidated income statement and balance sheet. AMRC prepares its financial statements in accordance with International Financial Reporting Standards. </p> <table style="width:95%;text-align:center"> <caption>Exhibit 1: Consolidated Statement of Income</caption> <tr><th class="left"></th><th colspan="2">2022</th><th colspan="2">2021</th></tr> <tr><th class="left"> For the Years Ended 31 December</th><th>Euros<br> millions</th><th>Revenues<br> (%)</th><th>Euros<br> millions</th><th>Revenues<br> (%)</th></tr> <tr><td class="left">Operating revenues</td><td>2,600</td><td>100.0</td><td>2,300</td><td>100.0</td></tr> <tr><td class="left">Operating expenses Depreciation</td><td>(200)</td><td>(7.7)</td><td>(190)</td><td>(8.3)</td></tr> <tr><td class="left">Other operating expense</td><td>(1,590)</td><td>(61.1)</td><td>(1,515)</td><td>(65.9)</td></tr> <tr><td class="left">Total operating expenses</td><td>(1,790)</td><td>(68.8)</td><td>(1,705)</td><td>(74.2)</td></tr> <tr><td class="left">Operating income</td><td>810</td><td>31.2</td><td>595</td><td>25.8</td></tr> <tr><td class="left">Other income</td><td>(50)</td><td>(1.9)</td><td></td><td>0.0</td></tr> <tr><td class="left">Interest expense</td><td>(73)</td><td>(2.8)</td><td>(69)</td><td>(3.0)</td></tr> <tr><td class="left">Income before taxes</td><td>687</td><td>26.5</td><td>526</td><td>22.8</td></tr> <tr><td class="left">Income taxes</td><td>(272)</td><td>(10.5)</td><td>(198)</td><td>(8.6)</td></tr> <tr><td class="left">Net income</td><td>415</td><td>16</td><td>328</td><td>14.2</td></tr> </table> <br> <table style="width:95%;text-align:center"> <caption>Exhibit 2: Consolidated Balance Sheet</caption> <tr><td class="left"><b>As of 31 December</b></td><th colspan="2">2022</th><th colspan="2">2021</th></tr> <tr><td class="left"><b>Assets</b></td><th>Euros millions</th><th>Assets (%)</th><th>Euros millions</th><th>Assets (%)</th></tr> <tr><td class="left">Current assets</td><td>500</td><td>9.4</td><td>450</td><td>8.5</td></tr> <tr><td class="left">Property & equipment: Land</td><td>700</td><td>13.1</td><td>700</td><td>13.2</td></tr> <tr><td class="left">Plant & equipment</td><td>6,000</td><td>112.1</td><td>5,800</td><td>109.4</td></tr> <tr><td class="left">Total property & equipment</td><td>6,700</td><td>125.2</td><td>6,500</td><td>122.6</td></tr> <tr><td class="left">Accumulated depreciation</td><td>(1,850)</td><td>(34.6)</td><td>(1,650)</td><td>(31.1)</td></tr> <tr><td class="left">Net property & equipment</td><td>4,850</td><td>90.6</td><td>4,850</td><td>91.5</td></tr> <tr><td class="left">Total assets</td><td>5,350</td><td>100.0</td><td>5,300</td><td>100.0</td></tr> <tr><td class="left"><b>Liabilities and Shareholders’ Equity</b></td><td></td><td></td><td></td><td></td></tr> <tr><td class="left">Current liabilities</td><td>480</td><td>9.0</td><td>430</td><td>8.1</td></tr> <tr><td class="left">Long-term debt</td><td>1,030</td><td>19.3</td><td>1,080</td><td>20.4</td></tr> <tr><td class="left">Other long-term provisions and liabilities</td><td>1,240</td><td>23.1</td><td>1,440</td><td>27.2</td></tr> <tr><td class="left">Total liabilities</td><td>2,750</td><td>51.4</td><td>2,950</td><td>55.7</td></tr> <tr><td class="left">Shareholders’ equity Common stock and paid-in-surplus</td><td>760</td><td>14.2</td><td>760</td><td>14.3</td></tr> <tr><td class="left">Retained earnings</td><td>1,888</td><td>35.5</td><td>1,600</td><td>30.2</td></tr> <tr><td class="left">Other comprehensive losses</td><td>(48)</td><td>(0.9)</td><td>(10)</td><td>(0.2)</td></tr> <tr><td class="left">Total shareholders’ equity</td><td>2,600</td><td>48.6</td><td>2,350</td><td>44.3</td></tr> <tr><td class="left">Total liabilities & shareholders’ equity</td><td>5,350</td><td>100.0</td><td>5,300</td><td>100.0</td></tr> </table>
<p>Brian Jordan is interviewing for a junior equity analyst position at Orion Investment Advisors. As part of the interview process, Mary Benn, Orion’s Director of Research, provides Jordan with information about two hypothetical companies, Alpha and Beta, and asks him to comment on the companies’ financial statements and ratios. Both companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and are identical in all respects except for their accounting choices.</p><p> Jordan is told that, at the beginning of the current fiscal year, both companies purchased a major new computer system and began building new manufacturing plants for their own use. Alpha capitalized and Beta expensed the cost of the computer system; Alpha capitalized and Beta expensed the interest costs associated with the construction of the manufacturing plants.</p><p> Benn asks Jordan, “What was the impact of these decisions on each company’s current fiscal year financial statements and ratios?”</p><p> Jordan responds, “Alpha’s decision to capitalize the cost of its new computer system instead of expensing it results in lower net income, lower total assets, and higher cash flow from operating activities in the current fiscal year. Alpha’s decision to capitalize its interest costs instead of expensing them results in a lower fixed asset turnover ratio and a higher interest coverage ratio.”</p><p> Jordan is told that Alpha uses the straight-line depreciation method and Beta uses an accelerated depreciation method; both companies estimate the same useful lives for long-lived assets. Many companies in their industry use the units-of-production method.</p><p> Benn asks Jordan, “What are the financial statement implications of each depreciation method, and how do you determine a company’s need to reinvest in its productive capacity?”</p><p> Jordan replies, “All other things being equal, the straight-line depreciation method results in the least variability of net profit margin over time, while an accelerated depreciation method results in a declining trend in net profit margin over time. The units-of-production can result in a net profit margin trend that is quite variable. I use a three-step approach to estimate a company’s need to reinvest in its productive capacity. First, I estimate the average age of the assets by dividing net property, plant, and equipment by annual depreciation expense. Second, I estimate the average remaining useful life of the assets by dividing accumulated depreciation by depreciation expense. Third, I add the estimates of the average remaining useful life and the average age of the assets in order to determine the total useful life.”</p><p> Jordan is told that at the end of the current fiscal year, Alpha revalued a manufacturing plant; this increased its reported carrying amount by 15 percent. There was no previous downward revaluation of the plant. Beta recorded an impairment loss on a manufacturing plant; this reduced its carrying value by 10 percent. Benn asks Jordan “What was the impact of these decisions on each company’s current fiscal year financial ratios?”</p><p> Jordan responds, “Beta’s impairment loss increases its debt to total assets and fixed asset turnover ratios, and lowers its cash flow from operating activities. Alpha’s revaluation increases its debt to capital and return on assets ratios, and reduces its return on equity.”</p>
<p>A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on 31 December 2021. The analyst compiles the following information about the vehicle:</p> <table style="width:95%;text-align:center"> <tr><td class="left">Acquisition cost of the vehicle</td><td class="right">ARP100,000</td></tr> <tr><td class="left">Acquisition date</td><td class="right">1 January 2019</td></tr> <tr><td class="left">Estimated residual value at acquisition date</td><td class="right">ARP100,000</td></tr> <tr><td class="left">Expected useful life</td><td class="right">9 years</td></tr> <tr><td class="left">Depreciation method</td><td class="right">Straight-line</td></tr> </table>
After reading the financial statements and footnotes of a company that reports under IFRS, an analyst identified the following three intangible assets: <br> ■ product patent expiring in 40 years;<br> ■ copyright with no expiration date; and<br> ■ goodwill acquired 2 years ago in a business combination.<br>
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