Financial Statement Analysis
Final Exam
Course Introduction
Financial Statement Analysis is a course designed to equip students with the skills and techniques required to evaluate and interpret the financial statements of businesses. Through a systematic exploration of balance sheets, income statements, and cash flow statements, students learn how to assess a company's financial health, profitability, and liquidity. The course covers key tools such as ratio analysis, trend analysis, and comparative financial metrics, while fostering an understanding of accounting policies and disclosures. By integrating real-world cases and financial data, this course prepares students to make informed decisions as investors, managers, or financial analysts.
Recommended Textbook
Financial Reporting and Analysis Revsine 6th Edition by Collins Johnson Mittelstaedt Soffer
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17 Chapters
2231 Verified Questions
2231 Flashcards
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Chapter 1: The Economic and Institutional Setting for Financial Reporting
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158 Verified Questions
158 Flashcards
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Sample Questions
Q1) Business enterprises enter into many different types of contracts.Examples of such contracts that often contain language that refers to verifiable financial statement numbers include all of the following except
A)royalty contracts with inventors.
B)sales contracts with customers.
C)compensation contracts with managers.
D)debt contracts with bankers.
Answer: B
Q2) All financial statements provide a basis for what might occur in the future.
A)True
B)False
Answer: True
Q3) Management has a responsibility to ensure that the company's financial information is properly classified,characterized,and presented clearly and concisely in order to make it understandable.
A)True
B)False
Answer: True
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Chapter 2: Accrual Accounting and Income Determination
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141 Verified Questions
141 Flashcards
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Sample Questions
Q1) Adjusting entries always fall into one of two categories: adjustments for prepayments or adjustments for unearned revenue.
A)True
B)False
Answer: False
Q2) To recognize revenue after the time of sale,there must be extreme uncertainty regarding the amount of cash to be collected or A)there must be substantial future services required whose costs cannot be reasonably estimated.
B)units are heterogeneous.
C)the product is immediately salable at quoted market prices.
D)a formal contract must be signeD.
Answer: A
Q3) Which one of the following events would be considered an extraordinary event?
A)A tornado in Kansas.
B)An earthquake in New York.
C)A flood in St.Louis near the Mississippi River.
D)An earthquake in southern California.
Answer: B
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Page 4
Chapter 3: Additional Topics in Income Determination
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) A seller may recognize revenue when the production of the goods is complete if the buyer requests that the transaction be on a "bill and hold" basis and has a substantial business purpose for such a request.
A)True
B)False
Answer: True
Q2) GAAP specifies that for a seller to record revenue at time of sale when right of return exists the following conditions must be met except:
A)The seller's price to the buyer is substantially fixed or determinable at the date of sale.
B)The buyer has paid the seller,or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
C)The buyer's obligation to the seller changes in the event of theft or physical destruction or damage of the product.
D)The amount of future returns can be reasonably estimateD.
Answer: C
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Chapter 4: Structure of the Balance Sheet and Statement
of Cash Flows
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) The U.K.Equity account "Share premium" is reported on U.S.GAAP balance sheets as A)capital reserve.
B)revaluation reserve.
C)capital in excess of par.
D)an accumulated other comprehensive income account.
Q2) Depreciation is subtracted from net income in arriving at a firm's cash flow from operations under the indirect method to cash flow statement preparation.
A)True
B)False
Q3) Marketable debt and equity securities that a firm expects to hold as a short-term investment are reported on the balance sheet at A)current market value.
B)historical cost.
C)amortized current market value.
D)amortized historical cost.
Q4) The balance sheet provides critical information for understanding an entity's capital structure.
A)True
B)False
6
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Chapter 5: Essentials of Financial Statement Analysis
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139 Verified Questions
139 Flashcards
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Sample Questions
Q1) In a trend income statement for 2012,where 2012 is the base year,sales are expressed as
A)84.4%
B)92.6%
C)100.0%
D)150.5%
Q2) All companies should be expected to produce positive operating cash flows every year.
A)True
B)False
Q3) Trend statements are better than common size statements at indicating which of the following?
A)Stability.
B)Monetary changes.
C)Profitability.
D)Growth and decline.
Q4) The accounts receivable turnover ratio can be used by the analyst to spot changing customer payment patterns.
A)True
B)False
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Chapter 6: The Role of Financial Information in Valuation and
Credit Risk Assessment
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153 Verified Questions
153 Flashcards
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Sample Questions
Q1) P/E ratios are a useful indicator and tool when performing valuation and comparing firms.List three factors that should be considered or adjusted for when comparing P/E ratios among different firms.
Q2) The amount available to finance planned expansion of operating capacity,reduce debt,pay dividends,or repurchase stock is distributable (or free)cash flow.
A)True
B)False
Q3) The implied share price of Firm B's stock is
A)$15.00.
B)$45.00.
C)$50.25.
D)$55.25.
Q4) Companies that report bad news earnings surprises tend to have an upward drift in stock returns before the actual earnings announcement date followed by a sharp decrease in stock returns at the announcement date.
A)True
B)False
Q5) Describe the role of accounting numbers in corporate valuation.
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Chapter 7: The Role of Financial Information in Contracting
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) Accounting-based incentive plans can encourage managers to adopt a long-term business focus.
A)True
B)False
Q2) The widespread use of accounting-based incentives to determine executive compensation is controversial for which one of the following reasons?
A)Earnings growth automatically increases shareholder value.
B)Accounting based incentive plans can encourage managers to adopt a long-term business focus.
C)Executives can use their discretion over the accounting policies.
D)Managers do not have accounting flexibility.
Q3) Since 2002,stock options have become a smaller component of long-term incentive pay due to a fundamental change in the tax treatment that options receive.
A)True
B)False
Q4) RAP sometimes shows up in a company's GAAP financial statements.
A)True
B)False
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Chapter 8: Receivables
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143 Verified Questions
143 Flashcards
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Sample Questions
Q1) If a transfer of receivables is really a borrowing but is erroneously treated as a sale
A)then both assets and liabilities are understated.
B)then both assets and liabilities are overstated.
C)then both assets and equity are understated.
D)then ratios like debt-to-equity are consequently distorted by the overstatements.
Q2) Island will record this transaction to recognize
A)an extraordinary debt restructuring gain of $20,000.
B)an extraordinary debt restructuring loss of $20,000.
C)an ordinary debt restructuring gain of $20,000.
D)neither a gain nor a loss from debt restructuring.
Q3) Companies occasionally adopt "aggressive" revenue recognition practices which then generate significant returns in later periods.
A)True
B)False
Q4) Factoring can either be with,or without,recourse.
A)True
B)False
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Chapter 9: Inventories
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161 Verified Questions
161 Flashcards
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Sample Questions
Q1) Current ratio distortion under LIFO inventory costing may be adjusted by
A)adding the LIFO reserve to current assets.
B)subtracting the LIFO reserve from current assets.
C)adding the LIFO reserve to current liabilities.
D)subtracting the LIFO reserve from current liabilities.
Q2) The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as
A)realized gains and losses.
B)unrealized holding gains and losses.
C)extraordinary gains and losses.
D)costs of goods solD.
Q3) When purchases and sales occur continuously,the most recently incurred costs will be virtually identical to current replacement cost so LIFO provides a good match between current costs and current revenues.
A)True
B)False
Q4) Inventory carrying cost includes storage costs.
A)True
B)False
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Chapter 10: Long-Lived Assets
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161 Flashcards
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Sample Questions
Q1) The depreciation rate for the double declining balance method is double the straight-line rate.
A)True
B)False
Q2) When the differences in useful lives of long-lived assets reflect real economic differences,the attempt on the part of financial analysts to undo these differences may
A)impede profit and loss comparisons.
B)enhance profit comparisons.
C)enhance profit comparisons,but impede loss comparisons.
D)enhance profit and loss comparisons.
Q3) When a firm purchases an intangible asset,the acquired intangible is recorded at its purchase price.
A)True
B)False
Q4) One way to value a piece of manufacturing equipment is to just add up the net future operating cash inflows the equipment is expected to generate over its life.
A)True
B)False
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Page 12
Chapter 11: Financial Instruments As Liabilities
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.
A)True
B)False
Q2) Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
A)Amortization of discount on bonds payable (bond discount)increases in later years relative to earlier years of a bond's life.
B)Amortization of premium on bonds payable (bond premium)increases in later years relative to earlier years of a bond's life.
C)Amortization of both premium on bonds payable (bond premium)and discount on bonds payable (bond discount)decreases in later years relative to earlier years of a bonds life.
D)Amortization of discount on bonds payable (bond discount)results in an increase in interest expense and in an increase in the bond's carrying value.
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Chapter 12: Financial Reporting for Leases
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) Describe three capital lease disclosures that are required of the lessee according to current GAAP.
Q2) How much straight-line depreciation expense will Pepper record for Year 1? (Round all calculations to the nearest whole dollar amount.)
A)$14,747
B)$15,362
C)$15,747
D)$17,500
Q3) Under IFRS
A)Disclosure of lessee future minimum lease payments for the periods within one year,within years two through five,and after five years are required.
B)Lessees can classify some assets held under leases as investment property.
C)The two additional lessor criteria provided under U.S.GAAP for lease revenue recognition are absent.
D)All of the choices are correct.
Q4) For a lessee,the current ratio deteriorates with a capitalized lease.
A)True
B)False
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14
Chapter 13: Income Tax Reporting
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111 Flashcards
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Sample Questions
Q1) What amount of deferred income tax liability should Stone report in its December 31,2015,balance sheet?
A)$5,000
B)$9,000
C)$20,000
D)$27,000
Q2) If no other temporary differences occurred subsequent to 2015,the deferred tax asset at the beginning of 2017 is
A)$750.
B)$1,000.
C)$4,000.
D)$2,500.
Q3) Income tax expense for 2015 is
A)$43,000.
B)$45,000.
C)$65,000.
D)$67,000.
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Page 15
Chapter 14: Pensions and Postretirement Benefits
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) When accounting for funded postretirement benefit plans,actual return on plan assets is deducted from the postretirement benefit expense.
A)True
B)False
Q2) The pension liability that must be shown on the balance sheet of the plan sponsor is the
A)accumulated benefit obligation.
B)projected benefit obligation.
C)excess of the accumulated benefit obligation over the plan assets at fair value.
D)excess of the projected benefit obligation over the fair value of plan assets.
Q3) IFRS permits two methods for handling actuarial gains and losses,one of which requires immediate recognition of actuarial gains and losses in pension expense.
A)True
B)False
Q4) Companies are required to disclose their estimate of pension funding for the upcoming year.
A)True
B)False
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Chapter 15: Financial Reporting for Owners Equity
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) Which of the following arguments was not used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No.25?
A)Stock options do not involve a cash flow,therefore the recording of an expense would violate appropriate income measurement.
B)The Black-Scholes method of valuing stock options has not been widely accepted and is arbitrary.
C)The fair value approach could jeopardize compliance with contract terms and conditions.
D)The fair value approach would increase expenses and lower net income which would result in lower stock prices.
Q2) Which of the following statements is correct when a company has a complex capital structure?
A)Diluted earnings per share must be shown on the income statement.
B)Diluted earnings per share and basic earnings per share must both be shown on the income statement.
C)The company might have convertible bonds outstanding.
D)The company must have participating preferred stock outstanding.
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Chapter 16: Intercorporate Equity Investments
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130 Flashcards
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Sample Questions
Q1) Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required in order to
A)obey the state laws.
B)avoid double counting.
C)follow tax laws.
D)eliminate transactions with third parties.
Q2) Bond investments made to generate trading gains are classified as A)available-for-sale securities.
B)trading securities.
C)held to maturity securities.
D)minority securities.
Q3) An investment of 30% of a company's voting shares must be accounted for using the equity method.
A)True
B)False
Q4) While both IFRS and GAAP require companies to consolidate entities they control,IFRS defines control more narrowly than GAAP.
A)True B)False
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Chapter 17: Statement of Cash Flows
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) The following information has been provided to you by Watts Corporation: \[\begin{array} { l r l }
\text { Net income } & \$ 175,300 \\
\text { Increase in accounts payable } & \$ 18,500 \\
\text { Increase in inventory } & \$ 17,500 \\
\text { Increase in accounts receivable } & \$ 7,700 \\
\text { Increase in bonds payable } & \$ 75,000 \\
\text { Amortization of bond premium } & \$ 5,400 \\
\text { Depreciation expense } & \$ 21,300 \\
\text { Decrease in income taxes payable } & \$ 7,300
\end{array}\]
What is Watts Corporation's net cash flow from operating activities?
A)$186,000
B)$175,200
C)$138,200
D)$210,200
Q2) An increase in cash flows from financing activities will occur when a company distributes a stock dividend.
A)True
B)False
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Page 19