Financial Statement Analysis
Exam Questions
Course Introduction
Financial Statement Analysis is a course designed to provide students with the tools and techniques necessary to evaluate and interpret financial statements for informed decision-making. The course covers the fundamentals of income statements, balance sheets, and cash flow statements, and delves into methods for assessing profitability, liquidity, solvency, and operational efficiency. Emphasis is placed on ratio analysis, trend analysis, and comparative analysis, as well as the impact of accounting choices and policies on financial results. By the end of the course, students will be equipped to critically analyze financial reports, assess the financial health of organizations, and make sound recommendations for management, investment, and lending decisions.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by J.
David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) The primary professional organization for those accountants working in industry is the:
A)AAA
B)AICPA
C)IIA
D)IMA
Answer: D
Q2) Of the following, the most important objective for financial reporting is to provide information useful for:
A)Predicting cash flows.
B)Determining taxable income.
C)Providing accountability.
D)Increasing future profits.
Answer: A
Q3) What is the SEC and how is it involved with accounting standard setting?
Answer: The Securities and Exchange Commission is a federal agency that has the authority to set accounting standards. However, the SEC has always delegated the task to a private sector body, such as the current FASB. The SEC's 10K & 10Q filing requirements call for more detailed disclosures than those required by GAAP.
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Permanent accounts would not include:
A)Interest expense.
B)Wages payable.
C)Prepaid rent.
D)Unearned revenues.
Answer: A
Q2) When converting an income statement from a cash basis to an accrual basis, cash received for services:
A)Exceed service revenue.
B)May exceed or be less than service revenue.
C)Is less than service revenue.
D)Equals service revenue.
Answer: B
Q3) Based on the information presented above, prepare the 12/31/09 Balance Sheet for Krafty Foods.
Answer: 11ea92df_7311_0975_9bd4_df7345ae20df_TB5911_00
Q4) What is an accrued liability?
Answer: An accrued liability results from an expense being incurred prior to cash payment. Examples include interest and wages payable.
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Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Compute the return on shareholders' equity ratio for Marjoram Company.
Answer: $73,080 / ($70,000 + 157,000) = 32% Return on shareholders' equity
Q2) Briefly explain what is meant by a subsequent event. Give two examples of subsequent events.
Answer: A subsequent event is a significant event that takes place after an entity's fiscal year-end but before the financial statements have been issued. Examples include issuance of debt or equity securities, mergers, discontinued operations, and the resolution of uncertainties that existed at the balance sheet date.
Q3) The current ratio is given by:
A)Current assets divided by non-current assets.
B)Current assets divided by total assets.
C)Current assets divided by current liabilities.
D)Current assets divided by total liabilities. Answer: C
Q4) Altoid Co.'s long term debt-to-equity ratio
Answer: Long term debt-to-equity $600/$1,150 = .52
Q5) Compute the acid-test ratio for Marjoram Company.
Answer: ($19,000 + 35,000 + 48,400) /$108,400 = .94 Acid-test ratio
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Chapter 4: The Income Statement and Statement of Cash
Flows
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Q1) Reconciliation between net income and comprehensive income would include:
A)Unrealized losses but not unrealized gains on available for sale securities.
B)Unrealized gains but not unrealized losses on available for sale securities.
C)Unrealized losses and unrealized gains on available for sale securities.
D)Neither unrealized losses nor unrealized gains on available for sale securities.
Q2) Harley Davis Inc. started its unicycle manufacturing business in 2007 and acquired $600,000 of equipment at the beginning of 2007. It decided to use the double-declining balance (DDB) depreciation on its equipment with no residual value and a 10-year useful life. In 2009 it changed to the straight-line depreciation method. Depreciation computed for 2007-8 is presented below: In 2009, Harley Davis would report depreciation of:
A)$96,000.
B)$38,400.
C)$60,000.
D)$48,000.
Q3) Required: Prepare a multiple-step income statement with earnings per share disclosure.
Q4) Required: Prepare a single-step income statement with basic earnings per share disclosure.
Page 6
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Chapter 5: Income Measurement
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Q1) Hulkster's 2009 average collection period is:
A)73 days.
B)104 days.
C)109 days.
D)128 days.Average collection period = 365/5.0 = 73 days
Q2) The following footnote appeared in a recent annual report to stockholders of Sprint Corporation: "Certain Wireless activation fees associated with unbundled sales continue to be deferred and amortized over the average life of the subscriber. Certain Local installation fees are deferred and amortized over the average life of the customer."
Briefly explain why Sprint recognizes this type of revenue as it does.
Q3) Assuming BCC uses the percentage-of-completion method of recognition the gross profit recognized in 2009 would be (rounded to the nearest thousand):
A)$ 6,000.
B)$39,000.
C)$42,000.
D)$45,000.2009: Total profit = $450,000 ($180,000 + 195,000) = $75,000 33,159 = $41,841 or $42,000 rounded.
Q4) Required: Compute the receivables turnover ratio for 2008.
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Page 7
Chapter 6: Time Value of Money Concepts
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Q1) On January 1, 2009, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2012. You are eager to earn 3%. What is the present value of the investment on January 1, 2009?
A)$28,286.
B)$25,886.
C)$26,662.
D)$27,300.PVA = $10,000 x (5.41719* - 2.82861**) = $25,886 *PVA of $1: n=6; i=3% **PVA of $1: n=3; i=3%
Q2) First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:
A)Multiply $10,500 by the present value of 1.
B)Divide $10,500 by the future value of an ordinary annuity of 1.
C)Divide $10,500 by the present value of an annuity due of 1.
D)Multiply $10,500 by the present value of an ordinary annuity of 1.
Q3) Prepare a time diagram for the future value an ordinary annuity with three payments of $300. Be sure to indicate the periods in which interest is added.
Q4) Provide two examples of the use of present value techniques in accounting.
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Chapter 7: Cash and Receivables
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Q1) In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges.
A)True
B)False
Q2) At December 31, 2008, Gill Co reported accounts receivable of $216,000 and an allowance for uncollectible accounts of $8,400. During 2009, accounts receivable increased by $22,000 after a $7,800 write-off of bad debts. An analysis of Gill Co.'s December 31, 2009, accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. Bad debt expense for 2009 would be:
A)$6,540.
B)$7,800.
C)$7,140.
D)None of these is correct.
Q3) A company's investment in receivables is affected by several related variables. Give an example of this interrelationship.
Q4) Is there any evidence in HP's disclosures above that are consistent with earnings management?
Q5) Describe some key elements of an internal control system for cash.
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Chapter 8: Inventories: Measurement
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Q1) It is the end of the accounting period, and your boss asks you to help determine the inventory balance to place in the company's balance sheet. Explain which physical quantities of inventory that you will include, and which you will exclude.
Q2) Ending inventory using the FIFO method is:
A)$ 650.
B)$1,000.
C)$ 707.
D)$ 600.10 units $60 = $600.
Q3) Required: Compute the ending inventory and cost of goods sold assuming Denver uses average cost and a periodic inventory system.
Q4) The use of LIFO in accounting for a firm's inventory:
A)Usually matches the physical flow of goods through the business.
B)Is usually used for internal management purposes.
C)Usually provides a better match of expenses with revenues.
D)None of these is correct.
Q5) Required: Compute the ending inventory and cost of goods sold assuming Denver uses LIFO and a periodic inventory system.
Q6) Briefly explain the advantages of dollar-value LIFO (DVL).
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Chapter 9: Inventories: Additional Issues
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Q1) Net realizable value is selling price less costs of completion and disposal.
A)True
B)False
Q2) In applying LCM, market cannot be:
A)Less than net realizable value minus a normal profit margin.
B)Net realizable value less reasonable completion and disposal costs.
C)Greater than net realizable value reduced by an allowance for normal profit margin.
D)Less than cost.
Q3) For a change from the average cost method to FIFO, the current year's income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.
A)True
B)False
Q4) Briefly explain what is meant by "market" in the lower-of-cost-or-market (LCM) approach.
Q5) The gross profit method and retail method are both ways of estimating ending inventory. Briefly explain how the two methods differ.
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Sales tax paid on equipment acquired for use in the business is not capitalized.
A)True
B)False
Q2) In a nonmonetary exchange of equipment, if the exchange has commercial substance, a gain is recognized if:
A)The fair value of the equipment received exceeds the book value of the equipment received.
B)The book value of the equipment received exceeds the fair value of the equipment surrendered.
C)The fair value of the equipment surrendered exceeds the book value of the equipment surrendered.
D)None of these is correct.
Q3) Amortization of capitalized computer software costs is:
A)Either the percentage-of-revenue method or the straight-line method at the company's option.
B)The greater of the percentage-of-revenue method or the straight-line method.
C)The lesser of the percentage-of-revenue method or the straight-line method.
D)Based on neither the percentage-of-revenue nor the straight-line method.
Q4) How are donated assets recorded?
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Chapter 11: Operational Assets: Utilization and Impairment
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Sample Questions
Q1) In January of 2009, Vega Corporation purchased a patent at a cost of $200,000. Legal and filing fees of $50,000 were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for all intangible assets. In 2012, Vega spent $40,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2012 related to the patent should be:
A)$ 40,000.
B)$ 65,000.
C)$215,000.
D)$ 25,000.
Q2) Jennings Advertising Inc. reported the following in its December 31, 2009, balance sheet: In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 10% of cost. What is the average age of the equipment owned by Jennings?
A)2.7 years
B)3 years
C)7 years
D)7.3 years
Q3) Briefly explain how a change in depreciation method is accounted for.
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Page 13
Chapter 12: Investments
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Sample Questions
Q1) All securities considered available for sale should be reported as current assets in a classified balance sheet.
A)True
B)False
Q2) If Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert would:
A)not reclassify the investment, as original classifications are irrevocable.
B)reclassify the investment as held to maturity and immediately recognize in net income any unrealized gain or loss on the reclassification date.
C)reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization.
D)need to restate earnings, as the original classification was in error.
Q3) The income statement reports changes in fair value for which type of securities?
A)Securities reported under the equity method.
B)Trading securities
C)Held-to-maturity securities.
D)Securities available for sale.
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Chapter 13: Current Liabilities and Contingencies
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Sample Questions
Q1) What was General's coupon promotion expense in 2009?
A)$30.0 million.
B)$21.0 million.
C)$13.5 million.
D)$7.5 million.100 million $.30 70% = $21 million
Q2) Stern Corporation borrowed $10 million cash on September 1, 2009, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year.
Required:
1. Prepare all journal entries from issuance to maturity for Stern Corporation.
2. Prepare all journal entries from issuance to maturity for Second State Bank.
Q3) The accounting concept that requires recognition of a liability for customer premium offers is
A)Periodicity.
B)Conservatism.
C)Historical cost.
D)The matching principle.
Q4) How are customer advances and refundable deposits similar and yet different?
Q5) Define a loss contingency and give two examples that almost always are accrued.
Page 15
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Chapter 14: Bonds and Long-Term Notes
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Q1) Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.
A)True
B)False
Q2) On June 30, 2009, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2009, and mature on June 30, 2016. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2009?
A)$32,000
B)$40,000
C)$46,000
D)$60,000 5% $9.2 million = $460,000
4% $10 million = $400,000
$460,000 400,000 =$60,000
Q3) The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.
A)True
B)False
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Page 16
Chapter 15: Leases
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Q1) Which of the following statements regarding guaranteed residual values is true for the lessee?
A)The asset and liability at the inception of the lease should be increased by the amount of the residual value.
B)The asset and liability at the inception of the lease should be decreased by the amount of the residual value.
C)The asset and liability at the inception of the lease should be increased by the present value of the residual value.
D)The asset and liability at the inception of the lease should be decreased by the present value of the residual value.
Q2) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to classifying a lease as a capital lease?
Q3) Of the four criteria for a capital lease, the one that most often is the decisive criteria is:
A)The 75% of economic life test.
B)The transfer of title.
C)The 90% of fair value test.
D)The bargain purchase option.
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Chapter 16: Accounting for Income Taxes
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Q1) In 2009, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2009, Magic Table Inc incurs:
A)An increase in a deferred tax asset.
B)A decrease in a deferred tax asset.
C)An increase in a deferred tax liability.
D)A decrease in a deferred tax liability.
Q2) Will LMC report $819.9 million as a liability in its balance sheet at December 31, 2009? Explain.
Q3) When a new tax rate is enacted, what adjustment, if any, is made to the retained earnings account as a result of the change?
Q4) Of the following temporary differences, which one ordinarily creates a deferred tax asset?
A)completed-contract method for long-term construction contracts.
B)installment sales.
C)accrued warranty expense.
D)depreciation.
Q5) What disclosures for deferred taxes, pertaining to the income statement, are required by SFAS 109?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) Lasagna Corporation has a defined benefit pension plan. Lasagna received the following information for the current calendar year: The expected long-term return on plan assets is 10%. There were no other relevant data for the year.
Required:
1) Determine Lasagna Corporation's pension expense for the year.
2) Prepare the journal entries to record the pension expense and funding for the year.
Projected benefit obligation
\( \begin{array}{lr}\text { Balance, January 1 } & \$ 100,000,000 \\ \text { Service cost } & 18,000,000 \\ \text { Interest cost } & 10,000,000 \\ \text { Benefits paid } & (8,000,000)
\\ \text { Balance, December 31 } & \$ 120,000,000\end{array} \)
Plan assets
\( \begin{array}{lr}\text { Balance, January 1 } & \$ 70,000,000 \\ \text { Actual return on plan assets } & 7,000,000 \\ \text { Contribution } & 16,000,000 \\ \text { Benefits paid } & (8,000,000) \\ \text { Balance, December 31 } & \$ 85,000,000\end{array} \)
Q2) What are the five components of postretirement benefit expense?
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Page 19
Chapter 18: Shareholders Equity
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Q1) During the current year JET Industries issued 5 million of its $1 par common shares to its underwriters for $25,000,000 less promotional and accounting services of $500,000 to effect the issue.
Required:
Prepare the journal entry to record the issuance of the shares.
Q2) On October 1, 2009, Chief Corporation declared and issued a 10% stock dividend. Prior to this date, Chief had 80,000 shares of $5 par common stock outstanding. The market value of Chief Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief's retained earnings will:
A)Decrease by $80,000.
B)Not change.
C)Decrease by $40,000.
D)Increase by $80,000.
Q3) When a property dividend is declared, the reduction in retained earnings is for:
A)The book value of the property on the date of declaration.
B)The book value of the property on the date of distribution.
C)The fair value of the property on the date of distribution.
D)The fair value of the property on the date of declaration.
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Page 20
Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Stock options, rights, and warrants are different from convertible securities in that they:
A)Typically increase cash upon exercise.
B)Usually reduce total assets upon exercise.
C)Often reduce liabilities upon exercise.
D)Normally increase retained earnings upon exercise.
Q2) If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of the bond discount:
A)Will have no effect.
B)Will decrease the numerator.
C)Will increase the numerator.
D)May increase or decrease the numerator, depending on the amortization method used.
Q3) All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?
A)Decrease.
B)No effect if the shares are held as treasury shares.
C)Increase only if the shares are considered to be retired.
D)Increase.
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Chapter 20: Accounting Changes
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Q1) All changes in estimate are accounted for retrospectively.
A)True
B)False
Q2) If undetected, what is the effect of this error on Berkshire's 12/31/08 balance sheet?
A)Assets understated by $600,000 and shareholders' equity understated by $600,000.
B)Assets understated by $420,000 and shareholders' equity understated by $420,000.
C)Assets understated by $600,000, liabilities understated by $180,000 and shareholders' equity understated by $420,000.
D)None of these is correct.
Q3) Which of the following changes should be accounted for using the retrospective approach?
A)A change in the estimated useful life of a depreciable asset.
B)A change from straight-line to double-declining-balance depreciation.
C)A change from percentage-of-completion to the completed contract method.
D)A change to LIFO from FIFO inventory costing.
Q4) How may accounting changes detract from accounting information?
Q5) How are accounting errors treated?
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Chapter 21: The Statement of Cash Flows
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Q1) In a statement of cash flows in which operating activities are reported by the direct method, which of the following would increase reported cash flows from operating activities?
A)gain on sale of equipment.
B)interest revenue.
C)gain on early extinguishment of bonds.
D)proceeds from sale of land.The two gains are not cash flows.Proceeds from the sale of land are reported as a component of investing activities.
Q2) Which of the following never requires an outflow of cash?
A)Early extinguishment of debt.
B)Retirement of common stock.
C)Payment of dividends.
D)Amortization of patent.
Q3) Which of the following causes a change in cash?
A)Accrual of interest payable.
B)Recording of depreciation expense.
C)Write-off of an uncollectible account.
D)Payment of a cash dividend declared in the previous fiscal year.
Q4) Is depreciation a source of cash? Explain.
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Chapter 22: Appendix a Derivatives
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Q1) What is a futures contract? A financial futures contract? Provide an example of each.
Q2) An option on a financial instrument-say a Treasury note-gives its holder the right either to buy or to sell the Treasury note at a specified price and within a given time period.
A)True
B)False
Q3) The effectiveness of a hedge is influenced by the closeness of the match between the item being hedged and the financial instrument chosen as a hedge.
A)True
B)False
Q4) If a derivative is not designated as a hedging instrument, or doesn't qualify as one, any gain or loss from fair value changes is not recognized immediately in earnings. A)True
B)False
Q5) How are derivatives reported on the balance sheet? Why?
Q6) How is a gain or a loss from a cash flow hedge reported when it initially occurs? When is it reported in the income statement?
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