Advanced Concepts of Financial Accounting & Financial Statement Analysis

Question 1

The two main types of pension plans are:

Answer 1

1) Defined Contribution plan

2) Defined benefit plan

Question 2

Is a type of retirement plan to which an employer makes periodic contributions of assets to be se aside for employees’ future benefit

Answer 2

Pension plan

Question 3

The employer’s only obligation is to make periodic deposits of the amounts defined by the plan’s formula in return for the services rendered by employees. Thus, the employer does not guarantee the amount of benefits that the employee will receive during retirement.

Answer 3

Defined contribution plan

Question 4

Defines an amount of pension benefit to be provided to each employee. The employer is responsible for providing the agreed benefits and, therefore, bears actuarial risk and investment risk.

Answer 4

Defined benefit plan

Question 5

Is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that data.

Answer 5

Projected benefit obligation (PBO)

Question 6

Is recognized in the employer’s year-end balance sheet if the PBO exceeds the fair value of plan assets.

Answer 6

Pension liability

Question 7

Is recognized if the fair value of plan assets exceed the PBO

Answer 7

Pension asset

Question 8

The lessee recognizes in its financial statements the leased asset and a leased liability at an amount equal to the present value of the minimum lease payments.

Answer 8

Capital lease

Question 9

Accounted for as a long-term rental contract

Answer 9

Operating lease

Question 10

A lease agreement transfers substantially all the benefits and risk of ownership of the asset of the lessee if at least one of the following criteria is met:

Answer 10

1) The lease provides for the transfer of ownership of the leased property
2) The lease contains a bargain purchase option (BPO)
3) The lease term is 75% or more of the estimated economic life of the leased property
4) The present value of the minimum lease payments is at least 90% of the fair value of the leased property.

Question 11

Involves uncertainty as to possible loss or gain

Answer 11

Contingency

Question 12

A contingent liability and a loss contingency are recognized when

Answer 12

A loss contingency is probable and can be reasonably estimated

Question 13

A gain contingency is recognized in the financial statements

Answer 13

Only when it is realized

Question 14

Foreign currency initial transaction measurement must be

Answer 14

In the reporting entity’s functional currency

Question 15

A foreign currency transaction gain or loss results from a change in the exchange rate

Answer 15

1) Between the date the transaction was recognized,
2) The financial statements date, and
3) The date the transaction is settled.

Question 16

Investment in common stock: when the investor has little or no influence over the investee (holds less than 20% of the voting interests), the investment is measured

Answer 16

At fair value

Question 17

Investment in common stock: When the investor has significant influence over the investee (holds between 20% and 50% of the voting interests), the investment in equity securities is accounted for using

Answer 17

The equity method

Question 18

Investment in common stock: When an acquirer obtains control of one or more business (acquires more than 50%of the voting interest), the transaction is a business combination and

Answer 18

The acquisition method must be used

Question 19

Regardless of the percentages of ownership, when one entity (parent) controls another (subsidiary),

Answer 19

Consolidated financial statements must be issued by the parent

Question 20

Contributed capital, treasury stock, retained earnings, and all items included in accumulated other comprehensive income are considered:

Answer 20

Equity accounts

Question 21

Is an entity’s ability to pay its current obligations as they come due and remain in business in the short run.

Answer 21

Liquidity

Question 22

Current assets minus Current liabilities

Answer 22

Working capital

Question 23

Current assets divided by Current liabilities

Answer 23

Current ratio

Question 24

( Cash and equivalents plus Marketable securities plus Net receivables) divided by Current liabilities

Answer 24

Quick (acid-test) ratio

Question 25

Reflect how quickly major noncash assets are converted to cash.

Answer 25

Activity ratios

Question 26

Net credit sales divided by Average balance in receivables

Answer 26

Accounts receivable turnover

Question 27

Days in year divided by Accounts receivable turnover ratio

Answer 27

Days’ sales in receivables

Question 28

Cost of goods sold divided by Average balance in inventory

Answer 28

Inventory turnover

Question 29

Days in year divided by Inventory turnover ratio

Answer 29

Days’ sales in inventory

Question 30

Days’ sales in inventory plus Days’ sales in receivables

Answer 30

Operating cycle

Question 31

Average collection period plus Days’ sales in inventory minus Average payables period

Answer 31

Cash conversion cycle

Question 32

Total purchases divided by Average balance in accounts payable

Answer 32

Accounts payable turnover

Question 33

Days in year divided by Accounts payable turnover

Answer 33

Average payable period

Question 34

Net total sales divided by Average total assets

Answer 34

Total assets turnover

Question 35

Net total sales divided by Average net fixed assets

Answer 35

Fixed assets turnover

Question 36

Is an entity’s ability to pay its noncurrent obligations as they come due and remain in business in the long run.

Answer 36

Solvency

Question 37

Total liabilities divided by Total assets

Answer 37

Debt ratio

Question 38

Total debt divided by Stockholders’ equity

Answer 38

Debt to equity

Question 39

Earnings before interest and taxes (EBIT) divided by Interest expense

Answer 39

Time-interest-earned

Question 40

Fixed costs divided by Total costs

Answer 40

Operating leverage

Question 41

Total assets divided by Total equity

Answer 41

Financial leverage

Question 42

Is a broad concept for measures that reflect how efficiently an entity is using the resources contributed by its shareholders to generate a profit.

Answer 42

Return on investment (ROI)

Question 43

Operating income divided by Average invested capital

Answer 43

Return on investment (ROI)

Question 44

Net income divided by Average total assets

Answer 44

Return on assets (ROA)

Question 45

Net income divided by Average total equity

Answer 45

Return on equity (ROE)

Question 46

Gross profit divided by Net Sales

Answer 46

Gross profit margin

Question 47

Operating income divided by Net sales

Answer 47

Operating income margin

Question 48

Net income divided by Net sales

Answer 48

Net income margin

Question 49

(Net income - Preferred dividends) divided by Weighted average number of common shares outstanding

Answer 49

Basic earnings per share (EPS)

Question 50

(Total equity - Liquidation value of preferred stock) divided by Common stock outstanding

Answer 50

Book value per common share

Question 51

Market price of share divided by Earnings per share (EPS)

Answer 51

Price-earnings

Question 52

Dividend paid per share divided by Earnings per share

Answer 52

Dividend payout ratio

Question 53

Dividends per share divided by Market price per share

Answer 53

Dividend yield ratio