Financial Accounting (15.

516x)
Sample Final Examination

Question/Topic Maximum Points

Question 1 – Inventory 10

Question 2 – Taxes 15

Question 3 – Investments 12

Question 4 – Long-term debt 15

Question 5 – Leases 10

Question 6 – Equity 15

Question 7 – PP&E 10

Question 8 – Miscellaneous 13

Total 100
1. Inventory (10 points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.
A. What would Thermo Fisher’s ending inventory balance have been if they had used FIFO
in 2017? (3 Points)

B. What would be Thermo Fisher’s reported COGS under FIFO for the fiscal year
ending on December 31, 2017? (4 Points)

C. Thermo Fisher’s inventory turnover ratio would be higher / lower if it used FIFO.
(circle one) Explain why in 30 words or less (3 Points)

2. Taxes (15 Points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

A. Using the BSE, record the entry for the provision for income taxes for the fiscal year
ended December 31, 2017, indicating clearly deferred taxes and taxes payable. (5
Points)

Note that Parts B and C ask for information about a fiscal year other than 2017.

B. Calculate Thermo Fisher’s effective tax rate for the fiscal year ended December 31,
2016. Show your work and round your answer to two decimal places (e.g., 34.509% =
34.51%). (4 points)

C. In one or two sentences, explain the main reason(s) that Thermo Fisher’s effective tax
rate for the fiscal year ended December 31, 2016 was different than the US statutory
rate of 35.00%. (3 Points)
D. Use the BSE to record the change in Thermo Fisher’s valuation allowance for the fiscal
year ended December 31, 2017. (3 Points)
3. Investments (12 Points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

A. In August 2017, Thermo Fisher acquired Patheon, a leading global provider of high-
quality drug development. Use the BSE to record the acquisition of Patheon, assuming
that Thermo Fisher purchased 100% of the outstanding equity for $7,358 million in
cash. (5 Points)

B. Suppose instead that Thermo Fisher acquired a 40% stake in Patheon for $2,950
million in cash in August 2017. Use the BSE to record the appropriate entry at the
acquisition date. (3 Points)

C. Suppose instead that Thermo Fisher acquired a 10% stake in Patheon for $740 million
in cash in August 2017. Use the BSE to record the appropriate entry at the acquisition
date. (2 Points)

D. Building on your answer to part C, suppose that at December 31, 2017, this 10% stake
is valued at $700 million. Use the BSE to identify any transactions that Thermo Fisher
might record on December 31, 2017. (2 Points)

4. Long-Term Debt (15 points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

FOR THIS QUESTION, ASSUME A 0% TAX RATE.

A. Use the Balance Sheet Equation (BSE) to identify Thermo Fisher’s debt repayments
during the year ended December 31, 2017. Assume that the repayments were made
because the debt matured (i.e., the debt reached its maturity date). (3 points)
B. Thermo Fisher did not mark their debt obligations to fair value. Use the BSE to
identify the transaction Thermo Fisher would record on December 31, 2017 if they
chose to mark their debt obligations to fair value. (4 points)

C. In August 2017, Thermo Fisher issued 4.10%, 30-year Senior Notes for cash. Assume
that the notes were issued on August 15, 2017 and that the notes pay interest annually on
August 15. Assume that the market rate of interest on the issuance date was 4.00%. Ignore
issuance expenses. Use the BSE to identify the transaction(s) Thermo Fisher would have
recorded on August 15, 2017 when it issued the notes. Ignore taxes. (4 points)
D. Regardless of your answer to Part C, suppose that on August 15, 2018, the net 4.10%
30-year Senior Notes outstanding are $765 million and that interest is paid annually on
August 15. Ignore issuance expenses. Record the payment of interest on August 15,
2019. (4 points)

5. Leases (10 points).

FOR THIS QUESTION, ASSUME A 0% TAX RATE.

Recall that there is a new standard for leases. Suppose that Thermo Fisher executes a new
lease on January 1, 2020, and accounts for it using the new standard. The six payments
on the lease are $20 million per year, and are due each December 31. The terms of the lease
are summarized below:

Annual lease payment: $20,000,000

Term of lease: 6 years
Interest rate: 5.00%
Lease commences on: January 1, 2020
Payments due: December 31 of each year in the lease term
Present value of lease payments $102 million
A. Use the BSE to identify the transaction(s) Thermo Fisher would record on December
31, 2020, assuming the lease is classified as a finance lease. (4 points)

B. Use the BSE to identify the transactions Thermo Fisher would record on December
31, 2020, assuming the lease is classified as an operating lease. (3 points)

C. Net income would be higher / lower / the same (circle one) under the finance lease
classification. Explain why in one sentence. (3 Points)

6. Equity (15 points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

FOR THIS QUESTION, ASSUME A 0% TAX RATE.

A. Use the BSE to show how Thermo Fisher accounted for its repurchase of stock during
the fiscal year ended December 31, 2017. (3 points).
B. How many shares were repurchased in the fiscal year ended December 31, 2017? (3
Points)
C. Regardless of your answer to Part B, suppose that Thermo Fisher repurchased 10
million shares in the fiscal year ended December 31, 2017. Assume that all of these
shares were repurchased on January 1, 2017, and further assume that Thermo Fisher
earns no interest on cash. What would Basic EPS have been if there were no
repurchase? (3 Points)
D. Use the BSE to identify the transaction(s) associated with Thermo Fisher’s share
issuance in fiscal year 2017. (4 Points)

E. How did Thermo Fisher’s account for the underwriting expenses on the offering (circle
one best answer). (2 points)

i. It capitalized them.
ii. It deferred them.
iii. It reduced paid-in capital by them.
iv. None of the above
v. All of the above

7. Property, Plant & Equipment (10 points)

The following questions are based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

A. Use the BSE to record Thermo Fisher’s purchase of fixed assets for cash in the fiscal
year ended December 31, 2017. (3 Points)

B. Suppose that due to political issues, Thermo Fisher must move much of its production
to Europe. As a consequence, the value of their PP&E falls to $2,500 million on January
1, 2018. Use the BSE to identify the transaction (if any) that they would record to reflect
this decline in value. (3 Points)

C. Suppose that on December 31, 2016, Thermo Fisher lengthens the depreciable lives
of its PP&E by 5 years (but does not change salvage values). Would the following
amounts for the year ended December 31, 2017 have been higher, lower or the same
as the respective number shown in their financial statements? Assume Thermo
Fisher’s tax rate is 0.0% (circle the correct answer) (4 Points)

Net Income: higher lower the same

Operating Cash Flows: higher lower the same

8. Miscellaneous (15 Points)
The following question is based on the financial statements contained in the
accompanying “modified” annual report that was provided along with this exam.

A. Use the BSE to show the entry Thermo Fisher used to record bad debt expense for
the fiscal year ended December 31, 2017. (3 Points)

B. Suppose that due to an audit that takes place on January 1, 2018, Thermo Fisher has to
write off $200 million in receivables immediately. Thermo Fisher estimates its
allowance for doubtful accounts should be $100 million after the write-off. Use the BSE
to record the transaction Thermo Fisher used to recognize write-offs on January 1,
2018. Record any other transactions that Thermo Fisher makes. (5 Points)
C. Use the following ratio definitions and 2016 ratio values to answer the question.

Ratio Definition 2016 Ratio Value

Return on Equity: Net Income 0.094

Ending Shareholders Equity

Net margin: Net Income 0.111

Sales

Asset turnover: Sales 0.399

Ending Assets

Leverage: Ending Total Assets 2.131

Ending Shareholders Equity

Return on equity was lower in 2017 than in 2016. Which of the following helps
explain this decrease in ROE? (circle only one best answer) (5 Points)

i. 2017 net margin was lower than 2016 net margin.

ii. 2017 asset turnover was higher than 2016 asset turnover.
iii. 2017 leverage was lower than 2016 leverage.
iv. None of the above
v. All of the above