Financial Statement Analysis
Midterm Exam
Course Introduction
Financial Statement Analysis is a comprehensive course designed to equip students with the skills necessary to evaluate and interpret the financial performance and position of businesses through their published financial statements. The course covers a range of analytical tools and techniques, including ratio analysis, trend analysis, and cash flow analysis, enabling students to assess profitability, liquidity, solvency, and operational efficiency. Emphasis is placed on understanding the principles behind financial reporting, recognizing potential limitations of accounting data, and making informed decisions based on financial analysis. Real-world case studies and hands-on exercises offer practical experience in applying these skills within various industries and business contexts.
Recommended Textbook
Financial Accounting 9th Edition by Walter T. Harrison
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Page 2
Chapter 1: The Financial Statements
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Q1) Refer to Exhibit 1.5-1.What is the Accumulated Depreciation for Buildings on December 31, 2012?
A) $12,000
B) $51,000
C) $63,000
D) $114,000
Answer: A
Q2) Which of the following is a correct statement about long-term assets?
A) Accumulated depreciation increases the cost of property, plant, and equipment on the balance sheet.
B) Intangibles are long-term assets with no physical form.
C) Long-term investments can never be sold by the company.
D) Other long-term assets include accumulated depreciation.
Answer: B
Q3) Generally, three factors influence business and accounting decisions:
A) operating, investing, and financing activities.
B) assets, liabilities, and equity.
C) economic, legal, and ethical.
D) revenues, expenses, and dividends.
Answer: C
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Chapter 2: Transaction Analysis
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Sample Questions
Q1) Cash dividends paid to stockholders will:
A) increase assets and decrease liabilities.
B) increase assets and increase liabilities.
C) have no effect on stockholders' equity or revenues.
D) decrease assets and decrease stockholders' equity.
Answer: D
Q2) The left side of a T-account is always the:
A) increase side.
B) decrease side.
C) debit side.
D) credit side.
Answer: C
Q3) Which error will be uncovered by a trial balance?
A) The bookkeeper recorded the same journal entry three times.
B) The bookkeeper forgot to record a journal entry for a large amount.
C) The bookkeeper recorded both the debit and credit of a journal entry as $200 instead of $700.
D) The bookkeeper recorded a journal entry with a debit of $400 and a credit of $930.
Answer: D
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Page 4
Chapter 3: Accrual Accounting Income
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Q1) Accounts Receivable and Common Stock are accounts that need to be adjusted at the end of the period.
A)True
B)False
Answer: False
Q2) The method of accounting that records revenues when the cash is received and expenses as they are paid is the:
A) deferral method.
B) cash method.
C) accrual method.
D) hybrid method.
Answer: B
Q3) Liquidity measures how quickly an item can be converted into cash.
A)True
B)False
Answer: True
Q4) Under cash-basis accounting, a company will record the usage of prepaid rent.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Internal Control Cash
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Sample
Questions
Q1) Use the information below to prepare a bank reconciliation for Doggy Day Care Company for the month of January.
Outstanding checks as of January 30 amounted to $2,704.
Deposits in transit as of January 30 amounted to $1,879.
The ending balance per the January bank statement is $36,482.
The bank statement shows that Doggy Day Care earned $150 of interest on its bank balance for the month of January.
The bank mistakenly recorded a deposit of $2,800 as $280 on January 15.
The Doggy Day Care pays its insurance of $986 by EFT.
Bank collected a note, for $3,000.
There was a NSF check on the bank statement for $368
The ending cash balance per the books for January before any adjustments was $36,381.
Q2) When preparing a bank reconciliation, which of the following items should be added to the book balance?
A) EFT receipts
B) Deposits in transit
C) Collection items
D) Both EFT receipts and collection items
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Page 6
Chapter 5: Short-Term Investments Receivables
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Q1) The Last Bank lends money to a customer on a six month note. The bank accrues interest on the note at the end of the year. The journal entry on the books of the bank would include a:
A) debit to Cash and a credit to Interest Revenue.
B) debit to Cash and a credit to Interest Payable.
C) debit to Interest Receivable and a credit to Interest Revenue.
D) debit to Interest Revenue and a credit to Interest Receivable.
Q2) An unrealized gain occurs when a company sells a trading security. A)True
B)False
Q3) There are two parties to a note and:
A) the creditor has a note receivable and the debtor has a note payable.
B) the creditor has a note payable and the debtor has a note receivable.
C) the creditor and debtor both have notes receivable.
D) the creditor and debtor both have notes payable.
Q4) Accounts receivable are shown on the balance sheet at their net realizable value. A)True
B)False
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Page 7
Chapter 6: Inventory Cost of Goods Sold
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Sample Questions
Q1) The financial statements of a merchandising company will show:
A) the same accounts as the financial statements of a service company.
B) gross profit after net income on the income statement.
C) inventory as a current asset on the balance sheet.
D) cost of goods sold as an operating expense on the income statement.
Q2) The cost of the inventory that the business has sold to customers is called:
A) inventory.
B) cost of goods sold.
C) purchases.
D) gross profit.
Q3) Operating expenses are subtracted from sales to determine gross profit.
A)True
B)False
Q4) A gross profit margin of 30% means that:
A) for each dollar of sales, the company has a cost of goods sold of seventy cents.
B) for each dollar of sales, the company has a gross profit of thirty cents.
C) for each dollar of sales, the company has a cost of goods sold of thirty cents.
D) both A and B are true.
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Page 8
Chapter 7: Plant Assets, Natural Resources, Intangibles
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Q1) In 2012, First Company purchased Second Company for $16,000,000 cash. At the time of purchase Second Company had $18,500,000 in assets and liabilities of $11,000,000. The 2012 balance sheet for First Company should show goodwill of:
A) $0.
B) $3,500,000.
C) $8,500,000.
D) $10,000,000.
Q2) Book value equals the cost of the asset less the total accumulated depreciation. A)True
B)False
Q3) It is illegal to use one method of depreciation for financial purposes and another method for tax purposes.
A)True B)False
Q4) Intangibles can have finite or infinite lives. A)True B)False
Q5) Determine the cost of the dump truck, based upon the following data:
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Chapter 8: Long-Term Investments the Time Value of Money
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Q1) When the investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is shown on the balance sheet as:
A) short-term.
B) long-term.
C) equity.
D) either long-term or short-term.
Q2) When an investor owns between 20% and 50% of the outstanding stock of another company, the ________ method is used to account for stock investments.
A) market value
B) equity
C) consolidated
D) historical cost.
Q3) Bonds of publicly traded companies are traded similarly to stocks.
A)True
B)False
Q4) Dividend revenue is recorded in a stock dividend.
A)True
B)False
10
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Chapter 9: Liabilities
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Q1) Which of the following items would not be included if a contingent liability were disclosed in the financial statements?
A) The nature of the item
B) Management's expected outcome
C) The amount of the contingency, if known
D) A numerical probability of the expected loss
Q2) If, as part of the accounting for a lease, the company debits an asset and credits a liability, then the lease must be a(n):
A) purchased lease.
B) operating lease.
C) cancelable lease.
D) capital lease.
Q3) Which of the liability accounts below is usually NOT an accrued liability:
A) interest payable.
B) wages payable.
C) taxes payable.
D) notes payable.
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Chapter 10: Stockholders Equity
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Q1) Ludington Corporation has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 25,000 shares of $1 par value common stock outstanding on December 31, 2011 and December 31, 2012. The board of directors declared and paid a $2,000 dividend in 2011. In 2012, $12,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2012?
A) $1,000
B) $3,000
C) $8,000
D) $12,000
Q2) Preferred stock that requires the company to redeem the stock at a set price is called:
A) preferred stock.
B) convertible preferred stock.
C) redeemable preferred stock.
D) callable preferred stock.
Q3) A Loss on Issue of Common Stock indicates that the stock was sold for less than its par value.
A)True
B)False
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Chapter 11: The Income Statement, the Statement of
Comprehensive Income, the Statement of Stockholders Equity
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Q1) Extraordinary gains and losses are shown "net of tax" on the income statement.
A)True
B)False
Q2) A company's change in total stockholders' equity from all sources other than from the owners of the business is:
A) comprehensive income.
B) earnings per share.
C) earnings quality.
D) investment capitalization.
Q3) Prepare the journal entries for the following transactions:
1. On April 12, 2012 the company discovered that Depreciation Expense on equipment for the year ended December 31, 2011 had been recorded twice, for a total amount of $120,000 instead of $60,000 (the correct amount).
2. On August 31, 2012, the company received a check from the IRS for $18,000. The company discovered that the 2011 income tax expense was recorded as $42,000, but the correct amount was $24,000.
3. On November 18, 2012, the company discovered that the July 2012 utilities bill for $3,800 had been charged to the Wages Expense account in error.
Page 13
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Chapter 12: The Statement of Cash Flows
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Q1) The statement of cash flows classifies cash receipts and payments as operating, nonoperating, and financial activities.
A)True
B)False
Q2) When preparing a statement of cash flows, cash equivalents are subtracted from cash in order to calculate the net change in cash during a period.
A)True
B)False
Q3) Land was purchased with the proceeds from the issuance of common stock. This transaction would be reported on the statement of cash flows as a(n):
A) operating activity.
B) investing activity.
C) financing activity.
D) noncash investing and financing activity.
Q4) The indirect method of preparing the statement of cash flows provides the clearest picture of the sources and uses of cash from investing activities.
A)True
B)False
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Chapter 13: Financial Statement Analysis
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Q1) If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base), an increase in the figure for current assets from 56% to 60% would always mean that:
A) the dollar amount of noncurrent assets has increased.
B) the dollar amount of total assets has increased.
C) total current assets have increased as a percentage of total assets.
D) the dollar amount of current assets has increased.
Q2) In the statement of cash flows, an increase in new borrowing, exceeding the payoff of long-term debt, is a sign of weakness.
A)True
B)False
Q3) As another analytical tool, analysts rely on the statement of cash flows as a predictor of eventual success for a given company.
A)True
B)False
Q4) Common-size financial statements report only dollar amounts.
A)True
B)False
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