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Financial Statement Analysis- An Introduction

Financial Statement Analysis- An Introduction

Question 1 of 76

1

Which of the following is least likely to be considered a role of financial statement analysis?

Select one of the following:

  • Determining whether to invest in the company's securities.

  • Assessing the management skill of the company's executives.

  • To make economic decisions.

Explanation

Question 2 of 76

1

A company collects cash from a customer to settle an account receivable. What effect does this transaction have on the
company's total assets and total shareholders' equity?

Assets Equity

Select one of the following:

  • Increase Increase

  • No effect Increase

  • No effect No effect

Explanation

Question 3 of 76

1

The Management Discussion and Analysis (MD&A) portion of the financial statements:

Select one of the following:

  • is not required by the SEC.

  • includes such items as discontinued operations, extraordinary items, and other
    unusual or infrequent events.

  • includes audited disclosures that help explain the information summarized in the
    financial statements.

Explanation

Question 4 of 76

1

In the expanded form of the accounting equation, assets equal liabilities plus contributed capital plus:

Select one of the following:

  • ending retained earnings minus beginning retained earnings.

  • beginning retained earnings plus revenue minus expenses.

  • ending retained earnings.

Explanation

Question 5 of 76

1

According to the IASB, which of the following least accurately describes financial reporting? Financial reporting:

Select one of the following:

  • provides information about changes in financial position of an entity.

  • uses the information in a company's financial statements to make economic decisions.

  • is useful to a wide range of users.

Explanation

Question 6 of 76

1

Alpha Company reported the following financial statement information:
December 31, 2006:
Assets $70,000
Liabilities 45,000
December 31, 2007:
Assets 82,000
Liabilities 55,000
During 2007:
Stockholder investments 3,000
Net income ?
Dividends 6,000
Calculate Alpha's net income for the year ended December 31, 2007 and the change in stockholders' equity for the year
ended December 31, 2007.

Net income Change in stockholders' equity

Select one of the following:

  • $5,000
    $2,000
    decrease

  • ($3,000)
    $2,000
    increase

  • $5,000
    $2,000
    increase

Explanation

Question 7 of 76

1

What is the fundamental balance sheet equation?

Select one of the following:

  • Assets = Liabilities + Stockholders' Equity (A = L + E).

  • Liabilities = Assets + Stockholders' Equity (L = A + E).

  • Assets = Stockholders' Equity Liabilities
    (A = E L).

Explanation

Question 8 of 76

1

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases
that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at
the:

Select one of the following:

  • initial trial balance.

  • general ledger.

  • general journal.

Explanation

Question 9 of 76

1

Beta Company reported the following financial statement information:
December 31, 2006:
Assets $58,000
Liabilities 28,000
December 31, 2007:
Assets ?
Liabilities 38,000
During 2007:
Stockholder investments 15,500
Net income 18,000
Dividends 7,750
Calculate Beta's total assets and stockholders' equity as of December 31, 2007.

Total assets Stockholders' equity

Select one of the following:

  • $93,750 $30,000

  • $93,750 $55,750

  • $79,250 $55,750

Explanation

Question 10 of 76

1

An accounting entry that updates the historical cost of an asset to current market levels is best described as:

Select one of the following:

  • a contra account.

  • a valuation adjustment.

  • accumulated depreciation.

Explanation

Question 11 of 76

1

Which of the following financial reporting choices is permitted under IFRS but not under U.S. GAAP?

Select one of the following:

  • Netting deferred tax assets with deferred tax liabilities.

  • Excluding actuarial gains and losses from balance sheet pension items.

  • Revaluing plant and equipment upward.

Explanation

Question 12 of 76

1

Accruals are best described as requiring an accounting entry:

Select one of the following:

  • when the earliest event in a transaction occurs.

  • only when a good or service has been provided.

  • when an expense has been incurred.

Explanation

Question 13 of 76

1

Which of the following statements represents information at a specific point in time?

Select one of the following:

  • The income statement and the balance sheet.

  • The balance sheet.

  • The income statement.

Explanation

Question 14 of 76

1

Which of the following statements about proxy statements is least accurate? Proxy statements are:

Select one of the following:

  • a good source of information about the qualifications of board members and
    management.

  • available on the EDGAR web site.

  • not filed with the SEC.

Explanation

Question 15 of 76

1

When a publicly traded U.S. company prepares a proxy statement for its shareholders prior to the annual meeting or other
shareholder vote, it also files the statement with the SEC as Form:

Select one of the following:

  • 144.

  • DEF14A.

  • 8K.

Explanation

Question 16 of 76

1

Which of the following is an analyst least likely to rely on as objective information to include in a company analysis?

Select one of the following:

  • Government agency statistical data on the economy and the company's
    industry.

  • Proxy statements.

  • Corporate press releases.

Explanation

Question 17 of 76

1

Wichita Corporation reported the following balances as of December 31, 2007:
Cash $?
Accounts payable 16,000
Accounts receivable 58,000
Additional paidin
capital 42,000
Common stock 19,600
Inventory 12,000
Plant and equipment 26,800
Notes payable 20,000
Retained earnings 32,000
Calculate Wichita's cash and total assets as of December 31, 2007 based only on these entries.
Cash Total assets

Select one of the following:

  • $32,800 $129,600

  • $32,800 $113,600

  • $16,000 $129,600

Explanation

Question 18 of 76

1

A firm engages in a new type of financial transaction that has a material effect on its earnings. An analyst should most likely be
suspicious of the new transaction if:

Select one of the following:

  • the transaction is not governed by existing regulations.

  • no accounting standard exists that applies to the transaction.

  • management has not explained its business purpose.

Explanation

Question 19 of 76

1

Reading the footnotes to a company's financial statements and the Management Discussion & Analysis is least likely to help
an analyst determine:

Select one of the following:

  • how well the financial statements reflect the company's true performance.

  • the various accruals, adjustments and assumptions that went into the financial
    statements.

  • the detailed information that underlies the company's accounting system.

Explanation

Question 20 of 76

1

Which of the following financial reporting choices is permitted under IFRS but not under U.S. GAAP?

Select one of the following:

  • Netting deferred tax assets with deferred tax liabilities.

  • Revaluing plant and equipment upward.

  • Excluding actuarial gains and losses from balance sheet pension items.

Explanation

Question 21 of 76

1

Information about a company's financial position at a point in time is most likely found in the:

Select one of the following:

  • income statement.

  • balance sheet.

  • cash flow statement.

Explanation

Question 22 of 76

1

Allowance for bad debts and investment in affiliates are most likely to be shown as what types of accounts?

Allowance for bad debts Investment in affiliates

Select one of the following:

  • Liabilities Asset

  • Contraasset
    Asset

  • Contraasset
    Liabilities

Explanation

Question 23 of 76

1

Characteristics of a coherent financial reporting framework are best described as:

Select one of the following:

  • materiality, comprehensiveness, and aggregation.

  • consistency, materiality, and transparency.

  • transparency, consistency, and comprehensiveness.

Explanation

Question 24 of 76

1

Which of the following would NOT require an explanatory paragraph added to the auditors' report?

Select one of the following:

  • Statements that the financial information was prepared according to GAAP.

  • Doubt regarding the "going concern" assumption.

  • Uncertainty due to litigation.

Explanation

Question 25 of 76

1

Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts?
Accumulated Treasury stock
depreciation

Select one of the following:

  • Liability Equity

  • Contraasset
    Contraequity

  • Contraasset
    Contraequity

Explanation

Question 26 of 76

1

Professional organizations of accountants and auditors that establish financial reporting standards are called:

Select one of the following:

  • Regulatory authorities.

  • International organizations of securities commissions.

  • Standard setting bodies.

Explanation

Question 27 of 76

1

Management disclosure of the likely impact of implementing recently issued accounting standards is least likely to:

Select one of the following:

  • conclude that the standard will not affect the financial statements materially.

  • conclude that the standard does not apply.

  • state that the impact of the standard is impossible to determine.

Explanation

Question 28 of 76

1

The Management Discussion and Analysis (MD&A) portion of the financial disclosure is least likely required to discuss:

Select one of the following:

  • capital resources and liquidity.

  • unusual or infrequent items.

  • results of operations.

Explanation

Question 29 of 76

1

Which of the following statements about financial statement analysis and reporting is least accurate?

Select one of the following:

  • Providing information about changes in a company's financial position is a role
    of financial reporting.

  • Deciding whether to recommend a company's securities to investors is a role of
    financial statement analysis.

  • Financial statement analysis focuses on the way companies show their financial
    performance to investors by preparing and presenting financial statements.

Explanation

Question 30 of 76

1

According to the IASB conceptual framework, characteristics that enhance relevance and faithful representation include:

Select one of the following:

  • comparability and thoroughness.

  • timeliness and verifiability.

  • assurance and understandability.

Explanation

Question 31 of 76

1

In the financial statement analysis framework, using the data to address the objectives of the analysis and deciding what
conclusions or recommendations the information supports is best described as:

Select one of the following:

  • analyzing and interpreting the data.

  • reporting the conclusions.

  • processing the data.

Explanation

Question 32 of 76

1

Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is
concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers
explains to Blackmon, "Even though we don't have access to the detailed transactions that underlie the financial statements,
we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of
every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters." Rivers is:

Select one of the following:

  • correct.

  • incorrect because even within appropriate accounting parameters, management can
    manipulate earnings through the assumptions that rely on their discretion.

  • Financial statements could potentially take any form if reporting standards didn't exist.

Explanation

Question 33 of 76

1

Which of the following statements about financial statements and reporting standards is least accurate?

Select one of the following:

  • Reporting standards focus mostly on format and presentation and allow
    management wide latitude in assumptions.

  • The objective of financial statements is to provide economic decision makers with
    useful information.

  • Financial statements could potentially take any form if reporting standards didn't exist.

Explanation

Question 34 of 76

1

Which of the following is the least likely to be considered an accrual for accounting purposes?

Select one of the following:

  • Unearned revenue.

  • Accumulated depreciation.

  • Wages payable.

Explanation

Question 35 of 76

1

Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash
down payment from the buyer. How will the transaction most likely affect Washburn's assets and liabilities?

Assets Liabilities

Select one of the following:

  • Increase Unchanged

  • Increase Increase

  • Unchanged Unchanged

Explanation

Question 36 of 76

1

Making a profitable sale on credit is most likely to have which of the following effects?

Select one of the following:

  • Increase assets and decrease liabilities.

  • Increase assets and increase equity.

  • Decrease assets and increase equity.

Explanation

Question 37 of 76

1

Which of the following is an independent auditor least likely to do with respect to a company's financial statements?

Select one of the following:

  • Prepare and accept responsibility for them.

  • Provide an opinion concerning their fairness and reliability.

  • Confirm assets and liabilities contained in them.

Explanation

Question 38 of 76

1

A listing of all the firm's journal entries by date is called the:

Select one of the following:

  • adjusted trial balance.

  • general ledger.

  • general journal.

Explanation

Question 39 of 76

1

In addition to the audited financial statements included in a firm's annual report, which of the following sources of information is
most likely to contain audited data?

Select one of the following:

  • Footnotes to the annual financial statements.

  • Management's commentary.

  • Interim financial statements filed with the SEC.

Explanation

Question 40 of 76

1

Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No.
1?

Select one of the following:

  • Statement of changes in owners' equity.

  • A summary of accounting policies.

  • Disclosures of material events.

Explanation

Question 41 of 76

1

An analyst is least likely to use disclosures of accounting policies and estimates to evaluate:

Select one of the following:

  • whether the disclosures have changed since the prior period.

  • what policies are likely to be modified in future periods.

  • what policies are discussed.

Explanation

Question 42 of 76

1

According to the IASB Conceptual Framework for Financial Reporting, one of the qualitative characteristics of financial
statements is:

Select one of the following:

  • going concern.

  • faithful representation.

  • timeliness.

Explanation

Question 43 of 76

1

The best description of the general ledger is that it:

Select one of the following:

  • groups accounts into the categories that are presented in the financial
    statements.

  • is where journal entries are first recorded.

  • sorts the entries in the general journal by account.

Explanation

Question 44 of 76

1

A company's chart of accounts is:

Select one of the following:

  • the set of journal entries that makes up the components of owners' equity.

  • a detailed list of the accounts that make up the five financial statement elements

  • used for entries that offset other accounts.

Explanation

Question 45 of 76

1

The term "convergence" is most accurately used to describe:

Select one of the following:

  • the reduction of the premium on a bond as it nears maturity.

  • the process of developing one universally accepted set of accounting standards.

  • when expected return and required return are equal.

Explanation

Question 46 of 76

1

Which of the following is least likely a qualitative characteristic accounting information must possess in order to provide useful
information to an analyst, according to the IASB Conceptual Framework?

Select one of the following:

  • Faithful representation.

  • Relevance.

  • Conservatism.

Explanation

Question 47 of 76

1

Which of the following is the best description of the flow of information in an accounting system?

Select one of the following:

  • Journal entries, general ledger, trial balance, financial statements.

  • Trial balance, general ledger, general journal, financial statements.

  • General ledger, trial balance, general journal, financial statements.

Explanation

Question 48 of 76

1

A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to
affect which accounts?
Purchase Sale

Select one of the following:

  • Assets only Assets, revenue, expenses, owners' equity

  • Assets and expenses Assets, revenue, expenses, owners' equity

  • Assets only Assets and revenues only

Explanation

Question 49 of 76

1

Disagreements that inhibit development of a coherent financial reporting framework are least likely to involve which of the
following?

Select one of the following:

  • Standard setting.

  • Transparency.

  • Valuation.

Explanation

Question 50 of 76

1

Which of the following statements regarding footnotes to the financial statements is least accurate?

Select one of the following:

  • Footnotes may contain information regarding contingent losses.

  • Footnotes provide information about assumptions and estimates used by
    management.

  • Some supplementary schedules are audited whereas footnotes are not audited.

Explanation

Question 51 of 76

1

Which of the following is least likely to be considered a characteristic of a coherent financial reporting framework?

Select one of the following:

  • Transparency.

  • Stability.

  • Comprehensiveness.

Explanation

Question 52 of 76

1

The step in the financial statement analysis framework that includes making any appropriate adjustments to the financial
statements and calculating ratios is best described as:

Select one of the following:

  • gathering the data.

  • processing the data.

  • analyzing and interpreting the data.

Explanation

Question 53 of 76

1

A company's operating revenues for a reporting period are most likely to be shown on its:

Select one of the following:

  • cash flow statement.

  • balance sheet.

  • income statement.

Explanation

Question 54 of 76

1

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are:

Select one of the following:

  • going concern and accrual accounting.

  • accrual accounting and historical cost.

  • historical cost and going concern.

Explanation

Question 55 of 76

1

Which of the following best describes financial reporting and financial statement analysis?

Select one of the following:

  • Financial reporting refers to how companies show their financial performance
    and financial analysis refers to using the information to make economic
    decisions.

  • The objective of financial analysis is to provide information about the financial position
    of an entity that is useful to a wide range of users.

  • Financial reports assess a company's past performance in order to draw conclusions
    about the company's ability to generate cash and profits in the future.

Explanation

Question 56 of 76

1

The purchase of equipment for $25,000 cash is most likely to be recorded as:

Select one of the following:

  • an increase in an asset account and an increase in a liability account.

  • an increase in one asset account and a decrease in another asset account.

  • an increase in two asset accounts.

Explanation

Question 57 of 76

1

An analyst can find a company's accounting policies that require significant judgement or estimates in:

Select one of the following:

  • both the footnotes to the financial statements and Management's Discussion
    and Analysis.

  • only the footnotes.

  • both the footnotes and in the auditor's opinion.

Explanation

Question 58 of 76

1

Which of the following least accurately describes a correct use of doubleentry
accounting?

Select one of the following:

  • A decrease in a liability account may be balanced by a decrease in another
    liability account.

  • A transaction may be recorded in more than two accounts.

  • An increase in an asset account may be balanced by an increase in an owner's equity
    account.

Explanation

Question 59 of 76

1

Under which framework for financial reporting systems are the financial statement elements related to performance defined as
revenues, expenses, gains, losses, and comprehensive income?

Select one of the following:

  • FASB framework.

  • Both IASB and FASB frameworks.

  • IASB framework.

Explanation

Question 60 of 76

1

The step in the financial statement analysis framework of "processing the data" is least likely to include which activity?

Select one of the following:

  • Making appropriate adjustments to the financial statements.

  • Acquiring the company's financial statements.

  • Preparing exhibits such as graphs.

Explanation

Question 61 of 76

1

Which description of the objective of financial statements is most accurate? The objective of financial statements is:

Select one of the following:

  • to provide a wide range of users with information about a firm's financial
    prospects.

  • to provide economic decision makers with useful information about a firm's financial
    performance and changes in financial position.
    to provide securities analysts with objective data about

  • to provide securities analysts with objective data about a firm's financial prospects.

Explanation

Question 62 of 76

1

Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to his new assistant, John
Stevenson, why it is crucial for an investment analyst to read the footnotes to a firm's financial statement and the Management
Discussion and Analysis (MD&A) before making an investment decision. Which rationale is Martinenko least likely to provide to
Stevenson regarding the importance of analyzing the footnotes and MD&A?

Select one of the following:

  • The footnotes disclose whether or not the company is adhering to GAAP.

  • Evaluating the footnotes helps the analyst assess whether management is
    manipulating earnings.

  • Accruals, adjustments and assumptions are often explained in the footnotes and
    MD&A.

Explanation

Question 63 of 76

1

According to the IFRS framework, timeliness is a characteristic that enhances:

Select one of the following:

  • faithful representation.

  • relevance.

  • both relevance and faithful representation

Explanation

Question 64 of 76

1

Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)?

Select one of the following:

  • Develop global accounting standards requiring transparency, comparability,
    and high quality in financial statements.

  • Remain neutral in the debate on the use of global accounting standards to avoid
    appearance of a conflict of interest.

  • Account for the needs of emerging markets and small firms when implementing global
    accounting standards.

Explanation

Question 65 of 76

1

Regarding the use of financial statements in security analysis and selection, it would be most accurate to say that:

Select one of the following:

  • analysts can verify the accuracy of financial statements by using a firm's
    detailed accounting system information.

  • further analysis of a firm's financial statements is typically not necessary if the firm has
    conformed to applicable accounting principles.

  • analysts can use footnotes and Management's Discussion and Analysis to better
    understand assumptions used in the financial statements.

Explanation

Question 66 of 76

1

Which of the following is most likely to be considered a barrier to developing one universally recognized set of reporting
standards?

Select one of the following:

  • Reluctance of firms to adhere to a single set of reporting standards.

  • Different standardsetting
    bodies of different countries disagree on the best treatment
    of a particular issue.

  • GATT already requires sufficient agreement.

Explanation

Question 67 of 76

1

Which of the following is the best description of the financial statement analysis framework?

Select one of the following:

  • State the objective and context, gather data, process the data, analyze and
    interpret the data, report the conclusions or recommendations, update the
    analysis.

  • Gather data, analyze and interpret the data, determine the context, report the
    conclusions, update the analysis.

  • Gather data, analyze and interpret the data, process the conclusions, assess the
    context, report the recommendations, update the analysis.

Explanation

Question 68 of 76

1

Required financial statements, according to International Accounting Standard (IAS) No. 1, include a(n):

Select one of the following:

  • balance sheet and explanatory notes.

  • cash flow statement and auditor's report.

  • income statement and working capital summary.

Explanation

Question 69 of 76

1

The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750;
contributed capital = $600. Based on this information alone, retained earnings must be equal to:

Select one of the following:

  • −$150.

  • $150.

  • $450.

Explanation

Question 70 of 76

1

The standard auditor's report is most likely required to:

Select one of the following:

  • provide reasonable assurance that management is reliable.

  • provide an "unqualified" opinion if material uncertainties exist.

  • provide reasonable assurance that the financial statements contain no material errors.

Explanation

Question 71 of 76

1

Which of the following statements about financial reporting standards is least accurate? Reporting standards:

Select one of the following:

  • narrow the range within which management estimates can be seen as
    reasonable.

  • are disclosed on Form 8K by publicly traded firms in the United States.

  • ensure that the information is "useful to a wide range of users."

Explanation

Question 72 of 76

1

Which of the following statements concerning the notes to the audited financial statements of a company is least accurate?
Financial statement notes:

Select one of the following:

  • contain information about contingent losses that may occur.

  • include management's assessment of the company's operating performance and
    financial results.

  • are audited.

Explanation

Question 73 of 76

1

Desirable attributes of accounting standardsetting
bodies least likely include:

Select one of the following:

  • making decisions that are in the public interest.

  • operating independently of interested stakeholders.

  • having clear and consistent standardsetting
    processes.

Explanation

Question 74 of 76

1

Which of the following is least likely to be available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval System)?

Select one of the following:

  • SEC filings.

  • Corporate press releases.

  • Form 10Q.

Explanation

Question 75 of 76

1

The process of developing one universally accepted set of accounting standards is best described as:

Select one of the following:

  • unification.

  • convergence.

  • IASB.

Explanation

Question 76 of 76

1

Which of the following statements about the elements of financial statements under the FASB and IASB frameworks is least
accurate?

Select one of the following:

  • The IASB framework lists income and expenses as the elements related to
    performance.

  • The IASB framework does not allow the values of assets to be adjusted upward.

  • The word "probable" is used by the FASB to define assets and liabilities.

Explanation

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