Valuation and Financial Statement Analysis Exam
Bank
Course Introduction
This course provides a comprehensive exploration of the principles and techniques used in valuing businesses and analyzing financial statements. Students will learn how to interpret financial data, assess company performance, and apply valuation models such as discounted cash flows, price multiples, and asset-based approaches. Emphasis is placed on understanding the impact of accounting choices on financial results, identifying red flags in reporting, and integrating financial analysis into investment decision-making. Through real-world case studies and hands-on exercises, students will develop the skills necessary to critically evaluate firms' financial position and estimate intrinsic value for a variety of business contexts.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde P. Stickney
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14 Chapters
732 Verified Questions
732 Flashcards
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Sample Questions
Q1) What is the rationale for the statement of cash flows?
Answer: The statement of cash flows provides information on the sources and uses of cash. Even profitable firms sometimes find themselves in need of cash and unable to pay suppliers, employees, and other creditors. This may occur for two reasons: 11ea92c5_78cd_1482_9469_737414a0b246_TB5976_00 Normally cash expenditures precede the recognition of expenses and cash receipts occur after the recognition of revenue.
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Q2) Under the ____________________ basis of accounting, a firm recognizes revenue when it performs all or a substantial portion, of the services it expects to perform and receives either cash or a receivable.
Answer: accrual
Q3) Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.
Answer: financial statements
Q4) Normally, intense rivalries have a tendency to reduce ____________________.
Answer: profitability
Page 3
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Sample Questions
Q1) When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability?
Answer: Deferred tax assets arise when taxable income exceeds book income. An example would be warranty expense. Deferred tax liabilities arise when book income exceeds taxable income. An example would be recognized more depreciation expense for tax purposes than for book purposes.
Q2) Current replacement cost represents
A) the amount a firm would have to pay currently to acquire an asset it now holds B) the amount a firm would have to pay currently to acquire an asset it does not now hold
C) the amount a firm would have to pay in the future to acquire an asset it now holds D) the amount a firm would have to pay to purchase a comparably depreciated version of the asset it now holds
Answer: A
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4
Chapter 3: Income Flows Versus Cash Flows: Key
Relationships in the Dynamics of a Business
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Q1) Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the ____________________ method
Answer: indirect
Q2) The receipt of cash when employees exercise stock options is a (an) ____________________ activity.
Answer: financing
Q3) Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?
A) A sale of equipment is a investing activity, the transaction will not affect the operating activities section.
B) The gain is added back to net income in the operating activities section.
C) The gain is subtracted from net income in the operating activities section.
D) The entire sales price is subtracted from net income in the operating activities section.
Answer: C
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) ________________________________________ is the level of earnings and the growth in the levels of earnings expected to persist in the future.
Answer:
Q2) Which of the following might an analyst not want to eliminate from past earnings when using past earnings to forecast future earnings.
A) nonrecurring gains from the sale of assets.
B) unusual asset impairment charges.
C) nonrecurring restructuring charges.
D) revenue from the sale of inventory.
Q3) Return on common equity can be disaggregated into three components, which of the three is not one of the components?
A) Assets Turnover ratio
B) Profit Margin ratio
C) Debt to Equity ratio
D) Capital Structure Leverage ratio
Q4) Economic theory suggests that higher levels of ____________________ in any activity should lead to higher levels of
Answer:
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Chapter 5: Risk Analysis
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Sample Questions
Q1) One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator. Detail how the interest coverage ratio and fixed charges coverage ratio are calculated. In addition, discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.
Q2) Univariate bankruptcy prediction models help identify factors related to bankruptcy, but they do not provide information about A) specific ratios that are important.
B) the amount of Type I and Type II errors.
C) which specific company will go bankrupt.
D) the relative importance of individual financial statement ratios.
Q3) When calculating the quick ratio, an analyst would include in the numerator cash, ________________________________________, and receivables.
Q4) The current risk-free rate of return in the economy is 4%. In addition, the market rate of return is currently 9.5%. Given this information what would be the expected return on common stock for a company with a systemic risk level (Beta) of 1.2? Show your calculations. In addition, describe systemic risk.
Q5) Beta captures the _________________________ of the firm.
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Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
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Sample Questions
Q1) Cannon Corp., a textile manufacturer, reported net income of $258,000 in 2007. During 2007 Cannon reported a gain of $29,800 from the sale of three used delivery trucks. The gain was included as part of income from continuing operations. Assuming that the gain is a one-time event and that Cannon has an effective tax rate of 35% calculate Cannon's adjusted net income. Show all of your calculations for credit. In addition, discuss why analysts might make an adjustment of this type.
Q2) Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company. Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss five motives that encourage managers to practice earnings management.
Q3) An _________________________ occurs when the carrying amount of a company's long-lived assets are not recoverable.
Q4) Earnings are informative if they signal the portion of current period's due to a new product and the additional earnings in the future as a result of the ____________________ of this new earnings stream.
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Chapter 7: Revenue Recognition and Related Expenses
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Sample Questions
Q1) Application of the LIFO and FIFO inventory methods result in differences in the balance sheet, income statement and cash flow statement. Compare and contrast the effect of the two methods on each financial statement and determine the advantages and disadvantages of each method.
Q2) A Company that uses FIFO will find that its ___________________________________ account tends to be somewhat out of date.
Q3) Although LIFO generally provides higher quality earnings measures, FIFO generally provides higher _____________________________________________ measures.
Q4) A company may try to paint a favorable picture of itself by accelerating the timing of revenues or estimating the collectible amounts too aggressively. In these cases the quality of accounting information declines because it does not represent the company's true economic condition and may not be sustainable. List four conditions which might suggest that a company is recognizing revenues too early?
Q5) A company that uses LIFO will find that its ______________________________ account will be somewhat out of date.
Q6) One sign that a company may be recognizing sales too early is that it has unusually large amounts of ______________________________.
Page 9
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Chapter 8: Liability Recognition and Related Expenses
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Q1) Liabilities requiring the future delivery of goods or services appear on the balance sheet at the ______________________________ of those goods and services.
Q2) An agreement in which a purchaser agrees to pay specified amounts periodically to a seller for products or services is known as a ________________________________________.
Q3) The projected benefit obligation measures
A) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
B) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
C) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
D) the shortest possible period for funding to maximize the tax deduction.
Q4) Differences between income before taxes and taxable income result are either ____________________ or ____________________.
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Chapter 9: Intercorporate Entities
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Q1) Under the fair value method of accounting for stock options, firms must value of stock options on the date of ____________________.
Q2) Discuss the method of accounting for employee stock options. In your answer discuss the how the accounting has changed during recent years.
Q3) Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________________ securities.
Q4) Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2006, Hobbitt earns $80,000 and pays cash dividends of $30,000. If the beginning balance in the investment account was $160,000, the balance at December 31, 2006 should b
A) $192,000
B) $172,000
C) $180,000
D) $160,000
Q5) When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in, it should account for the investment using the ______________________________.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information sales growth forecasts will most likely affect growth in A) accounts receivables.
B) accounts payable.
C) depreciation.
D) salary payable.
Q2) The objective of forecasting is to develop
A) stand alone financial statements for future analysis.
B) a set of realistic expectations for future value-relevant payoffs.
C) a balance sheet and income statement that articulate.
D) financial statements for comparison to industry averages.
Q3) Realistic expectations are ____________________ and ____________________.
Q4) It may be difficult to forecast sales for firms with _________________________ patterns because their historical growth rates reflect wide variations in both direction and amount from year to year.
Q5) 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.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q2) In some valuation scenarios, such as a leveraged buyout, it may be necessary to adjust the market equity beta to reflect a
Q3) One rational for using expected dividends in valuation is
A) Dividends are a necessary payment in order for a firm to have value.
B) Dividends are paid in cash, and cash serves as a measurable common denominator for comparing the future benefits of alternative investment opportunities.
C) Dividends are the most reliable measure of value because most companies payout dividends to shareholders.
D) Dividend payout ratios are set based on profitability.
Q4) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q5) Provide the rationale for using expected dividends in a valuation model.
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Free cash flow from operations equals cash flow from operations adjusted for net interest after tax and adjusted for
Q2) Starting with free cash flows from operations discuss how an analyst would measure free cash flows to common equity shareholders.
Q3) Provide the rationale for using expected free cash flow in valuation.
Q4) Operating assets include all of the following except
A) accounts receivable
B) property, plant and equipment
C) intangible assets
D) Property held for sale
Q5) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q6) The forecasting and valuation process is particularly difficult for ______________________________ when the near term free cash flows tend to be negative.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are
Q2) What is the rationale for using expected earnings as a basis for valuations?
Q3) Over the life of the firm, the present value of ______________________________, ______________________________, and ____________________ will be the same.
Q4) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q5) Assume that a firm's book value at the beginning of the year is $12,500 and that the firm reports net income of $3,200 and pays dividends of $1,100<sub>.</sub> What will the firm's book value at the end of the year?
A) $2,100
B) $15,700
C) $14,600
D) $16,800
Q6) The residual income valuation approach assumes that accounting for net income and book value of shareholders' equity follows ________________________________________.
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) Industries with relatively high market-to-book ratios are more likely to have ___________________________________ assets.
Q2) The use of P/E ratios in valuation can result in measurement bias. What two items can result in measurement error and why?
Q3) The price differential, or the amount by which the market has discounted share price for risk is calculated by
A) subtracting the book value from the residual income model book value calculated using the risk free rate.
B) subtracting the market price from the residual income model price calculated using the risk free rate.
C) multiplying the theoretical price-earnings ratio by the market price.
D) subtracting the residual income model price calculated using R<sub>E</sub> from the residual income model price calculated using the risk free rate.
Q4) The risk of the firm increases the _____________________________________________.
Q5) Sometimes a high market to book ratio is a result of having __________________________________________________.
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