Chapter 5 - reporting analysis

Question 1

List the users and uses of accounting information.

Answer 1

1) Directors govern - using resources wisely?
2) creditors contract - can company pay its liabilities?
3) Investors value - what is company’s shares worth?
4) managers manage - how do we improve?
5) government regulates - is it following rules?

Question 2

Define loan covenant.

Answer 2

• terms of a loan agreement that if broken entitles lender to renegotiate loan terms or to force repayment.

Question 3

Define comparative financial statement.

Answer 3

• report numbers for two or more time periods.

Question 4

Define material misstatements.

Answer 4

• large enough to influence the decisions of financial statement users.

Question 5

Define unqualified audit opinion.

Answer 5

• statements are presented in accordance with GAAP

Question 6

What is the purpose of CSA?

Answer 6

• canadian securites administrators

- to ensure sufficient, relevant info is available to investors

Question 7

What is debt-to-asset ratio?

Answer 7

• TOTAL LIABILITIES/TOTAL ASSETS and expressed as a percentage
• indicates financing risk
• higher the ratio = more risk

Question 8

What is asset turnover ratio?

Answer 8

• NET SALES REV/AVG TOTAL ASSETS
• indicates how well assets are being used to generate revenue
• the higher the ratio = more effectively company is utilizing its assets

Question 9

What is net profit margin ratio?

Answer 9

• NET INCOME/NET SALES REV and expressed as a percentage

- indicates how much profit is earned from each dollar of revenue and how well company has controlled expenses

Question 10

Why do ratios exist?

Answer 10

To measure:

1) profitability - generate income
2) liquidity - current assets to pay liabilities
3) solvency - repay lenders

Question 11

Define cross-sectional analysis

Answer 11

• compares results of one company with those of others in the same section of the industry

Question 12

define qualified audit opinion

Answer 12

• indicates either financial statements do not follow GAAP

- or auditors were unable to complete tests

Question 13

Define single-step statement

Answer 13

-reports net income by subtracting a single group of expenses from a single group of revenues

Question 14

Define time-series analysis

Answer 14

• compares a company’s results from one period to its own results over a series of time periods

Question 15

Define asset turnover ratio

Answer 15

• indicates how well assets are being used to generate revenues

Question 16

Define debt-to-asset ratio

Answer 16

• indicates financial risk by computing the proportion of total assets financed by debt.

Question 17

Define net profit margin ratio

Answer 17

• indicates how much profit is earned from each dollar of revenue