Financial Statements Analysis I

Question 1

Securities Offerings Registration Statement is for ?

Answer 1

New securities offering

Question 2

Forms 10-K, 20-F, and 40-F are for

Answer 2

Annual reports

Question 3

Forms 10-Q and 6-K are for ?

Answer 3

Quarterly and semiannual reports

Question 4

Form DEF-14A is for ?

Answer 4

Proxy statements

Question 5

Form 8-K is for ?

Answer 5

Significant events

Question 6

Form 144 is for ?

Answer 6

Sale of restricted securities, securities held by affiliates

Question 7

Forms 3, 4, 5, and 11-K are for ?

Answer 7

: Purchases and sales of securities by corporate insiders and affiliates

Question 8

The most stringent test of a company’s liquidity is its:

cash ratio.

quick ratio.

current ratio.

Answer 8

A is correct. The cash ratio determines how much of a company’s near-term obligations can be settled with existing amounts of cash and marketable securities.

Question 9

An analyst assessing a company’s solvency would most likely review its:

cash ratio.

quick ratio.

total debt ratio

Answer 9

The total debt ratio is one of the solvency ratios.

The cash ratio and quick ratio are both liquidity ratios.

Question 10

Common-size financial statements are most likely a component of which step in the financial analysis framework?

Collect data

Analyze/interpret data

Process data

Answer 10

Correct. Preparing common-size financial statements is part of the process data step.

Question 11

Where might an analyst look for details covering the full extent of a company’s capital resources?

Balance sheet

Notes to the financial statements

Management discussion and analysis (MD&A)

Answer 11

Correct because in the MD&A, management must highlight any favorable or unfavorable trends and identify significant events and uncertainties that affect the company’s liquidity, capital resources, and results of operations. The MD&A must also provide information about off-balance-sheet obligations and about contractual commitments, such as purchase obligations.

Question 12

Notes to financial statements most likely include:

A.
an auditor’s opinion as to the fair presentation of the financial statements.

B.
supplementary information about accounting policies, methods, and estimates.

C.
a discussion of significant trends, events, and uncertainties that affect the operating results.

Answer 12

B. Correct because the notes also disclose information about the accounting policies, methods, and estimates used to prepare the financial statements.

Question 13

Common-size financial statements are most likely a component of which step in the financial analysis framework?

Collect data

Analyze/interpret data

Process data

Answer 13

Process Data

Question 14

Which of the following reports is least likely to be filed with the US SEC?

A.
Annual report

B.
Form 10-K

C.
Proxy statement

Answer 14

A. Correct because the annual report is not a requirement of the US SEC.

B Incorrect because the 10-K is required by the US SEC.

C Incorrect because a proxy statement is required by the US SEC.

Question 15

Ratios are an input into which step in the financial statement analysis framework?

Process data
Collect input data
Analyze/interpret the processed data

Answer 15

C is correct. Ratios are an output of the process information step but are an input into the analyze/interpret data step.

Question 16

Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations?

Answer 16

Follow-Up

Question 17

Which of the following best describes the role of financial statement analysis?

To provide information about a company’s performance

To provide information about a company’s changes in financial position

To form expectations about a company’s future performance and financial position

Answer 17

C is correct. In general, analysts seek to examine the past and current performance and financial position of a company to form expectations about its future performance and financial position.

Question 18

The primary role of financial statement analysis is best described as:

providing information useful for making investment decisions.

evaluating a company for the purpose of making economic decisions.

using financial reports prepared by analysts to make economic decisions.

Answer 18

B is correct. The primary role of financial statement analysis is to use financial reports prepared by companies to evaluate their past, current, and potential performance and financial position for the purpose of making investment, credit, and other economic decisions.

Question 19

International Financial Reporting Standards are currently developed by which entity?

IFRS Foundation
International Accounting

Standards Board
International

Organization of Securities Commissions

Answer 19

B is correct. The International Accounting Standards Board (IASB) is currently charged with developing International Financial Reporting Standards.

Question 20

US GAAP are currently developed by which entity?

Securities and Exchange Commission

Financial Accounting Standards Board

Public Company Accounting Oversight Board

Answer 20

B is correct. US Generally Accepted Accounting Principles are developed by the US Financial Accounting Standards Board (FASB).

Question 21

Which of the following best describes why the notes that accompany the financial statements are required? The notes:

permit flexibility in statement preparation.
standardize financial reporting across companies.
provide information necessary to understand the financial statements.

Answer 21

C is correct. The notes provide information that is essential to understanding the information provided in the primary statements.

Question 22

Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the:

auditor’s report.

management commentary.

notes to the financial statements.

Answer 22

C is correct. The notes disclose choices in accounting policies, methods, and estimates.

Question 23

What type of audit opinion is preferred when analyzing financial statements?

Adverse
Qualified
Unqualified

Answer 23

C is correct. An unqualified opinion is a “clean” opinion and indicates that the financial statements present the company’s performance and financial position fairly in accordance with applicable accounting standards.

Question 24

An independent audit report is most likely to provide:

absolute assurance about the accuracy of the financial statements.

reasonable assurance that the financial statements are fairly presented.

a qualified opinion with respect to the transparency of the financial statements.

Answer 24

B is correct. The independent audit report provides reasonable assurance that the financial statements are fairly presented, meaning that there is a high probability that the audited financial statements are free from material error, fraud, or illegal acts that have a direct effect on the financial statements.

Question 25

Interim financial reports released by a company are most likely to be:

monthly.
unaudited.
unqualified.

Answer 25

B is correct. Interim reports are typically provided semiannually or quarterly and require certain financial information, including unaudited financial statements and an MD&A for the interim period covered by the report. Unqualified refers to a type of audit opinion.

Question 26

Which of the following sources of information used by analysts is found outside a company’s annual report?

Auditor’s report
Peer company analysis
Management discussion and analysis

Answer 26

B is correct. When performing financial statement analysis, analysts should review all company sources of information as well as information from external sources regarding the economy, the industry, the company, and peer (comparable) companies.

Question 27

Interim reports most likely:

are audited.

are issued semi-annually or quarterly.

include a full set of financial statements and notes.

Answer 27

A Incorrect. Interim reports are not audited.

B is Correct. Interim reports are provided semi-annually or quarterly, depending on applicable regulatory requirements.

C Incorrect. Interim reports generally present the four basic financial statements and condensed notes.

Question 28

Deferred tax liabilities result when:

Answer 28

Deferred tax liabilities result when, for a given period, taxable income and the associated income tax payable are less than the reported financial statement income before taxes and the associated income tax expense.

Question 29

an acquisition’s purchase price.
the acquired company’s book value.
the fair value of the acquirer’s assets and liabilities.is a long-term asset, and cash and inventories are current assets.

Answer 29

A is correct. Initially, goodwill is measured as the difference between the purchase price paid for an acquisition and the fair value of the acquired, not acquiring, company’s net assets (identifiable assets less liabilities).

Question 30

All of the following are current assets except:

cash.
goodwill.
inventories.

Answer 30

goodwill The initial measurement of goodwill is most likely affected by:

Question 31

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders’ equity?

They are not recognized.

They flow through income into retained earnings.

They are a component of accumulated other comprehensive income.

Answer 31

For financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders’ equity as part of retained earnings.

Question 32

For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity?

They are not recognized.

They flow through retained earnings.

They are a component of accumulated other comprehensive income.

Answer 32

C is correct. For financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of shareholders’ equity.

Question 33

For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders’ equity?

They are not recognized.

They flow through retained earnings.

They are a component of accumulated other comprehensive income.

Answer 33

Financial assets classified as held to maturity are measured at amortized cost. Gains and losses are recognized only when realized.

Question 34

Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in:

the debt-to-equity ratio but not the total asset turnover.

the total asset turnover but not the debt-to-equity ratio.

both the debt-to-equity ratio and the total asset turnover.

Answer 34

C is correct. Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt !!!!!!!!!!!!!!!!!

, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.

Question 35

Which of the following statements is most accurate? A company’s cash flow statement links to its balance sheet by showing the change in the value of:

A
equity.

B
an asset.

C
net income.

Answer 35

The cash flow statement shows a change in cash (an asset). The income statement would show the change in revenue, and the statement of changes in owners’ equity shows the change in equity.

Question 36

Unless it is impractical to do so, changes in accounting policies are to be reported:

prospectively.

retrospectively.

at the bottom of the income statement in the year of change.

Answer 36

B is Correct. Changes in accounting policies are reported through retrospective application unless it is impractical to do so.

Question 37

After a two-for-one stock split, which of the following will most likely change relative to its pre-split value?

Earnings per share (EPS)

Price-to-earnings ratio (P/E

Dividend payout ratio

Answer 37

Correct. A two-for-one stock split will double the number of shares, thus reducing the EPS to half of its pre-split value. P/E will remain unchanged because the price also reduces by half and exactly cancels out the effect of the reduced EPS. The dividend payout ratio remains unchanged because the same proportion of earnings will still be used after the split.

Incorrect because the P/E ratio is unchanged.

Incorrect because the dividend payout ratio is unchanged.

Question 38

Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately:

below continuing operations.

below discontinued operations.

as part of continuing operations

Answer 38

C is Correct. Under US GAAP, material items that are unusual or infrequent and that are both as of reporting periods beginning after 15 December 2015 are shown as part of a company’s continuing operations but are presented separately.

Question 39

Under IFRS, income includes increases in economic benefits from:

increases in liabilities not related to owners’ contributions.
enhancements of assets not related to owners’ contributions.
increases in owners’ equity related to owners’ contributions.

Answer 39

B is correct. Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.

Question 40

A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for:

all prior periods.
current and future periods.
prior periods shown in a report.

Answer 40

C is correct. If a company changes an accounting policy, the financial statements for all fiscal years shown in a company’s financial report are presented, if practical, as if the newly adopted accounting policy had been used throughout the entire period; this retrospective application of the change makes the financial results of any prior years included in the report comparable. Notes to the financial statements describe the change and explain the justification for the change.

Question 41

Q. A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company’s:

basic EPS equals its diluted EPS.
capital structure is considered complex at year-end.
basic EPS is calculated by using a simple average number of shares outstanding.

Answer 41

A is correct. Basic and diluted EPS are equal for a company with a simple capital structure. A company that issues only common stock, with no financial instruments that are potentially convertible into common stock has a simple capital structure. Basic EPS is calculated using the weighted average number of shares outstanding.

Question 42

When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders?

Stock options

Convertible debt that is dilutive

Convertible preferred stock that is dilutive

Answer 42

A is correct. When a company has stock options outstanding, diluted EPS is calculated as if the financial instruments had been exercised and the company had used the proceeds from the exercise to repurchase as many shares possible at the weighted average market price of common stock during the period. As a result, the conversion of stock options increases the number of common shares outstanding but has no effect on net income available to common shareholders. The conversion of convertible debt increases the net income available to common shareholders by the after-tax amount of interest expense saved. The conversion of convertible preferred shares increases the net income available to common shareholders by the amount of preferred dividends paid; the numerator becomes the net income.

Question 43

Which statement is most accurate? A common size income statement:

restates each line item of the income statement as a percentage of net income.

allows an analyst to conduct cross-sectional analysis by removing the effect of company size.

standardizes each line item of the income statement but fails to help an analyst identify differences in companies’ strategies.

Answer 43

B is correct. Common size income statements facilitate comparison across time periods (time-series analysis) and across companies (cross-sectional analysis) by stating each line item of the income statement as a percentage of revenue. The relative performance of different companies can be more easily assessed because scaling the numbers removes the effect of size. A common size income statement states each line item on the income statement as a percentage of revenue. The standardization of each line item makes a common size income statement useful for identifying differences in companies’ strategies.

Question 44

For which of the examples given would common-size income statements generally provide the most insight?

A liquidity analysis of two companies within the same industry

A time-series analysis of a rapidly expanding single company

A comparison of similarly sized companies from different industries

Answer 44

B is Correct. Common-size income statements facilitate comparison across time periods (time-series analysis) because the standardization of each line item removes the effect of size. They would be particularly useful in neutralizing the size effect for a company experiencing rapid growth. For example, efficiencies gained from increased volume may be more readily apparent. Common-size income statements would be less useful for similarly sized companies from different industries because the size effect is less important in the comparison.

Question 45

One appropriate method of preparing a common-size cash flow statement is to show each line item:

of revenue and expense as a percentage of net revenue.

on the cash flow statement as a percentage of net revenue.

on the cash flow statement as a percentage of total cash outflows.

Answer 45

B is correct. An appropriate method to prepare a common-size cash flow statement is to show each line item on the cash flow statement as a percentage of net revenue. An alternative way to prepare a statement of cash flows is to show each item of cash inflow as a percentage of total inflows and each item of cash outflows as a percentage of total outflows./

Question 46

The first step in cash flow statement analysis should be to:

evaluate consistency of cash flows.
determine operating cash flow drivers.
identify the major sources and uses of cash.

Answer 46

C is correct. An overall assessment of the major sources and uses of cash should be the first step in evaluating a cash flow statement.