Winter 2006 Midterm Solutions

Winter 2006 Midterm Solutions - LAST...

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Unformatted text preview: LAST NAME:_____________________________ FIRST NAME:_____________________________ STUDENT #:______________________________ SECTION:________________________________ McGill University Faculty of Management Introduction to Financial Accounting MGCR 211 Version 1 Mid-Term Examination (Circle your lecturers name) Lecturer: Karen Zajdman-Borden Date: March 3, 2006 Steve Fortin Instructions: This is a closed book exam. You are allowed translation dictionaries. Only non-text storing calculators are allowed This exam consists of 3 questions and a total of 15 pages. All Questions are to be answered on this examination paper. Answer the question in the space provided. Do not exceed the space allowed. Show your calculations and explain your reasoning. You must return this examination. Question Marks available Grade 1 50 2 20 3 30 Total 100 1 Question 1 (50 marks 60 minutes) 2 Question 1 (50 marks 60 minutes) ( continued) 3 Question 1 (50 marks 60 minutes) ( continued) 4 Question 1 (50 marks 60 minutes) ( continued) Required The above corporation sells paper and wood produce. Over the past few years, the U.S. government has increased tariffs on Canadian wood imported into the United States, in turn making the prices for the buyers of the corporations products more expensive. These price increases are passed on to the customers and do not benefit the corporation. The corporation has approached the Canadian government requesting a subsidy to help cover the negative impact of the tariff. You are a financial analyst for the Canadian Government. The Canadian Government has agreed to subsidize this corporation, ONLY IF it can be shown that the company is suffering from the situation, and is in financial danger. Prepare a report to the Minister of Agriculture assessing the situation. Your report should include an assessment of whether the corporation is really suffering from the situation, and if it is really in financial danger. You have also been given permission to perform an investigation of documentation at their headquarters, which will be held next week. You are to include in your report a list of supplementary information that you wish to receive, including explanations of why you need it. 5 Question 1 (50 marks 60 minutes) ( continued) Introduction 1. There will clearly be evidence of problems in this corporation, as if there were not, they would not have approached us with their request. 1 2. Still, we cannot discount the likelihood that they have engaged in earnings management (or creative accounting) to make the situation look worst than it is, and increase the likelihood of receiving a subsidy 2 3. Accrual accounting gives several possibility for earnings management 4. Particularly easy for a corporation that wants to look worse than it is. 5. Our decision should be based on reality as opposed to appearance, and we will need to consider carefully financial reporting incentives...
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Winter 2006 Midterm Solutions - LAST...

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