Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
What is the balancing equation for the balance sheet?(a) Assets = Liabilities + Stockholders’ equity.(b) Assets + Stockholders’ equity = Liabilities.(c) Assets + Liabilities =
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
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)
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
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
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
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’
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
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
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
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
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
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
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
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
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
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
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
Which of the following cause(s) a change in the retained earnings account balance?(a) Prior period adjustment.(b) Payment of dividends.(c) Net profit or loss.(d) All of the above.
How is a common-size income statement created?
What are the two causes of an increasing or decreasing sales number?
Explain the two methods to account for stock investments in companies that own less than 50% of the voting stock.
Explain what can be found on a statement of stockholders’ equity.
The CEO of Sunway Corporation is puzzled. During the year, the company experienced a loss of $800,000, yet its cash increased $300,000 during the same period. Explain how this situation occurred.
Prepare a multiple-step income statement for Jackrabbit Inc. from the following singlestep statement. Net sales $1,840,000 Gain on sale of equipment 15,000 Interest income 13,000 1,868,000 Costs and
The table below shows the common-sized income statements for six firms and a description of their operations. All of these firms use U.S. GAAP.(a) Commonwealth Edison: generates and sells electricity
Acme Enterprises, a hypothetical company that prepares its financial statements in accordance with IFRS, manufactures tables. In 2009, the factory produced 900,000 finished tables and scrapped 1,000
Global Sales, Inc. (GSI) is a hypothetical distributor of consumer products, including bars of violet essence soap. The soap is sold by the kilogram. GSI began operations in 2009, during which it
If GSI (the company in Example 2) had used a perpetual inventory system, the timing of purchases and sales would affect the amounts of cost of sales and inventory. Following is a record of the
Company L and Company F are identical in all respects except that Company L uses the LIFO method and Company Fuses the FIFO method. Each company has been in business for five years and maintains a
Caterpillar Inc. (NYSE: CAT), based in Peoria, Illinois, USA, is the largest maker of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines in the world.
The following excerpts are from the 2007 10-K of Sturm Ruger & Co., Inc. (NYSE: RGR):Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations“Reduction
Reliable Fans, Inc. (RF), a hypothetical company, sells high quality fans and has been in business since 2006. Exhibit 4 provides relevant data and financial statement information about RF’s
Acme Enterprises, a hypothetical company, manufactures computers and prepares its financial statements in accordance with IFRS. In 2008, the cost of ending inventory was €5.2 million but its net
The Volvo Group (OMX Nordic Exchange: VOLV B), based in Göteborg, Sweden, is a leading supplier of commercial transport products such as construction equipment, trucks, buses, and drive systems for
1. Using CAT’s LIFO numbers as reported and FIFO adjusted numbers and Volvo’s numbers as reported (Example 9), compare the following for 2008: inventory turnover ratio, days of inventory on hand,
The following excerpts commenting on inventory management are from the Volvo Group Annual Report, 2008:From the CEO Comment: “In a declining economy, it is extremely important to act quickly to
Selected excerpts from the consolidated financial statements and notes to consolidated financial statements for Alcatel-Lucent (NYSE: ALU) are presented in Exhibits 8, 9, and 10. Exhibit 8 contains
Inventory cost is least likely to include:A. production-related storage costs.B. costs incurred as a result of normal waste of materials.C. transportation costs of shipping inventory to customers.
Mustard Seed PLC adheres to IFRS. It recently purchased inventory for €100 million and spent €5 million for storage prior to selling the goods. The amount it charged to inventory expense (€
Carrying inventory at a value above its historical cost would most likely be permitted if:A. the inventory was held by a producer of agricultural products.B. financial statements were prepared using
Eric’s Used Bookstore prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later
Fernando’s Pasta purchased inventory and later wrote it down. The current net realizable value is higher than the value when written down. Fernando’s inventory balance will most likely be:A.
Cinnamon Corp. started business in 2007 and uses the weighted average cost method.During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it
Zimt AG started business in 2007 and uses the FIFO method. During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it purchased another 50,000
Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by:A. Zimt is too
Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by:A. Zimt
Like many technology companies, TechnoTools operates in an environment of declining prices. Its reported profits will tend to be highest if it accounts for inventory using the:A. FIFO method.B. LIFO
Compared to using the weighted average cost method to account for inventory, during a period in which prices are generally rising, the current ratio of a company using the FIFO method would most
Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the ratios that would have been calculated if the write-down had never occurred, Zimt’s
Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the results the company would have reported if the write-down had never occurred, Zimt’s
Compared to a company that uses the FIFO method, during periods of rising prices a company that uses the LIFO method will most likely appear more:A. liquid.B. efficient.C. profitable.Assume the
Nutmeg Inc. uses the LIFO method to account for inventory. During years in which inventory unit costs are generally rising and in which the company purchases more inventory than it sells to
Compared to using the FIFO method to account for inventory, during periods of rising prices, a company using the LIFO method is most likely to report higher:A. net income.B. cost of sales.C. income
Carey Company adheres to U.S. GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that:A. Carey has reversed an inventory write-down.B. Jonathan has reversed an inventory write-down.C.
The costs least likely to be included by the CFO as inventory are:A. storage costs for the chocolate liquor.B. excise taxes paid to the government of Brazil for the cacao beans.C. storage costs for
What is the most likely justification for Century Chocolate’s choice of inventory valuation method for its finished goods?A. It is the preferred method under IFRS.B. It allocates the same per unit

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