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financial reporting financial statement analysis and valuation
Understanding Financial Statements 11th Global Edition Lyn Fraser, Aileen M. Ormiston - Solutions
Which of the following is a cash outflow?(a) Proceeds from borrowing.(b) Repayments of debt principal.(c) Payment for taxes.(d) Both (b) and (c).
How would payments for taxes be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing outflow.(d) Financing outflow
How would the sale of a building be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing inflow.(d) Financing inflow.
How would the repayment of debt principal be classified?(a) Operating outflow.(b) Operating inflow.(c) Investing outflow.(d) Financing outflow
What type of accounts are accounts receivable and inventory?(a) Cash accounts.(b) Operating accounts.(c) Financing accounts.(d) Investing accounts.
What type of accounts are notes payable and current maturities of longterm debt?(a) Cash accounts.(b) Operating accounts.(c) Financing accounts.(d) Investing accounts.
The change in retained earnings is affected by which of the following?(a) Net income and common stock.(b) Net income and paid-in capital.(c) Net income and payment of dividends.(d) Payment of dividends and common stock.
The indirect method of the statement of cash flows starts with:(a) Deferrals.(b) Non-cash items such as depreciation and amortization.(c) Net income.(d) Gains and losses on asset sales.
What constitutes a cash inflow?(a) + Asset account.(b) + Liability account.(c) + Equity account.(d) (b) and (c)
What constitutes a cash outflow?(a) + Asset account(b) – Liability account(c) – Equity account(d) All of the above
What are internal sources of cash?(a) Cash inflows from operating activities.(b) Cash inflows from investing activities.(c) Cash inflows from financing activities.(d) All of the above.
What are external sources of cash?(a) Cash inflows from operating activities.(b) Cash inflows from investing activities.(c) Cash inflows from financing activities.(d) Both (b) and (c).
Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities?(a) Depreciation expense for the period.(b) The change in deferred taxes.(c) The amount by which equity income recognized exceeds cash received.(d) All of the above.
Which statement is true for gains and losses from capital asset sales?(a) They do not affect cash and are excluded from the statement of cash flows.(b) They are included in cash flows from operating activities.(c) They are included in cash flows from investing activities.(d) They are included
Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?(a) Accounts receivable.(b) Inventory.(c) Prepaid expenses.(d) All of the above.
Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities?(a) Accounts payable.(b) Notes payable and current maturities of long-term debt.(c) Accrued liabilities.(d) Both (a) and (c)
How is it possible for a firm to be profitable and still go bankrupt?(a) Earnings have increased more rapidly than sales.(b) The firm has positive net income but has failed to generate cash from operations.(c) Net income has been adjusted for inflation.(d) Sales have not improved even though
Which of the following statements is true?(a) The decrease in prepaid expenses is deducted because the firm has recognized an expense in the current period for which cash was paid in an earlier period, on a net basis.(b) An increase in income taxes payable is added because less has been paid for
Which of the following statements is false?(a) Operating activities include delivering or producing goods for sale and providing services and the cash effects of transactions and other events that enter into the determination of income.(b) The statement of cash flows is called so because it shows
Which of the following could lead to cash flow problems?(a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.(b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers.(c) Obsolete inventory, increasing notes
Indicate whether each of the following transactions for the current period would appear as an operating, investing, or financing activity in the statement of cash flows. If any transaction does not appear in the statement of cash flows, explain why.(a) Disbursement of $96,900 to merchandise
State, for the transactions affecting cash, whether they relate to an operating, investing, financing activity, or a non-cash transaction.(a) Bank interest paid.(b) Lease paid.(c) Depreciation expense.(d) Sales of goods on credit.(e) Taxation payable.(f) Receipts from share issue.(g) Rent
The income statement and balance sheet of All Wired, Inc., follows:Additionally, All Wired purchased land of $24,500 by financing it 100% with long-term notes payable during 2016. During the year, there were no sales of land or equipment, no additional issuances of notes payable, no retirements of
All Wired is a marketing services firm that creates advertising copy for clients and places the advertising in various mass media. Accounts receivable represents amounts owed by clients, and accounts payable represent amounts payable to various media. All Wired has purchased marketing services
Which of the following is not a source of information for the financial statement user?(a) Auditor’s report.(b) Proxy statement.(c) Stock price(d) Management discussion and analysis.
Which of these are tools and techniques used by the financial analyst to convert financial statement data from sources that facilitate the evaluation of a firm’s financial condition and performance?(a) Common-size financial statements.(b) Structural analysis, which looks at the internal
Which one is not a key financial ratio?(a) Liquidity ratios.(b) Activity ratios.(c) Common size ratios.(d) Profitability ratios.
What information does the auditor’s report contain?(a) The results of operations.(b) An unqualified opinion.(c) An opinion as to the fairness of the financial statements.(d) A detailed coverage of the firm’s liquidity, capital resources, and operations.
Which of the following would be helpful to an analyst evaluating the performance of a firm?(a) Understanding the economic and political environment in which the company operates.(b) Reviewing the annual reports of a company’s suppliers, customers, and competitors.(c) Preparing common-size
Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations?(a) Liquidity.(b) Capital resources.(c) Operations.(d) Earnings projections.
What type of information found in supplementary schedules is required for inclusion in an annual report?(a) Segmental data.(b) Inflation data.(c) Material litigation and management photographs.(d) Management remuneration and segmental data.
Why is the cash conversion cycle important information for the analyst to understand?(a) It helps the analyst understand how profitable the firm is.(b) It helps the analyst understand why cash flow generation has improved or deteriorated by analyzing the key account balances– accounts
The quick or acid-test ratio is a more rigorous test for short-term insolvency than the current ratio because it eliminates ___________, considered the least liquid current asset and most likely source of losses. (a) Cash.(b) Accounts receivable.(c) Marketable securities.(d) Inventory.
Which of the following is not a tool or technique used by a financial statement analyst?(a) Common-size financial statements.(b) Trend analysis.(c) Random sampling analysis.(d) Industry comparisons.
What do liquidity ratios measure?(a) A firm’s ability to meet cash needs as they arise.(b) The liquidity of fixed assets.(c) The overall performance of a firm.(d) The extent of a firm’s financing with debt relative to equity.
Which category of ratios is useful in assessing the capital structure and long-term solvency of a firm?(a) Liquidity ratios.(b) Activity ratios.(c) Leverage ratios.(d) Profitability ratios
What is a serious limitation of financial ratios?(a) Ratios are screening devices.(b) Ratios can be used only by themselves.(c) Ratios indicate weaknesses only.(d) Ratios are not predictive.
What is the most widely used liquidity ratio?(a) Quick ratio.(b) Current ratio.(c) Inventory turnover.(d) Debt ratio.
What is a limitation common to both the current and the quick ratio?(a) Accounts receivable may not be truly liquid.(b) Inventories may not be truly liquid.(c) Marketable securities are not liquid.(d) Prepaid expenses are potential sources of cash.
Why is the quick ratio a more rigorous test of short-run solvency than the current ratio?(a) The quick ratio considers only cash and marketable securities as current assets.(b) The quick ratio eliminates prepaid expenses for the numerator.(c) The quick ratio eliminates prepaid expenses for the
What does an increasing collection period for accounts receivable suggest about a firm’s credit policy?(a) The credit policy is too restrictive(b) The firm is probably losing qualified customers.(c) The credit policy may be too lenient.(d) The collection period has no relationship to a
Which of the following statements about inventory turnover is false?(a) Inventory turnover measures the efficiency of the firm in managing and selling inventory.(b) Inventory turnover is a gauge of the liquidity of a firm’s inventory.(c) Inventory turnover is calculated with cost of goods sold
Which of the following items would cause the cash conversion cycle to decrease?(a) Increasing days payable outstanding.(b) Increasing the average collection period.(c) Increasing the days inventory held.(d) None of the above
What do the asset turnover ratios measure?(a) The liquidity of the firm’s current assets.(b) Management’s effectiveness in generating sales from investments in assets.(c) The overall efficiency and profitability of the firm.(d) The distribution of assets in which funds are invested
Which of the following ratios would not be used to measure the extent of a firm’s debt financing?(a) Debt ratio.(b) Debt to equity.(c) Times interest earned.(d) Long-term debt to total capitalization.
Why is the amount of debt in a company’s capital structure important to the financial analyst?(a) Debt implies risk.(b) Debt is less costly than equity.(c) Equity is riskier than debt.(d) Debt is equal to total assets.
Why is the fixed charge coverage ratio a broader measure of a firm’s coverage capabilities than the times interest earned ratio?(a) The fixed charge ratio indicates how many times the firm can cover interest payments.(b) The times interest earned ratio does not consider the possibility of
Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders?(a) Gross profit margin and net profit margin.(b) Return on investment.(c) Total asset turnover and operating profit margin.(d) Return on investment and
What does a financial leverage index greater than one indicate about a firm?(a) The unsuccessful use of financial leverage.(b) Operating returns more than sufficient to cover interest payments on borrowed funds.(c) More debt financing than equity financing.(d) An increased level of borrowing.
In analyzing the financial statements of a firm, what is management looking to find?
Eleanor’s Computers is a retailer of computer products. Using the financial data provided, complete the financialratio calculations for 2016. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems. Financial Ratios 2014 2015
Hong Hong Printing Company has sales totaling $40,000,000 in fiscal year 2012. Some of the ratios for the company are listed below. Use this information to determine the dollar values of the various income statement and balance sheet accounts.Calculate values for the following:(a) Gross profit.(b)
Ahmad Nazri, the CEO of 1MDB Inc., has a proposal to present to his board of directors pertaining to a power plant expansion that will cost $50 million. He is, however, unsure whether the planned expansion should be financed via a debt issue (a long-term note from the SBC Bank with an interest of
The new owners of Indomie Foods Inc. have hired you to help them diagnose and cure problems that the company has had in maintaining adequate liquidity. As the first step, you perform a liquidity analysis. You then do an analysis of the company’s short-term activity ratios. Your calculations and
Choose an industry and find four companies in that industry. Using a financial Internet database such as www.marketwatch.com, calculate or locate the four market ratios discussed in the chapter for each of the four companies. Write an analysis comparing the market ratios of the four companies.
Why should an individual learn to read and interpret financial statements?(a) Understanding financial statements will guarantee at least a 20% return on investments.(b) An individual need not learn to read and interpret financial statements because auditors offer a report indicating whether the
Which of the following is not a key accounting characteristic in the preparation of accounting data?(a) Materiality.(b) Comparability.(c) Consistency.(d) Revenue generation.
What is the goal of the IASB?(a) To have worldwide acceptance of a set of international financial reporting standards.(b) To create a set of accounting rules that Europe and the United States will follow.(c) To create a set of accounting rules for countries other than the United States.(d) To work
What are the basic financial statements provided in an annual report?(a) Balance sheet and income statement.(b) Statement of financial earnings and statement of stockholders’ equity.(c) Balance sheet, income statement, and statement of cash flows.(d) Balance sheet, income statement, statement of
What items are included in the notes to the financial statements?(a) Summary of accounting policies.(b) Changes in accounting policies, if any.(c) Detail about particular accounts.(d) All of the above.
What does an unqualified auditor’s report indicate?(a) The financial statements unfairly and inaccurately present the company’s financial position for the accounting period.(b) The financial statements present fairly the financial position, the results of operations, and the changes in cash
Which of the following statements is false?(a) The balance sheet or statement of financial position shows the financial position of the firm on a particular date, such as the end of a quarter or a year.(b) The income or earning statement presents the results of operations for the accounting
In terms of inventory valuation for the recognition of the cost of goods sold, which of the following methods is not acceptable?(a) Cost based on the selling price of the goods.(b) Lowest cost of goods sold first.(c) Most recent goods sold first.(d) Oldest goods sold first.
What subject(s) should the management discussion and analysis section discuss?(a) Liquidity.(b) Commitments for capital expenditures.(c) A breakdown of sales increases into price and volume components.(d) All of the above.
Which of the following statements is true?(a) Annual reports only contain glossy pictures.(b) Public relations material should be used cautiously.(c) Market data refers to the advertising budget of a firm.(d) The shareholders’ letter should be ignored.
What information can be found in a proxy statement?(a) Information on voting procedures.(b) Information on executive compensation.(c) Information on the breakdown of audit and nonaudit fees paid to the audit firm.(d) All of the above.
What does it mean by the matching principle in accounting?(a) Expenses are matched with the generation of revenues to determine net income for an accounting period.(b) Generation of revenues are matched with expenses to determine net income for the previous period.(c) Generation of revenues are
What is the accrual basis of accounting?(a) Recognition of revenue when it is received in cash.(b) Recognition of revenue in the accounting period when the sale is made rather than when cash is received.(c) Matching expenses with revenue in the appropriate accounting period.(d) Both (b) and (c).
Which of the following are methods by which management can manipulate earnings and possibly lower the quality of reported earnings?(a) Changing an accounting policy to increase earnings.(b) Refusing to take a loss on inventory in an accounting period when the inventory is known to be obsolete.(c)
What is the eventual goal of the IASB?
What can a financial analyst find in the MD&A section of the annual report?
What are the purposes of (a) the income statement, (b) the balance sheet, (c) the statement of cash flows, and (d) the statement of stockholders’ equity?
Research the joint FASB/IASB Financial Statement Presentation project. Write a short essay outlining the current status of the project and the expected changes to the financial statements.
What does the balance sheet summarize for a business enterprise? (a) Operating results for a period. (b) Financial position at a point in time. (c) Financing and investment activities for a period. (d) Profit or loss at a point in time.
What is the balancing equation for the balance sheet?(a) Assets = Liabilities + Stockholders’ equity.(b) Assets + Stockholders’ equity = Liabilities.(c) Assets + Liabilities = Stockholders’ equity.(d) revenues - Expenses = Net income.
What is a common-size balance sheet?(a) A statement that expresses each account on the balance sheet as a percentage of net income.(b) A statement that is common to an industry.(c) A statement that expresses each account on the balance sheet as a percentage of total assets.(d) A statement that
Which of the following assets would be classified as current assets on the balance sheet?(a) Cash, accounts payable, deferred income taxes.(b) Cash equivalents, inventory, prepaid expenses.(c) Accounts receivable; prepaid expenses; property, plant, and equipment.(d) Inventory, goodwill, unearned
What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts?(a) The growth rates of sales and inventories.(b) The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account
How is a common-size balance sheet created?
Define goodwill. How is it recorded on the balance sheet?
Describe what is meant by deferred taxes. In which situation can it become a liability and when can it become an asset?
How does buying back stock affect shareholders equity?
Alex operates a small bookshop, EMO Bookstore. He employs Michael to help out in the bookshop. Michael lists out the account balance for the shop at the end of June 2016 reporting period.From the data provided, prepare a balance sheet for EMO Bookstore for the year ending 30 June 2016. Account $
What does the income statement measure for a firm?(a) The changes in assets and liabilities that occurred during the period.(b) The financing and investment activities for a period.(c) The results of operations for a period.(d) The financial position of a firm for a period.
How are companies required to report total comprehensive income?(a) On the face of the income statement.(b) In a separate statement of comprehensive income.(c) In the statement of stockholders’ equity.(d) All of the above.
Which of the following items needs to be disclosed separately in the income statement?(a) Discontinued operations.(b) Salary expense.(c) Warranty expense.(d) Bad debt expense.
How does one derive a common-sized income statement?(a) All items on the common-sized income statement are shown relative to net profit.(b) All items on the common-sized income statement are shown relative to sales.(c) All items on the common-sized income statement are shown relative to gross
Which of the following statements is incorrect with regard to gross profit or gross profit margin?(a) The gross profit margin and cost of goods sold percentage are complements of each other.(b) Generally, firms want to maintain the relationship between gross profit and sales, or, if possible,
Which of the following would be recognized as an expense in the current financial period?(a) A payment made in the current financial period to purchase a machine that will be used at the beginning of the next financial period.(b) An invoice for printing, owing at the end of the previous financial
Which of the following assets will not be depreciated over its service life?(a) Buildings.(b) Furniture.(c) Land.(d) Equipment.
Selling and administrative expenses include:(a) Salaries.(b) Rent.(c) Utilities.(d) All of the above.
The calculation of operating profit may include three of the following four expenses. Which one is not included?(a) Rent payable.(b) Depreciation.(c) Loan interest.(d) Insurance.
Suppose John commenced business on 1 January, 2016. During the year ending 31 December, 2016, he bought a quantity of leather shoes at a uniform cost and sold 5,800 of them at $50 each. An inventory check on 31 December, 2016 established he holds 650 unsold pairs. John’s gross profit for the year
Why can the equity method of accounting for investments in the voting stock of other companies cause distortions in net earnings?(a) Significant influence may exist even if the ownership of voting stock is less than 20%.(b) Income is recognized where no cash may ever be received.(c) Income
Why should the effective tax rate be evaluated when assessing earnings?(a) It is important to understand whether earnings have increased because of tax techniques rather than from positive changes in core operations.(b) Effective tax rates are irrelevant because they are mandated by
Which of the following items is not recorded as comprehensive income?(a) Foreign currency translation effects.(b) Additional pension liabilities.(c) Unrealized gains and losses.(d) Discontinued operations.
What are three profit measures calculated from the income statement?(a) Operating profit margin, net profit margin, repairs and maintenance to fixed assets.(b) Gross profit margin, cost of goods sold percentage, EBIT.(c) Gross profit margin, operating profit margin, net profit margin.(d) None
Which of the following statements is true?(a) Depreciation and amortization represent the cost of assets other than land that will benefit a business enterprise for less than a year.(b) Repair and maintenance are the annual costs of repairing and maintaining the firm’s property, plant, and
What is a statement of stockholders’ equity?(a) It is the same as a retained earnings statement.(b) It is a statement that reconciles only the treasury stock account.(c) It is a statement that summarizes changes in the entire stockholders’ equity section of the balance sheet.(d) It is a
What accounts can be found on a statement of stockholders’ equity? (a) Investments in other companies.(b) Treasury stock, accumulated other comprehensive income, retained earnings.(c) Market value of treasury stock.(d) Both (a) and (c).
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