CPA BAR — Task Based Simulations (TBS) — Solutions & Explanations
TBS 1 — Ratio Analysis & Interpretation
Facts
- Net income = $200,000
- Sales revenue = $1,000,000
- Total assets = $800,000
- Total equity = $500,000
Required
- Return on Assets (ROA)
ROA = Net income ÷ Total assets
= $200,000 ÷ $800,000 = 0.25 = 25.0% - Return on Equity (ROE)
ROE = Net income ÷ Total equity
= $200,000 ÷ $500,000 = 0.40 = 40.0% - Interpretation for a potential investor
- ROA 25%: For every dollar of assets, the company generated $0.25 of net income — this is a strong asset performance indicator (depends on industry norm).
- ROE 40%: Shareholders earned $0.40 on each dollar of equity — very high and attractive.
- ROE >> ROA: This gap commonly signals financial leverage (the company is using debt financing). Leverage magnifies returns to equity when returns on assets exceed the cost of debt, but it increases financial risk (interest obligations).
- Investor considerations:
- Check industry benchmarks: Are these ratios typical for the sector?
- Assess leverage: need debt/equity or interest coverage ratios to see sustainability.
- Look at trend: single period good, but sustained performance matters.
- Examine quality of earnings (cash flows, one-off items).
Exam Tip: Report the numeric answers and then one paragraph interpreting leverage implication + a short note on what other metrics you’d check (debt ratios, interest coverage, cash flow).
TBS 2 — Consolidation Adjustment (Parent owns 80% of Subsidiary)
Facts
- Parent net income = $400,000
- Subsidiary net income = $200,000
- Parent ownership of Subsidiary = 80% → Non-controlling interest (NCI) = 20%
Required
- Consolidated net income (total reported on consolidated financial statements)
Consolidated net income = Parent’s net income + Subsidiary’s net income
= $400,000 + $200,000 = $600,000 - Non-controlling interest share
NCI share of subsidiary net income = Subsidiary net income × 20%
= $200,000 × 0.20 = $40,000 - Net income attributable to parent (consolidated)
Net income attributable to parent = Consolidated net income − NCI share
= $600,000 − $40,000 = $560,000
Explanation / Key points
- On the consolidated statement of comprehensive income you present total consolidated net income (here $600k) and then allocate it between owners of the parent ($560k) and non-controlling interest ($40k).
- If there were intercompany transactions or unrealized profits, adjustments would be required before consolidation; none were given here.
Exam Tip: Show the arithmetic and then state how the allocation appears on consolidated statement (Income attributable to owners of parent / Income attributable to non-controlling interests).
TBS 3 — Segment Reporting (10% revenue threshold)
Facts
- Segment revenues:
- A = $80,000
- B = $120,000
- C = $250,000
- D = $50,000
- Total revenue = $500,000
- Reporting threshold: 10% of total revenue = 0.10 × $500,000 = $50,000
Required
- Which segments meet the 10% threshold?
- Segment A: $80,000 ≥ $50,000 → Report
- Segment B: $120,000 ≥ $50,000 → Report
- Segment C: $250,000 ≥ $50,000 → Report
- Segment D: $50,000 = $50,000 → Report (equal to threshold — typically included)
Conclusion: All four segments (A, B, C, D) meet or equal the 10% revenue threshold and therefore should be reported separately.
- Short disclosure note (sample)
Segment reporting — revenue by operating segment (extract):
The Group operates across four reportable segments (A, B, C and D). Each segment’s revenue and profit (loss) are evaluated regularly by the chief operating decision maker. For the year ended [Year], revenues were: Segment A $80,000; Segment B $120,000; Segment C $250,000; Segment D $50,000. The Company discloses segment revenue, segment profit or loss, and segment assets where material. Inter-segment revenue is eliminated in consolidation. Measurement basis is consistent with consolidated financial statements.
Explanation / Key points
- IAS/IFRS (or similar GAAP) requires separate disclosure of reportable segments that meet quantitative thresholds (10% of revenue, profit/loss, or assets) or where management believes meaningful info should be provided.
- Also include: basis of segmentation, types of products/services, reconciliation to consolidated totals, significant customers (if any single external customer accounts for 10%+ of revenue).
Exam Tip: Write a brief disclosure (2–4 lines) including amounts and a statement on measurement basis and eliminations.
TBS 4 — Cash Flow Classification (Issue bonds $100,000; Purchase equipment $70,000)
Facts
- Issued bonds → cash inflow $100,000
- Purchased equipment → cash outflow $70,000
Required
- Classify transactions
- Issuance of bonds = Financing activity (cash inflow): cash received from borrowing (debt).
- Purchase of equipment = Investing activity (cash outflow): acquisition of long-lived asset.
- Cash flow snippet (simple indirect-style presentation)
Because only two transactions are provided, show the Investing and Financing sections and net change in cash:
Cash flows from operating activities (Indirect method)
- Net income (example) … (not provided)
- Adjustments for non-cash items … (none provided)
- Net cash provided by (used in) operating activities … [not given]
Cash flows from investing activities
- Purchase of equipment (cash outflow) … ($70,000)
Cash flows from financing activities
- Proceeds from issuance of bonds … $100,000
Net increase in cash during the period = Financing inflow $100,000 + Investing outflow (−$70,000) = $30,000
Explanation / Key points
- Classification follows standard statements of cash flows: operating, investing, financing.
- Financing includes borrowing and equity transactions; investing includes property, plant & equipment purchases and disposals.
- If the purchase was financed through noncash financing (e.g., capital lease), present as noncash investing+financing disclosure.
Exam Tip: Clearly label each item under the correct section and compute the net change in cash.
TBS 5 — EPS (Earnings Per Share)
Facts
- Net income = $150,000
- Preferred dividends = $20,000
- Weighted average common shares outstanding = 50,000
- Options outstanding = 10,000 (exercise price below market price — they are potentially dilutive)
Required
- Basic EPS
Basic EPS = (Net income − Preferred dividends) ÷ Weighted average common shares
= ($150,000 − $20,000) ÷ 50,000 = $130,000 ÷ 50,000 = $2.60 per share - Impact on Diluted EPS (qualitative + numeric example)
Qualitative:
- Options exercisable at a strike below current market price are potentially dilutive (they would increase shares outstanding if exercised). Diluted EPS uses the treasury stock method to compute incremental shares from option exercise. The result is diluted EPS ≤ basic EPS (if options are dilutive).
Numeric example (assume exercise price = $10; market price = $20)
- If options are exercised: proceeds = 10,000 options × $10 = $100,000
- Under treasury stock method, company uses proceeds to repurchase shares at market price: repurchase shares = $100,000 ÷ $20 = 5,000 shares
- Incremental shares = Options outstanding − Repurchased shares = 10,000 − 5,000 = 5,000 shares
- Diluted weighted shares = 50,000 + 5,000 = 55,000
- Diluted EPS = (Net income − Preferred dividends) ÷ Diluted weighted shares = $130,000 ÷ 55,000 = $2.3636 ≈ $2.36
Interpretation: Diluted EPS fell from $2.60 → $2.36 due to the dilution effect of in-the-money options.
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Exam Tip: If exercise price/market price not given, explain using the treasury stock method and state that diluted EPS will be lower if options are dilutive. If given prices, perform the numeric treasury-stock calculation.