SOLUTIONS

1. C is correct. For a large, diversified company, margin changes in different business segments may offset each other. Furthermore, margins are most likely to be stable in mature industries.
2. C is correct. Accounts receivable turnover is equal to 365/19 (collection period in days) = 19.2 for 2003 and needs to equal 365/15 = 24.3 in 2004 for Galambos to meet its goal. Sales/turnover equals the accounts receivable balance. For 2003, $300,000,000/19.2 = $15,625,000, and for 2004, $400,000,000/24.3 = $16,460,905. The difference of $835,905 is the increase in receivables needed for Galambos to achieve its goal.
3. C is correct. Credit analysts consider both business risk and financial risk.
4. A is correct. Requiring that net income be positive would eliminate companies that report a positive return on equity only because both net income and shareholders' equity are negative.
5. B is correct. A lower value of debt/total assets indicates greater financial strength. Requiring that a company's debt/total assets be below a certain cutoff point would allow the analyst to screen out highly leveraged and, therefore, potentially financially weak companies.
6. C is correct. Survivorship bias exists when companies that merge or go bankrupt are dropped from the database and only surviving companies remain. Look-ahead bias involves using updated financial information in back-testing that would not have been available at the time the decision was made. Back-testing involves testing models in prior periods and is not, itself, a bias.
7. C is correct. Financial statements should be adjusted for differences in accounting standards (as well as accounting and operating choices). These adjustments should be made prior to common-size and ratio analysis.
8. C is correct. IFRS makes a distinction between unrealized gains and losses on available-for-sale debt securities that arise as a result of exchange rate movements and requires these changes in value to be recognized in the income statement, whereas US GAAP does not make this distinction.
9. A is correct. LIFO is not permitted under IFRS.
10. C is correct. To convert LIFO inventory to FIFO inventory, the entire LIFO reserve must be added back: $600,000 + $70,000 = $670,000.
11. C is correct. The company made no additions to or deletions from the fixed asset account during the year, so depreciation expense is equal to the difference in accumulated depreciation at the beginning of the year and the end of the year, or $0.4 million. Average age is equal to accumulated depreciation/depreciation expense, or $1.6/$0.4 = 4 years. Average depreciable life is equal to ending gross investment/depreciation expense = $2.8/$0.4 = 7 years.
12. C is correct. Tangible book value removes all intangible assets, including goodwill, from the balance sheet.
13. B is correct. Operating leases can be used as an off-balance-sheet financing technique because neither the asset nor liability appears on the balance sheet. Inventory and capital leases are reported on the balance sheet.
14. C is correct. The present value of future operating lease payments would be added to total assets and total liabilities.