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Tobin Yoakam, CFA, is analyzing the financial performance of Konker Industries, a U.S. company which is publicly traded under the ticker KONK. Yoakam is particularly concerned about the quality of Konker's financial statements and its choices of accounting methodologies.
Below is a summary of Konker's financial statements prepared by Yoakam.
Konker has an operating lease for several of its large machining tools. The lease term expires in five years, and the annual lease payments are $2 million. The applicable interest rate on the operating lease is 9%.
Yoakam believes that the operating lease should be capitalized and treated as a finance lease. For purposes of adjusting the financial statements, Yoakam believes that the machining tools should be depreciated using straight-line depreciation with a salvage value of $3 million.
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Konker has three major operating divisions: Konker Industrial, Konker Defense, and Konker Capital.
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Regarding the three operating divisions of Konker, Yoakam should be most concerned that:
A. the ratio of the Capex percent change to the asset percentage is significantly less than one for the Defense division.
B. the operating ROA of the Capital division has fallen over the last year.
C. Konker is growing the Industrial division over time.
Answer: C
Explanation:
Explanation/Reference:
Explanation:
The fact that Konker is growing the Industrial division most rapidly (highest capex percent to asset percent ratio) is a likely cause for concern and further investigation, since this division has the lowest operating return on assets. The decrease in the operating ROA for the Capital division is not particularly troublesome as it mirrors the pattern for the other divisisions and likely just reflects year-to-year variation in profitability.
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Which of the following is the final stage in the standard sequence of software development?
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B. Programming
C. Analysis
D. Testing
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