Financial Statement Analysis
Final Exam Questions
Course Introduction
Financial Statement Analysis focuses on equipping students with the essential tools and concepts required to evaluate and interpret the financial health and performance of businesses. Through a detailed examination of income statements, balance sheets, cash flow statements, and shareholders equity reports, the course teaches students how to utilize ratio analysis, trend analysis, and comparative statement techniques. Students will learn how to assess profitability, liquidity, solvency, and operational efficiency, as well as how to use financial information for decision-making by various stakeholders, including investors, creditors, and managers. The course also covers red flags for potential manipulation, industry benchmarking, and the impact of accounting choices on financial reporting.
Recommended Textbook
Financial Accounting and Reporting A Global Perspective 5th Edition by
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Page 2
Herv Stolowy
Chapter 1: Accounting: the Language of Business
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Q1) Which of the following can be capital providers?
A) Shareholders and lenders
B) Shareholders and managers
C) Lenders and suppliers
D) Lenders and customers
Answer: A
Q2) Financial accounting only recognizes transactions that have or will have monetary implications.
A)True
B)False
Answer: True
Q3) What kind(s)of delegation occur(s)in business?
A) Delegation from the capital providers to the enterprise
B) Delegation from the capital providers to managers
C) Delegation within the organization to specialized managers
D) All of these.
Answer: D
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Chapter 2: Introduction to Financial Statements
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Q1) The decision regarding what to do with profit of the period consists in:
A) Distributing the profit entirely to the shareholders as dividends.
B) Not distributing profit at all,and the shareholders reinvest their claim in its entirety in the business.
C) Distributing the profit partially to the shareholders as dividends,and the balance is considered to be an increase of the investment of the shareholders in the proportion of their previous contributions.
D) Choosing among any of the previous possibilities.
Answer: D
Q2) Which items are traditionally listed first in North America?
A) Short-term
B) Valuable
C) Long-term
D) None of these.
Answer: A
Q3) Acquired equipment is valued at its historical cost.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Statements: Interrelations and Construction
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Q1) Which of the following accounts is expected to present a credit balance?
A) Accounts receivable
B) Provision for doubtful debts
C) Doubtful debt accounts
D) Selling expenses
Answer: B
Q2) By convention,the left-hand side of a T-account is called:
A) Debt side
B) Cash side
C) Debit side
D) Credit side
Answer: C
Q3) The accounting process relies only on the use of technical tools and does not require human intervention and interpretation.
A)True
B)False
Answer: False
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Chapter 4: Accounting Principles and End-Of-Period Adjustments
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Q1) Why is it necessary to know the income generated by the managers' decisions and actions?
A) In order to know the performance potential of the firm and evaluate the quality of the management and of their decisions as agents of the shareholders.
B) In order to provide a basis for the state to levy taxes based on income.
C) In order to share the income between partners or shareholders.
D) All of these
Q2) Which of the following fixed assets is not subject to downward value adjustments?
A) Building
B) Equipment
C) Land
D) Office furniture
Q3) The IASB (IAS 16)defines fixed or tangible assets as assets held by an entity for which purpose(s)?
A) Use in the production or supply of goods or services
B) Administrative purposes
C) Rental to others
D) All of these
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Chapter 5: Regulation of Accounting and Financial Reporting
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Q1) The IASB imposes the use of the classification by function.
A)True
B)False
Q2) An annual report includes:
A) A letter to the shareholders
B) A management report
C) Financial statements
D) All of these
Q3) Accounting terminology differs from one country to another.Which terms deal with the same concept respectively in US,UK and IASB terminology?
A) Long-term/Fixed/Non-current Assets
B) Short-term/Fixed/Non-current Assets
C) Long-term/Fixed/Non-operating Assets
D) Long-term/Tangible/Non-current Assets
Q4) For the statement of financial position/balance sheet,the 'single-step' format provides more detail than the 'multiple-step' format.
A)True
B)False
Page 7
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Chapter 6: Revenue Recognition Issues
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Q1) Which of the following methods is not used to determine the percentage of completion of a transaction?
A) Cost allocation method.
B) Quantity of services performed to date as a percentage of total services to be performed.
C) Actual measurement of work performed.
D) The proportion that costs incurred to date represented as a percentage of the re-estimated total cost of the transaction at completion.
Q2) The basic principle of deferred taxation is that the difference is not expected to be reversed in future periods.
A)True
B)False
Q3) Loss carry-back means that the losses of one period can be used to offset profits made in previous periods,allowing a tax refund.
A)True
B)False
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Chapter 7: Tangible Fixed Assets
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Q1) How is the depreciation expense calculated using the service quantity method?
A) Depreciation expense = Depreciable amount/Total quantity of productive service
B) Depreciation expense = (Depreciable amount/Total quantity of productive service)× Productive service for period
C) Depreciation expense = Depreciable amount/Productive service for period
D) Depreciation expense = Depreciable amount × Productive service for period
Q2) How is the depreciation expense calculated using the productive output method?
A) Depreciation expense = (Depreciable amount/Life expressed in units of output)× Units of output for period
B) Depreciation expense = Depreciable amount/Units of output for period
C) Depreciation expense = Depreciable amount × Units of output for period
D) Depreciation expense = Depreciable amount/Life expressed in units of output
Q3) At the time of capitalization of the costs incurred in the construction of the asset,expenses pertaining to the new asset must go through the income statement.
A)True
B)False
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Chapter 8: Intangible Assets
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Q1) Internally generated software cannot be capitalized and must therefore be expensed.
A)True
B)False
Q2) There is no relationship between the company's R&D investment and its market value.
A)True
B)False
Q3) Which of the following examples is not an example of development activities?
A) The design of tools,jigs,molds and dies involving new technology.
B) The search for,evaluation and final selection of,applications of research findings or other knowledge.
C) The design,construction,and operation of a pilot plant that is not of a scale economically feasible for commercial production.
D) The design,construction,and testing of a chosen alternative for new or improved materials,devices,products,processes,systems,or services.
Q4) The acquisition value of soccer players is always expensed.
A)True
B)False
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Chapter 9: Inventories
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Q1) Which of the following procedures does not exist for the valuation of inventory outflows?
A) First-In,First-Out (FIFO)
B) Weighted average cost method (WAC)
C) First-In,Last-Out (FILO)
D) Specific identification method
Q2) In a periodic inventory system,the fundamental inventory equation is: Beginning inventory + Purchases or additions - Consumption = Ending inventory.What is the unknown in this equation?
A) Beginning inventory
B) Purchases or additions
C) Consumption
D) Ending inventory
Q3) Given the above data,what is the amount of the ending inventory under LIFO?
A) 60
B) 50
C) 55
D) 65
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11
Chapter 10: Financial Instruments in the Statement of Financial Position
and Fair Value Accounting
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Q1) What does the credit policy of a firm impact?
A) Sales revenue
B) The level of receivables
C) The length of the cash collection cycle
D) All of these
Q2) Generally,the uncollectibility risk is evaluated and an allowance for uncollectibles is recorded as a provision.What is this method called?
A) Provision method
B) Allowance method
C) Prudent method
D) None of the above
Q3) Held-to-maturity investments are valued at fair value through profit or loss in the balance sheet.
A)True
B)False
Q4) The valuation of the uncollectibility risk constitutes one of the tools managers use to manage their earnings.
A)True
B)False
Page 12
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Chapter 11: Shareholders Equity
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Q1) IAS 1 states that an entity shall present a statement of changes in equity showing on the face of the statement:
A) Total comprehensive income for the period,showing separately the total amounts attributable to owners of the parent and to non-controlling interests;.
B) For each component of equity,the effects of retrospective application or retrospective restatement recognized in accordance with IAS 8.
C) For each component of equity,a reconciliation between the carrying amount at the beginning and the end of the period,separately disclosing changes resulting from: (i)profit or loss; (ii)each item of other comprehensive income;and (iii)transactions with owners in their capacity as owners,showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.
D) All of these
Q2) In the United States,dividends are mostly paid to the shareholders by anticipation. A)True
B)False
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Chapter 12: Liabilities and Provisions
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Q1) A provision is an obligation that could eventually be reversed because some degree of estimation is involved in its amount and timing.
A)True
B)False
Q2) Which of the following items is not considered to be payroll taxes?
A) Employer's portion of social security
B) Unemployment taxes
C) Employer's portion of employees' life insurance premiums
D) Workers' compensation taxes
Q3) For the IASB,a provision should be recognized when:
A) An entity has a present obligation as a result of a past event.
B) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
C) A reliable estimate can be made of the amount of the obligation.
D) All of these.
Q4) Contingent liabilities are recognized in the balance sheet.
A)True
B)False
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Chapter 13: Business Combinations
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Q1) If the percentage of interest of the parent is not 100%,who owns part of the assets and liabilities of the subsidiary?
A) Negligible shareholders.
B) Insignificant shareholders.
C) Non-controlling (minority)shareholders.
D) Third shareholders.
Q2) Which of the following examples is not a case in which the investing firm takes an active role in the decisions of the firm in which they have invested?
A) Lend resources to another corporate entity.
B) Enter into an active partnership with an existing firm.
C) Invest in marketable securities.
D) Acquire a controlling interest in an existing entity.
Q3) What represents the claim held by the parent company over the shareholders' equity of its subsidiaries or associates?
A) Percentage of interest
B) Percentage of control
C) Percentage of stake
D) Percentage of voting rights
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Chapter 14: Income Statement Analysis
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Q1) Fedora SpA is a wool hat manufacturer.The price of wool is increasing at the rate of 20% a year.Labor cost per hour increases at the rate of 2% a year.During period X1,for 100 CU of sales,the raw materials represented 50% of the cost of manufacturing a hat.Manufacturing labor represented 20% of the cost of manufacturing a hat.Forty percent of both manufacturing and SG&A costs were allowances for depreciation of fixed assets,the rest were labor costs or purchases from third parties that tend to increase at the same rate as manufacturing labor cost per hour.No new investment is considered in X1 or X2.Selling,general,administrative and interest expenses represent 32% of the sales revenue.The working capital needed to support 100 CU of sales is 50 CU that are financed at an average cost of capital of 4% a year (the amount of WCN is expected to remain the same in X2).Net profit before tax is 8% of the selling price.What is the expected profit per 100 CU of revenue for X2 if selling prices cannot increase more than 5%?
A) 3.17 CU
B) 6.18 CU
C) 5.94 CU
D) 5.88 CU
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Chapter 15: Balance Sheet Analysis
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Q1) A positive working capital need is typical of a firm operating in the distribution sector.
A)True
B)False
Q2) How does one describe the way a business financed its resources?
A) By measuring its financial leverage
B) By measuring its return on capital employed
C) By measuring its financial structure
D) By calculating the net present value of future cash flows
Q3) Two firms are completely identical in all aspects,except for their capital structure.Firm A is more leveraged than firm B.
A) Firm A shows higher profit and lower risk than firm B
B) Firm A shows higher profit and higher risk than firm B
C) Firm A show a lower profit and a higher risk than firm B
D) Firms A shows a lower profit and a lower risk than firm B
Q4) How is the working capital calculated?
A) Working capital need - Net cash
B) Fixed assets - Equity and Long-term liabilities
C) Current assets (except cash)- Current liabilities
D) Equity and Long-term liabilities - Fixed assets
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Chapter 16: Statement of Cash Flows Construction
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Q1) Which of the following equations is correct?
A) Income statement items + Increase in related receivables + Decrease in related receivables - Increase in related liabilities - Decrease in related liabilities = Cash flow
B) Income statement items - Increase in related receivables + Decrease in related receivables + Increase in related liabilities - Decrease in related liabilities = Cash flow
C) Income statement items - Increase in related receivables - Decrease in related receivables + Increase in related liabilities + Decrease in related liabilities = Cash flow
D) Income statement items + Increase in related receivables - Decrease in related receivables - Increase in related liabilities + Decrease in related liabilities = Cash flow
Q2) The majority of activities or transactions that affect the income statement are included in which section of the statement of cash flows?
A) Operating activities
B) Investing activities
C) Financing activities
D) Managing activities
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Chapter 17: Statement of Cash Flows Analysis and Earnings
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Q1) What ratio is used to calculate 'cash flow yield'?
A) Operating cash flow/Net sales
B) Operating cash flow/Interest paid
C) Operating cash flow/Net income
D) Operating cash flow/Average current liabilities
Q2) Which of the following action is unlikely to help a business entity increase its cash flow from operations?
A) Push sales at year-end by invoicing before shipment.
B) Grow sales by courting marginal customers not serviced by any other firm.
C) Structure credit terms for customers on the basis of the level of risk of default they represent.
D) Reduce the diversity of suppliers to increase the entity's negotiation power with the remaining selected suppliers.
Q3) Outsourcing can improve the cash flow from operations even if it may deteriorate the profit from operations.
A)True
B)False
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Chapter 18: Ratio Analysis, financial Analysis and Beyond
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Q1) Residual income is:
A) Income remaining after taxes have been paid.
B) Income remaining after dividends have been paid.
C) Income minus a virtual expense representing the cost of capital employed.
D) Income after R&D and competitiveness maintenance expenditures.
Q2) Segment reporting consists in:
A) Breaking down the earnings of the firm into the various functional components of its generation process.
B) Breaking down the earnings of a firm into the elements traceable to identifiable components of the business entity defined around markets,technologies or regions.
C) Reporting the three consolidated financial statements of a group plus,separately,those of each of its key subsidiaries.
D) Reporting the accrual-based earnings and the cash flows by structuring them by term.
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