SS 8. FR&A: Income Statements, Balance Sheets and Cash Flow Statements

Question 1

The par value of common stock is defined as:

Answer 1

the stated or nominal value assigned to the stock.

It has no relationship to market value.

Question 2

The cumulative amount of earnings recognized on a company’s income statements that have not been distributed as dividends to the company’s owners is best described as:

Answer 2

retained earnings.

Question 3

Where assets, liabilities and equity are all in one column, this is called a:

Answer 3

Report format

Question 4

Cash return on assets =

Answer 4

Cash flow from operations
/
Average total assets

Question 5

What is the proper classification of interest received in the Statement of Cash Flows under IFRS?

Answer 5

Operating or Investing

Question 6

Extraordinary items are placed on the income statement:

Answer 6

after net income from continuing operations and net of tax.

Question 7

In the direct method statement of cash flows, the primary component of investing cash flow is typically:

Answer 7

capital expenditures for long-term assets

Question 8

Under U.S. GAAP, how are dividends paid and dividends received reported on the cash flow statement?

Answer 8

Dividends received: Operating

Dividends paid: Financing

Question 9

The obligations of an entity resulting from previous transactions that are expected to result in an outflow of economic benefit in the future is the definition of a:

Answer 9

Liability

Question 10

Income statement equation is:

Answer 10

revenues - expenses = net income

Question 11

Cash ratio =

Answer 11

(Cash + cash equivalents + invested funds)
/
current liabilites

Question 12

‘Stock that has been reacquired by the issuing firm but not yet retired’ is called:

Answer 12

Treasury stock

Question 13

Cash from Operations using the indirect method =

Answer 13

net income
+ non cash charges - non cash gains
+ increase in current liabilites - decrease in current liabilites
+ decrease in current assets - inrease in current assets
+ cash interest income - cash interest expenses

Question 14

Working Capital =

Answer 14

Current Assets - Current Liabilities

Question 15

Current ratio =

Answer 15

Current assets / current liabilites

or

(Cash + marketable securities + receivables + inventory) / current liabilites

Question 16

Free Cash Flow to Equity (FCFE) =

Answer 16

CFO (Cash Flow from Operations) - net fixed capital expenditures + net borrowing

Question 17

As a general rule, revenue is normally recognised when it is:

Answer 17

Realizable and Earned

Question 18

The definition of a current liability is:

Answer 18

Settlement is expected within one year or one operating cycle, whichever is greater.

Question 19

How are Inventories valued under IFRS and U.S. GAAP?

Answer 19

IFRS: lower of cost or net realizable value

GAAP: lower of cost or market value

Inventory write-up allowed under IFRS, not GAAP

Question 20

What is the preferred method for revenue recognition if estimates relating to total revenue and costs are not reliable?

Answer 20

The completed-contract method

Question 21

Basic EPS =

Answer 21

(Net income - Preferred Dividends)
/
Weighted average no. of shares outstanding

Question 22

Receivables Turnover ratio =

Answer 22

Net credit sales
/
Average accounts receivable

Question 23

Ending retained earnings =

Answer 23

opening retained earnings + earnings after tax - dividends paid

Question 24

Under U.S. GAAP, the format of the income statement:

Answer 24

is not specified

Question 25

'The process of converting non-cash resources and rights into money' is called:

Answer 25

Realization

Question 26

'Outflows or depletions of assets in the course of a business's activities' defines:

Answer 26

Expenses

Question 27

Only in the ______ method is depreciation added back to net income when determining CFO because net income is only used in the ______ method

Answer 27

Indirect

Question 28

Traditional DuPont equation is:

Answer 28

ROE = (net income / sales)(sales / assets)(assets / equity) or ROE = (net profit margin)(asset turnover)(leverage ratio) Leverage ratio is also known as financial leverage or equity multiplier.

Question 29

Under which situations does an analyst need to adjust both the numerator and the denominator for calculating diluted EPS?

Answer 29

If the dilutive security is: A convertible bond Preferred shares

Question 30

Under the direct method, the only section of the cash flow statement that will differ in presentation is the:

Answer 30

Cash Flow from Operations

Question 31

Under IFRS, dividend payments are classified as:

Answer 31

Operating or Financing

Question 32

Under US GAAP, operating activities generally involve:

Answer 32

producing and delivering goods and providing services

Question 33

A complex capital structure is one that contains:

Answer 33

securities that have the potential to dilute a firm's earnings per share.

Question 34

How does the indirect method calculate cash flow?

Answer 34

Indirect method starts with income after taxes and adjusts backwards for non-cash and other items for operating activities only.

Question 35

How are dividend payments reported on the statement of cashflows under US GAAP and IFRS?

Answer 35

Financing activities under U.S GAAP, and operating or financing activities under IFRS

Question 36

Long-term debt =

Answer 36

100% - (% equity + % current liabilities)

Question 37

The accounting concept of fair value is best described as:

Answer 37

The price that knowledgeable and willing parties would pay in an arms length transaction

Question 38

Diluted EPS formula:

Answer 38

(Total income - preferred dividends) / (Outstanding shares + diluted shares)

Question 39

An item that gives a company future economic benefits because it is owned or controlled by the company as a result of a previous transaction is best described as a(n)

Answer 39

Asset

Question 40

Quick ratio =

Answer 40

(Current assets - inventories) / current liabilites or (cash and equivalents + marketable securities + accounts receivable) / current liabilities

Question 41

If a balance sheet shows the assets in one column and liabilities and equity in an adjacent column, this is called:

Answer 41

Account format

Question 42

Reversal of impairments are allowable under:

Answer 42

IFRS NOT U.S. GAAP

Question 43

Cash Conversion Cycle (CCC) =

Answer 43

Average receivables collection period + Average inventory processing period - Average payables payment period

Question 44

Unrealized foreign currency translation gains and losses are not reported in the income statement and are included in:

Answer 44

comprehensive income.

Question 45

Under U.S. GAAP, in a cash flow statement, are interest paid and received, respectively, classified as operating or investing activities?

Answer 45

Operating, operating

Question 46

Defensive interval ratio =

Answer 46

current assets / daily operational expenses Answer is expressed as a number of days.

Question 47

Other Comprehensive Income =

Answer 47

Comprehensive Income - Net Income

Question 48

When preparing a direct method statement of cash flows, the principal component of cash flows from operating activities is:

Answer 48

Cash collections

Question 49

Average Collection Period =

Answer 49

Days x AR / Credit Sales

Question 50

Transactions included in other comprehensive income (4):

Answer 50

1 . Foreign currency translation gains and losses. 2. Adjustments for minimum pension liability. 3 . Unrealized gains and losses from cash flow hedging derivatives. 4. Unrealized gains and losses from available-for-sale securities.

Question 51

Give examples of 4 short-term liquidity ratios

Answer 51

Current ratio Quick ratio Cash ratio Defensive interval ratio

Question 52

Held-to-maturity (HTM) securities are reported on the balance sheet at (1) _____________ whereas available-for-sale securities (AFS) are reported at (2) __________.

Answer 52

1. Amortized cost | 2. Fair market value

Question 53

Retained cash flow is most likely to be defined as:

Answer 53

Operating cash flow before working capital changes less dividends

Question 54

Extended DuPont equation is:

Answer 54

ROE = (net income/ EBT)(EBT/ EBIT)(EBIT / revenue)(revenue / total assets)(total assets / total equity) or ROE = (tax burden)(interest burden)(EBIT margin)(asset turnover)(financial leverage)