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Series 86. questions and answers verified 2024
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Series 86. questions and answers verified 2024
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Series 86Which of the following statements is TRUE concerning a company's ability to
use net operating losses (NOLs)?
A) An NOL may be carried forward 20 years but may not be carried back
B) An NOL may be carried back two years and carried forward 20 years
C) An NOL may be carried back two years and carried forward three years
D) An NOL may be carried back two years and carried forward indefinitely -
correct answer ✔Net operating losses that a company has had in past years
may be used to offset income. This would enable a company to use losses in
the past to lower taxable income by either carrying back or carrying forward
these losses. Under IRS guidelines, an NOL may be carried back two years
and carried forward for a period of 20 years.
Your firm is in negotiation with Healthcare Industries, Inc. to underwrite the
buyout of Pharma-Lab Distributors. The management of Healthcare has
expressed a concern that the accounting methods used by Pharma-Lab might
be aggressive. Which TWO of the following accounting actions taken by
Pharma-Lab would overstate earnings in the short run?
I) Expensing stock options
II) Capitalizing purchased software
III) Recognizing goodwill impairment
IV) Capitalizing research & development
A) I and II
B) II and III
C) II and IV
,D) III and IV - correct answer ✔Aggressive accounting refers to a method of
accounting that is used to report lower expenses and higher income, or to
overstate assets while understating (not recognizing) liabilities. Accounting
standards require firms to follow promulgated opinions; however, in some
cases there are gray areas. Capitalizing software would defer the recognition
of expenses, boosting earnings. Capitalizing R&D increases the cost basis of
the future product, but is not taken as an expense in the short run, thereby
boosting earnings. Expensing stock options lowers earnings, and writing off
goodwill through impairment (as opposed to amortizing over a lengthy period)
also lowers earnings.
Exhibit 42
The 20XX Form 10-K of Robin's Hamburgers, Inc. provides the following
information.
Consolidated Statement of Income
In millions
Revenue $16,500
Cost of Sales 8,500
SG&A 2,400
Nonrecurring Expenses 1,500
EBIT $ --
Interest Expense 1,200
Income Before Tax $ --
Provision for Income Tax 1,000
Net Income $ --
,Tax Rate 34.5%
You are a research analyst and are reviewing Form 10-K of Robin's
Hamburgers, Inc. to compare its earnings to other firms in the industry sector.
The managing director of your team has asked you to exclude Robin's
nonrecurring items and recalculate the co's net income. The revised net
income is:
A) $1,900
B) $2,354
C) $2,882
D) $2,950 - correct answer ✔(C) The revised net income is $2,882,000.
Robin's Hamburger Net Income with Nonrecurring Expenses (In millions)
Revenue $16,500
Cost of Sales 8,500
SG&A 2,400
Nonrecurring Expenses 1,500
EBIT 4,100
Interest Expense 1,200
Income before Taxes 2,900
Provision for Income Tax (34 1/2%) 1,000
Net Income 1,900
Robin's Hamburger Net Income without Nonrecurring Expenses
In millions
Revenue $16,500
, Cost of Sales 8,500
SG&A 2,400
EBIT 5,600
Interest Expense 1,200
Income before Taxes 4,400
Provision for Income Tax (34 1/2%) 1,518
Net Income 2,882
A company has the following financial information:
EBIT = $85mm
EBIT growth rate of 9%
35% tax rate
20mm outstanding shares
$300m 7.5% debentures outstanding
Cash dividends paid out of $5m
The co is planning a follow-on offering in which the co will sell an add'l 2m
shares and selling shareholders will sell an additional 2m shares. Using the
growth rate given, what will the co's EPS be after the offering?
A) $1.67
B) $1.83
C) $1.90
D) $2.07 - correct answer ✔The following steps are needed to calculate the
answer. The EBIT would increase to $92.65m ($85m x 1.09). Next, subtract
the interest expense of $22.5m ($300 x 7.5%) which equals earnings before
tax of $70.15m ($92.65m - $22.5m). The net income would be equal to $
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