Questions and Answers of Financial Statement Analysis

A company with a price-earnings ratio of 14 has an earnings yield closest to:A. 7.14%B. 14.00%C. 92.86%
Which of the following is not produced by a company to communicate its financial results?A. Schedule 13D.B. Annual report.C. 10-K statement.
The role of the 8-K filing with the Securities and Exchange Commission is best described as to disclose:A. the annual report.B. executive compensation.C. holdings of beneficial owners.
The 10-Q filing with the Securities and Exchange Commission is produced by the company's:A. management.B. beneficial owners.C. independent accountant.
If an investor would like to find out the compensation of the highest paid employees of the company, the best source of this information is the company's:A. 8-K filing.B. 10-K filing.C. proxy
The accounting standards that are used in many non-U.S. countries are the:A. Financial Accounting Standards.B. International Financial Standards.C. International Financial Reporting Standards.
Off-balance sheet financing is a concern because:A. It is illegal.B. It is recorded at book value instead of market value.C. There is debt that is not fully reported in the financial statements.
Which of the following statements is correct?A. Publicly traded corporations must disclose information to all investors at the same time in the interest of fairness.B. Publicly traded corporations
Which of the following statements best describes the use of economic data?A. Financial statements should be analyzed without the potential influence or bias arising from using economic data.B.
Which of the following is a direct result of the Sarbanes-Oxley Act?A. Shareholders can vote on executive compensation.B. Trading is prohibited by corporate insiders during a pension blackout
Which of the following is a direct result of the Dodd-Frank Act?A. Increased penalties for white-collar crime.B. Rating agencies are not permitted to disclose the analysis behind the credit rating
The independent auditor's opinion is best described as an opinion as to whether the:A. performance of the company is sufficient.B. company's management has committed fraud.C. company's financial
Which of the following statements represents the valuation of accounts as of the end of the fiscal period?A. Balance sheet.B. Income statement.C. Statement of cash flows.
Depreciation is added back to net income in the statement of cash flows because it is:A. a cash flow.B. not taxable.C. a noncash expense that was deducted to arrive at net income.
Treasury stock is best described as:A. outstanding shares of stock of the company.B. authorized, yet unissued shares of stock of the company.C. shares of stock of the company that are purchased by
Suppose a company has the following:Shareholders' equity is closest to:A. $$2$ million B. $$10$ million C. $$12$ million Current assets Current liabilities $10 million $8 million Net
The operating profit of a company is best described as the earnings:A. before interest and taxes.B. after interest but before taxes.C. before depreciation, amortization, interest, and taxes.
Which of the following methods will result in highest depreciation expenses, hence lowest reported earnings, in the first few years that an asset is depreciated?A. Straight-line depreciation.B.
A major source of deferred income taxes is the use of:A. off-balance sheet financing.B. net operating loss carryovers.C. straight-line depreciation for reporting purposes, but MACRS depreciation for
If a company borrows during the period using long-term debt to buy processing equipment, this directly affects all but which of the following?A. Cash flow for investing.B. Cash flow from financing.C.
The SEC requires companies that present pro forma accounting statements or data to also provide:A. a reconciliation with GAAP.B. forecasted financial statements.C. an auditor's opinion on the
When a company sells products to a customer on credit, the resulting accrual is best described as:A. accruals management.B. a discretionary accrual.C. a nondiscretionary accrual.
If a company's management selects straight-line depreciation for an asset that is expected to lose most of its value in the earliest years of its life, this selection is most likely consistent
Which of the following is not a technique used to inflate revenues or net income?A. Increasing the rate of uncollectible accounts as a percentage of accounts receivable.B. Forcing customers to accept
Channel stuffing is best described as:A. pushing product onto dealers before the end of a fiscal period.B. exaggerating loan losses, only to reverse these in a subsequent fiscal period.C. increasing
Goodwill impairment is best described as:A. the sale of an intangible asset.B. a write-down of the goodwill account.C. the disclosure of a value for goodwill that is less than what is reported in the
A company that writes down its inventory by too much in one fiscal year will most likely experience:A. no effect on subsequent fiscal years' profits.B. increased profitability the following fiscal
A company with an underfunded pension plan that reduces its assumed return on plan assets for its defined benefit plan will, holding all other factors constant, most likely report:A. less plan
Lengthening the useful life of a depreciable asset will most likely:A. increase profitability.B. decrease profitability.C. have no effect on profitability.
The announcement of a restatement that is perceived as a result of an intentional act to deceive investors is most likely accompanied by:A. no stock market reaction.B. a negative stock market
The auditor opinion that indicates that the financial statements are presented fairly in conformity with GAAP, without exception, is the:A. adverse opinion.B. qualified opinion.C. unqualified opinion.
Which of the following is best described as a liquidity ratio?A. Quick ratio B. Return on assets C. Times interest earned ratio
It takes a company 80 days to convert its purchased raw materials into sold inventory, 50 days to collect on its receivables from its customers, and 30 days to pay its own suppliers. This company has
Which of the following types of ratios are best for evaluating how well a company puts its assets to use?A. Activity ratios B. Liquidity ratios C. Financial leverage ratios
The DuPont system involves the breakdown of a return on equity ratio into:A. profitability and activity components.B. liquidity, activity, and financial leverage components.C. profitability,
If a company has a return on equity of 30% and a return on assets of 20%, its debt to assets ratio is closest to:A. 33%.B. 50%.C. 70%.
If a company has no debt, its:A. equity multiplier will be undefined.B. return on assets will be equal to its return on equity.C. operating return on assets will be equal to its return on assets.
A company with current assets of $$50$ million, current liabilities of$$30$ million, and inventory of $$10$ million has a current ratio and quick ratios, respectively, of:A. 2 and 1.B. 2 and
If it takes, on average, 40 days to collect on its customers' accounts, the company's accounts receivable turnover is closest to:A. 2.500 times.B. 9.125 times.C. 10.959 times.
If a company has a net income of $$400$ million, revenues of $$1$ billion, and total assets of $$800$ million, its total asset turnover and return on assets, respectively, are:A. 2 times and
Common size income statements provide which of the following ratios?A. Activity ratios B. Profitability ratios C. Financial leverage ratios
Pro forma earnings are best described as:A. projected earnings.B. earnings without extraordinary items.C. earnings determined using accounting principles other than GAAP.
Dilutive earnings per share will always be:A. equal to basic earnings per share.B. less than or equal to basic earnings per share.C. greater than or equal to basic earnings per share.
According to the Molodovsky effect, in recessionary environments, the price-earnings ratios of cyclical companies are most likely:A. correct.B. overstated.C. understated.
A cyclical company with a constant dividend growth rate strategy most likely will have:A. constant dividend yields.B. variable dividend payouts.C. constant dividend payouts.
For a company with dividends that are expected to grow at a rate of 4% per year, a current dividend that is $1.50 per share, and investors who require a 9% return on their investments, the value of a
Suppose a company currently pays $1 in dividends, and dividends are expected to grow at a rate of 5% per year for two years and then grow at a rate of 3% per year, ad infinitum. If investors require
Based on the relationships in the dividend valuation model, an increase in the dividend payout ratio most likely results in:A. a lower price-earnings ratio.B. a higher price-earnings ratio.C. no
A stock of a company that has a high book-to-market ratio is most likely referred to as a:A. value stock.B. growth stock.C. defensive stock.
Possible explanations for the role of the book value to market value in explaining stock returns include all but which of the following:A. The book value to market value ratio is a proxy for risk.B.
Cash flow from operations may differ from net income because of:A. taxes paid.B. changes in working capital.C. interest payments on debt obligations.
If a company's net income is $$30$ million, its depreciation and amortization is $$10$ million, its interest expense is $$5$ million, and its tax rate is 30%, the company's EBDA and EBITDA,
Free cash flow to equity is cash flow from operations, less capital expenditures, plus:A. taxes.B. interest paid.C. net borrowings.
If a company has cash flow from operations of $$10$ million, capital expenditures of $$2$ million, and net borrowings of $$3$ million, its free cash from to equity is closest to:A. $$5$
Net free cash flow is best described as free cash flow after:A. taxes.B. financing costs.C. financing costs and taxes.
An increasing cash flow-to-capital expenditures ratio is consistent with:A. increasing capital intensity.B. increasing financial flexibility.C. decreasing financial flexibility.
A cash waterfall is best described as a breakdown of cash flows by:A. time.B. source.C. operations, financing, and investment.
The CFAR ratio is best described as a comparison of free cash flow and:A. debt obligations.B. interest expense.C. capital expenditures.
A company that has cash flow from operations of $$100$ million, free cash flow of $$120$ million, and net borrowings of $$20$ million has capital expenditures closest to:A. $0.B. $$20$
Which of the following statements is incorrect?A. There is one formula used in calculating free cash flow according to GAAP.B. The ratio of cash flow to debt indicates a company's ability to meet its
Key elements of a good performance measure includes all but which of the following?A. Measure considers risk associated with investment decisions.B. Measure is not sensitive to the choice of
Based on Porter's Five Forces, a beer company that has a single supplier of hops, but distributes its product among many retail clients has a threat based on:A. new entrants.B. bargaining power of
Which of the following is not one of Porter's Five Forces?A. The threat of new entrants.B. The threat of complements.C. The bargaining power of regulators.
Economic profit is best described as the difference between revenues and costs, where costs include:A. all cash outlays.B. all accrued expenses.C. both direct expenses and the cost of capital.
Cash operating taxes are best described as:A. tax expense, less deferred taxes.B. taxes actually paid during the period.C. taxes calculated based only on the results of operations.
When calculating net operating profit after taxes, depreciation is:A. ignored.B. added back to operating income.C. subtracted from operating income.
Suppose the risk free rate of interest is 4% and the market risk premium is 5%. A company with a stock beta of 1.2 has a cost of equity closest to:A. 1.2%.B. 6%.C. 10%.
A company with a marginal tax rate of 35% and a yield on any new debt issuance of 8% has an after-tax cost of debt closest to:A. 2.8%.B. 5.2%.C. 8.0%.
Market value added is best described as the:A. market value of the firm, less invested capital.B. market value of equity, less the book value of equity.C. sum of the market value of equity and the
Which of the following statements is incorrect?A. In practice, the calculation of economic profit is determined based on GAAP.B. The market value added is the difference between the market value of
Which of the following best describes default risk?A. The risk that the debt obligation will be downgraded.B. The risk that the borrower will not satisfy the terms of the debt obligation.C. The risk
Which of the following is not considered one of the “four Cs”?A. Capital B. Capacity C. Character
Migration risk is best described as the risk of the:A. increase in the credit spread.B. shifting of the ownership of the debt.C. downgrading of the debt obligation's credit rating.
Which of the following will most likely have a higher yield at a point in time?A. 10-year Treasury bond.B. 10-year AAA rated corporate bond.C. 10-year BBB rated corporate bond.
During a recessionary economic environment, credit spreads:A. do not change.B. tend to increase.C. tend to decrease.
Spread duration is best described as:A. the length of time a credit rating stays constant.B. a measure of the weighted cash flows of the debt obligation.C. a measure of how a bond's price will likely
The ability of the issuer to pay its obligations is best described as:A. capacity.B. character.C. collateral.
An issuer's ability to secure liquid funds may be represented by all but which of the following?A. An Altman Z-score above 1.81.B. The ability to securitize assets.C. The presence of back-up credit
A low Altman Z-score is most indicative of a:A. financially healthy company.B. company likely to enter bankruptcy.C. company likely to be misclassified as financially unhealthy.
Which of the following is most likely considered a negative covenant?A. The company must maintain a current ratio of 2.0 or above.B. The company must maintain insurance on specific property.C. The
The larger the standard deviation of an asset's returns, the greater is the asset’s:A. total risk.B. market risk.C. unsystematic risk.
A stock's beta is a measure of the stock's:A. total risk.B. market risk.C. unsystematic risk.
An efficient portfolio, according to Markowitz, is all but which of the following:A. lowest risk for a given level of expected return.B. greatest expected return for a given level of risk.C. greatest
The risk that can be diversified away is best described as:A. beta risk.B. systematic risk.C. unsystematic risk.
Which of the following statement is not true:A. A company's beta does not change over time.B. The fundamental beta allows for potential of beta to change over time.C. An historical beta is calculated
According to the CAPM, the higher the beta, the:A. higher the market return.B. lower the stock's expected return.C. higher the stock's expected return.
The arbitrage pricing theory is a model in which:A. the market return explains a stock's expected return.B. several factors may explain a stock's expected return.C. one and only one factor explains a
Which of the following uses factors drawn from a firm's financial statements and market information?A. Statistical factor model.B. Fundamental factor model.C. Macroeconomic factor model.
Which of the following best describes the MSCI fundamental factor model?A. The model does not include the market factor.B. The model includes only unsystematic factors.C. The model includes risk
Which of the following has not been observed for the Fama-French three-factor model?A. In general, smaller capitalization firms have greater returns than larger capitalization firms.B. In general,
Transparency is best described as:A. the approval of compensation by shareholders.B. allowing shareholders and other stakeholders access to the financial records.C. providing information to owners
Mark-to-market accounting:A. smoothes earnings.B. caused the financial crisis of 2007–2008.C. exposed the value of the holdings of financial firms.
Regarding growth rates in revenues and earnings, a high growth rate:A. may not be sustainable.B. is an indication of high growth in the future.C. is indicative of a financially healthy company.
A financially healthy company will most likely have:A. cash flow for operations.B. cash flow from financing.C. cash flow from operations.
An adverse opinion regarding a material weakness in internal controls is:A. generally viewed as a warning of financial or governance issues.B. the same thing as an adverse auditor opinion on the
Restatements are most often affecting:A. revenues.B. costs and expenses.C. extraordinary items.
A clawback in the context of financial restatements refers to:A. revised net income.B. recoupment of taxes.C. executive compensation.
Pro forma financial statements are best described as:A. projections of income.B. consistent with GAAP.C. a company's own preference for reporting.
Cash flow information:A. is most likely more reliable than earnings.B. provides the same information to the investor and analyst as net income.C. is unnecessary in the analysis of a company's
Footnotes to financial statements most likely:A. are not useful.B. provide additional information.C. are redundant, but restate information in a different manner.

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