Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

On 1 January 2010, Elegant Fragrances Company issues £1,000,000 face value, five-year bonds with annual interest payments of £55,000 to be paid each 31 December. The market interest rate is 6.0
Consolidated Enterprises issues €10 million face value, five-year bonds with a coupon rate of 6.5 percent. At the time of issuance, the market interest rate is 6.0 percent. Using the effective
The management of Bank EZ repurchases its own bonds in the open market. They pay €6.5 million for bonds with a face value of €10.0 million and a carrying value of €9.8 million. The bank will
Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely :A. rise as the maturity date approaches.B.
Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have since risen to 7 percent. Using only the carrying amount (based on historical cost) reported on the balance sheet
Debt covenants are least likely to place restrictions on the issuer’s ability to:A. pay dividends.B. issue additional debt.C. issue additional equity.
Compared to using a finance lease, a lessee that makes use of an operating lease will most likely report higher:A. debt.B. rent expense.C. cash flow from operating activity.
Which of the following is most likely a lessee’s disclosure about operating leases?A. Lease liabilities.B. Future obligations by maturity.C. Net carrying amounts of leased assets.
For a lessor, the leased asset appears on the balance sheet and continues to be depreciated when the lease is classified as:A. a sales-type lease.B. an operating lease.C. a financing lease.
Under US GAAP, a lessor’s reported revenues at lease inception will be highest if the lease is classified as:A. a sales-type lease.B. an operating lease.C. a direct financing lease.
A lessor will record interest income if a lease is classified as:A. a capital lease.B. an operating lease.C. either a capital or an operating lease.
Cavalier Copper Mines has $840 million in total liabilities and $520 million in shareholders’ equity. It discloses operating lease commitments over the next five years with a present value of $100
Penben Corporation has a defined benefit pension plan. At 31 December, its pension obligation is €10 million and pension assets are €9 million. Under either IFRS or US GAAP, the reporting on the
PACCAR Inc. (PCAR: NasdaqGS) designs, manufactures, and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt, and DAF nameplates. In 2013, the US SEC
Nokia Corporation (NASDAQ OMX Helsinki and NYSE:NOK), a global telecommunications company headquartered in Finland, operates three businesses: Devices & Services, HERE (the new brand for location
Jake Lake, a financial analyst, has identified several items in the financial reports of several (hypothetical) companies. Describe each of these items in the context of the financial reporting
Exhibit 7 depicts the typical exploration and production operating cycle, beginning with exploration activities, through realization of cash from customers, and beyond, to the payment of royalties
For each of the following two scenarios, identify(1) factors that might motivate the company’s managers to manipulate reported financial amounts(2) applicable mechanisms that could discipline
Groupon is an online discount merchant. In the company’s initial S-1 registration statement in 2011, then-CEO Andrew Mason gave prospective investors an up-front warning in a section entitled “We
A company starts operations with no inventory at the beginning of a fiscal year and makes purchases of a good for resale five times during the period at increasing prices.Each purchase is for the
The information provided by a low-quality financial report will most likely :A. decrease company value.B. indicate earnings are not sustainable.C. impede the assessment of earnings quality.
To properly assess a company’s past performance, an analyst requires:A. high earnings quality.B. high financial reporting quality.C. both high earnings quality and high financial reporting quality.
Low quality earnings most likely reflect:A. low-quality financial reporting.B. company activities which are unsustainable.C. information that does not faithfully represent company activities.
Financial reports of the lowest level of quality reflect:A. fictitious events.B. biased accounting choices.C. accounting that is non-compliant with GAAP.
If a particular accounting choice is considered aggressive in nature, then the financial performance for the current period would most likely :A. be neutral.B. exhibit an upward bias.C. exhibit a
Which of the following is most likely to reflect conservative accounting choices?A. Decreased reported earnings in later periods B. Increased reported earnings in the current period C. Increased
Which of the following statements most likely describes a situation that would motivate a manager to issue low-quality financial reports?A. The manager’s compensation is tied to stock price
A company is experiencing a period of strong financial performance. In order to increase the likelihood of exceeding analysts’ earnings forecasts in the next reporting period, the company would
Which of the following situations will most likely motivate managers to inflate earnings in the current period?A. Possibility of bond covenant violation B. Earnings in excess of analysts’
Which of the following best describes an opportunity for management to issue low-quality financial reports?A. Ineffective board of directors B. Pressure to achieve some performance level C.
An audit opinion of a company’s financial reports is most likely intended to:A. detect fraud.B. reveal misstatements.C. assure that financial information is presented fairly.
If a company uses a non-GAAP financial measure in an SEC filing, then the company must:A. give more prominence to the non-GAAP measure if it is used in earnings releases.B. provide a reconciliation
A company wishing to increase earnings in the current period may choose to:A. decrease the useful life of depreciable assets.B. lower estimates of uncollectible accounts receivables.C. classify a
Bias in revenue recognition would least likely be suspected if:A. the firm engages in barter transactions.B. reported revenue is higher than the previous quarter.C. revenue is recognized before goods
Which of the following is an indication that a company may be recognizing revenue prematurely?Relative to its competitors, the company’s:A. asset turnover is decreasing.B. receivables turnover is
Which of the following would most likely signal that a company may be using aggressive accrual accounting policies to shift current expenses to later periods? Over the last five year period, the
Apple Inc. (NASDAQ: AAPL) is a company that has evolved and adapted over time.In its 1994 Prospectus (Form 424B5) fi led with the US SEC, Apple identified itself as “one of the world’s leading
In the process of comparing the 2009 performance of three telecommunication companies—Teléfonos de México, S.A.B. DE C.V. (NYSE: TMX), Tele Norte Leste Participações S.A. (NYSE: TNE), and
One approach to projecting operating profit is to determine a company’s average operating profit margin over the previous several years and apply that margin to a forecast of the company’s sales.
Assume a company is formed with $100 of equity capital, all of which is immediately invested in working capital. Assumptions are as follows:Based on this information, forecast the company’s net
Brown Corporation had an average days-of-sales-outstanding (DSO) period of 19 days in 2009. An analyst thinks that Brown’s DSO will decline in 2010 (because of expected improvements in the
Moody’s considers a number of items when assigning credit ratings for the global aerospace and defense industry, including quantitative measures of three broad factors: size and scale; business
A credit analyst is assessing the efficiency and leverage of two aerospace companies on the basis of certain sub-factors identified by Moody’s. The analyst collects the information from the
Below are two alternative strategies under consideration by an investment firm:Strategy A : Invest in stocks that are components of a global equity index, have a ROE above the median ROE of all
An analyst is comparing the financial performance of Carpenter Technology Corporation (NYSE: CRS), a US company operating in the specialty metals industry, with the financial performance of a similar
Company A reports under IFRS and uses the FIFO method of inventory accounting.Company B reports under US GAAP and uses the LIFO method. Exhibit 7 gives data pertaining to current assets, LIFO
An analyst is evaluating the financial statements of two companies in the same industry.The companies have similar strategies with respect to the use of equipment in manufacturing their products. The
Miano Marseglia is an analyst who is evaluating the relative valuation of two securities brokerage companies: TD Ameritrade Holding Corporation (NasdaqGS: AMTD) and the Charles Schwab Corporation
An analyst is evaluating the capital structure of two (hypothetical) companies, Koller Semiconductor and MacRae Manufacturing, as of the beginning of 2010. Koller Semiconductor makes somewhat less
The analyst is also evaluating the interest coverage ratio of the companies in the previous example, Koller Semiconductor and MacRae Manufacturing.The prior-year (2009) rent expense was $11 for
Projecting profit margins into the future on the basis of past results would be most reliable when the company:A. is in the commodities business.B. operates in a single business segment.C. is a
Galambos Corporation had an average receivables collection period of 19 days in 2003.Galambos has stated that it wants to decrease its collection period in 2004 to match the industry average of 15
Credit analysts are likely to consider which of the following in making a rating recommendation?A. Business risk but not financial risk B. Financial risk but not business risk C. Both business risk
When screening for potential equity investments based on return on equity, to control risk, an analyst would be most likely to include a criterion that requires:A. positive net income.B. negative net
One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently
When a database eliminates companies that cease to exist because of a merger or bankruptcy, this can result in:A. look-ahead bias.B. back-testing bias.C. survivorship bias.
In a comprehensive financial analysis, financial statements should be:A. used as reported without adjustment.B. adjusted after completing ratio analysis.C. adjusted for differences in accounting
When comparing financial statements prepared under IFRS with those prepared under US GAAP, analysts may need to make adjustments related to:A. realized losses.B. unrealized gains and losses for
When comparing a US company that uses the last in, first out (LIFO) method of inventory with companies that prepare their financial statements under international financial reporting standards
An analyst is evaluating the balance sheet of a US company that uses last in, first out(LIFO) accounting for inventory. Th e analyst collects the following data:After adjusting the amounts to convert
An analyst gathered the following data for a company ($ millions):The average age and average depreciable life of the company’s fixed assets at the end of 2001 are closest to: Gross investment in
To compute tangible book value, an analyst would A. add goodwill to stockholders’ equity.B. add all intangible assets to stockholders’ equity.C. subtract all intangible assets from
Which of the following is an off -balance-sheet financing technique? The use of A. capital leasesB. operating leases.C. the last in, first out inventory method.
To better evaluate the solvency of a company, an analyst would most likely add to total liabilities A. the present value of future capital lease payments.B. the total amount of future operating lease
A company’s current financial position would best be evaluated using the:A. balance sheet.B. income statement.C. statement of cash flows.
A company’s profitability for a period would best be evaluated using the:A. balance sheet.B. income statement.C. statement of cash flows.
Accounting policies, methods, and estimates used in preparing financial statements are most likely found in the:A. auditor’s report.B. management commentary.C. notes to the financial statements.
Information about management and director compensation would least likely be found in the:A. auditor’s report.B. proxy statement.C. notes to the fi nancial statements.
Information about a company’s objectives, strategies, and signifi cant risks would most likely be found in the:A. auditor’s report.B. management commentary.C. notes to the fi nancial statements.
What type of audit opinion is preferred when analyzing financial statements?A. Qualified.B. Adverse.C. Unqualified.
Ratios are an input into which step in the financial statement analysis framework?A. Process data.B. Collect input data.C. Analyze/interpret the processed data.
Sennett Designs (SD) sells furniture on a retail basis. SD began operations during December 2009 and sold furniture for €250,000 in cash. Th e furniture sold by SD was purchased on credit for
Which of the following items would most likely be classified as an operating activity?A. Issuance of debt.B. Acquisition of a competitor.C. Sale of automobiles by an automobile dealer.
Which of the following items would most likely be classified as a financing activity?A. Issuance of debt.B. Payment of income taxes.C. Investments in the stock of a supplier.
Which of the following elements represents an economic resource?A. Asset.B. Liability.C. Owners’ equity.
Which of the following elements represents a residual claim?A. Asset.B. Liability.C. Owners’ equity.
An analyst has projected that a company will have assets of €2,000 at year-end and liabilities of €1,200. The analyst’s projection of total owners’ equity should be closest to:A. €800.B.
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions):The analyst’s estimate of ending retained earnings (in
An analyst has compiled the following information regarding Rubsam, Inc.There have been no distributions to owners. The analyst’s most likely estimate of total assets at year-end should be closest
A group of individuals formed a new company with an investment of $500,000. The most likely effect of this transaction on the company’s accounting equation at the time of the formation is an
HVG, LLC paid $12,000 of cash to a real estate company upon signing a lease on 31 December 2005. Th e payment represents a $4,000 security deposit and $4,000 of rent for each of January 2006 and
TRR Enterprises sold products to customers on 30 June 2006 for a total price of €10,000.The terms of the sale are that payment is due in 30 days. Th e cost of the products was €8,000. The most
On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on production of a custom machine to be delivered in August 2006. Th is transaction would most likely result in which
Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in December 2005.The most likely effect on the company’s accounting equation is:A. no effect on assets.B. a decrease in assets
An analyst who is interested in assessing a company’s financial position is most likely to focus on which financial statement?A. Balance sheet.B. Income statement.C. Statement of cash flows.
The statement of cash flows presents the flows into which three groups of business activities?A. Operating, Nonoperating, and Financing.B. Operating, Investing, and Financing.C. Operating,
Which of the following statements about cash received prior to the recognition of revenue in the financial statements is most accurate? The cash is recorded as:A. deferred revenue, an asset.B.
When, at the end of an accounting period, a revenue has been recognized in the financial statements but no billing has occurred and no cash has been received, the accrual is to:A. unbilled (accrued)
When, at the end of an accounting period, cash has been paid with respect to an expense, the business should then record:A. an accrued expense, an asset.B. a prepaid expense, an asset.C. an accrued
When, at the end of an accounting period, cash has not been paid with respect to an expense that has been incurred, the business should then record:A. an accrued expense, an asset.B. a prepaid
The collection of all business transactions sorted by account in an accounting system is referred to as:A. a trial balance.B. a general ledger.C. a general journal.
If a company reported fictitious revenue, it could try to cover up its fraud by:A. decreasing assets.B. increasing liabilities.C. creating a fictitious asset.
Canon is a manufacturer of copy machines and other electronic equipment. Abbreviated balance sheets as of 31 December 2004 and 2005 are presented below.Using Equation 1a , address the following:1.
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (amounts in millions):The analyst’s estimate of ending retained earnings (in
An analyst has compiled the following information regarding RDZ, Inc.There have been no distributions to owners. The analyst’s estimate of total assets at yearend should be closest to:A.
To facilitate comparisons across companies (cross sectional analysis) and over time for a single company (time series analysis), it is important that accounting methods are comparable and
In certain cases, multiple regulatory bodies affect a company’s financial reporting requirements. For example, in almost all jurisdictions around the world, banking-specific regulatory bodies
In 2004, Google filed a Form S-1 registration statement with the US SEC to register its initial public offering of securities (Class A Common Stock). In addition to a large amount of financial and
A tradeoff between enhancing qualitative characteristics often occurs. For example, when a company records sales revenue, it is required to simultaneously estimate and record an expense for potential
Prime Retailers (PR), a US-based distributor of men’s shirts, has a policy of marking its merchandise up by $5 per unit. At the beginning of 2009, PR had 10,000 units of inventory on hand, which

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