Discipline Test Option 1: Business Analysis and Reporting (BAR)

Which statement regarding liquidity and solvency is incorrect?

The current ratio is defined by the formula current assets ÷ accounts payable.

Which statement regarding solvency and profitability ratios is correct?

Return on equity (ROE) is calculated as net income ÷ total equity.

Which statement regarding earnings before interest, taxes, depreciation, and amortization (EBITDA) is incorrect?

EBITDA adds interest, taxes, depreciation, and cost of goods sold back to earnings per share.

Which statement regarding the concept of a balanced scorecard is correct?

Nonfinancial measurements may include quality, customer satisfaction, and employee engagement.

Which statement regarding cost accounting is incorrect?

Direct costs are also referred to as overhead costs.

Which statement regarding the business cycle is correct?

A business cycle starts over when a customer pays for a product or service, and funds are used for new customer orders.

Which statement regarding capital structure is incorrect?

The combination of stock and accounts receivable issued to raise capital is a company’s capital structure.

Which statement regarding cost of capital is correct?

One type of cost of capital is the interest rate charged on long‐term debt.

Which statement regarding asset valuations and goodwill is incorrect?

Carrying value is the fair value of the net assets, or total assets less total liabilities.

Which statement regarding accounting for inventory is correct?

When an asset is sold, the cost is moved from inventory to cost of goods sold.

Which statement regarding accounting for fixed assets is incorrect?

An accelerated depreciation method posts more depreciation expense in the later years of an asset’s useful life.

Which statement about accounting for long-term debt is correct?

When a bond is issued at a discount, the purchaser pays less than the face value of the bond.

Seaside Retail has 20 store locations and is creating the business plan for next year. Which statement regarding liquidity and solvency is incorrect?

Seaside must strive to generate a working capital ratio that is less than 1, in order to pay current liabilities as they come due.

Sterling Builders’ CFO is analyzing the financial results for the past year using this data:

Gross profit $10,000,000
Net income $2,000,000
Total assets $50,000,000
Total equity $38,000,000

Which statement regarding solvency and profitability ratios is incorrect?

The numerator in the times interest earned formula is interest expense.

Hilltop Remodeling is in the kitchen and bath remodeling business. The company meets with clients and provides a specific bid for each job. If the customer approves, Hilltop buys materials and schedules carpenters, electricians, and other professionals to complete the project. Clients are asked to make a 20 percent deposit before work begins, and Hilltop collects the remaining 80 percent when each job is completed.

Which statement regarding Hilltop’s business cycle is correct?

Hilltop’s business cycle starts over when a customer pays the remaining 80 percent for project, and funds are used for new customer projects.

Bitesize Software has raised $30 million in equity and issued $10 million in debt. The company has generated consistent annual earnings for the past 5 years. Bitesize is considering the purchase of a competitor and is discussing the need for raising more capital.

Which statement regarding capital structure is incorrect?

The combination of stock and fixed assets issued to raise capital is Bitesize’s capital structure.

East Coast Chemicals has these assets listed on the balance sheet:

Equipment $12 million
Machinery $30 million
Patent $5 million
Building $15 million

Which statement regarding asset valuations and goodwill is incorrect?

The equipment’s carrying value is the fair value of the asset, which is updated annually.

Playground Toys is performing an inventory count at year end, with help from the CPA firm that audits the business. Playground’s 12/1 beginning inventory is $5.5 million, and the 12/31 ending inventory is $5.2 million.

Which statement regarding accounting for inventory is correct?

When an asset is sold, Playground moves the cost from inventory to cost of goods sold.

Regent Plumbing has these fixed assets listed on the balance sheet:

Equipment $5 million Straight-line depreciation method
Vehicles $16 million Accelerated depreciation method (Double-declining balance)
Building $8 million Straight-line depreciation method

Which statement regarding accounting for fixed assets is incorrect?

The accelerated depreciation method used for vehicles posts more depreciation expense in the later years of an asset’s useful life.

Acme Manufacturing has issued two bond offerings to inventors:

$1,000,000 face amount 8% bond. Acme received total proceeds of $1,070,000 when the bond was issued.

$2,000,000 face amount 6% bond. Acme received total proceeds of $1,850,000 when the bond was issued.

Which statement regarding accounting for long-term debt is correct?

When the 6% bond is issued at a discount, the purchaser pays less than the face value of the bond.