Financial Statement Analysis
Review Questions
Course Introduction
Financial Statement Analysis is a course that equips students with the skills to interpret and evaluate financial statements for informed decision-making. Emphasizing both qualitative and quantitative techniques, the course covers key topics such as ratio analysis, cash flow analysis, and the assessment of financial health and performance. Students learn how to analyze income statements, balance sheets, and statements of cash flows, while also considering the impact of accounting policies, industry standards, and economic environments. By the end of the course, students are prepared to use financial statements as tools for evaluating company performance, assessing risks, and making strategic business and investment decisions.
Recommended Textbook
Financial Managerial Accounting 14th Edition by Carl Warren
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Chapter 1: Introduction to Accounting and Business
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Q1) The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of stockholders.
A)True
B)False
Answer: True
Q2) Financial accounting provides information to all users,while the main focus for managerial accounting is to provide information to the management.
A)True
B)False
Answer: True
Q3) Which of the following is not true of accounting principles?
A) Financial accountants follow generally accepted accounting principles (GAAP).
B) Following GAAP allows accounting information users to compare one company to another.
C) A new accounting principle can be adopted with stockholders' approval.
D) The Financial Accounting Standards Board (FASB)has primary responsibility for developing accounting principles.
Answer: C
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3
Chapter 2: Analyzing Transactions
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Sample Questions
Q1) Debiting the cash account will increase the account.
A)True
B)False
Answer: True
Q2) Which side of the account increases the cash account?
A) credit
B) neither a debit nor a credit
C) debit
D) either a debit or a credit
Answer: C
Q3) Which of the following will increase stockholders' equity?
A) expenses > revenues
B) the company pays dividends
C) revenues > expenses
D) cash is received from customers on account
Answer: C
Q4) The chart of accounts should be the same for each business.
A)True
B)False
Answer: False
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Chapter 3: The Adjusting Process
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Sample Questions
Q1) Generally accepted accounting principles require that companies use the ____ of accounting.
A) cash basis
B) deferral basis
C) accrual basis
D) account basis
Answer: C
Q2) On January 1,Great Designs Company had a debit balance of $1,450 in the office supplies account.During the month,Great Designs purchased $115 and $160 of office supplies and journalized them to the asset account upon purchasing.On January 31,an inspection of the office supplies cabinet shows that only $350 of office supplies remains.Prepare the January 31 adjusting entry for office supplies.
Answer:
11ea8952_b5b0_60c0_861b_9f517b8c6ead_TB6238_00
11ea8952_b5b0_87d1_861b_d9d8dad1b580_TB6238_00
Q3) Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned.
A)True
B)False
Answer: True
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Describe a classified balance sheet.
Q2) Determine the retained earnings ending balance.
A) $12,150
B) $15,730
C) $6,480
D) $21,400
Q3) Which of the following accounts will be closed to the retained earnings account at the end of the fiscal year?
A) Rent Expense
B) Fees Earned
C) Income Summary
D) Depreciation Expense
Q4) During the closing process,some balance sheet accounts are closed and end the period with a zero balance.
A)True
B)False
Q5) The end-of-period spreadsheet is not considered a part of the formal accounting records.
A)True
B)False
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Chapter 5: Accounting for Merchandising Businesses
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Q1) When merchandise that was sold is returned,a credit to Customer Refunds Payable is made.
A)True
B)False
Q2) Service businesses provide services for income,while a merchandising business sells merchandise.
A)True B)False
Q3) When the terms of sale are FOB shipping point,the buyer pays the freight charges.
A)True
B)False
Q4) A seller may grant a buyer a reduction in selling price and this is called a customer discount.
A)True
B)False
Q5) Gross profit minus selling expenses equals net income.
A)True B)False
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Chapter 6: Inventories
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Q1) The weighted average cost method will always yield results between FIFO and LIFO.
A)True
B)False
Q2) The inventory costing method that reports the most current prices in ending inventory is
A) FIFO
B) specific identification
C) LIFO
D) average cost
Q3) Average cost periodic (round average to nearest cent)
Q4) "Market" as used in the phrase "lower of cost or market" for valuing inventory,refers to the price at which the inventory is being offered for sale by the company.
A)True
B)False
Q5) One negative effect of carrying too much inventory is risk that customers will change their buying habits.
A)True
B)False
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Chapter 7: Internal Control and Cash
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Sample Questions
Q1) Accompanying the bank statement was a debit memo for an NSF check received from a customer.What entry is required in the company's accounts?
A) debit Other Income; credit Cash
B) debit Cash; credit Other Income
C) debit Cash; credit Accounts Receivable
D) debit Accounts Receivable; credit Cash
Q2) A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695.This item would be included in the bank reconciliation as a(n)
A) deduction from the balance per the company's records
B) addition to the balance per the bank statement
C) deduction from the balance per the bank statement
D) addition to the balance per the company's records
Q3) A voucher is usually supported by
A) a supplier's invoice
B) a purchase order
C) a receiving report
D) all of these
Q4) Why would a bank require a company to maintain a compensating balance?
Q5) List and define each of the five elements of internal control.
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Chapter 8: Receivables
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Q1) When a company uses the allowance method of accounting for uncollectible receivables,which entry would not be found in the general journal?
A) Bad Debt Expense 500
Allowance for Doubtful Accounts 500
B) Bad Debt Expense 500
Accounts Receivable,Bob Smith 500
C) Cash 300
Allowance for Doubtful Accounts 200
Accounts Receivable,Bob Smith 500
D) Cash 500
Accounts Receivable,Bob Smith 500
Q2) The operating expense recorded from uncollectible receivables can be called all of the following except
A) accounts receivable
B) bad debt expense
C) doubtful accounts expense
D) uncollectible accounts expense
Q3) Discuss the similarities and differences between accounts receivable,notes receivable,and other receivables.
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Page 10
Chapter 9: Long-Term Assets: Fixed and Intangible
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Q1) For income tax purposes,most companies use an accelerated deprecation method called double declining balance.
A)True
B)False
Q2) On July 1,Andrew Company purchased equipment at a cost of $150,000 that has a depreciable cost of $120,000 and an estimated useful life of 3 years or 60,000 hours.
Using straight-line depreciation,prepare the journal entry to record depreciation expense for (a)the first year,(b)the second year,and (c)the last year.
Q3) A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5 years or 15,000 hours.It is to be depreciated by the units-of-output method.What is the amount of depreciation for the second full year,during which the machine was used 5,000 hours?
A) $5,000
B) $35,000
C) $21,000
D) $45,000
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Chapter 10: Liabilities: Current,installment Notes,and
Contingencies
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Q1) In a defined benefits plan,the employer bears the investment risks in funding a future retirement income benefit.
A)True
B)False
Q2) Each year there is a ceiling for the amount that is subject to all of the following except
A) social security tax
B) federal income tax
C) federal unemployment tax
D) state unemployment tax
Q3) Blast sells portable CD players and each unit carries a one-year replacement warranty.The cost of repair defects under the warranty is estimated at 10% of the sales price.During May,Blast sells 650 portable CD players for $50 each.For what amount in May would Blast debit Product Warranty Expense?
A) $3,250
B) $1,625
C) $650
D) $1,300
Q4) List five internal controls that relate directly to payroll.
Page 12
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Chapter 11: Liabilities: Bonds Payable
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Q1) A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000.Journalize the redemption of the bonds.
Q2) A bond is usually divided into a number of individual bonds of $500 each.
A)True
B)False
Q3) Dylan Corporation issues for cash $2,000,000 of 8%,15-year bonds,interest payable annually,at a time when the market rate of interest is 9%.The straight-line method is adopted for the amortization of bond discount or premium.Which of the following statements is true?
A) The amount of annual interest paid to bondholders remains the same over the life of the bonds.
B) The amount of annual interest expense decreases as the bonds approach maturity.
C) The amount of annual interest paid to bondholders increases over the 15-year life of the bonds.
D) The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity.
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Chapter 12: Corporations: Organization, stock Transactions, and Dividends
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Q1) A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $120.If the corporation issues a 5-for-1 stock split,the par value of the stock after the split will be
A) $5
B) $60
C) $25
D) $24
Q2) The Sneed Corporation issues 10,000 shares of $50 par preferred stock for cash at $75 per share.The entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to
A) Preferred Stock for $750,000
B) Preferred Stock for $500,000 and Paid-In Capital in Excess of Par-Preferred Stock for $250,000
C) Preferred Stock for $500,000 and Retained Earnings for $250,000
D) Paid-In Capital from Preferred Stock for $750,000
Q3) For accounting purposes,stated value is treated the same way as par value.
A)True
B)False
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Chapter 13: Statement of Cash Flows
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Q1) There is no difference in the investing and financing sections of the statement of cash flows using the indirect and direct method.
A)True B)False
Q2) To arrive at cash flows from operations,it is necessary to convert the income statement from an accrual basis to the cash basis of accounting.
A)True B)False
Q3) A cash flow per share amount should be reported on the statement of cash flows. A)True B)False
Q4) Changes in current assets and current liabilities are reported on the statement of cash flows,indirect method,in the A) operating activities
B) financing activities
C) investing activities
D) separate schedule of noncash activities
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability.As a result of this transaction,the current ratio and working capital will
A) both decrease
B) both increase
C) increase and remain the same,respectively
D) remain the same and decrease,respectively
Q2) The current ratio is
A) used to evaluate a company's liquidity and short-term debt paying ability
B) a solvency measure that indicates the margin of safety for bondholders
C) calculated by dividing current liabilities by current assets
D) calculated by subtracting current liabilities from current assets
Q3) Using the balance sheets for Kellman Company,if net income is $150,000 and interest expense is $20,000 for Year 2,what is the return on stockholders' equity for Year 2?
A) 6.9%
B) 14.5%
C) 16.4%
D) 13.8%
Q4) Define solvency and profitability.How are they alike?
Page 16
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Chapter 15: Introduction to Managerial Accounting
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Sample Questions
Q1) A staff department has no direct authority over a line department.
A)True
B)False
Q2) Who are the individuals charged with the responsibility for directing the day-to-day operations of a business?
A) investors
B) managers
C) shareholders
D) customers
Q3) Managerial accounting reports are designed to meet the specific needs of a company's management.
A)True
B)False
Q4) An example of a sustainable business practice in energy is the use of wind turbines.
A)True
B)False
Q5) Managerial accounting provides useful information to managers on product costs.
A)True
B)False
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Chapter 16: Job Order Costing
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Q1) The document that serves as the basis for recording direct labor on a job cost sheet is the clock card.
A)True
B)False
Q2) The document authorizing the issuance of materials from the storeroom is a
A) materials requisition
B) purchase requisition
C) receiving report
D) purchase order
Q3) Cavy Company estimates that total factory overhead costs will be $660,000 for the year.Direct labor hours are estimated to be 100,000.
Determine (a)the predetermined factory overhead rate; (b)the amount of factory overhead applied to Job 345 if the amount of direct labor hours is 560 and Job 777 if the amount of direct labor hours is 800; and (c)prepare the journal entry to apply factory overhead for April according to the predetermined overhead rate.
Q4) Factory overhead is applied to production using a predetermined overhead rate.
A)True
B)False
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Chapter 17: Process Cost Systems
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Q1) Which of the following is not included in conversion costs?
A) direct labor
B) factory overhead
C) indirect labor
D) direct materials
Q2) What is the equivalent units of production used to compute unit conversion cost on the cost of production report for Department W? Assume the company uses FIFO.
A) 16,100 units
B) 13,600 units
C) 15,000 units
D) 18,500 units
Q3) Which of the following best describes the effect on direct labor when management adopts a lean manufacturing environment?
A) Workers typically perform one function.
B) The environment becomes more labor intensive.
C) Each employee runs a single machine.
D) Workers are often cross-trained to perform more than one function.
Q4) Explain the concept of equivalent units.Give an example to validate your explanation.
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Chapter 18: Activity-Based Costing
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Sample Questions
Q1) Calculate the cost of services for a highlight.
Q2) Service companies can effectively use activity-based costing to compute product (service)costs.
A)True
B)False
Q3) Which of the following does not rely on managerial decisions involving accurate product costing?
A) product constraints
B) emphasis of a product line
C) product mix
D) product price
Q4) In a service organization,the multiple department overhead rate method is the most effective in providing information about the cost of services.
A)True
B)False
Q5) A single plantwide overhead rate method is very expensive to apply.
A)True
B)False
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Chapter 19: Cost-Volume-Profit Analysis
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Q1) Manley Co.manufactures office furniture.During the most productive month of the year,4,500 desks were manufactured at a total cost of $86,625.In its slowest month,the company made 1,800 desks at a cost of $49,500.Using the high-low method of cost estimation,total fixed costs are
A) $61,875
B) $33,875
C) $24,750
D) cannot be determined from the data given
Q2) If employees accept a wage contract that increases the unit contribution margin,the break-even point will decrease.
A)True
B)False
Q3) What was Carter Co.'s variable cost of E?
A) $140
B) $70
C) $64
D) $60
Q4) Break-even analysis is one type of cost-volume-profit analysis.
A)True
B)False
21
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Chapter 20: Variable Costing for Management Analysis
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Q1) Sales mix is generally defined as the relative distribution of sales among the various products sold.
A)True
B)False
Q2) What term is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost,direct labor cost,and all factory overhead cost?
A) Standard costing
B) Variable costing
C) Absorption costing
D) Marginal costing
Q3) Service firms can only have one activity base for analyzing changes in costs.
A)True
B)False
Q4) The relative distribution of sales among various products sold is referred to as the:
A) by-product mix
B) joint product mix
C) profit mix
D) sales mix
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Chapter 21: Budgeting
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Q1) The budgeting process does not involve which of the following activities?
A) Specific goals are established.
B) Periodic comparison of actual results to goals.
C) Execution of plans to achieve goals.
D) Increase in sales by increasing marketing efforts.
Q2) What is the amount of the deficiency or excess cash (after considering the minimum cash balance required)for January?
A) excess of $26,700
B) deficiency of $136,700
C) excess of $356,700
D) excess of $60,000
Q3) Southern Company is preparing a cash budget for April.The company has $12,000 cash at the beginning of April and anticipates $30,000 in cash receipts and $34,500 in cash disbursements during April.Southern Company has an agreement with its bank to maintain a minimum cash balance of $10,000.To maintain the required balance during April,the company must
A) borrow $4,500
B) borrow $2,500
C) borrow $7,500
D) borrow $5,000
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Chapter 22: Evaluating Variances From Standard Costs
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Q1) A negative fixed overhead volume variance can be caused due to the following except
A) sales orders at a low level
B) machine breakdowns
C) employee inexperience
D) increase in utility costs
Q2) The variable factory overhead controllable variance is
A) $73,250 favorable
B) $73,250 unfavorable
C) $59,400 favorable
D) $59,400 unfavorable
Q3) Non-financial measures are often linked to the inputs or outputs of an activity or process.
A)True
B)False
Q4) Normally,standard costs should be revised when labor rates change to incorporate new union contracts.
A)True
B)False
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Chapter 23: Evaluating Decentralized Operations
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Q1) The income from operations for the Rails Division is
A) $60,800
B) $33,600
C) $8,700
D) $21,150
Q2) Managers of what type of decentralized units have authority and responsibility for revenues,costs,and assets invested in the unit?
A) profit center
B) investment center
C) production center
D) cost center
Q3) Under the cost price approach,the transfer price is the price at which the product or service transferred could be sold to outside buyers.
A)True
B)False
Q4) Office salaries expense for a department store is an indirect expense.
A)True
B)False
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Chapter 24: Differential Analysis and Product Pricing
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Q1) The unit selling price for the company's product is
A) $16.32
B) $13.44
C) $12.10
D) $13.72
Q2) Lara Technologies is considering a cash outlay of $250,000 for the purchase of land,which it could lease out for $35,000 per year.If alternative investments are available that yield a 12% return,the opportunity cost of the purchase of the land is
A) $35,000
B) $30,000
C) $250,000
D) $4,200
Q3) The amount of income that would result from an alternative use of cash is called:
A) differential income
B) sunk cost
C) differential revenue
D) opportunity cost
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26
Chapter 25: Capital Investment Analysis
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Q1) Which of the following is a present value method of analyzing capital investment proposals?
A) average rate of return
B) cash payback method
C) accounting rate of return
D) net present value
Q2) In net present value analysis for a proposed capital investment,the expected future net cash flows are averaged and then reduced to their present values.
A)True
B)False
Q3) Often referred to as the discounted cash flow method
A)Capital investment analysis
B)Time value of money concept
C)Net present value method
D)Average rate of return
E)Cash payback period
Q4) What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?
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Chapter 26: Lean Manufacturing and Activity Analysis
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Q1) A setup is the time required to prepare an operation for a new production run.
A)True
B)False
Q2) Inventory reduction is a ____ principle.
A) lean
B) traditional processing
C) economic
D) wait time
Q3) Push manufacturing is also referred to as make-to-order processing.
A)True
B)False
Q4) Which of the following are features of the lean manufacturing system?
(a)maintaining excess inventory to ensure that products will always be available
(b)cross training of employees
(c)giving employees additional authority and responsibility
(d)product-oriented layout
(e)increased set-up time
Q5) From the above schedule,calculate the (a)prevention and (b)appraisal costs.
Page 28
Q6) From the above schedule,compute the percentage of non-value-added activities.
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