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business
financial reporting and analysis

Questions and Answers of Financial Reporting and Analysis

The accounting for not-for-profit institutions does not typically include the concept of efficiency. Indicate how the concept of efficiency can be incorporated in the financial reporting of a
The rating on an industrial revenue bond is representative of the probability of default of bonds issued with the full faith and credit of a governmental unit. Comment.
Which organization provides a service whereby it issues a certificate of conformance to governmental units with financial reports that meet its standards?
The budget for a state or local government is not as binding as a budget for a commercial business. Com- ment.
How many funds will be used by a state or local government?
For governmental accounting, define the following types of funds: 1 . General fund 2 . Proprietary fund 3 . Fiduciary fund
The accounting for governments is centered on the entity concept and the efficiency of the entity. Com- ment.
Do not-for-profit organizations, other than governments, use fund accounting? Comment.
List some objectives that could be incorporated into the financial reporting of a professional accounting organization.
If quoted market prices are not available, a personal financial statement cannot be prepared. Comment.
Give examples of disclosure in footnotes with personal financial statements.
List some sources of information that may be available when preparing personal financial statements.
Is the concept of working capital used with personal financial statements? Comment.
GAAP as they apply to personal financial statements use the cash basis. Comment.
Is the presentation of a personal income statement appropriate?
What personal financial statement should be prepared when an explanation of changes in net worth is de- sired?
In a personal statement of financial condition, what is the equity section called?
When preparing a personal statement of financial condition, should assets and liabilities be presented on the basis of historical cost or estimated current value?
Are comparative financial statements required when presenting personal financial statements?
Is a statement of changes in net worth required when presenting personal financial statements?
What is the basic personal financial statement?
May personal financial statements be prepared only for an individual? Comment.
Real estate companies contend that conventional accounting does not recognize the underlying value of the property and that this misleads investors. Discuss.
Insurance companies tend to have a stock market price at a discount to the average market price(price/earnings ratio). Indicate some perceived reasons for this relatively low price/earnings ratio.
Insurance industry-specific financial ratios are usually prepared from financial statements prepared under what standards?
Briefly describe the unique aspects of revenue recognition for an insurance company.
Briefly describe the difference between accounting for intangibles for an insurance company under GAAP and under SAP.
For an insurance company, describe the difference between GAAP reporting and SAP reporting of deferred policy acquisition costs.
Why could an insurance company with substantial investments in real estate represent a risk?
Annual reports that insurance companies issue to the public are in accordance with what accounting stan- dards?
Annual reports filed with state insurance departments are in accordance with what accounting standards?
Explain how the publication Financial Analysis of the Motor Carrier Industry could be used to determine the percentage of total revenue a firm has in relation to similar trucking firms.
How is the passenger load factor of a bus company related to profitability?
If a transportation firm shows a rise in revenue per passenger mile, what does this rise imply?
In a transportation firm, what types of things will change operating revenues? Operating expenses?
Briefly describe the revenue section of the income statement for a transportation firm.
What is the most important category of assets for transportation firms?
What type of ratio is operating revenue to operating property? Will it exceed 1:1 for a utility?
Is it more desirable to have the operating ratios increasing or decreasing for utilities and transportation companies?
For oil and gas companies, there is the potential for a significant difference between the reported income and cash flows from operations. Comment.
Oil and gas companies must disclose quantity estimates for proved oil and gas reserves and the major factors causing changes in these resource estimates. Briefly indicate why this disclosure can be
When reviewing the financial statements of oil and gas companies, why is it important to note the method of costing (expensing) exploration and production costs?
Some industries described in this chapter are controlled by federal regulatory agencies. How does this af- fect their accounting systems?
Differentiate between successful-efforts and full-costing accounting as applied to the oil and gas industry.
For a utility, describe the income statement accounts, allowance for equity funds used during construc- tion, and allowance for borrowed funds used during construction.
For a utility, why review the account construction work in progress?
Are current liabilities presented first in utility reporting? Comment.
Is times interest earned meaningful for utilities? Why or why not?
What does the funded debt to operating property ratio measure for a utility?
Are inventory ratios meaningful for utilities? Why?
Why are plant and equipment listed first for utilities?
How does demand for utilities differ from demand for other products or services?
Utilities are very highly leveraged. How is it that they are able to carry such high levels of debt?
Why review the footnote that describes commitments and contingent liabilities for a bank?
Why could a review of savings deposit balances be important when reviewing a bank's financial state- ments?
Why review the disclosure of nonperforming assets for banks?
Why review the disclosure of allowance for loan losses for a bank?
Why review the disclosure of foreign loans for banks?
Why review the disclosure of the market value of investments versus the book amount of investments for banks?
Give an example of why a review of bank assets may indicate risk or opportunity you were not aware of.
What type of ratio is deposits times capital?
What does the loan loss coverage ratio measure?
Why are banks concerned about the percentage of earning assets to total assets?
What ratios are used to indicate profitability for banks?
What does the ratio total deposits times capital measure?
What is usually the biggest expense item for a bank'
Why must the user be cautious in analyzing bank holding companies?
To what agencies and other users of financial statements must banks report?
Why are banks concerned with their loans/deposits ratios?
Why are savings accounts liabilities for banks?
Why are loans, which are usually liabilities, treated as assets for banks?
What are the main sources of revenue for banks?
The surveyed CFAs gave the highest significance rating to which type of financial ratio?
Indicate two possible problems with a pie graph for accounting data.
List two things that can make a line graph misleading.
List three popular forms of graphs used by accountants.
You are in charge of preparing a comprehensive budget for your firm. Indicate how financial ratios can help determine an acceptable, comprehensive budget.
You are the auditor of Piedmore Corporation. You determine that the accounts receivable turnover has been much slower this period than in prior periods and that it is also materially lower than the
No conclusive model has been developed to forecast financial failure. This indicates that financial ratios are not helpful in forecasting financial failure. Comment.
Indicate a practical problem with computing a Z score for a closely held firm.
What does a Z score below 2.675 indicate, according to the Altman model?
According to the Beaver study, three current asset accounts should be paid particular attention in order to forecast financial failure. List each of these accounts and indicate whether they should be
According to the Beaver study, which ratios should be watched most closely, in order of their predictive power?
Describe what is meant by a firm's financial failure.
Indicate some possible uses of a reliable model that can be used to forecast financial failure.
All firms are required to expense R&D costs incurred each period. Some firms spend very large sums on R&D, while others spend little or nothing on this area. Why is it important to observe whether a
Indicate which of the following accounting policies are conservative by placing an X under Yes or No. Assume inflationary conditions exist.
What type of accounting policies are described as conservative?
The study of annual reports reviewed in this chapter indicated that wide differences of opinion exist on how many ratios should be computed. Comment.
According to a study of annual reports reviewed in this chapter, what type or types of financial ratios are most likely to be included in annual reports? Speculate on the probable reason for these
List the sections of annual reports where ratios are most frequently located, in order of use.
Financial ratios are used extensively in annual reports to interpret and explain financial statements. Comment.
CPAs regard which two financial ratios as the most significant? The highest rated profitability ratio? The highest debt ratio?
List the top five financial ratios included in corporate objectives according to the study reviewed in this book. Indicate what each of these ratios primarily measures.
Corporate controllers regard profitability financial ratios as very significant. Comment.
The commercial loan officers did not list the dividend payout ratio as a highly significant ratio, but they indicated that the dividend payout ratio was a ratio that appeared frequently in loan
Which two financial ratios do commercial loan officers regard as the most significant? Which two financial ratios appear most frequently in loan agreements?
Commercial loan officers regard profitability financial ratios as very significant. Comment.
The Hornet Company had operating cash flow of $60,000 during a year in which it paid dividends of$1 1,000. What does this indicate about Hornet's dividend-paying ability?
Operating cash flow per share is a better indicator of profitability than is earnings per share. Do you agree? Explain.

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