Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

Interest paid is classified as an operating cash flow under:A. US GAAP but may be classified as either operating or investing cash flows under IFRS.B. IFRS but may be classified as either operating
Cash flows from taxes on income must be separately disclosed under:A. IFRS only.B. US GAAP only.C. both IFRS and US GAAP.
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP?A. Operating.B. Investing.C. Financing.
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method?A. Net income.B. Cash paid to suppliers.C. Cash received from customers.
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total
White Flag, a women’s clothing manufacturer, reported salaries expense of $20 million.The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1
An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):Based only on the information above, the company’s 2010 statement of cash flows in the
Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4
An analyst gathered the following information from a company’s 2010 financial statements (in $ millions):In 2010, the company declared and paid cash dividends of $10 million and recorded
Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company’s income statement shows depreciation expense of $8
Jaderong Plinkett Stores reported net income of $25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the
Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow?A. Add $2 million.B. Add $6
The first step in cash flow statement analysis should be to:A. evaluate consistency of cash flows.B. determine operating cash flow drivers.C. identify the major sources and uses of cash.
Which of the following would be valid conclusions from an analysis of the cash flow statement for Telefónica Group presented in Exhibit 3?A. The primary use of cash is financing activities.B. The
Which is an appropriate method of preparing a common-size cash flow statement?A. Show each item of revenue and expense as a percentage of net revenue.B. Show each line item on the cash flow statement
Which of the following is an appropriate method of computing free cash flow to the firm?A. Add operating cash flows to capital expenditures and deduct after-tax interest payments.B. Add operating
An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure,
An analyst is examining the profitability of three Asian companies with large shares of the global personal computer market: Acer Inc. (Taiwan SE: ACER), Lenovo Group Limited (HKSE: 0992), and
A US insurance company reports that its “combined ratio” is determined by dividing losses and expenses incurred by net premiums earned. It reports the following combined ratios:Explain what this
On 15 July, an analyst is examining a company with a fiscal year ending on 31 December.Use the following data to calculate the company’s trailing 12 month earnings (for the period ended 30 June
An analyst would like to evaluate Lenovo Group’s efficiency in collecting its trade accounts receivable during the fiscal year ended 31 March 2010 (FY2009). The analyst gathers the following
A credit analyst is evaluating the solvency of Alcatel-Lucent (Euronext Paris: ALU) as of the beginning of 2010. The following data are gathered from the company’s 2009 annual report (in €
An analyst is evaluating the profitability of Daimler AG (Xetra: DAI) over a recent five-year period. He gathers the following revenue data and calculates the following profitability ratios from
An analyst collects the information shown in Exhibit 16 for two companies:Which of the following choices best describes reasonable conclusions an analyst might make about the companies’
Referring to the data for Anson Industries and Clarence Corporation in Example 14 , which of the following choices best describes reasonable conclusions an analyst might make about the companies’
An analyst examining Royal Dutch Shell PLC (Amsterdam and London SEs: RDSA) wishes to understand the factors driving the trend in ROE over a recent four-year period.The analyst obtains and calculates
The information contained in Exhibit 22 relates to the business segments of Groupe Danone (EuronextParis: BN) for 2008 and 2009 in millions of euro. According to the company’s 2009 annual
Comparison of a company’s financial results to other peer companies for the same time period is called:A. technical analysis.B. time-series analysis.C. cross-sectional analysis.
In order to assess a company’s ability to fulfill its long-term obligations, an analyst would most likely examine:A. activity ratios.B. liquidity ratios.C. solvency ratios.
Which ratio would a company most likely use to measure its ability to meet short-term obligations?A. Current ratio.B. Payables turnover.C. Gross profit margin.
Which of the following ratios would be most useful in determining a company’s ability to cover its lease and interest payments?A. ROA.B. Total asset turnover.C. Fixed charge coverage.
An analyst is interested in assessing both the efficiency and liquidity of Spherion PLC. The analyst has collected the following data for Spherion:Based on this data, what is the analyst least
An analyst is evaluating the solvency and liquidity of Apex Manufacturing and has collected the following data (in millions of euro):Which of the following would be the analyst’s most likely
With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data?A. The decline in the company’s equity results from a decline in the market value of this
An analyst observes a decrease in a company’s inventory turnover. Which of the following would most likely explain this trend?A. The company installed a new inventory management system, allowing
Which of the following would best explain an increase in receivables turnover?A . The company adopted new credit policies last year and began offering credit to customers with weak credit
Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection
An analyst observes the following data for two companies:Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies’ abilities to pay
The company’s total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company’s efficiency?A.
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s solvency?A. Comparing FY14 with FY10, the company’s solvency improved, as indicated
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s liquidity?A. Comparing FY14 with FY10, the company’s liquidity improved, as
Which of the following choices best describes reasonable conclusions an analyst might make about the company’s profitability?A. Comparing FY14 with FY10, the company’s profitability improved, as
Assuming no changes in other variables, which of the following would decrease ROA?A. A decrease in the effective tax rate.B. A decrease in interest expense.C. An increase in average assets.
An analyst compiles the following data for a company:Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company’s:A. net profit margin
A decomposition of ROE for Integra SA is as follows:Which of the following choices best describes reasonable conclusions an analyst might make based on this ROE decomposition?A Profitability and the
A decomposition of ROE for Company A and Company B is as follows:An analyst is most likely to conclude that:A. Company A’s ROE is higher than Company B’s in FY15, and one explanation consistent
What does the P/E ratio measure?A. The “multiple” that the stock market places on a company’s EPS.B. The relationship between dividends and market prices.C. The earnings for one common share of
A creditor most likely would consider a decrease in which of the following ratios to be positive news?A. Interest coverage (times interest earned).B. Debt-to-total assets.C. Return on assets.
When developing forecasts, analysts should most likely :A. develop possibilities relying exclusively on the results of financial analysis.B. use the results of financial analysis, analysis of other
Compared with using the Singapore dollar as Acceletron’s functional currency for 2007, if the US dollar were the functional currency, it is most likely that Redline’s consolidated:A. inventories
Compared to 2009 net income as reported, if XYZ had used the same expected volatility assumption for its 2009 option grants that it had used in 2008, its 2009 net income would have been:A. lower.B.
Compared to the reported 2009 financial statements, if Stereo Warehouse had used the 2007 expected volatility assumption to value its employee stock options, it would have most likely reported
Compared to the assumptions Stereo Warehouse used to value stock options in 2008, earnings in 2009 were most favorably affected by the change in the:A. expected life.B. risk-free rate.C. dividend
In this example, two fictitious companies are used. On 1 January 2011, Baxter Inc. invested £300,000 in Cartel Co. debt securities (with a 6% stated rate on par value, payable each 31 December). The
In 2009, Cinnamon’s earnings before taxes includes a contribution (in £ millions) from its investment in Cambridge Processing that is closest to:A. £3.8.B. £5.8.C. £7.6.Cinnamon, Inc. is a
Branch (a fictitious company) purchases a 20% interest in Williams (a fictitious company) for €200,000 on 1 January 2010. Williams reports income and dividends as follows:Calculate the investment
In 2010, if Cinnamon is deemed to have control over Cambridge, it will most likely account for its investment in Cambridge using:A. the equity method.B. the acquisition method.C. proportionate
Assume that the hypothetical Blake Co. acquires 30% of the outstanding shares of the hypothetical Brown Co. At the acquisition date, book values and fair values of Brown’s recorded assets and
At 31 December 2010, Cinnamon’s shareholders’ equity on its balance sheet would most likely be:A. highest if Cinnamon is deemed to have control of Cambridge.B. independent of the accounting
On 1 January 2011, Parker Company acquired 30% of Prince Inc. common shares for the cash price of €500,000 (both companies are fictitious). It is determined that Parker has the ability to exert
In 2010, Cinnamon’s net profit margin would be highest if:A. it is deemed to have control of Cambridge.B. it had not increased its stake in Cambridge.C. it is deemed to have significant influence
On 1 January 2011, Wicker Company acquired a 25% interest in Foxworth Company (both companies are fictitious) for €1,000,000 and used the equity method to account for its investment. The book value
In 2009, Zimt’s earnings before taxes includes a contribution (in € millions) from its investment in Oxbow Limited closest to:A. (€0.6) million.B. (€1.0) million.C. €2.0 million.Zimt, AG is
At 31 December 2010, assuming control and recognition of goodwill, Cinnamon’s reported debt to equity ratio will most likely be highest if it accounts for its investment in Cambridge using the:A.
Compared to Cinnamon’s operating margin in 2009, if it is deemed to have control of Cambridge, its operating margin in 2010 will most likely be:A. lower.B. higher.C. the same.Cinnamon, Inc. is a
Jones Company owns 25% of Jason Company (both fictitious companies) and appropriately applies the equity method of accounting. Amortization of excess purchase price, related to undervalued assets at
Franklin Company, headquartered in France, acquired 100% of the outstanding shares of Jeff erson, Inc. by issuing 1,000,000 shares of its €1 par common stock (€15 market value). Immediately
At 31 December 2010, Zimt’s total assets balance would most likely be:A. highest if Zimt is deemed to have control of Oxbow.B. highest if Zimt is deemed to have significant influence over Oxbow.C.
On 1 January 2012, the hypothetical Parent Co. acquired 90% of the outstanding shares of the hypothetical Subsidiary Co. in exchange for shares of Parent Co.’s no par common stock with a fair value
Based on Gelblum’s estimates, if Zimt is deemed to have significant influence over Oxbow, its 2010 net income (in € millions) would be closest to:A. €75.B. €109.C. €143.Zimt, AG is a
The cash-generating unit of a French company has a carrying value of €1,400,000, which includes €300,000 of allocated goodwill. The recoverable amount of the cash-generating unit is determined to
Based on Gelblum’s estimates, if Zimt is deemed to have joint control of Oxbow, and Zimt uses the proportionate consolidation method, its 31 December 2010 total liabilities (in € millions) will
Based on Gelblum’s estimates, if Zimt is deemed to have control over Oxbow, its 2010 consolidated sales (in € millions) will be closest to:A. €1,700.B. €2,375.C. €3,050.Zimt, AG is a
A reporting unit of a US corporation (e.g., a division) has a fair value of $1,300,000 and a carrying value of $1,400,000 that includes recorded goodwill of $300,000. Th e estimated fair value of the
Based on Gelblum’s estimates, Zimt’s net income in 2010 will most likely be:A. highest if Zimt is deemed to have control of Oxbow.B. highest if Zimt is deemed to have significant influence over
The balance sheet carrying value of Confabulated’s investment portfolio (in € thousands) at 31 December 2009 is closest to:A. 112,000.B. 115,000.C. 118,000.Burton Howard, CFA, is an equity
The balance sheet carrying value of Confabulated’s investment portfolio at 31 December 2009 would have been higher if which of the securities had been reclassified as a held for trading security?A.
Compared to Confabulated’s reported interest income in 2009, if Dumas had been classified as available-for-sale, the interest income would have been:A. lower.B. the same.C. higher.Burton Howard,
Compared to Confabulated’s reported earnings before taxes in 2009, if Bugle had been classified as a held for trading security, the earnings before taxes (in € thousands) would have been:A. the
Confabulated’s reported interest income would be lower if the cost was the same but the par value (in € thousands) of:A. Bugle was €28,000.B. Cathay was €37,000.C. Dumas was €55,000.Burton
Confabulated’s special purpose entity is most likely to be:A. held off -balance sheet.B. consolidated on Confabulated’s financial statements.C. consolidated on Confabulated’s financial
Compared to accounting principles currently in use, the pooling method BetterCare used for its Statewide Medical acquisition has most likely caused its reported:A. revenue to be higher.B. total
Based on Ohalin’s estimates, the amount of joint venture revenue (in $ millions) included on BetterCare’s consolidated 2010 financial statements should be closest to:A. $0.B. $715.C.
Based on Ohalin’s estimates, the amount of joint venture net income included on the consolidated financial statements of each venturer will most likely be:A. higher for BetterCare.B. higher for
Based on Ohalin’s estimates, the amount of the joint venture’s 31 December 2010 total assets (in $ millions) that will be included on Supreme Healthcare’s consolidated financial statements will
Based on Ohalin’s estimates, the amount of joint venture shareholders’ equity at 31 December 2010 included on the consolidated financial statements of each venturer will most likely be:A. higher
If Supreme Healthcare sells its receivables to the SPE, its consolidated financial results will most likely show:A. a higher revenue for 2010.B. the same cash balance at 31 December 2010.C. the same
NinMount’s current ratio on 31 December 2008 most likely will be highest if the results of the acquisition are reported using:A. the equity method.B. consolidation with full goodwill.C.
NinMount’s long-term debt to equity ratio on 31 December 2008 most likely will be lowest if the results of the acquisition are reported using:A. the equity method.B. consolidation with full
Based on Byron’s forecast, if NinMount deems it has acquired control of Boswell, Nin-Mount’s consolidated 2009 depreciation and amortization expense (in £ millions) will be closest to:A. 102.B.
Based on Byron’s forecast, NinMount’s net profit margin for 2009 most likely will be highest if the results of the acquisition are reported using:A. the equity method.B. consolidation with full
Based on Byron’s forecast, NinMount’s 2009 return on beginning equity most likely will be the same under:A. either of the consolidations, but different under the equity method.B. the equity
Based on Byron’s forecast, NinMount’s 2009 total asset turnover ratio on beginning assets under the equity method is most likely :A. lower than if the results are reported using consolidation.B.
FinnCo purchases goods from its Mexican supplier on 1 November 20X1; the purchase price is 100,000 Mexican pesos. Credit terms allow payment in 45 days, and FinnCo makes payment of 100,000 pesos on
If Ukraine’s economy becomes highly inflationary, Eurexim will most likely translate inventory by:A. restating for inflation and using the temporal method.B. restating for inflation and using the
Given Ruiz’s belief about the direction of exchange rates, Eurexim’s gross profit margin would be highest if it accounts for the Ukraine subsidiary’s inventory using:A. FIFO and the temporal
FinnCo sells goods to a customer in the United Kingdom for £10,000 on 15 November 20X1, with payment to be received in British pounds on 15 January 20X2. FinnCo’s functional and presentation
If the euro is chosen as the Ukraine subsidiary’s functional currency, Eurexim will translate its fixed assets using the:A. average rate for the reporting period.B. rate in effect when the assets

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