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Free CFA-Level-II Exam Braindumps (page: 8)

Page 7 of 181
PDF with 715 Questions

High Plains Tubular Company is a leading manufacturer and distributor of quality steel products used in energy, industrial, and automotive applications worldwide.
The U.S. steel industry has been challenged by competition from foreign producers located primarily in Asia. All of the U.S. producers are experiencing declining margins as labor costs continue to increase. In addition, the U.S. steel mills arc technologically inferior to the foreign competitors. Also, the U.S. producers have significant environmental issues that remain unresolved.

High Plains is not immune from the problems of the industry and is currently in technical default under its bond covenants. The default is a result of the failure to meet certain coverage and turnover ratios. Earlier this year, High Plains and its bondholders entered into an agreement that will allow High Plains time to become compliant with the covenants. If High Plains is not in compliance by year end, the bondholders can immediately accelerate the maturity date of the bonds. In this case. High Plains would have no choice but to file bankruptcy.

High Plains follows U.S. GAAP. For the year ended 2008, High Plains received an unqualified opinion from its independent auditor. However, the auditor's opinion included an explanatory paragraph about High Plains' inability to continue as a going concern in the event its bonds remain in technical default.

At the end of 2008, High Plains' Chief Executive Officer (CEO) and Chief Financial Officer (CFO) filed the necessary certifications required by the Securities and Exchange Commission (SEC).

To get a better understanding of High Plains' financial situation, it is helpful to review High Plains' cash flow statement found in Exhibit 1 and selected financial footnotes found in Exhibit 2.



Exhibit 2: Selected Financial Footnotes
1. During 2008, High Plains' sales increased 27% over 2007. Its sales growth continues to significantly exceed the industry average. Sales are recognized when a firm order is received from the customer, the sales price is fixed and determinable, and collectability is reasonably assured.

2. The cost of inventories is determined using the last-in, first-out (LIFO) method. Had the first-in, first-out method been used, inventories would have been $152 million and $143 million higher as of December 31,2008 and 2007, respectively.

3. Effective January 1, 2008, High Plains changed its depreciation method from the double- declining balance method to the straight-line method in order to be more comparable with the accounting practices of other firms within its industry. The change was not retroactively applied and only affects assets that were acquired on or after January 1,2008.

4. High Plains made the following discretionary expenditures for maintenance and repair of plant and equipment and for advertising and marketing:



5. During the fiscal year ended December 31, 2008, High Plains sold $50 million of its accounts receivable, with recourse, to an unrelated entity. All of the receivables were still outstanding at year end.

6. High Plains conducts some of its operations in facilities leased under noncancelable capital leases. Certain leases include renewal options with provisions for increased lease payments during the renewal term.

7. High Plains' average net operating assets at the end of 2008 and 2007 was $977.89 million and $642.83 million, respectively.

Which of the following statements about evaluating High Plains financial reporting quality is least accurate?

  1. Higher Plains may have manipulated earnings due to the risk of
  2. High Plains' extreme revenue growth will likely revert back to normal levels over time.
  3. Because of the estimates involved, a higher weighting should be assigned to the accrual component of High Plains' earnings as compared to the cash component.

Answer(s): C

Explanation:

It appears thai High Plains manipulated its earnings upward in 2008 to avoid default under its bond covenants. However, the higher earnings are lower quality as measured by the cash flow accrual ratio. Because of the estimates involved, a lower weighting should be assigned to the accrual component of High Plains' earnings. Extreme earnings (including revenues) tend to revert to normal levels over time (mean reversion). (Study Session 7, LOS 25.b,e)



Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company's employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.

Global Oilfield's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company's annual report are shown in the following exhibits.






If Global Oilfield's retirement plan is a defined contribution arrangement, which of the following statements would be the most correct?

  1. Pension expense and the cash funding amount would be the same.
  2. The potential gains or losses from the assets contributed to the plan are borne by the firm.
  3. The firm would report the difference in the accumulated benefit obligation and the pension assets on the balance sheet.

Answer(s): A

Explanation:

In a defined contribution plan, pension expense is equal to the amount contributed by the firm. The plan participants bear the shortfall risk. There is no ABO in a defined contribution plan. (Study Session 6, LOS 22.a)



Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company's employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.

Global Oilfield's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company's annual report are shown in the following exhibits.






If Global Oilfield were to adopt U.S. pension accounting standards, what adjustment, if any, is necessary to its balance sheet at the end of 2008 assuming no taxes?

  1. Decrease assets by €7,222, decrease liabilities €2,524, and decrease equity by $4,698.
  2. Decrease assets by €4,698 and decrease equity by €4,698.
  3. No adjustment is necessary.

Answer(s): B

Explanation:

At the end of 2008, Global Oilfield repotred a net pension asset of €7,222 in accordance with IFRS. Under SFAS No. 158, Global Oilfields funded status of €2,524 should be reported on the balance sheet. Thus, it is necessary to reduce the net pension asset by €4,698(€7,222 as reported - €2,524 funded status). In order for the accounting equation to balance, it is also necessary to reduce equity by €4,698. (Study Session 6, LOS22.d)



Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company's employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.

Global Oilfield's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company's annual report are shown in the following exhibits.






What was the most likely cause of the actuarial gain reported in the reconciliation of the projected benefit obligation for the year ended 2008?

  1. Increase in the average life expectancy of the participating employees.
  2. Decrease in the expected rate of return.
  3. Increase in the discount rate.

Answer(s): B

Explanation:

At the end of 2008, Global Oilfield reported a net pension asset of €7,222 in accordance with IFRS. Under SFAS No. 158, Global Oilfields funded status of €2,524 should be reported on the balance sheet. Thus, it is necessary to reduce the net pension asset by €4,698 (€7,222 as reported - €2,524 funded status). In order for the accounting equation to balance, it is also necessary to reduce equity by €4,698. (Study Session 6, LOS22.d)






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