Financial Statement Analysis
Test Bank
Course Introduction
Financial Statement Analysis is a course designed to equip students with the analytical skills necessary to interpret and evaluate the financial health and performance of organizations. Through comprehensive study of financial statements including the balance sheet, income statement, and cash flow statement students learn how to assess profitability, liquidity, solvency, and operational efficiency. The course covers key tools such as ratio analysis, trend analysis, and comparative financial statements, as well as the impact of accounting choices and policies on financial results. Case studies and real-world examples are incorporated to develop critical thinking and decision-making abilities relevant to investors, managers, and other stakeholders.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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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) Which of the following economic characteristics is consistent with a pharmaceutical company?
A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margins.
D) Low business risk.
Answer: B
Q2) ___________________________________ equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners.
Answer: Comprehensive income
Q3) The two categories of shareholders' equity usually found on the balance sheet of a corporation are:
A) Contributed capital and property, plant, and equipment.
B) Retained earnings and notes payable.
C) Common stock and retained earnings.
D) Contributed capital and equity securities.
Answer: C
Q4) Cash and cash equivalents are considered ____________________ assets. Answer: Monetary
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Chapter 2: Asset and Liability Valuation and Income
Recognition
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Sample Questions
Q1) ________________________________________ is the net amount that a firm would receive if it sold an asset or the net amount it would have to pay to settle a liability.
Answer: Net realizable value
Q2) The income statement approach to measuring income tax expense:
A) is required by FASB Statement No.109.
B) compares revenues and expenses recognized for book and tax purposes, eliminates permanent differences, and computes income tax expense based on book income before taxes excluding permanent differences.
C) computes income tax expense as a difference between the tax basis of an asset or a liability and its reported amount in the [balance sheet] that will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled.
D) is required by IAS 12.
Answer: B
Q3) Net income equals revenues plus ____________________ minus expenses and ____________________.
Answer: gains,losses
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Sample Questions
Q1) Which of the following is the correct formula for calculating cash collections from customers?
A) sales for the period plus accounts receivable at the beginning of the period
B) sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period
C) sales for the period plus accounts receivable at the end of the period
D) sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period
Answer: B
Q2) All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers,except:
A) restaurants
B) wineries
C) construction companies
D) aerospace manufacturers
Answer: A
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5
Chapter 4: Profitability Analysis
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Sample Questions
Q1) Which of the following scenarios is consistent with an increasing cost of goods sold to sales percentage and increasing inventory turnover?
A) Firm raises prices to increase its gross margin but inventory sells more slowly.
B) Weak economic conditions lead to reduced demand for a firm's products, necessitating price reductions to move goods.
C) Strong economic conditions lead to increased demand for a firm's products, allowing price increases.
D) Firm shifts its product mix toward lower margin, faster moving products.
Q2) Refer to the information for Carl Industries.In a common size balance sheet for 2010,plant and equipment (net)is expressed as:
A) 74.5%
B) 93.2%
C) 83.5 %
D) 30.5%
Q3) To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.
Q4) When calculating Basic earnings per share net income is adjusted by____________
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Chapter 5: Risk Analysis
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Q1) Refer to the information for Mobile Company.Mobile's current ratio in 2010 was:
A) 1.07
B) 1.45
C) 1
D) .69
Q2) The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.
Q3) All of the following are common international risks faced by companies except:
A) asset expropriation
B) exchange rate changes
C) political unrest
D) dependence on one or a few suppliers
Q4) All of the following typically drive firm-specific risks except:
A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts
Q5) The source of risk related to management competence,strategic direction and lawsuits is _________________________.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) On the income statement,income from discontinued operations is shown:
A) as an accounting principle change.
B) without any income tax effect.
C) as a separate section of income from continuing operations.
D) net of taxes after income from continuing operations.
Q2) During July 2013,Ralston Company decides to dispose of one of its subsidiaries,which qualifies for accounting as a discontinued operation.At the July 2013 measurement date,Ralston Company estimates that it will report net income of $300,0000 dollars from the measurement date until the disposal date,which is expected to be in April 2014.In addition,Ralston estimates that it will lose 100,000 on the sale of the segment.How much gain or loss on discontinued operations will Ralston report in its 2012 income statement (net of income taxes)?
A) $200,000 gain
B) $0
C) $100,000 loss
D) $300,000 loss.
Q3) In bankruptcy prediction analysis,a type ____________________ error is classifying a firm as nonbankrupt when it ultimately goes bankrupt.
Q4) 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) Discuss the difference between transferring receivables with and without recourse. When a company transfers receivables to the factor without recourse the factor pays the company a percentage of the total receivables and in effect it is a sale of the receivables to the factor.
The factor takes the receivables with recourse if any uncollected receivables can be returned to the company for a refund.
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) Why can exercising stock options create cash flow problems for managers at the exercise date? What is an alternative to this problem?
Q4) Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.
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Chapter 8: Investing Activities
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Q1) When dividends from an investment are recognized as a reduction of the investment account,the investment must have been of which type?
A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment
Q2) All of the following are typically costs that fail the future benefits test of long-lived operating assets except:
A) costs related to research and development
B) costs related to marketing
C) costs related to brand-building activities
D) costs of equipment used in production
Q3) U.S.GAAP stipulates that firms should ____________________ expenditures that increase the service potential of an asset beyond that originally anticipated
Q4) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
Q5) Under U.S.GAAP,when an asset's carrying amount is deemed _______________,the asset is considered impaired.
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Chapter 9: Operating Activities
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Sample Questions
Q1) Using the information provided by Falcon Networks,determine the federal effective tax rate for 2012.
A) 33.52%
B) 35.00%
C) 42.25%
D) 45.49%
Q2) All of the following are events that can change the projected benefit obligation (PBO)during a period except:
A) The payment of retirement benefits.
B) Amendments to the pension plan agreement
C) The interest accumulated on the liability.
D) All of these can change the PBO.
Q3) All of the following are considered by analysts when assessing the quality of accounting except:
A) Price variation and the speed at which inventory turns over
B) Any liquidation of FIFO inventory layers
C) Any physical deterioration or obsolescence of inventory
D) The inventory cost-flow assumption chosen by management
Q4) What are the five steps to apply the core principles of revenue recognition?
Q5) What are the four disclosures required by U.S.GAAP relating to income taxes?
Page 11
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following types of companies would most likely be able to increase prices?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to experience technological improvements in its production process.
D) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.
Q2) To develop forecasts of individual assets,the analyst must first link historical growth rates for individual assets to historical growth rates in ____________________ and other activity-based drivers.
Q3) When projecting ____________________,the analyst should consider economy-wide factors such as the expected rate of general price inflation in the economy.
Q4) Financial statement forecasts should rely on ____________________ within financial statements.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Sample Questions
Q1) Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:
A) 79.00%
B) 78.3%
C) 41.8%
D) 50%
Q2) Why do investors typically accept a lower risk-adjusted rate of return on debt capital than equity capital? Suppose a stable,financially healthy,profitable,tax-paying firm that has been financed with all equity and no debt decides to add a reasonable amount of debt to its capital structure.What effect will that change in capital structure likely have on the firm's weighted average cost of capital?
Q3) Suppose a firm has a market beta of 1.24 and the risk-free interest rate is 6.25.In addition,the excess return over the risk-free rate is 6.3%.Calculate the firm's cost of equity capital using the CAPM model.
Q4) Provide the rationale for using expected dividends in a valuation model.
Q5) Why are dividends value-relevant to common equity shareholders?
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) What is the purpose of a free cash flow analysis?
Q2) Continuing free cash flows represent:
A) the cash flows remaining after deducting cash flows attributable to debt holders.
B) the free cash flows after the point at which the firm has settled into a long-run steady-state growth rate.
C) all sustainable free cash flows.
D) all after-tax free cash flows.
Q3) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
Q4) The present value of future free cash flows valuation method focuses on free cash flows,a base that economists argue has more economic meaning than ____________________.
Q5) What three elements are needed to value a resource when using cash flows?
Q6) Even in relatively efficient securities markets,______ is observable but ______ is not; therefore,______ must be estimated.
Q7) 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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Sample Questions
Q1) Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,500 at the end of 2010.During 2011 the firm earns net income of $1,900,pays dividends to shareholders of $200,and issues new stock to raise $500 of capital.The book value of shareholders' equity at the end of 2011 is:
A) $2,750
B) $250
C) $1,450
D) $3,700
Q2) Where is comprehensive income reported and what is its relevancy to the computation of residual income?
Q3) Residual income valuation focuses on ____________________ as a periodic measure of shareholder wealth creation.
Q4) What are the four components that make up dirty surplus accounting according to the FASB?
Q5) The foundation for residual income valuation is the classical
Q6) What is meant by the term clean surplus accounting?
Q7) What is the rationale for using expected earnings as a basis for valuations?
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Under the value-to-book model a firm will be valued below book value when:
A) the ROCE is greater than RE
B) the ROCE is equal to RE
C) the ROCE is less than RE
D) the firm's growth rate is above the industry average
Q2) A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons.Discuss how a successful,internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one another.
Q3) Firms with low P/E ratios tend to have current residual income that is greater than:
A) future actual income.
B) future residual income.
C) past actual income.
D) past residual income.
Q4) Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.
Q5) The value-to-book model indicates that a firm in steady state equilibrium earnings ROCE=RE will be valued at _________________________.
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