Financial Analysis for Managers
Final Test Solutions
Course Introduction
Financial Analysis for Managers equips students with essential tools and techniques to interpret and evaluate financial information for effective decision-making in business environments. The course covers key topics such as financial statement analysis, ratio analysis, cash flow assessment, and budgeting. Emphasis is placed on understanding how financial data can be used to assess organizational performance, identify trends, and make strategic managerial decisions. Through real-world case studies and hands-on exercises, students develop the analytical skills necessary to communicate financial insights and contribute to the achievement of organizational goals.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen
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Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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Q1) Which financial statement would you look at to determine whether a company will be able to pay for the goods when payment is due in 30 days?
A) Statement of cash flows.
B) Statement of stockholders' equity.
C) Income statement.
D) Balance sheet.
Answer: D
Q2) Which of the following is not considered to be a liability?
A) Wages payable.
B) Accounts payable.
C) Notes payable.
D) Cost of goods sold.
Answer: D
Q3) Depreciation is a ___________________ added back to net income when preparing the operating activities section of the Statement of Cash Flows.
Answer: Non-cash expenditure
Q4) Labor contracts and purchase order commitments are examples of ____________________ contracts.
Answer: executory
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Q1) Firms recognize the reduction in service potential of assets such as patents and trademarksusing the process of ____________________.
Answer: amortization
Q2) Discuss the two principal reasons income before taxes for financial reporting differs from taxable income.
Answer: 1.Permanent Differences--Revenues and expenses that firms include in net income to shareholders,but which never appear in the income tax return.2.Temporary Differences--Revenues and expenses that firms include in both net income to shareholders and in taxable income but in different periods.
Q3) Firms may not include all income taxes for a period on the line for income tax expense in the income statement.Other places that income tax expenses may occur include all of the following except:
A) Discontinued Operations
B) Extraordinary Items
C) Other Comprehensive Income
D) Common Stock
Answer: D
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Chapter 3: Income Flows Versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) Under the ______________________________ of preparing the statement of cash flow's operating activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to providers of goods and services.
Answer: direct method
Q2) Which of the following is the correct formula for calculating cash collections from customers?
A) sales for the period plus accounts receivable at the beginning of the period
B) sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period
C) sales for the period plus accounts receivable at the end of the period
D) sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period
Answer: B
Q3) EBITDA not only ignores four expenses but also ignores changes in __________________________________________________ accounts.
Answer: operating working capital
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Chapter 4: Profitability Analysis
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Q1) Refer to the information for Orca Industries.The return on common shareholders' equity for Orca Industries is
A) 15.2%
B) 13.5%
C) 10%
D) 11.9%
Q2) Refer to the information for Orca Industries.Orca's basic earnings per share is
A) .22
B) .13
C) .25
D) .30
Q3) Firms with high levels of operating leverage experience which of the following in comparison to firms with low levels of operating leverage
A) Higher levels of risk in operations.
B) Lower expected rates of return.
C) Lower variability in returns on assets.
D) Higher sales.
Q4) Operating income is negative in an amount equal to _________________________ when revenues are zero.
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Chapter 5: Risk Analysis
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Q1) Changes in interest rates can typically affect firms in all of the following ways except:
A) The value of investments in bonds or other investment securities with fixed interest Rates.
B) The value of liabilities with fixed interest rates.
C) The returns a firm generates from pension fund investments.
D) The cash-equivalent value of assets invested abroad.
Q2) Which of the following is not one of the three explanatory variables that determines a firm's market beta?
A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.
Q3) Caraway Company's net accounts receivable was $300,000 at December 31,2012 and $450,000 at December 31,2013.Net cash sales for 2008 were $425,000.The accounts receivable turnover for 2013 was 7.0,and this turnover figure was computed from net credit sales for the year.
Required:
What were Caraway's total net sales for 2013?
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Chapter 6: Accounting Quality
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Q1) When evaluating the quality of accounting information,an analyst should consider all of the following except:
A) reliability of the measurements made
B) adequacy of disclosures
C) comparability of estimates
D) economic faithfulness of the measurements made
Q2) Which of the following items is consistent with earnings not being informative about current performance but are informative about future earnings?
A) The firm recognizes an unexpected gain
B) The firm recognizes a fair value gain on a financial asset as a result of a favorable move in interest rates.
C) The firm recognizes additional expenses this period due to pre-opening costs associated with new stores.
D) The firm experiences a large jump in sales and earnings as a result of successful research and development of new products.
Q3) Quality accounting information seeks to maximize relevance and economic faithfulness,subject to the constraints of the ____________________ of the measurements.
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Chapter 7: Financing Activities
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Q1) All of the following are benefits of leasing except:
A) They have the ability to shift the tax benefits from depreciation and other deductions from a lessee that has little or no taxable income to a lessor that has substantial taxable income.
B) They provide flexibility to change capacity as needed without having to purchase or sell assets.
C) They have the ability to reduce the risk of technological obsolescence, relative to outright ownership, by maintaining the flexibility to shift to technologically more advanced assets.
D) In an operating lease, the lessee recognizes the signing of the lease as the simultaneous acquisition of a long-term asset and the incurring of a long-term liability for lease payments.
Q2) All of the following are typically recognized as accounting liabilities except:
A) Obligations with Fixed Payment Dates and Amounts
B) Obligations under Mutually Unexecuted Contracts
C) Obligations Arising from Advances from Customers on Unexecuted Contracts and Agreements
D) Obligations with Fixed Payment Amounts but Estimated Payment Dates
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Chapter 8: Investing Activities
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Q1) You are trying to determine the functional currency of a foreign unit.For the following three factors determine what conditions would result in the foreign currency being the functional currency:a.Sales Prices
b.Financing
c.Relationships between the Parent and the Foreign Unit
Q2) When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in,it should account for the investment using the ______________________________.
Q3) Under IFRS,when an asset is revalued upwards,subsequent depreciation is based on A) the asset's fair value.
B) the asset's original cost.
C) the method used for determining depreciation on the company's tax returns.
D) the amount of future cash flows the asset is expected to generate.
Q4) The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.
Q5) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
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Chapter 9: Operating Activities
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Q1) Many firms use derivative instruments to hedge exposure to changes in the fair value an asset or liability or to hedge exposure to variability in expected future cash flows.As an analyst examining the financial reports of a company that uses derivative instruments to hedge,what questions should be asked when thinking about derivatives and accounting quality?
Q2) A company that uses LIFO will find that its ______________________________ account will be somewhat out of date.
Q3) When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.
Q4) A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
Q5) Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.
Q6) ___________________________________ is primarily a question of timing.
Q7) What are the foiur disclosures required by US.GAAP relating to income taxes?
Q8) 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) All of the following are true regarding projected financial statements except:
A) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B) Preparing projected financial statements must incorporate a company's past performance records.
C) Preparing projected financial statements must incorporate a company's current performance records.
D) The income statement demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital.
Q2) In developing forecasts of expenses the analyst must take into consideration that expenses can be broken down into ________________________ or ______________________ components.
Q3) Realistic expectations are ____________________ and ____________________.
Q4) One problem caused by using turnover ratios to calculate asset balances is that it can lead to volatility in projected ending balances.What might an analyst do to reduce the "sawtooth" pattern caused by using turnover ratios?
Q5) Financial statement forecasts should rely on _________________________ across financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) 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.
Q2) Assuming that riskless rate is 4.6% and the market premium is 7.3% calculate Zonk's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 8.28%
Q3) Equity valuation models based on dividends,cash flows,and earnings have been the topic of many theoretical and empirical research studies in recent years.All of the following are true regarding these studies except:
A) share prices in the capital markets generally correlate closely with share value
B) share prices do not always equal share values
C) temporary deviations of price from value occur
D) unexpected changes in earnings, dividends, and cash flows do not correlate closely With changes in stock prices
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Regarding the equity buyout,compute the weighted average cost of capital of the new capital structure.
Q2) The forecasting and valuation process is particularly difficult for ______________________________ when the near term free cash flows tend to be negative.
Q3) Financial assets include all of the following except
A) Excess cash
B) short term investments
C) intangible assets
D) long trm investments
Q4) Starting with net cash flow from operations and adjusting for capital expenditures and dividends equals
A) free cash flows for all debt and equity capital stakeholders
B) free cash flow
C) free cash flows to common equity capital shareholders
D) free cash flow from operations
Q5) For most firms,______________________________ include cash and short-term investment securities,accounts receivable,inventory,property,plant and equipment,intangible assets and investments in affiliated companies.
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The required earnings of the firm equals the product of the required rate of return on common equity capital times the __________________________________________________ at the beginning of the period.
Q2) In many cases,using the residual income valuation model will result in a different value than either the dividend discount model and the free cash flow valuation methods.What are some reasons that the three valuation models would result in inconsistent valuations?
Q3) Why is the weighted average cost of capital not used as the discount rate when computing residual income?
Q4) What are the four components that make up dirty surplus accounting according to the FASB?
Q5) ______________________________ is the amount by which expected future earnings exceed the required earnings.
Q6) Explain residual income.What does residual income represent? What does residual income measure?
Q7) The residual income_____________________________ valuation model uses __________________ and the book value of common shareholders' equity as the basis for valuation.
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The use of P/E ratios in valuation can result in measurement bias.What two items can result in measurement error and why?
Q2) A company is expected to generate $175,000 in earnings next period and requires a 20 percent 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
Q3) The PEG ratio does not take into account differences in ____________________ and ________________________________________ across firms.
Q4) The ______________________________ represents the value of the firm,based on book value of equity and forecasts of expected future earnings,in the absence of discounting for risk.
Q5) Discuss how risk and profitability factors cause differences in price-earnings ratios across firms.Explain the difference between abnormal and normal earnings.
Q6) Explain the analysts' role in making the capital markets efficient.
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