Financial Statement Analysis
Exam Materials
Course Introduction
Financial Statement Analysis is a course that equips students with the tools and techniques needed to interpret and evaluate the financial health of organizations through comprehensive examination of their financial statements. The course covers the analysis of income statements, balance sheets, and cash flow statements to assess profitability, liquidity, solvency, and operational efficiency. Students learn how to use ratios, trend analysis, and benchmarking to make informed judgments about a company's performance and value, aiding decision-making for investors, creditors, and management. Real-world case studies and practical exercises form a core part of the course, helping students apply analytical concepts to actual business scenarios.
Recommended Textbook
Intermediate Accounting 18th Edition by Earl K. Stice
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Page 2
Chapter 1: Financial Reporting
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Q1) Conservatism is best described as selecting an accounting alternative that
A)understates assets and/or net income.
B)has the least favorable impact on owners' equity.
C)overstates, as opposed to understates, liabilities.
D)is least likely to mislead users of financial information.
Answer: B
Q2) Which of the following elements of financial statements is not a component of comprehensive income?
A)Revenues
B)Expenses
C)Losses
D)Distributions to owners
Answer: D
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Page 3
Chapter 2: A Review of the Accounting Cycle
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Q1) Which of the following is true regarding the accounting process?
A)Preparation of the trial balance ensures that all amounts have been posted to the correct accounts.
B)Preparation of the trial balance is a step in the recording process.
C)Preparation of the trial balance determines that total debits equal total credits.
D)Preparation of the trial balance determines both that total debits equal total credits and that all amounts have been posted to the correct accounts.
Answer: C
Q2) Adjusting entries normally involve
A)real accounts only.
B)nominal accounts only.
C)real and nominal accounts.
D)liability accounts only.
Answer: C
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4
Chapter 3: The Balance Sheet and Notes to the Financial Statements
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Q1) Accrued revenues would normally appear on the balance sheet as A)plant assets.
B)current liabilities.
C)long-term liabilities.
D)current assets.
Answer: D
Q2) An operating cycle
A)is twelve months or less in length.
B)is the average time required for a company to collect its receivables.
C)is used to determine current assets when the operating cycle is longer than one year. D)starts with inventory and ends with cash.
Answer: C
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Chapter 4: The Income Statement
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Q1) Seaworthy Company's gross sales in 2014 were $3,930,000.Assuming sales returns and allowances were $74,000,sales discounts were $35,000,and freight-out was $28,000,what were Seaworthy's net sales in 2014?
A)$3,793,000
B)$3,821,000
C)$3,856,000
D)$3,930,000
Q2) The allowance for doubtful accounts,which appears as a deduction from accounts receivable on a balance sheet,is an application of the
A)going-concern assumption.
B)revenue recognition principle.
C)matching principle.
D)materiality constraint.
Q3) An example of direct matching of an expense with revenues would be A)depreciation expense.
B)office salaries expense.
C)direct labor costs incurred to produce inventory sold during a period.
D)advertising expense.
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6
Chapter 5: Statement of Cash Flows and Articulation
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Q1) In preparing a statement of cash flows,sale of treasury stock at an amount greater than cost would be classified as a(n)
A)transfer activity.
B)operating activity.
C)investing activity.
D)financing activity.
Q2) In a statement of cash flows,proceeds from issuing equity instruments should be classified as cash inflows from
A)brokerage activities.
B)financing activities.
C)investing activities.
D)operating activities.
Q3) Which of the following is not a source of cash?
A)Sale of equipment below book value at a loss
B)Issuance of bonds payable below par value at a discount
C)Collection of a long-term note receivable from a customer
D)Declaration of a cash dividend to be paid in the next accounting period
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Chapter 6: Earnings Management
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Q1) Several catastrophic accounting failures have occurred over the last few years.Although the details of each failure is different,each case stems from attempts to manage earnings and thus all of these failures have common elements.
One of the elements identified in these earnings management meltdowns is the auditor's calculated risk.
Explain what is meant by the term "the auditor's calculated risk".
Q2) A Company showed a large restructuring charge on its income statement in 2014 and has experienced a constantly rising earnings trend since that time.This would most nearly represent an example of
A)cookie jar reserves.
B)big bath accounting.
C)creative acquisition accounting.
D)using immaterial transactions to increase reported earnings to meet analysts' expectations.
Q3) Excessive earnings management typically begins as a result of
A)a regulatory investigation.
B)pressure to meet the expectations of stakeholders.
C)a downturn in business.
D)a violation of generally accepted accounting principles.
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Page 8
Chapter 7: The Revenuereceivablescash Cycle
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Q1) When the direct write-off method of recognizing bad debt expense is used,the entry to write off a specific customer account would
A)increase net income.
B)have no effect on net income.
C)increase the accounts receivable balance and increase net income.
D)decrease the accounts receivable balance and decrease net income.
Q2) An operating cycle
A)is twelve months or less in length.
B)is the average time required for a company to collect its receivables.
C)is used to determine current assets when the operating cycle is longer than one year.
D)begins with inventory and ends with cash.
Q3) See Foreman Company information above.
Required:
Prepare the entries on Foreman Company's books to record the sale of the equipment.
Q4) See Foreman Company information above.
Required:
Explain how and why this transaction was structured as it is.
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Chapter 8: Revenue Recognition
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Q1) In accounting for a long-term construction contract for which there is a projected profit,the balance in the Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be A)zero.
B)the same as the completed-contract method.
C)higher than the completed-contract method.
D)lower than the completed-contract method.
Q2) The completed-contract method (as opposed to the percentage-of-completion method)of accounting for revenue from long-term construction contracts should be used in which of the following circumstances?
A)The contractor has been in business for many years and has completed many contracts in the past.
B)Reasonably accurate estimates of the degree of completion cannot be made due to the lack of experience with similar types of contracts.
C)Reasonable accurate estimates of the degree of completion can be made based on past experience.
D)The contracts are of a relatively long duration.
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Chapter 9: Inventory and Cost of Goods Sold
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Q1) See information regarding the four products above.Using the lower-of-cost-or-market procedure,what is the reported inventory value at December 31 for one unit of Product IV?
A)$60
B)$80
C)$90
D)$70
Q2) A markup of 25 percent on cost is equivalent to what markup on selling price? (rounded)
A)15 percent
B)20 percent
C)25 percent
D)33 percent
Q3) Which of the following would NOT be reported as inventory?
A)Land acquired for resale by a real estate firm
B)Stocks and bonds held for resale by a brokerage firm
C)Partially completed goods held by a manufacturing company
D)Machinery acquired by a manufacturing company for use in the production process
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Chapter 10: Investments in Noncurrent Operating
Assets-Acquisition
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Q1) You have just been promoted to the position of senior accountant with the public accounting firm of Ohm and Dylan.Your first audit client as senior accountant is to be the United Manufacturing Company.You have had a considerable amount of experience both in planning and conducting the audit procedures for current asset accounts such as cash,receivables,and inventory.This is your first experience,however,in planning the audit of the property,plant,and equipment accounts.Compare the nature of current assets with property,plant,and equipment,and describe how any differences might affect your audit generally.
Q2) According to SFAS No.34,"Capitalization of Interest Cost," interest should be capitalized for assets that are
A)in use or ready for their intended use in the earnings activities of the enterprise.
B)being constructed or otherwise being produced as discrete projects for an enterprise's own use.
C)not being used in the earnings activities of the enterprise and that are not undergoing the activities necessary to get them ready for use.
D)routinely produced on a repetitive basis for inventory but require an extended period of time for completion.
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Page 12
Chapter 11: Investments in Noncurrent Operating
Assets-Utilization and Retirement
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Q1) Nielsen Cargo Company recently exchanged an old truck,which cost $108,000 and was one-third depreciated,and paid $70,000 cash for a similar truck having a current fair value of $130,000.The exchange lacked commercial substance.At what amount should the truck be recorded on the books of Nielsen?
A)$70,000
B)$108,000
C)$130,000
D)$142,000
Q2) On January 1,2013,Pastel Colors Corporation purchased drilling equipment for $11,500.The equipment has an estimated useful life of four years and a salvage value of $200.Assuming that Pastel Colors uses the straight-line method of depreciation,if it trades the equipment for new equipment with a list price of $15,500 on December 31,2014,and pays $4,050 in the exchange,assuming the exchange lacks commercial substance,the new equipment should be recorded at A)$15,500.
B)$11,450.
C)$9,850.
D)$9,900.
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Chapter 12: Debt Financing
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Q1) The issuance price of a bond does not depend on the A)face value of the bond.
B)riskiness of the bond.
C)method used to amortize the bond discount or premium.
D)effective interest rate.
Q2) At December 31,2014,Ambrose Sales & Service has a $100,000,120-day note payable outstanding.The company has followed the policy of replacing the note rather than repaying it over the last three years.The company's treasurer says that this policy is expected to continue indefinitely,and the arrangement is acceptable to the bank to which the note was issued.The proper classification of the note on the December 31,2014,balance sheet is
A)dependent on the intention of management.
B)dependent on the actual ability to refinance.
C)current liability, unless specific refinancing criteria are met.
D)noncurrent liability.
Q3) Callable bonds
A)can be redeemed by the issuer at some time at a pre-specified price.
B)can be converted to stock.
C)mature in a series of payments.
D)None of these is correct.
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Chapter 13: Equity Financing
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Q1) Current financial accounting standards require
A)the use of the fair value method, but not the intrinsic value method.
B)the use of the fair value method and the intrinsic value method to account for each plan.
C)disclosure in the notes to the financial statements of compensation expense under the fair value method if the intrinsic value method is used.
D)disclosure in the notes to the financial statements of compensation expense under the intrinsic value method if the fair value method is used.
Q2) On December 10,Vandalia Co.split its stock 5-for-2 when the market value was $49 per share.Prior to the split,Vandalia had 250,000 shares of $15 par value stock.After the split,Vandalia's outstanding shares would be
A)250,000
B)225,000
C)375,000
D)625,000
Q3) Prepare a statement of comprehensive income in a one-statement format.
Q4) Prepare a statement of comprehensive income in a two-statement format.
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Chapter 14: Investments in Debt and Equity Securities
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Q1) On October 1,Ryan Company purchased $200,000 face value 12% bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities.Interest is paid semiannually on January 1 and July 1.Brokerage fees for this transaction were $700.At what amount should this acquisition of bonds be recorded?
A)$196,000
B)$196,700
C)$202,000
D)$202,700
Q2) When an investor purchases sufficient common stock to gain significant influence over the investee,what is the proper accounting treatment of any excess of cost over book value acquired?
A)The excess remains in the asset account until the investment is sold.
B)The excess is immediately charged to expense in the period in which the investment is made.
C)The excess is amortized over the period of time that is reasonable in light of the underlying cause of the excess.
D)The excess is charged to retained earnings at the time the investor resells the common stock.
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16
Chapter 15: Leases
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Q1) Which of the following is NOT a required disclosure for lessors?
A)Total of minimum sublease rentals to be received in the future under noncancelable subleases
B)Unearned interest revenue
C)Unguaranteed residual values accruing to the benefit of the lessor
D)A general description of the lessor's leasing arrangements
Q2) Generally accepted accounting principles require that certain lease agreements be accounted for as purchases.The theoretical basis for this treatment is that a lease of this type
A)effectively conveys all of the benefits and risks incident to the ownership of property.
B)is an example of form over substance.
C)provides the use of the leased asset to the lessee for a limited period of time.
D)must be recorded in accordance with the concept of cause and effect.
Q3) Celestion should account for this lease as
A)an operating lease.
B)a direct-financing lease.
C)a sale-type lease.
D)leveraged lease.
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17
Chapter 16: Income Taxes
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Q1) For the current year,Phoenix Company reported income tax expense of $195,000.Income taxes payable at the end of the prior year were $125,000 and at the end of the current year were $130,000.The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $120,000 at the beginning of the current year to $123,000 at the end of the current year.How much cash was paid for income taxes during the year?
A)$187,000
B)$197,000
C)$195,000
D)$190,000
Q2) In computing the change in deferred tax accounts,which of the following tax rates is used?
A)Current tax rate
B)Estimated future tax rates
C)Enacted future tax rates
D)Past years' tax rates
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Chapter 17: Employee Compensation-Payroll,pensions, Other Compissues
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Q1) Which of the following payroll taxes are paid by the employer?
A)FICA taxes
B)Federal unemployment taxes
C)State unemployment taxes
D)All of these
Q2) Interest cost relating to defined-benefit pension plans represents the
A)increase in projected benefit obligation as a result of recomputing the firm's pension obligation when estimated turnover and other relevant factors related to the pension are reassessed.
B)increase in the projected benefit obligation during the year resulting from all factors affecting the projected benefit obligation.
C)increase in the projected benefit obligation from the beginning of the year to the end of the year solely due to the passage of time.
D)expected return on the plan assets for the year.
Q3) Which of the following is not an issue in accounting for defined benefit plans?
A)The amount of pension expense to be recognized
B)The amount of pension liability to be reported
C)The amount of funding (contributions) required by the plan
D)Disclosures needed to supplement the financial statements
Page 19
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Chapter 18: Earnings Per Share
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Q1) When computing earnings per share on common stock,dividends on cumulative,nonconvertible preferred stock should be
A)deducted from net income only if the dividends were declared or paid in the current period.
B)deducted from net income regardless of whether the dividends were not paid or declared in the period.
C)deducted from net income only if net income is greater than the dividends.
D)ignored.
Q2) Lamonde Corporation has 20,000 shares of common stock and 5,000 shares of preferred stock outstanding during 2014.Lamonde reported net income of $60,000 for 2014.Each share of preferred stock is convertible into two shares of common stock.The preferred stock is entitled to a noncumulative annual dividend of $5 per share.After the common stock has been paid a dividend of $1 per share,the preferred stock participates in any additional dividends on a 2:3 per share ratio with the common.For 2014,the common shareholders have been paid $25,000 (or $1.25 per share),and the preferred shareholders have been paid $25,000 (or $5.00 per share).
Required:
Calculate basic earnings per share under the two-class method for 2014.
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Page 20
Chapter 19: Derivatives, contingencies, business Segments, and Interim Reports
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Q1) A company that receives 10 percent or more of its revenue from sales to a single customer must disclose the
A)identity of the customer.
B)identity of the customer and the amount of revenue from that customer.
C)type of revenues earned from that customer only.
D)amount of revenue from that customer only.
Q2) Which of the following is NOT true regarding standards for interim reporting?
A)Declines in inventory value should be deferred to future interim periods.
B)Use of the gross margin method for computing cost of goods sold must be disclosed.
C)Costs and expenses not directly associated with interim revenue must be allocated to interim periods on a reasonable basis.
D)Gains and losses that arise in an interim period should be recognized in the interim period in which they arise if they would not normally be deferred at year-end.
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Which of the following types of errors will NOT self-correct in the next year?
A)Accrued expenses not recognized at year-end
B)Accrued revenues that have not been collected not recognized at year-end
C)Depreciation expense overstated for the year
D)Prepaid expenses not recognized at year-end
Q2) Which of the following is the proper time period in which to record a change in accounting estimate?
A)Current period and future periods
B)Current period and retroactively
C)Retroactively only
D)Current period only
Q3) For a company with a periodic inventory system,which of the following would cause income to be overstated in the period of occurrence?
A)Overestimating bad debt expense
B)Understating beginning inventory
C)Overstated purchases
D)Understated ending inventory
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22
Chapter 21: Statement of Cash Flows Revisited
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Q1) Jacquin Corporation reports its income from investments under the equity method and recognized income of $15,000 from its investment in Trapper Company during the current year.Trapper declared no dividends during the current year.On Jacquin's statement of cash flows the $15,000 would
A)be shown as cash from investing activities.
B)be shown as an addition to net income in the reconciliation of net income to cash from operations.
C)be shown as a deduction from net income in the reconciliation of net income to cash from operations.
D)not be shown.
Q2) Which of the following is NOT required by generally accepted accounting principles?
A)Statement of cash flows
B)Earnings per share
C)Cash per share
D)Disclosure in notes to financial statements of the projected benefit obligation of a defined-benefit pension plan
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Chapter 22: Accounting in a Global Market
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Q1) Which of the following is true regarding the application of lower-of-cost-or-market method under international accounting standards?
A)No lower-of-cost-or-market rule for inventory exists under international accounting standards.
B)Inventory is recorded at the lower-of-cost-or-market value (defined as replacement cost of the inventory).
C)Inventory is recorded at the lower-of-cost-or-market value defined as net-realizable value.
D)Inventory is recorded at the lower-of-cost-or-market value defined as net-realizable value, minus the normal profit margin.
Q2) Under international accounting standards,remote contingent liabilities are A)not disclosed.
B)not disclosed unless a guarantee arrangement (e.G), cosigning the loan of another party) exists.
C)disclosed if the amount of the contingent liability is reasonably estimable.
D)treated the same as reasonable possible contingencies.
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Chapter 23: Analysis of Financial Statements
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Q1) Refer to the Sculley Corporation information above.Sculley's quick (acid test)ratio as December 31,2014,is
A)1.44 to 1.
B)1.50 to 1.
C)1.67 to 1.
D)1.66 to 1.
Q2) The calculation of the return on total assets ratio would use all of the following except
A)average stockholders' equity.
B)total assets.
C)average total assets.
D)net sales.
Q3) Refer to the Sculley Corporation information above.Sculley's account receivable turnover for 2014 is
A)13.85.
B)10.00.
C)9.49.
D)7.78.
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