Corporate Financial Reporting
Midterm Exam
Course Introduction
Corporate Financial Reporting explores the principles, standards, and processes involved in preparing and analyzing financial statements for corporations. The course covers critical topics such as accounting frameworks, the structure and interpretation of balance sheets, income statements, cash flow statements, and statements of shareholders equity. Students will develop an understanding of regulatory requirements, the role of financial reporting in corporate governance, and the impact of financial disclosures on business decision-making. Emphasis is placed on real-world application through case studies and analysis of actual corporate reports, equipping students with the skills to evaluate and communicate financial information effectively to stakeholders.
Recommended Textbook Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) On a common size basis,which of the following assets is normally largest for a commercial bank?
A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities
Answer: A
Q2) Which of the following is not an expense of a business?
A) Depreciation
B) Dividends
C) Salaries
D) Advertising
Answer: B
Q3) When assessing buyer power using Porter's five forces,which of the following is not consistent with low buyer power?
A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price
Answer: C
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Q1) What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations.
Answer: Valuation methods reflecting historical cost include:
1.acquisition cost
2.adjusted acquisition cost
3.present value of cash flows using historical interest rates
The main advantages of using historical valuations are simplicity,less subjectivity and reliability.The disadvantages include lack of relevance.
Q2) Refer to the Balance Sheet Equation.If ORP Corporation sells $25,000 of its product on account,it will see an increase in non-cash assets and
Answer: retained earnings
Q3) Which of the following valuation methods reflects current values?
A) acquisition cost
B) present value of cash flows using historical interest rates
C) net realizable value
D) adjusted acquisition cost
Answer: C
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Discuss operating,investing,and financing cash flows in relation to the various stages of the product life cycle.
Answer: 1.Operating cash flows begin negative in the introduction phase and start becoming positive in the growth phase.Operating cash flows reach their peak in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase.
2.Investing cash flows begin negative in the introduction phase and stays negative in the growth phase.Investing cash flows become positive in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase.
3.Financing cash flows are positive in the introduction and growth phase.Financing cash flows start to decrease at the end of the maturity phase and continue to decrease in the decline phase.
Q2) The receipt of cash when employees exercise stock options is a(n)____________________ activity.
Answer: financing
Q3) One factor that may cause cash flow from operations to differ from net income is the length of the ______________________________.
Answer: operating cycle
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Chapter 4: Profitability Analysis
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Q1) Accounts receivable turnover is calculated by dividing ________________________________________ by average net accounts receivable.
Q2) Firms with ____________________ levels of operating leverage experience greater variability in their return on assets.
Q3) Refer to the information for Orca Industries.The return on assets for Orca Industries is:
A) 6.8%
B) 13.5%
C) 10% D) 12.3%
Q4) Firms with complex capital structures can use which of the following in calculating EPS?
A) Outstanding convertible bonds.
B) Stock options exercised
C) Stock warrants issued
D) All of these are correct.
Q5) The ability of a firm to generate income from operations given a particular level of sales is measured by the ______________________________.
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Chapter 5: Risk Analysis
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Q1) Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations? \(\begin{array}{lll} & \underline {\text { Ability to generate cash}}&\underline {\text { Need to use cash}}\\
a. &\text { Profitability of goods and services sold }& \text { Working capital requirements}\\
b. &\text { Sales of existing plant assets }& \text { Plant capacity requirements}\\
c. & \text { Borrowing capacity} & \text { Debt service requirements}\\
d. & \text { Profitability of goods and services sold }& \text { Debt service requirements}\\ \end{array}\)
Q2) Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.
Q3) By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.
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Chapter 6: Accounting Quality
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Q1) Achieving comparability in financial reporting is important to the analysis of multinational firms.However,the data from the reconciliation of foreign firm's financial statement to U.S.GAAP must be carefully interpreted.What types of things complicate the analysis of multinational firms?
Q2) Accounting information should be a fair and complete representation of the firm's economic ____________________,____________________,and
Q3) Quality accounting information seeks to maximize relevance and economic faithfulness,subject to the constraints of the ____________________ of the measurements.
Q4) Banks Corp.reported net income of $595,000 in 2012.During 2012 Banks reported a loss of $87,435 from a peripheral activity.The loss was included as part of income from continuing operations.Assuming that the loss is a one-time event and that Banks has an effective tax rate of 35%,calculate Banks' adjusted net income.Show all of your calculations for credit. In addition,discuss why analysts might make an adjustment of this type.
Q5) U.S.GAAP requires that changes in estimates be accounted for by recognizing the effect ________________________________________ period(s).
Q6) A change in the useful life of an asset is treated as a(n)_____________
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Chapter 7: Financing Activities
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Q1) The first date at which employees can exercise their stock options is termed the
Q2) Derivatives are financial instruments that derive their value from changes in any of the following underlying securities except:
A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices
Q3) Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge.Distinguish between the two types of hedges.
Q4) When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.
Q5) All of the following are correct regarding operating leases except:
A) Cash outflow is in the form of rent payments
B) The rights to use the property for a specified period of time are conferred to the lessee by the lessor.
C) At the end of the lease the lessee returns the property to the lessor
D) Depreciation expense can be recorded on the books by the lessee
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Chapter 8: Investing Activities
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Q1) When a firm sells a trading security,it recognizes:
A) the average of the selling price and the book value as a gain or loss in measuring net income.
B) the difference between the selling price and the book value as a gain or loss in measuring net income.
C) amortizes any difference between the acquisition cost and maturity value as interest revenue over the life of the debt.
D) the difference between the selling price and the acquisition cost of the security as a realized gain or loss on the income statement.
Q2) Discuss how firms should account for intangible assets under U.S.GAAP.Your answer should include discussion of the following areas:
a.Internally generated intangible assets versus specifically identifiable intangible assets acquired from others
b.Amortization and impairment testing
Q3) U.S.GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated
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Chapter 9: Operating Activities
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Q1) A contractor would not use ________________________________________ method of income recognition when there is substantial uncertainty regarding the total costs it will incur in completing the project.
Q2) The difference between the economic resources received from customers and the economic resources paid to suppliers,employees and other providers of goods and services is called ____________________.
Q3) The accumulated benefit obligation measures:
A) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
B) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
C) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
D) the shortest possible period for funding to maximize the tax deduction.
Q4) One sign that a company may be recognizing sales too early is that it has unusually large amounts of ______________________________.
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Chapter 10: Forecasting Financial Statements
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Q1) If a company has very low operating leverage (i.e.,a low proportion of fixed costs in the cost structure)and no changes are expected in operations:
A) percentage change income statement percentages can serve as the basis for projecting operating expenses.
B) using common-size income statement percentages will overstate future projected operating expenses.
C) using common-size income statement percentages will understate future projected operating expenses.
D) using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses.
Q2) Projected financial statements can be used to assess the sensitivity of all of the following except:
A) a firm's liquidity.
B) a firm's leverage to changes in assumptions.
C) conditions under which the firm's debt covenants may become binding.
D) unusual patterns for projected total assets.
Q3) Financial statement forecasts should rely on ____________________ within financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable,financially healthy,profitable,tax-paying firm that has been financed with all equity and no debt decides to add a reasonable amount of debt to its capital structure.What effect will that change in capital structure likely have on the firm's weighted average cost of capital?
Q2) Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.
Q3) Using the above information,calculate Zonk's weighted-average cost of capital:
A) 11.5%
B) 7.97%
C) 7.48%
D) 10.90%
Q4) Normally,valuation methods are designed to produce reliable estimates of the value of a firm's ______________________________.
Q5) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Which of the following is not a problem with using a dividend-based valuation formula?
A) Dividends are arbitrarily established.
B) Dividends represent a transfer of wealth to shareholders.
C) Some firms do not pay a regular periodic dividend.
D) It is a challenge to forecast the final liquidating dividend.
Q2) If an analyst wants to value a potential investment in the common stock equity of a firm,the analyst should discount the projected free cash flows at the:
A) required return on equity capital.
B) weighted average cost of capital.
C) risk-free rate.
D) market risk premium.
Q3) Free cash flows for common equity shareholders are the cash flows specifically available to the common shareholders after making all capital expenditures,_____________________________________________ and
Q4) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q5) What is the purpose of a free cash flow analysis?
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Where is comprehensive income reported and what is its relevancy to the computation of residual income?
Q2) Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?
A) Overbidding
B) Over optimistic appraisal of market potential
C) Over estimation of synergies
D) Overuse of conventional financial statements
Q3) The two most popular discounted earnings models appear to be:
A) free cash flow and dividend discount model.
B) sales/market capitalization and price-earnings.
C) discounted abnormal earnings and residual income.
D) price-cash flow and dividend discount.
Q4) Over the life of the firm,the present value of
and ____________________ will be the same.
Q5) Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are
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Q6) What is meant by the term clean surplus accounting?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) A company is expected to generate $175,000 in earnings next period and requires a 20% return on equity capital.Using the assumptions of the price-earnings ratio,what would be the company's value at the beginning of next period?
A) $781,250
B) $1,250,000
C) $2,000,000
D) $875,000
Q2) Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.
Q3) Assuming that Ska Company's cost of equity capital is 14% and it expects to grow earnings at a rate of 8% per year,we would expect Ska's P/E ratio to be:
A) 8
B) 16.7
C) 14
D) 4.5
Q4) The differences in industry market-to-book ratios may be the result of differences in growth,ROCE relative to RE,as well as differences in
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