Financial Statement Analysis
Study Guide Questions
Course Introduction
Financial Statement Analysis is a course that equips students with the skills to interpret and evaluate financial statements, enabling informed decision-making in business and investment contexts. The course covers core concepts such as income statements, balance sheets, and cash flow statements, emphasizing techniques to assess a firms profitability, liquidity, solvency, and operational efficiency. Students learn to use various analytical tools including ratio analysis, trend analysis, and benchmarking to uncover underlying financial health and identify red flags. Case studies and real-world examples provide practical insights into how financial statement analysis informs valuation, risk assessment, credit analysis, and strategic planning.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume II by Kin Lo George Fisher
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Chapter 11: Current Liabilities and Contingencies
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Sample Questions
Q1) Which of the following characteristic is required for a "liability" under IFRS Framework?
A)Expected to result in the inflow of economic benefits.
B)Expected to result in the inflow of economic benefits that are measurable.
C)Expected to result in the outflow of resources embodying economic benefits.
D)Expected to result in the outflow of economic benefits that are virtually certain.
Q2) Which statement about contingencies is correct?
A)If the future outcome is possible and reliably measurable,a provision is recorded.
B)If the future outcome is possible,but reliably measurable,no action is required.
C)If the future outcome is possible,but not reliably measurable,no action is required.
D)If the future outcome is possible,but reliably measurable,disclosure is required.
Q3) List three characteristics of a franchise arrangement.
Q4) Explain the meaning of the following terms: "financial guarantee" contract and "onerous" contract
Q5) Explain the difference between "probable," "possible," and "remote" under IFRS.
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Chapter 12: Non-Current Financial Liabilities
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Sample Questions
Q1) What is the role of debt rating agencies and what two benefits result from their rating a company?
Q2) Explain how non-current liabilities are measured after initial recognition.
Q3) Ginny Inc.sold $800,000 of two-year bonds for $701,500 less commissions of $50,500.Interest is of 5.5% is payable semi-annually.What is the effective rate of interest (round to 2 decimal places)?
A)5.50%
B)8.43%
C)8.65%
D)17.29%
Q4) Which statement best explains the concept of "leverage"?
A)A measure of the efficiency of the company.
B)A measure of solvency of the company.
C)A measure of the company's operations.
D)A measure of the company's debt paying ability.
Q5) What is a bond indenture?
A)Guarantee of the price to the borrower.
B)Contract that outlines the terms of the borrowing agreement.
C)Promise from the borrower to restrict certain activities.
D)Feature that permits the borrower to redeem before maturity.
Page 4
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Chapter 13: Equities
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Sample Questions
Q1) Which statement is correct about "par value"?
A)Par value refers to the price at which a common share is sold to the equity holders.
B)The dividend rate can be specified as a percentage of the par value for common shares.
C)The dividend rate can be specified as a percentage of the par value for preferred shares.
D)Par value refers to the price at which a preferred share is sold to the equity holders.
Q2) Briefly describe recycling as it pertains to other comprehensive income.
Q3) What does "priority" mean?
A)Higher priority confers preferential payout before lower priority claimants.
B)Refers to the amount of payment that will be made upon bankruptcy.
C)Lower priority confers preferential payout before higher priority claimants.
D)Debtors will be paid after the equity holders if there is a bankruptcy.
Q4) List and explain four reasons why a company might repurchase its own shares.
Q5) When is a corporation legally obligated (liable)to pay dividends?
Q6) Where is accumulated other comprehensive income reported and what does it represent?
Q7) Outline the difference between cumulative and non-cumulative dividends.
Page 5
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Chapter 14: Complex Financial Instruments
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Sample Questions
Q1) What is an option?
A)A contract that gives the holder the right to sell an instrument at a pre-specified price.
B)A contract that is derived from some other underlying quantity,index,asset or event.
C)A contract that gives the holder the right to acquire an instrument at a pre-specified price.
D)A contract that gives the holder the right to buy or sell something at a specified price.
Q2) AnnuG Inc.granted 200,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2015,when the share price was $23.Employees still employed by the company six years after the grant date may exercise the option to purchase shares at $45 each;that is,the options vest to the employees after five years.A consultant estimated the value of each option at the date of grant to be $2.50 each.
Required:
Record the journal entries relating to the issuance of stock options.
Q3) List three common stock compensation plans and describe them.
Q4) Explain how bonds issued with warrants alleviate adverse selection problem.
Q5) What are the similarities and differences between forwards and futures?
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Chapter 15: Earnings Per Share
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Sample Questions
Q1) Summer Surprise Ltd.(SSL)was incorporated on January 1,2018.At that time,it issued 210,000 ordinary shares;95,000,$65,2% preferred shares "A";and 85,000,$65,4% preferred shares "B." Net income for the year ended December 31,2018 was $500,000.SSL neither declares nor pays dividends during the year.The series A preferred shares are cumulative and the series B preferred shares are non-cumulative.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders. Required:
Compute basic BPS.
Q2) Which statement is correct about the "if-converted" method for EPS?
A)This method assumes the interest is paid on the convertible security until it was converted into ordinary shares.
B)This method assumes the interest is paid on the convertible security for one-half of the year.
C)This method assumes the interest is paid on the convertible security for the period after its issue date.
D)This method assumes the no interest is paid on the convertible security for the entire year.
Q3) Explain the difference between basic and diluted EPS.
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Chapter 16: Accounting for Income Taxes
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Sample Questions
Q1) A company facing a 45% tax rate has calculated its taxable income for the year to be $2,100,000.It made installment payments during the year totalling $955,000;this amount has been recorded in an asset account as "income tax installments"
Required:
Prepare the journal entry to record the adjusting entry for income taxes at the end of the year under the taxes payable method.
Q2) A large public company reported that its provision for income taxes was $500 million and that it has a deferred tax liability of 2 billion.A Member of Parliament calls you and says,I see hundreds of companies who have these huge deferred tax liabilities on their balance sheets.If the government could get even half of what's owed,it could cut the public deficit down to size in a hurry.
Required:
Write a memo to the Member of Parliament explaining the issues.
Q3) Which statement is accurate?
A)The taxes payable method is also known as the "deferral method."
B)The deferral method and the accrual method are "tax allocation" approaches.
C)The income statement approach is also known as the "accrual method."
D)The balance sheet approach is also known as the "deferral method."
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Chapter 17: Pensions and Other Employee Future Benefits
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Sample Questions
Q1) What four accounts are affected by the accounting for a defined benefit pension plan?
A)Cash,pension expense,OCI,and the defined benefit asset or liability
B)Expected gains and losses,cash,income,pension expense
C)Pension liability,pension expense,cash,income
D)Pension expense,pension assets,pension liability,cash
Q2) Saul is currently 30 years old and he plans to retire early,in 20 years' time.He would like to have an income of $60,000 per year during his retirement,which he anticipates will last for another 40 years.Assume that he receives the retirement income at the end of each of the 40 years.
Required:
Determine the amount of money he will need to have accumulated by the time he starts his retirement.Assume a discount rate of 5%.
Q3) If a company provides a non-contributory pension plan,who makes the contributions?
A)Both the employer and employee.
B)Only the employee.
C)Only the employer.
D)No one.
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Chapter 18: Accounting for Leases
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Sample Questions
Q1) For the following lease,determine the minimum present value calculation for the lessor.
\[\begin{array} { | l | l | }
\hline \text { Annual payment (due at end of year) } & \$ 22,000 \\
\hline \text { Lease term } & 5 \\
\hline \text { Incremental rate } & 10 \% \\
\hline \text { Implicit rate (unknown to lessee) } & 8 \% \\
\hline \text { Unguaranteed residual value } & \mathrm { NA } \\
\hline \text { Bargain purchase option } & 5,000 \\
\hline
\end{array}\]
A)86,502
B)91,243
C)95,816
D)101,451
Q2) What entry is required for the lessor in a operating lease?
A)Gain/loss on asset sale.
B)Loan receivable.
C)Interest income.
D)Depreciation expense.
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Chapter 19: Statement of Cash Flows
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Sample Questions
Q1) List three reasons why the statement of cash flows is a useful component of an enterprise's financial statements.
Q2) Which statement is correct?
A)Net income equals the cash generated by the company's operations.
B)Net income seldom reflects the change in cash during the period.
C)Net income is the most important metric to measure the financial performance of a company.
D)Cash flow is the most important metric to measure the financial performance of a company.
Q3) Which of the following is an operating activity?
A)Receipt of customer deposit.
B)Proceeds from mortgage issue.
C)Purchase of land.
D)Redemption of preferred shares.
Q4) What is included in "cash and cash equivalents"?
A)Cash restricted for plant expansion.
B)Term deposits maturing in 180 days.
C)Treasury bills maturing in 120 days.
D)US dollar chequing account.
Q5) What are the two distinct components to investing activities?
Page 11
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Chapter 20: Accounting Changes
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Sample Questions
Q1) Why are retrospective adjustments to past years' income and expenses recorded directly in retained earnings?
Q2) How should enterprises reflect changes in accounting standards?
Q3) For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years remaining as at the beginning of the year,the accountant should do the following:
A)Compute current year depreciation as (carrying amount - residual value)divided by 15 years.
B)Adjust prior year's depreciation.
C)Adjust the amount of accumulated depreciation as at the beginning of the year.
D)Compute current year depreciation as (carrying amount)X 15/20.
Q4) Over time,has management's free will over accounting changes increased or decreased? Explain why.
Q5) A company changes the depreciation for a piece of equipment from 20% decliningbalance to units-of-production.Describe a plausible circumstance that would support this change as one of the following: (i)an error, (ii)a change in estimate,or (iii)a change in accounting policy.
Q6) What types of accounting treatments are treated retrospectively and why?
Q7) Define "a retrospective adjustment."
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