Financial Statement Analysis
Exam Practice Tests
Course Introduction
Financial Statement Analysis is a course designed to equip students with the critical skills necessary to assess and interpret the financial health of businesses through their financial statements. The course covers the foundational principles and techniques used to analyze balance sheets, income statements, cash flow statements, and notes to accounts. Students will learn how to evaluate financial performance, profitability, solvency, and liquidity, as well as identify key financial ratios and trends to support decision-making processes. Through practical exercises and real-world case studies, the course prepares students to make informed judgments and recommendations based on comprehensive financial analysis.
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) What are three activities reported in the statement of cash flows and what information does each activity provide?
Answer: 1.Operating activities - Provides information on cash generated and used by a firm in its normal activities of selling goods and providing services.
2.Investing activities - Provides information about the firm's use of cash in the acquisition of long-lived productive assets and cash provided by the disposal of long-lived productive assets.In addition,cash provided and used by investment in debt and equity securities are included in this category.
3.Financing activities - Provides information about cash provided and used by shortand long-term borrowing and from issuing or repurchasing capital stock.In addition,cash used for dividends is reported in this category.
Q2) Which of the following economic characteristics is consistent with a commercial bank?
A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margin on lending activities.
D) Low profit margin on fee-based financial services, such as merger consulting.
Answer: C
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Chapter 2: Asset and Liability Valuation and Income Recognition
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Sample Questions
Q1) A change in the _________________________ or _________________________ will not change a preset series of cash flows,however it will change the present value of those cash flows.
Answer: interest rate,discount rate discount rate,interest rate
Q2) ____________________ assets and liabilities represent amounts of cash a firm can expect to receive or pay in the future.
Answer: Monetary
Q3) Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment,which has a useful life of four years.Tax legislation requires the company to depreciate its equipment using the following schedule: year 150%,year 2 - 30%,year 3 - 15% and year 4 - 5%.In 2014 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000.What amount will Plaxo record as a deferred tax asset or liability in 2010?
A) Deferred tax asset of $25,000.
B) Deferred tax liability of $25,000.
C) Deferred tax asset of $8,750.
D) Deferred tax liability of $8,750.
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) ____________________ activities relate to the normal operations of the firm,selling goods and providing services.
Answer: Operating
Q2) Norton Company reported total sales revenue of $55,000,total expenses of $45,000,and net income of $10,000 on its income statement for the year ended December 31,2010.During 2010,accounts receivable increased by $4,000,merchandise inventory increased by $6,000,accounts payable decreased by $2,000,and depreciation of $18,000 was recorded.Therefore,based only on this information,the net cash flow from operating activities using the indirect method for 2010 was:
A) $30,000
B) $10,000
C) $16,000
D) $19,000
Answer: C
Q3) The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Carridine Company reported net income of $1,903 on revenues of $55,618 for Year 4.Interest expense totaled $459,and preferred dividends totaled $13.5.Average total assets for Year 4 were $17,500.The income tax rate is 40 percent.Average preferred shareholders' equity totaled $250,and average common shareholders' equity totaled $7,500.Assume that all the following amounts are in thousands.
REQUIRED:
a.Compute the rate of ROA.Disaggregate ROA into profit margin for ROA and assets turnover components.
b.Compute the rate of ROCE.Disaggregate ROCE into profit margin for ROCE,assets turnover,and capital leverage ratio components.
c.Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital,the excess return on preferred shareholders' capital, and the return on common shareholders' capital.
Q2) Another term for earnings power is:
A) nonrecurrent revenue.
B) nonrecurrent gains.
C) sustainable earnings.
D) net change in equity.
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Chapter 5: Risk Analysis
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Q1) On January 1,2012,Deputron Company's beginning inventory was $600,000.During 2012,the company purchased $2,600,000 of additional inventory,and on December 31,2012 Creek's ending inventory was $565,000.
Required: What was Deputron's inventory turnover for 2012?
Q2) The source of risk related to interest rate changes and demographic changes is ____________________.
Q3) All of the following are common domestic risks faced by companies except: A) recessions B) technology C) inflation D) demographic shifts
Q4) Marker's 2012 Long-term Debt to Shareholders' Equity ratio is:
A) 31.4%
B) 29.4%
C) 34.0%
D) 45.8%
Q5) Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) One definition of earnings management is that it occurs when managers use:
A) judgment in financial reporting to alter financial reports to mislead stakeholder.
B) an accounting method that is inconsistent with other industry members.
C) more conservative accounting estimates than other companies.
D) pro forma accounting results as opposed to GAAP results.
Q2) All of the following are criteria that financial reporting requires before recognizing an obligation as a liability except:
A) The transaction or event that gave rise to the obligation has already occurred.
B) The firm has a present obligation and little or no discretion to avoid the transfer.
C) The firm must know the precise amount of the obligation before recording it.
D) The obligation involves a probable future sacrifice of economic benefits-a future transfer of cash, goods, or services; the forgoing of a future cash receipt; or the transfer of equity shares-at a specified or determinable date.The firm can measure with reasonable precision the cash-equivalent value of the resources needed to satisfy the obligation.
Q3) 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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Sample Questions
Q1) The _________________________ is the date a firm gives a stock option to employees.
Q2) Under U.S.GAAP,which of the following items would require a lessee to classify a lease of equipment as a capital lease?
A) There is no transfer of ownership to the lessee at the end of the lease term.
B) The lease does not contain a bargain purchase option.
C) The lease term is 90% of the estimated economic life of the lease property.
D) The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.
Q3) Which is the date when a firm gives a stock option to employees?
A) vesting date
B) grant date
C) exercise date
D) market date
Q4) Which of the following is not one of the GAAP classifications for derivatives?
A) Speculative investment
B) Fair value hedge
C) Asset-liability hedge
D) Cash flow hedge
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Chapter 8: Investing Activities
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Sample Questions
Q1) Although the organizational structure and operating policies of a particular foreign unit determine its functional currency,discuss two actions that a management team might take to ensure that the foreign currency is the functional currency.
Q2) The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.
Q3) 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
Q4) A company would need to record an impairment loss for its equipment when:
A) the original cost of the equipment exceeds its fair value and is deemed not recoverable.
B) management determines that the equipment will no longer be used.
C) the carrying amount of the equipment exceeds its fair value and is deemed not recoverable.
D) the cash flows from the equipment are less than its fair value.
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Chapter 9: Operating Activities
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Sample Questions
Q1) A large manufacturer recently changed its cost-flow assumption method for inventories at the beginning of 2012.The manufacturer has been in operation for almost 40 years,and for the last decade,it has reported moderate growth in revenues.The firm changed from the LIFO method to the FIFO method and reported the following information:
\(\begin{array}{|l|r|r|}
\hline\text { December 31: (amounts in millions) }&2011&2012\\
\hline\text { Inventories at FIFO cost } & \$ 388.1 & \$ 419.7 \\
\hline \text { Excess of FIFO cost over LIFO cost } & (229.0) & (210.4) \\
\hline \text { Cost of goods sold (FIFO) } & & \$ 2,050.8 \\
\hline \text { Cost of goods sold (LIFO) } & & \$ 2,417.1\\
\hline \end{array}\)
Calculate the inventory turnover ratio for 2012 using the LIFO and FIFO cost-flow assumption methods.Explain why the costs assigned to inventory under LIFO at the end of 2011 and 2012 are so much less than they are under FIFO.
Q2) ___________________________________ is primarily a question of timing.
Q3) A company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
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Chapter 10: Forecasting Financial Statements
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Q1) As a firm progresses through the growth life-cycle stage,what type of flexible account will it be more likely to use to balance the balance sheet?
A) issued debt
B) paying down of debt
C) dividends
D) stock buy-backs
Q2) To ensure that the financial statements articulate,it is important that the change in the cash balance on the balance sheet each year agrees with:
A) the cash collections from sales in the projected income statement.
B) the cash provided by or used by operations on the projected statement of cash flows.
C) the net change in cash on the projected statement of cash flows.
D) the net change in working capital from period to period.
Q3) Financial ratio,percentage,and trend comparisons can be distorted by all of the following except:
A) aggressive revenue recognition practices.
B) the timing of asset purchases.
C) accounting for similar economic fundamentals in similar fashion.
D) the presence of nonrecurring items among the firms being analyzed.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Identify the types of firm-specific factors that increase a firm's nondiversifiable risk (systematic risk).Identify the types of firm-specific factors that increase a firm's diversifiable risk (idiosyncratic risk or nonsystematic risk).Why do models of risk-adjusted expected returns include no expected return premia for diversifiable risk?
Q2) A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.
Q3) 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%
Q4) Equity-based valuation models are based on all metrics except: A) dividends B) cash flow C) working capital D) earnings.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) The analyst can use expectations of the dividends to be paid to the investor or the free cash flows to be generated by the firm (that will ultimately be paid to the investor)as equivalent approaches to measure the ____________ expected payoffs to shareholders.
Q2) For most firms,______________________________ include cash and short-term investment securities,accounts receivable,inventory,property,plant and equipment,intangible assets and investments in affiliated companies.
Q3) The cash-flow-based valuation approach measures and values the cash flows that are "free" to be ________________________________________ unencumbered by necessary reinvestments in operating assets or required payments to debt holders.
Q4) Net cash flow from operations ________________ dividends equals_______________________
Q5) What is Houston's free cash flow for all debt and equity holders for year 2012?
A) $564
B) $399
C) $324
D) $202
Q6) Provide the rationale for using expected free cash flow in valuation.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows
Q2) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q3) At the beginning of 2012 investors had invested $125,000 of common equity in Jan Corp.and expect to earn a return of 15% per year.In addition,investors expect Jan Corp.to pay out 100% of income in dividends each year.Forecasts of Jan's net income are as follows:
2012 - $41,000
2013 - $35,400
2014 - $33,200
2015 and beyond - $25,000
Using this information,what is Jan's residual income valuation at the beginning of 2012?
A) $125,000
B) $184,600
C) $190,262
D) $260,415
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The risk of the firm increases the _____________________________________________.
Q2) Which of the following ratios give a perspective on risk in the capital structure?
A) Book value per share
B) Price/earnings ratio
C) Degree of financial leverage
D) Dividend yield
Q3) Valuation using market multiples captures:
A) absolute valuation per dollar of book value or per dollar of earnings.
B) dollar of book value or dollar of earnings per dollar of common equity.
C) relative valuation per dollar of book value or per dollar of earnings.
D) intrinsic valuation per dollar of book value or per dollar of earnings.
Q4) One problem with the price-earnings ratio commonly reported is that:
A) it divides share price, which reflects the present value of future earnings by historical earnings.
B) it divides share price, which reflects the present value of book value by historical earnings.
C) it does not take into consideration the present value of future earnings.
D) it is based on analysts' expectations.
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