Financial Analysis and Decision Making
Exam Solutions
Course Introduction
This course provides an in-depth exploration of financial analysis techniques and their application in strategic decision making within organizations. Students will learn to interpret financial statements, analyze cash flows, assess profitability, and evaluate investment opportunities using a variety of analytical tools. Key topics include ratio analysis, trend analysis, forecasting, capital budgeting, and risk assessment. Emphasis is placed on real-world case studies and the practical use of financial data to support business decisions, preparing students to make informed recommendations in complex financial environments.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James
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14 Chapters
1088 Verified Questions
1088 Flashcards
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Page 2
M. Wahlen
Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) On a common size basis,which of the following assets is normally largest for a commercial bank?
A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities
Answer: A
Q2) An example of an intangible asset is
A) A patent
B) Land
C) Investment in another company
D) Raw material inventory
Answer: A
Q3) Which forces typically represent vertical competition in a value chain?
A) Potential entry and substitutes.
B) Buyer power and rivalry among existing firms
C) Supplier power and potential entry.
D) Buyer power and supplier power
Answer: D
Page 3
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Chapter 2: Asset and Liability Valuation and Income Measurement
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Sample Questions
Q1) If a portfolio manager had to estimate the fair value of private equity funds invested in a young,privately-held start-up company,which of the following would he/she most likely identify as the level of inputs to determine this?
A) Level 1.
B) Level 2.
C) Level 3.
D) None of these.
Answer: C
Q2) U.S.GAAP,IFRS,and other major accounting standards are best characterized as A) historical accounting models.
B) current value accounting models.
C) acquisition cost accounting models.
D) mixed attribute accounting models.
Answer: D
Q3) Interest on Municipal Bonds represents what kind of tax difference?
A) Permanent timing difference that results in that income item not being taxed.
B) Temporary difference that will reversed in the future
C) Tax rate on Municipal bonds are based on estimated tax rates.
D) Not recognized in taxable income on the accrual basis of accounting.
Answer: A
Page 4
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Chapter 3: Income Flows Versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Academic research has found that market rates of return on common stock are the most highly correlated with A) net income.
B) cash flow from operations.
C) EBITDA.
D) cash flow from investing activities.
Answer: A
Q2) An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is A) depreciation expense.
B) compensation expense related to stock option plans.
C) income from an investment accounted for using the equity method.
D) unrealized losses on trading investments
Answer: C
Q3) ____________________ ___________________ equals current assets minus current liabilities
Answer: Working capital
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Page 5
Chapter 4: Profitability Analysis
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Sample Questions
Q1) Refer to the information for Orca Industries.The return on assets for Orca Industries is
A) 6.8%
B) 13.5%
C) 10%
D) 12.3%
Q2) Discuss the economic characteristics of firms that have the following mix of profit margin and asset turnover.In addition provide an example of an industry that would have the relevant profit margin asset turnover mix:
A.High profit margin and low asset turnover.
B.Low profit margin and high asset turnover
Q3) Which of the following is the primary objective in most financial statement analysis?
A) to value a firm's equity securities.
B) to look for unrecorded liabilities.
C) to establish a firm's strategy within the industry.
D) to define markets for the firm.
Q4) Operating income is negative in an amount equal to _________________________ when revenues are zero.
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6
Chapter 5: Risk Analysis
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Sample Questions
Q1) Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations? Ability to generate cash Need to use cash
A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements
Q2) One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.
Q3) Here are several ratios calculated from Midas Company's financial statements: Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?
A) 39 days
B) 36 days
C) 56 days
D) 26 days
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Page 7
Chapter 6: Accounting Quality
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Sample Questions
Q1) Achieving comparability in financial reporting is important to the analysis of multinational firms.However,the data from the reconciliation of foreign firms financial statement to U.S.GAAP must be carefully interpreted.What types of things complicate the analysis of multinational firms?
Q2) When evaluating the quality of accounting information the user should consider the ____________________ of the measurements made.
Q3) ____________________ represents the concept of being able to compare financial statement data across years for any particular firm.
Q4) When evaluating the quality of accounting information the user should consider the reasonableness of the ____________________ made in applying GAAP.
Q5) When evaluating the quality of accounting information the user should consider the ____________________ of the firm's disclosures.
Q6) Under current GAAP unrealized gains and losses from four balance sheet items are reported in
Q7) A change in the useful life of an asset is treated as a _____________
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Chapter 7: Financing Activities
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Sample Questions
Q1) Under which of the following conditions does the equipment lease qualify for capital lease accounting?
A) The lease contains a bargain purchase option.
B) The lease term is equal to or greater than 75% of the asset's economic life.
C) A, and B are correct answers.
D) The lease transfers ownership to the lessee at the end of the lease term.
Q2) Which of the following is the typical tradeoff when issuing preferred stock?
A) The tradeoff between different accounting for an initial issuance of preferred stock as compared to a common stock issuance.
B) The tradeoff between maintaining corporate control and creating a class of shareholders with preference in all asset distributions.
C) The tradeoff of giving common shareholders priority over preferred shareholders in corporate liquidations.
D) The tradeoff of a convertibility feature of common shares into preferred shares.
Q3) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
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Chapter 8: Investing Activities
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Sample Questions
Q1) Solo Corp.purchased $500,000 of bonds for $515,000 as an investment.If Solo expects to hold the bonds until they mature the initial investment should be recorded at
A) Investment in Bonds - $500,000
Additional Investment Expense - $15,000
B) Investment in Bonds - $515,000
C) Investment in Bonds - $500,000
Prepaid Interest Revenue - $15,000
D) Accumulated Other Comprehensive Investment - $500,000
Q2) When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in,it should account for the investment using the ______________________________.
Q3) When a company has a minority passive investment it will recognize changes in the market value of the investment as ____________________ gains and losses.
Q4) Which of the following would not be used to determine the cost of an asset?
A) cash paid
B) sales and excise taxes
C) cost incurred to get the asset ready for its intended use
D) depreciation method
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Page 10
Chapter 9: Operating Activities
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Sample Questions
Q1) Recording municipal bond interest received in the general ledger will generate a _________________ difference
Q2) At the end of 2012 Funtime provided the following information about the project: \[\begin{array} { l l l } & \text { Costs incurred } &\text { Estimuted rast } \\ \underline{\text { Year }} & \underline{\text { to dnte } }&\underline{ \text { remainine } }\\ 2012 & \$ 1,200,000 & \$ 600,000 \end{array}\]
What percentage is playground complete?
A) 62.5%
B) 66.7%
C) 55.6%
D) 50.0%
Q3) Income tax expense consists of two components,the ____________________ portion and the ____________________ portion.
Q4) A company that uses LIFO will find that its ______________________________ account will be somewhat out of date.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following types of companies would most likely be able to increase prices?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to experience technological improvements in its production process.
D) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.
Q2) Firms which have differentiated ___________________________________ for its products may have a greater potential to increase prices.
Q3) A firm in a mature industry with little expected change in its market share might anticipate volume increases equal to the growth rate in the _________________________ within its geographic markets.
Q4) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Sample Questions
Q1) Explain the theory behind the dividends valuation approach.Why are dividends value-relevant to common equity shareholders?
Q2) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q3) In theory,the value of a share of common equity is the present value of ____________________________________________________________.
Q4) One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the __________________________________________________ are quite sensitive to the time period and methodology used in their computation.
Q5) Assume that Zonk is a potential leveraged buyout candidate.Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pre tax borrowing cost of 14 percent and 30 percent common equity.Compute the weighted average cost of capital for Zonk based on the new capital structure.
A) 8.85%
B) 12.56%
C) 13.01%
D) 9.94%
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) If an analyst wants to value a potential investment in the common stock equity of a firm,the analyst should discount the projected free cash flows at the A) required return on equity capital
B) weighted average cost of capital
C) risk free rate
D) market risk premium
Q2) If an analyst wants to value a potential investment in the net operating assets of a division of another firm,the relevant cash flows the analyst should use are
A) free cash flow from operations
B) free cash flows for all debt and equity capital stakeholders
C) free cash flows to common equity shareholders
D) cash flow from operations
Q3) The forecasting and valuation process is particularly difficult for ______________________________ when the near term free cash flows tend to be negative.
Q4) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
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Chapter 13: Valuation: Earnings-Based Approaches
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Sample Questions
Q1) Required earnings are the
A) adjusted net income multiplied by the required rate of return on common equity capital.
B) net income the analyst expects the firm to generate multiplied by the required rate of return on common equity capital.
C) the market value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
D) the book value of common equity capital at the beginning of the period multiplied by the required rate of return on common equity capital.
Q2) The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows
Q3) Residual income in a long-run steady-state growth period is referred to as:
A) dynamic residual income
B) realistic residual income
C) continuing residual income
D) equilibrium residual income.
Q4) What is the rationale for using expected earnings as a basis for valuations?
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Chapter 14: Valuation: Market-Based Approaches
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Sample Questions
Q1) Which of the following is not a reason why price-earnings ratios would differ across firms?
A) Risk
B) Profitability
C) Growth
D) Operating leverage
Q2) If the market price of a share of stock is based on the expectations of all of the market participants and the trading volume in that stock.What would happen if the companies reputation would be damaged by a scandal or defective product that caused personal injury or death
Q3) Under the value-to-book model a firm in steady state equilibrium earning ROCE = RE will
A) create additional shareholder wealth and be valued above book value.
B) maintain shareholder wealth and be valued at book value.
C) destroy shareholder wealth and be valued below book value.
D) be in a no-growth state.
Q4) What is the value of reverse engineering stock prices? How does the process work?
Q5) Explain the analysts' role in making the capital markets efficient.
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