Financial Statement Analysis
Practice Exam
Course Introduction
Financial Statement Analysis introduces students to the techniques and tools needed to evaluate the financial health and performance of businesses using their published financial reports. The course covers fundamental concepts such as ratio analysis, common-size statements, trend analysis, and the interpretation of income statements, balance sheets, and cash flow statements. Students learn to assess profitability, liquidity, solvency, and operational efficiency, while also exploring issues like earnings management and the impact of accounting choices on reported results. By the end of the course, students are equipped to make informed judgments about a companys financial position and future prospects, skills essential for careers in finance, accounting, and business management.
Recommended Textbook
Financial Accounting 2nd Edition by J. David Spiceland
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Page 2
Chapter 1: Accounting Information and Decision Making
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Sample Questions
Q1) Transactions of a company involving external sources of funding are referred to as:
A)Investing activities.
B)Financing activities.
C)External activities.
D)Operating activities.
Answer: B
Q2) The assumption that a business can continue to remain in operation into the future is the:
A)Monetary unit assumption.
B)Periodicity assumption.
C)Economic entity assumption.
D)Going concern assumption.
Answer: D
Q3) An alternative form of the accounting equation is:
A)Net Income = Revenues - Expenses.
B)Stockholders' Equity = Assets + Liabilities.
C)Assets = Liabilities - Stockholders' Equity.
D)Assets - Liabilities = Stockholders' Equity.
Answer: D
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Page 3
Chapter 2: The Accounting Information System
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Sample Questions
Q1) A journal provides a chronological record of all transactions affecting a firm.
A)True
B)False
Answer: True
Q2) Providing services to customers is recorded with a debit to Service Revenue.
A)True
B)False
Answer: False
Q3) Liability accounts increase with a credit and decrease with a debit.
A)True
B)False
Answer: True
Q4) Which of the following is not part of measuring external transactions?
A)Using source documents to analyze accounts affected.
B)Recording transactions.
C)Making payments on all amounts owed.
D)Analyzing transactions for their effect on the accounting equation.
Answer: C
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Chapter 3: The Financial Reporting Process
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Sample Questions
Q1) The adjusting entry for an accrued revenue always includes a debit to a liability account and a credit to a revenue account.
A)True
B)False
Answer: False
Q2) During the year,Cheng Company paid salaries of $24,000.In addition,$8,000 in salaries has accrued by the end of the year but has not been paid.The year-end adjusting entry would include which one of the following?
A)Debit to Salaries Expense for $32,000.
B)Credit to Salaries Expense of $8,000.
C)Debit to Salaries Payable for $24,000.
D)Credit to Salaries Payable for $8,000.
Answer: D
Q3) Which of the following accounts will NOT be involved in closing entries?
A)Prepaid Insurance.
B)Service Revenue.
C)Utilities Expense.
D)Retained Earnings.
Answer: A
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Page 5
Chapter 4: Cash and Internal Controls
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Sample Questions
Q1) The act of collusion refers to:
A)Top management and lower-level employees working together to share information necessary for effective internal controls.
B)Two or more people acting in coordination to circumvent internal controls.
C)Management working with an auditor to prevent occupational fraud.
D)Middle-level managers taking full responsibility for effective internal controls.
Q2) Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.
A)True
B)False
Q3) An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check. This is an example of a timing difference.
A)True
B)False
Q4) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category.
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6
Chapter 5: Receivables and Sales
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Q1) Under the direct write-off method,recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.
A)True
B)False
Q2) Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts.Which of the two is acceptable under financial accounting rules?
Q3) Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?
A)Allowance method.
B)Direct write-off method.
C)Aging method.
D)Percentage-of-receivables method.
Q4) A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances.
A)True
B)False
Q5) Explain how companies account for uncollectible accounts receivable (bad debts).
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Chapter 6: Inventory and Cost of Goods Sold
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Sample Questions
Q1) Consider the following inventory data:
\[\begin{array} { l r }
\text { Beginning inventory } & \$ 150,000 \\
\text { Ending inventory } & 100,000 \\
\text { Purchases } & 310,000
\end{array}\]
What is the average days in inventory for the year?
A)126.7 days.
B)101.4 days.
C)152.0 days.
D)111.7 days.
Q2) For most companies,actual physical flow of their inventory follows LIFO.
A)True
B)False
Q3) Which inventory method is better described as having an income statement focus and why is it considered as such?
A)FIFO; better approximates the value of ending inventory.
B)LIFO; better approximates the value of ending inventory.
C)LIFO; better approximates inventory cost necessary to generate revenue.
D)FIFO; better approximates inventory cost necessary to generate revenue.
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Chapter 7: Long-Term Assets
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Sample Questions
Q1) At the beginning of the year,Big Time Tires acquired 100% of the common stock of Discount Tires.The purchase price allocation included the following items: $800,000,patent; $300,000,trademark considered to have an indefinite useful life; and $2 million,goodwill.Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method,no residual value,and a five-year service life.What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?
Q2) Using the straight-line method,the book value at December 31,2012 would be:
A)$44,000.
B)$49,000.
C)$55,000.
D)$60,000.
Q3) The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation,while maintaining the original cost of each asset in the accounting records.
A)True
B)False
Q4) Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately?
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Chapter 8: Current Liabilities
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Sample Questions
Q1) The Pita Pit borrowed $100,000 on November 1,2012,and signed a six-month note bearing interest at 12%.Principal and interest are payable in full at maturity on May 1,2013.In connection with this note,The Pita Pit should report interest expense in 2013 for the amount of:
A)$0.
B)$4,000.
C)$2,000.
D)$6,000.
Q2) During January,Deluxe Printing pays employee salaries of $1 million.Withholdings in January are $76,500 for the employee portion of FICA,$210,000 for federal and state income tax,and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue Shield).The company incurs an additional $38,000 for federal and state unemployment tax and $30,000 for the employer portion of health insurance.
1.Record the employee salary expense,withholdings,and salaries payable.
2.Record the employer-provided fringe benefits.
3.Record the employer payroll taxes.
Q3) Explain why we record interest in the period in which we incur it rather than in the period we pay it.
Q4) Why is it important to distinguish between current and long-term liabilities?
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Chapter 9: Long-Term Liabilities
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Sample Questions
Q1) THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/12 and retires them.What gain or loss,if any,would THA record on this date?
A)No gain or loss.
B)$370 gain.
C)$4,000 gain.
D)$1,242 loss.
Q2) An amortization schedule provides a summary of the cash interest payments,interest expense,and changes in carrying value for each period.
A)True
B)False
Q3) Which of the following is true for bonds issued at a discount?
A)The stated interest rate is greater than the market interest rate.
B)The market interest rate is greater than the stated interest rate.
C)The stated interest rate and the market interest rate are equal.
D)The stated interest rate and the market interest rate are unrelated.
Q4) Pizza Pier retires its 7% bonds for $70,000 before their scheduled maturity.At the time,the bonds have a carrying value of $74,937.Record the early retirement of the bonds.
Q5) Why do some companies issue bonds rather than borrow money directly from a bank?
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Chapter 10: Stockholders Equity
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Sample Questions
Q1) Retained Earnings is the amount stockholders have invested in the company.
A)True
B)False
Q2) Treasury stock is a contra-equity account since treasury stock increases total stockholders' equity..
A)True
B)False
Q3) Which of the following stages of equity financing comes last in the traditional order of progression?
A)Investment by friends and family of the founders.
B)Investment by the founders of the business.
C)Initial public offering (IPO).
D)Outside investment by "angel" investors and venture capital firms.
Q4) We compute the return on equity ratio by dividing net income by ending stockholders' equity.
A)True
B)False
Q5) Authorized stock is the number of shares that have been sold to investors.
A)True
B)False
Page 12
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Chapter 11: Statement of Cash Flows
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Sample Questions
Q1) During 2012,Victoria Group: (1)received cash of $5,000 billed to a customer in 2011; (2)earned $20,000 of net income; (3)paid interest of $6,000 on a corporate bond issued; (4)paid dividends of $8,000 to its stockholders; (5)borrowed $40,000 from a local bank; and (6)purchased its own shares of common stock for $10,000.What is Victoria Group's cash flow from financing activities in 2012?
A.$40,000.
B.$30,000.
C.$22,000.
D.$16,000.
Q2) The indirect method begins with net income,while the direct method considers each of the individual accounts that make up net income.
A)True
B)False
Q3) In the operating activities section of the statement of cash flows,we start with net income when using:
A)the direct method.
B)the indirect method.
C)both the direct and the indirect method.
D)neither the direct nor the indirect method.
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Page 13
Chapter 12: Financial Statement Analysis
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Sample Questions
Q1) The current ratio is calculated as:
A)Current assets divided by noncurrent assets.
B)Current assets divided by current liabilities.
C)Current liabilities divided by noncurrent liabilities.
D)Current liabilities divided by current assets.
Q2) When using a company's current earnings to estimate future earnings performance,investors normally should exclude discontinued operations and extraordinary items.
A)True
B)False
Q3) An extraordinary item must meet which of the following criteria?
A)Unusual in nature.
B)Infrequent in occurrence.
C)Unusual in nature and infrequent in occurrence.
D)Unusual in nature or infrequent in occurrence.
Q4) Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.
A)True
B)False
Page 14
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Chapter 13: Time Value of Money
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Sample Questions
Q1) Below are excerpts from interest tables for 8% interest.
\(\begin{array} { c c c c c }
& \underline { 1 } & \underline { 2 } & \underline { 3 } & \underline { 4 } \\
1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \\
2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \\
3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \\
4 & 4.5061 & 0.73503 & 1.36049 & 3.31213
\end{array}\)
Column 2 is an interest table for the:
A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.
Q2) What is the value today of receiving $2,500 at the end of three years,assuming an interest rate of 9% compounded annually?
A)$1,984.
B)$1,930.
C)$2,104.
D)$3,238.
Q3) Briefly describe the difference between simple interest and compound interest.
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Chapter 14: Investments
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Sample Questions
Q1) Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.
A)True
B)False
Q2) The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends.
A)True
B)False
Q3) When the investor has insignificant influence,the receipt of cash dividends is recorded as dividend revenue.
A)True
B)False
Q4) Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories.What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?
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Page 16
Chapter 15: International Financial Reporting Standards
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Q1) By late 2007,over 100 jurisdictions,including China,Australia,and all of the countries in the European Union (EU),either require or permit the use of IFRS.
A)True
B)False
Q2) Which of the following characteristics of a country most likely affects the extent of companies' financial disclosure practices?
A)Inflation.
B)Tax laws.
C)Population.
D)Culture.
Q3) Suppose a severe storm floods a company's headquarters,causing damages to the building of $300,000 and destruction of inventory of $200,000.Because of the unusual nature of this event,the company had no flood insurance to cover these losses.Under IFRS,how much would the company report as an extraordinary loss in the current year's income statement?
A)$0.
B)$200,000.
C)$300,000.
D)$500,000.
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