3.1 intro do Financial Statement Analysis

Question 1

Liquidity

Answer 1

a company’s ability to meet its short-term obligations

Question 2

Solvency

Answer 2

refers to the ability to meet long-term obligations.

Question 3

The balance sheet (also called the statement of financial position)

Answer 3

illustrates the company’s financial position by disclosing its assets as well as the sources of financing for those assets (liabilities and equity)

Question 4

The income statement

Answer 4

defines the revenue earned in a period and the expenses incurred to earn that revenue

The income statement is also called the statement of operations or profit and loss (P&L) statemen

Question 5

Operating profit

Answer 5

earnings before interest and taxes (EBIT).

Question 6

Basic earnings per share

Answer 6

is the net income divided by the number of shares outstanding.

Question 7

Diluted earnings per share

Answer 7

includes shares that would be outstanding if options were exercised.

Question 8

Cash flows from operating activities

Answer 8

generally arise from day-to-day activities.

Question 9

Cash flows from investing activities

Answer 9

relate to the acquisition and disposal of long-term assets.

Question 10

Cash flows from financing activities

Answer 10

result from obtaining or repaying capital.

Question 11

The International Accounting Standards Board (IASB) recommends the following five elements be included in the Management Commentary or Management’s Discussion and Analysis:

Answer 11

Nature of business

Management’s objectives and strategies

Company’s significant resources, risks, and relationships

Results of operations

Critical performance measures

Question 12

The Securities and Exchange Commission (SEC) requires publicly listed companies in the United States to provide a management’s discussion and analysis and include:

Answer 12

Any favorable and unfavorable trends

Information about effects of inflation, changing prices, or other material events

Off-balance-sheet obligations and contractual commitments

Critical accounting policies

Question 13

the audit report

Answer 13

Annual reports generally must be reviewed by an independent accounting firm

Under the international standards for auditing (ISAs), the auditor’s objectives are:

1. Obtain reasonable assurance the financial statements are free from material misstatement and determine if statements are prepared according to the
2. applicable financial reporting framework
   Report the findings

Question 14

Unqualified audit opinions

Answer 14

state the financial statements give a true and fair view. This is referred to as a clean opinion.

Question 15

Qualified audit opinions

Answer 15

point out limitations or exceptions to the accounting standards.

Question 16

Adverse audit opinions

Answer 16

are issued when the statements materially depart from accounting standards.

Question 17

A disclaimer of opinion (Audit)

Answer 17

occurs when the auditor is unable to issue an opinion.

Question 18

the Sarbanes-Oxley Act

Answer 18

requires auditors to provide an additional opinion on the internal control systems that companies used to ensure that a sound process is used to prepare financial reports.

Question 19

interim reports

Answer 19

other, non-audited, source of information

Question 20

Subzero Corporation is currently involved in a legal dispute with one of its customers. The company’s legal counsel has advised that a potential loss from the dispute is probable but the amount of loss cannot be reasonably estimated. Subzero failed to adequately disclose the lawsuit in its financial statement notes. Subzero’s independent auditor will most likely issue:

A
a disclaimer of opinion.

B
a qualified audit opinion.

C
an unqualified audit opinion.

Answer 20

B
a qualified audit opinion.

Subzero will most likely receive a qualified opinion. A qualified opinion contains an exception to the standard opinion when there is a lack of conformity with applicable accounting standards, inadequate disclosure, or an audit scope limitation.

Question 21

Proxy statements are most likely:

A
required to be filed with regulators at least annually.

B
reported in a supplemental schedule to a company’s audited financial statements.

C
distributed to provide shareholders with information about matters to be voted on at a company’s annual meeting.

Answer 21

C
distributed to provide shareholders with information about matters to be voted on at a company’s annual meeting.

Proxy statements are distributed to shareholders as needed. These statements include information about matters to be put to a vote at the annual (or special) meeting of shareholders.