Financial Statement Analysis
Exam Answer Key
Course Introduction
Financial Statement Analysis provides students with the essential tools and techniques to evaluate and interpret financial reports, including balance sheets, income statements, and cash flow statements. The course focuses on understanding the underlying principles of accounting, recognizing the impact of different accounting policies, and using a variety of analytical methods to assess a company's financial health, profitability, and risk. Students will learn to perform ratio analysis, trend analysis, and benchmarking, and will gain the skills necessary to make informed decisions based on financial data. Through practical exercises and real-world case studies, the course prepares students for careers in finance, investment, and management.
Recommended Textbook
Financial Accounting 2nd Edition by J. David Spiceland
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Page 2
Chapter 1: Accounting Information and Decision Making
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Sample Questions
Q1) How does the value of an audit affect financial statements?
Answer: Outside auditors add credibility to financial statements,increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations.
Q2) The balance sheet depicts which of the following equations?
A)Net income = revenue - expenses.
B)Ending retained earnings = beginning retained earnings + net income - dividends.
C)Assets = liabilities + stockholders' equity.
D)Net cash flows = total cash inflows - total cash outflows.
Answer: C
Q3) The primary objective of financial reporting is to provide useful information to managers in making decisions.
A)True
B)False
Answer: False
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Chapter 2: The Accounting Information System
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Sample Questions
Q1) A company provides services to customers on account for $2,400.Indicate the amount of increases and decreases in the accounting equation.
Answer: \[\begin{array} { c c c c c }
\text { Assets } & = & \text { Liabilities } & + & \text { Stockholders' Equity } \\ \$ 2,400 & = & \$ 0 & + & \$ 2,400 \end{array}\]
Q2) When a company pays utilities of $1,800 in cash,the transaction is recorded as:
A)Debit Utilities Expense $1,800,credit Utilities Payable $1,800.
B)Debit Utilities Payable $1,800,credit Cash $1,800.
C)Debit Cash $1,800,credit Utilities Expense $1,800.
D)Debit Utilities Expense $1,800,credit Cash $1,800.
Answer: D
Q3) Which of the following is not possible when recording a transaction?
A)Liabilities increase and assets decrease.
B)Stockholders' equity increases and assets increase.
C)One asset increases and another asset decreases.
D)Stockholders' equity decreases and assets decrease.
Answer: A
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Chapter 3: The Financial Reporting Process
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Sample Questions
Q1) The post-closing trial balance is a list of all accounts and their balances at a particular date after the account balances have been updated for closing entries.
A)True
B)False
Answer: True
Q2) Because adjusting entries allow the proper application of the revenue recognition principle or the matching principle,they are a necessary part of cash-basis accounting.
A)True
B)False
Answer: False
Q3) If the beginning balance of Retained Earnings equals $10,000,net income for the year equals $6,000,and dividends for the year equal $2,000,then the ending balance of Retained Earnings equals $18,000.
A)True
B)False
Answer: False
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Chapter 4: Cash and Internal Controls
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Sample Questions
Q1) Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.
A)True
B)False
Q2) Operating cash flows would exclude:
A)Payment of employee salaries.
B)Receipt of cash from customers.
C)Payment of dividends.
D)Payment for advertising.
Q3) Earnings quality is the ability of net income to report the true underlying performance of the company.
A)True
B)False
Q4) A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).
A)True
B)False
Q5) Describe the procedures used to reconcile a company's cash balance.
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Chapter 5: Receivables and Sales
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Sample Questions
Q1) Using the allowance method,writing off an actual bad debts would include a:
A)Debit to Bad Debt Expense.
B)Credit to Accounts Receivable.
C)Debit to Accounts Receivable.
D)Credit to Allowance for Uncollectible Accounts.
Q2) How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?
Q3) Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?
A)Allowance method.
B)Direct write-off method.
C)Aging method.
D)Percentage-of-receivables method.
Q4) A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.
A)True
B)False
Q5) Give three examples of contra revenue accounts and the transactions with which they are associated.
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Chapter 6: Inventory and Cost of Goods Sold
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Sample Questions
Q1) The distinction between operating and nonoperating income relates to:
A)Continuity of income.
B)Principal activities of the reporting entity.
C)Consistency of income stream.
D)Reliability of measurements.
Q2) Inventory does not include:
A)Materials used in the production of goods to be sold.
B)Assets intended to be sold in the normal course of business.
C)Equipment used in the manufacturing of assets for sale.
D)Assets currently in production for normal sales.
Q3) Using LIFO,the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system.
A)True
B)False
Q4) Overstating ending inventory in the current year causes net income in the current year to be overstated.
A)True
B)False
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Chapter 7: Long-Term Assets
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Sample Questions
Q1) If a firm successfully defends an intangible right,it should expense the litigation costs as incurred.
If a firm successfully defends an intangible right,it should capitalize the litigation costs and amortize them over the remaining useful life of the related intangible.
A)True
B)False
Q2) In testing for recoverability of an operational asset,an impairment loss is required if the:
A)Asset's book value exceeds the present value of its expected future cash flows.
B)Expected future cash flows exceeds the asset's book value.
C)Present value of expected future cash flows exceeds its carrying value.
D)Asset's book value exceeds the expected future cash flows.
Q3) The factors used to compute depreciation expense are an asset's:
A)Cost,residual value,and physical life.
B)Cost,residual value,and service life.
C)Fair market value,residual value,and economic life.
D)Cost,replacement value,and service life.
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Chapter 8: Current Liabilities
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Sample Questions
Q1) During November,Wireless,Inc.makes a $1,600 credit sale.The state sales tax rate is 5% and the local sales tax rate is 1.5%.Record sales revenue and sales tax payable.
Q2) Which of the following statements regarding liquidity ratios is false?
A)A high current ratio generally indicates the ability to pay current liabilities on a timely basis.
B)A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.
C)All current assets are due within one year and therefore have essentially equal liquidity.
D)As a rule of thumb,a current ratio of 1 or higher often reflects an acceptable level of liquidity.
Q3) In December,2011,Quebecor Printing received magazine subscriptions for 2012 from a customer,who paid $500 in cash.What would be the appropriate journal entry for this event?
A)Debit Cash,$500; credit Subscription Revenue,$500.
B)Debit Cash,$500; credit Unearned Revenue,$500.
C)Debit Subscription Revenue,$200; credit Cash,$200.
D)No journal entry is necessary.
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Page 10
Chapter 9: Long-Term Liabilities
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Sample Questions
Q1) Stealth Fitness Center issues 7%,15-year bonds with a face amount of $200,000.The market interest rate for bonds of similar risk and maturity is 6%.Interest is paid semiannually.At what price will the bonds be issued?
Q2) Which of the following leases is essentially the purchase of an asset with debt financing?
A)an operating lease.
B)a capital lease.
C)both an operating and a capital lease.
D)neither an operating lease nor a capital lease.
Q3) The mixture of liabilities and stockholders' equity a business uses is called its capital structure.
A)True
B)False
Q4) What is the annual market interest rate on the bonds?
A)3%.
B)3.5%.
C)6%.
D)7%.
Q5) Why do some companies issue bonds rather than borrow money directly from a bank?
11
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Chapter 10: Stockholders Equity
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Sample Questions
Q1) Convertible preferred stock allows the stockholder to exchange shares of preferred stock for common stock at a specified conversion ratio.
A)True
B)False
Q2) Why doesn't stockholders' equity equal the market value of equity?
A)Stockholders' equity usually does equal the market value of equity.
B)Investors tend to incorrectly price the market value of equity.
C)It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising.
D)It's due to incorrect entries prepared by accountants.
Q3) In terms of total sales,assets,and earnings,the dominant form of business organization is the:
A)Sole proprietorship.
B)Partnership.
C)Corporation.
D)Limited liability company (LLC).
Q4) Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds.
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Chapter 11: Statement of Cash Flows
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Sample Questions
Q1) Income statement items that have no cash effect are still reported under the direct method.
A)True
B)False
Q2) Which of the following is NOT a correct practice when adjusting net income to net operating cash flows?
A)Subtract depreciation expense.
B)Add losses on sales of assets.
C)Subtract increase in Accounts Receivable.
D)Add increase in Accounts Payable.
Q3) The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year,respectively.Sales revenues are $1.5 million ($1.2 million in the previous year),net income is $150,000,and net cash flows from operating activities are $175,000.What is Sound Designs' asset turnover?
A)2.0 times.
B)1.7 times.
C)0.5 times.
D)1.9 times.
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Chapter 12: Financial Statement Analysis
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Sample Questions
Q1) We report any profits or losses on discontinued operations in the current year,separately from profits and losses on the portion of the business that will continue.
A)True
B)False
Q2) If a company's sales are $648,000 in 2012,and this represents an 8% increase over sales in 2011,what were sales in 2011?
Q3) Which of the following is a sign that a company can quickly turn its receivables into cash?
A)A low receivables turnover ratio.
B)A high receivables turnover ratio.
C)A high average collection period.
D)Both a low receivables turnover ratio and a high average collection period.
Q4) Using horizontal analysis,if the base year is negative and the following year is positive,the percentage change is just as useful as if the base year and the following year were both positive.
A)True
B)False
Q5) Explain the difference between vertical and horizontal analysis.
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Chapter 13: Time Value of Money
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Sample Questions
Q1) Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments,which will be made at the end of the month,with interest of 12% on the unpaid balance.She should use a table for the:
A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.
Q2) The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period.
The three-year annuity represents three payments of $500 (= $1,500),so the present value of the annuity is greater.
A)True
B)False
Q3) If you put $200 into a savings account that pays annual compound interest of 8% per year and then withdraw the money two years later,you will earn interest of $32.
A)True
B)False
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Page 15
Chapter 14: Investments
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Q1) Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities.At the end of the year,the fair value of the securities was $105,000.How should the investment be reported in the year-end financial statements?
A)The investment in available-for-sale securities would be reported in the balance sheet at its $100,000 cost.
B)The investment in available-for sale securities would be reported in the balance sheet at its $105,000 market value.
C)An unrealized holding gain would be reported in other comprehensive income. D)Both b and c are correct.
Q2) Because the carrying value of bonds purchased at a discount increases over time,interest revenue will also increase each semi-annual interest period.
A)True
B)False
Q3) Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.
A)True
B)False
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Chapter 15: International Financial Reporting Standards
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Sample Questions
Q1) The Norwalk Agreement:
A)Allows foreign companies listed on U.S.stock exchanges to prepare financial statements in accordance with IFRS.
B)Formalizes the commitment between the FASB and IASB to converge U.S.GAAP and IFRS.
C)Eliminates the requirement that U.S.firms report under U.S.GAAP.
D)Gives authority to the IASB to set accounting standards for U.S.companies.
Q2) Why are some U.S.companies opposed to elimination of the LIFO inventory method?
A)Inventory amounts are more difficult to calculate under FIFO.
B)LIFO most likely matches actual flow of inventory.
C)Increased tax burden.
D)Most international companies use LIFO.
Q3) Some countries are more secretive (Brazil and Switzerland),leading to fewer financial disclosures.
A)True
B)False
Q4) Convergence of accounting practices is expected to increase the flow of investment across borders.
A)True
B)False
Page 17
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