Financial Statement Analysis
Exam Bank
Course Introduction
Financial Statement Analysis provides students with the essential tools and techniques to evaluate the financial health and performance of businesses. The course covers the interpretation and analysis of balance sheets, income statements, and cash flow statements, emphasizing the use of financial ratios, trend analysis, and comparative financial methods. Students learn to assess profitability, liquidity, solvency, and operational efficiency, as well as to identify red flags and the impact of accounting policies on financial outcomes. Practical case studies and real-world company data are incorporated to develop critical thinking and decision-making skills necessary for informed investment, lending, and management decisions.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
1070 Verified Questions
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) Basic EPS is calculated as net income minus _____________________________________________ divided by the weighted average number of shares outstanding.
Answer: dividends on preferred stock
Q2) Depreciation is a(n)___________________ added back to net income when preparing the operating activities section of the Statement of Cash Flows.
Answer: Non-cash expenditure
Q3) The accrual basis of accounting recognizes:
A) Revenue when cash is received from customers
B) Expenses when paid
C) Revenue when all or a substantial portion is performed
D) Revenue when contracts are signed
Answer: C
Q4) The threat of new entrants is measured by whether there are entry barriers,such as capital investment,________________________________________,patents,or regulation that inhibit new entrants.
Answer: technological expertise
Q5) Normally,intense rivalries have a tendency to reduce ____________________.
Answer: profitability
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Sample Questions
Q1) Historical costs include all of the following except:
A) acquisition costs for assets
B) net realizable values for assets.
C) adjusted acquisition costs for assets.
D) initial present value for assets and liabilities
Answer: B
Q2) The traditional accounting model delays the recognition of value changes of assets and liabilities until what event occurs?
A) A change in value.
B) A market transaction.
C) A balance sheet date.
D) Cash is received or cash is paid.
Answer: B
Q3) Disregarding cash flows with owners,over sufficiently long periods of time,net income equals:
A) revenues minus dividends and expenses
B) assets minus liabilities
C) stockholders' equity
D) cash inflows minus cash outflows
Answer: D
Page 4
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Lagos Corp.recorded sales of $345,000 in 2010.In addition,its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: \(\begin{array}{lll} &\text {Jan. 1, 2010 }&\text { Dec. 31,2010 }\\
\text { Accounts Receivable } & \$ 65,000 & \$ 90,000 \\ \text { Accounts Payable } & \$ 32,000 & \$ 28,000 \end{array}\)
How much cash did Lagos collect from customers in 2010?
A) $345,000
B) $320,000
C) $324,000
D) $316,000
Answer: B
Q2) ____________________ ___________________ equals current assets minus current liabilities
Answer: Working capital
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Refer to the information for Ramos Company.In a common size income statement for 2011,the cost of goods sold is expressed as:
A) 130%
B) 115%
C) 64.5%
D) 63.1%
Q2) Freedom Company reported net income for 2010 of $2,031 million on sales of $25,600 million.Interest expense for 2010 was $235 million,and minority interest was $344 million for 2010.The income tax rate is 40 percent.Total assets were $10,800 million at the beginning of 2010 and $14,874 million at the end of 2010.Compute the rate of ROA for 2010 and disaggregate ROA into profit margin for ROA and asset turnover components.
Q3) Refer to the information for Net Devices Inc.What is Net Devices' capital structure leverage ratio for 2011?
A) 3.89
B) 1.68
C) 3.71
D) 10.32
Q4) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) Doran Corp.has a current ratio of 6.Under which of the following scenarios might this indicate a problem?
A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Doran Corp.operates is experiencing a recession
Q2) Bankruptcy analysis research has gone through many iterations,from univariate bankruptcy prediction models to sophisticated logit models.However,after examining the results of the research there appear to be a number of common factors that consistently explain bankruptcy.These factors can be grouped into investment factors,financing factors,operating factors.For each of the three groups discuss specific factors that have been found to significantly explain bankruptcy.
Q3) Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.
Q4) _________________________ concerns a firm's ability to make interest and principal payments on borrowings as they become due.
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Page 7
Chapter 6: Accounting Quality
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Sample Questions
Q1) All of the following are typically recognized as accounting liabilities except:
A) Bonds Payable
B) Rental Fees Received in Advance
C) Loan Guarantees
D) Taxes Payable
Q2) 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.
Q3) Earnings are informative if they signal the portion of current period's due to a new product and the additional earnings in the future as a result of the ____________________ of this new earnings stream.
Q4) A change in the useful life of an asset is treated as a(n)_____________
Q5) On the income statement the disposal of a segment of a business should be shown
Q6) In bankruptcy prediction analysis,a type ____________________ error is classifying a firm as nonbankrupt when it ultimately goes bankrupt.
Page 8
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Chapter 7: Financing Activities
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Q1) Assuming that Santa Corporation was required to capitalize its operating lease,how would the company's fixed asset ratio change under this assumption?
A) increase
B) decrease
C) no effect
D) unable to determine
Q2) Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.
Q3) Which kind of dividend typically pays dividends with additional shares of the corporation's stock?
A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend
Q4) Which kind of dividend is a return of the original investment by shareholders?
A) cash dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend
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Chapter 8: Investing Activities
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Q1) Based on the information concerning Snowflake Corp.what is the market value of the company's shareholders' equity at the acquisition date?
A) $1,775,000
B) $475,000
C) $2,250,000
D) $0
Q2) Based on the information concerning Record Corp.,what is the market value of the company's shareholders' equity at the acquisition date?
A) $0
B) $908,000
C) $1,200,000
D) $1,458,000
Q3) Under the equity method the investor's share of investee income ____________________ the investment account and dividends ____________________ the investment account.
Q4) When a foreign entity operates as a direct and integral extension of the U.S.parent,normally,its functional currency is the _________________________.
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Chapter 9: Operating Activities
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Sample Questions
Q1) To calculate a company's average tax rate an analyst would:
A) Divide income tax payable by income before taxes
B) Divide income tax expense by income before taxes
C) Multiply the statutory income tax rate by income before tax
D) Average a firm's Federal, State, Local and Foreign tax rates.
Q2) Assume that Madison Corp.has agreed to construct a new basketball arena for Gator Town for $70 million dollars.Construction of the new arena begins in July,2012 and is expected to be completed in March 2009.At the signing of the contract Madison Corp.estimates that the new arena will cost $60 million dollars to build.Given the following cost and building schedule determine the cumulative degree of completion and how much revenue and gross margin Madison Corp.should recognize in years 2012,2013 and 2014.
\(\begin{array} { l l l }
& \text { Casts incurred } & \text { Estimated casts } \\ \text { Year } & \text { to date } & \text { remainine } \\
2012& \$ 18,000,000 & \$ 42,000,000 \\
2013 & \$ 48,000,000 & \$ 12,000,000\\
2014 &\$ 600.000&\$0\\ \end{array}\)
Q3) What are the four disclosures required by U.S.GAAP relating to income taxes?
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) If a firm competes in a capital-intensive industry with excess capacity,all of the following are true except:
A) price increases will be less likely.
B) price increases will be more likely.
C) companies in competitive industries face high exit barriers.
D) companies in competitive industries may experience future price decreases.
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) The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.
Q4) Realistic expectations are ____________________ and ____________________.
Q5) Firms that have differentiated ___________________________________ for its products may have a greater potential to increase prices.
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Q6) The formula for forecasting inventory is ____________ /365 X.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Investors typically accept a lower risk-adjusted rate of return on debt capital than on equity capital because:
A) debt is typically less risky because fixed claims bear less residual risk than equity claims.
B) equity bears less residual risk than debt.
C) equity capital costs are tax deductible.
D) the yield to maturity on equity is inversely related to its market value.
Q2) Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements.What are the three elements that the analyst needs to measure?
Q3) A company with a new Capital structure will increase the __________ and at the same time the __________ risk.
Q4) Why are dividends value-relevant to common equity shareholders?
Q5) Provide the rationale for using expected dividends in a valuation model.
Q6) If dividend projections include the effect of inflation,then the discount rate used should be a(n)____________________ rate.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Currently,financial reporting does not take into account changes in prices,either at the general level or at the specific level.Many analysts believe that not taking price changes into account distorts the meaningfulness of financial reports.How do changing prices affect financial reports?
Q2) Sun Corporation reports the following information: \( \begin{array}{lr}\text { Net cash provided by operating activities } & \$ 255,000 \\ \text { Average current liabilities } & 150,000 \\ \text { Average long-term liabilities } & 100,000 \\ \text { Dividends paid } & 60,000 \\ \text { Capital expenditures } & 110,000 \\ \text { Payments of debt } & 35,000\end{array} \)
Sun's free cash flow is:
A) $195,000
B) $145,000
C) $50,000
D) $85,000
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) 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) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q2) When debating the issue of whether to use free cash flows or earnings in a valuation model,economists sometimes argue that ____________________ can be subject to purposeful management by a firm and thus make them less useful.
Q3) Economists sometimes argue that earnings are not a(n)_________________________ attribute on which to base valuation.
Q4) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be:
A) exactly equal to the book value of common shareholders' equity.
B) greater than the book value of common shareholders' equity.
C) less than the book value of common shareholders' equity.
D) exactly equal to working capital.
Q5) The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows
Q6) What is meant by the term clean surplus accounting?
Q7) What is the rationale for using expected earnings as a basis for valuations?
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The market price of a share of common equity reflects:
A) the aggregated expectations of all of the market participants following that particular stock.
B) the present value of future residual income.
C) book value plus the present value of future residual income.
D) the correct value for the particular stock.
Q2) Strictly speaking,the price-earnings ratio assumes that firm value is the:
A) future value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate.
B) future value of a constant stream of expected future earnings, discounted at a constant expected future discount rate.
C) present value of a constant stream of expected future earnings, discounted at a constant expected future risk-free rate.
D) present value of a constant stream of expected future earnings, discounted at a constant expected future discount rate.
Q3) The PE multiple assumes that firm value is the present value of a constant stream of _____________________________________________,discounted at a constant expected future discount rate.
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