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CFA CFA-Level-II Exam Actual Questions
CFA Level II Chartered Financial Analyst (Page 12 )

Updated On: 19-Jul-2026
Page 12 of 145
PDF with 715 Questions

Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.


Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will total asset turnover (calculated using end-of-period balance sheet figures) likely be larger when calculated from the Rho financial statements or the financial statements translated into the reporting currency (US$) using the all-current method?

  1. Larger on US$ statements.
  2. Larger on Rho statements.
  3. No difference.

Answer(s): B

Explanation:

If the Rho is appreciating, mixed ratios like return on assets and total asset turnover (using end-of-pcriod balance sheet figures) calculated from the local currency statements will be larger than the same ratios calculated from the reporting currency statements that were translated using the all-current method. For example, under the all-current method net income will be translated at the lower average rate ($0.42) and assets will be rramlared at the higher ending rate ($0.45). Therefore the original return on assets (ner income divided by total assets) from the Rho statements will be higher than the ratio after it is translated into the reporting currency. (Study Session 6, LOS 23.d,e)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.


Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:
• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Will fixed asset turnover (calculated using end-of-period balance sheet figures) likely be lower when calculated using the all-current method or remeasured using the temporal method?

  1. Lower under the temporal method.
  2. Lower under the all-current method.
  3. The same under either method.

Answer(s): B

Explanation:

With the Rho appreciating, fixed asset turnover will be lower under the all-current method. (Study Session 6, LOS 23.d,e)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.



Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:
• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Suppose for this question only that Stuart has determined that (1) the operating, financing, and investing decisions related to Wayward's operations are typically made by Wayward's local management located in the foreign country; and (2) some of Wayward's accounts receivable are denominated in a different foreign currency called the Del (DI). Which method is the best to use to translate the Del receivables into Rho, according to U.S. GAAP?

  1. The all-current method.
  2. The temporal method.
  3. The method will depend on inflation.

Answer(s): B

Explanation:

In this example, the Del is the local currency, the Rho is the functional currency (because Wayward is an independent subsidiary), and the U.S. dollar is the reporting currency. The appropriate application of U.S. GAAP is to first remeasure the Del receivables from Del to Rho using the temporal method. (Study Session 6, LOS 23.c)



Jenna Stuart is a financial analyst for Deuce Hardware Company, a U.S. company that reports its results in U.S. dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.



Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

• Spot rate on 1/01/08: $0.35 per Rho
• Spot rate on 12/31/08: $0.45 per Rho
• Average spot rate during 2008: $0.42 per Rho

Suppose for this question only that Stuart decides to use the all-current method to translate Wayward's results into U.S. dollars. Is it likely that the quick ratio and the interest coverage ratio will be the same or different in Rho before translation and in U.S. dollars after translation?

  1. Neither the quick ratio nor the interest coverage ratio will change.
  2. Only the interest coverage ratio will change.
  3. Only the quick ratio will change.

Answer(s): A

Explanation:

The quick ratio (cash and receivables divided by current liabilities) is a pure balance sheet ratio, which means both numerator and denominator will be translated at the current exchange rate and the ratio will be the same before and after translation. The result is the same for the interest coverage ratio (EBIT divided by interest expense) because it is a pure income statement ratio; both the numerator and denominator will be translated at the average rate over the reporting period and the ratio will be the same before and after translation. (Study Session 6, LOS 23.d,e)



Kevin Rathbun, CFA, is a financial analyst at a major brokerage firm. His supervisor, Elizabeth Mao, CFA, asks him to analyze the financial position of Wayland, Inc. (Wayland), a manufacturer of components for high quality optic transmission systems. Mao also inquires about the impact of any unconsolidated investments.

On December 31,2007, Wayland purchased a 35% ownership interest in a strategic new firm called Optimax for $300,000 cash. The pre-acquisition balance sheets of both firms are found in Exhibit 1.


On the acquisition date, all of Optimax's assets and liabilities were stated on its balance sheet at their fair values except for its property, plant, and equipment (PP&E), which had a fair value of $1.2 million. The remaining useful life of the PP&E is ten years with no salvage value. Both firms use the straight-line depreciation method.

For the year ended 2008, Optimax reported net income of $250,000 and paid dividends of
$100,000.

During the first quarter of 2009, Optimax sold goods to Wayland and recognized $15,000 of profit from the sale. At the end of the quarter, half of the goods purchased from Optimax remained in Wayland's inventory.

Wayland currently uses the equity method to account for its investment in Optimax. However, given the potential significance of the investment in the future, Rathbun believes that a proportionate consolidation of Optimax may give a clearer picture of the financial and operating characteristics of Wayland.

Rathbun also notes that Wayland owns shares in Vanry, Inc. (Vanry). Rathbun gathers the data in Exhibit 2 from Wayland's financial statements. The year-end portfolio value is the market value of all Vanry shares held on December 31. All security transactions occurred on July 1, and the transaction price is the price that Wayland actually paid for the shares acquired. Vanry pays a cash dividend of $1 per share at the end of each year. Wayland expects to sell its investment in Vanry in the near term and accounts for it as held-for-trading.



Wayland owns some publicly traded bonds of the Rotor Corporation that it reports as held-to- maturity securities.

The amount of goodwill as a result of Wayland's acquisition of Optimax is closest to:

  1. $0.
  2. $20,000.
  3. $50,000.

Answer(s): B

Explanation:

The excess of purchase price over the pro-rata share of the book value of Optimax is allocated to PP&E. The remainder is goodwill.

Purchase price (in thousands) $300
Less: Pro-rata share of Optimax 210 [$600 Optimax book value .x 35%] Excess of purchase price 90
Less: Excess allocated to PPE 70 [($1,200 fair value - $1,000 book value) x 35%]
Acquisition goodwill $20 (Study Session 5, LOS 21.c)



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