Financial Statement Analysis
For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo's basic earnings per share for 2009? $0.80. $0.91. $0.95.
$0.95. The weighted average number of shares outstanding for 2009 is 1,050,000. Basic earnings per share would be $1,000,000 divided by 1,050,000
Denali Limited, a manufacturing company, had the following income statement information: Revenue$4,000,000 Cost of goods sold$3,000,000 Other operating expenses$500,000 Interest expense$100,000 Tax expense$120,000 Q. Denali's gross profit is equal to: $280,000. $500,000. $1,000,000.
$1,000,000.
In 2018, a company using US GAAP made cash payments of $6 million for salaries, $2 million for interest expense, and $4 million for income taxes. Additional information for the company is provided in the table:($ millions)20172018Revenue4237Cost of goods sold1816Inventory3640Accounts receivable2219Accounts payable1412 Q. Based only on the information given, the company's operating cash flow for 2018 is closest to: $6 million. $10 million. $14 Million.
$10 million. Operating cash flows = Cash received from customers − (Cash paid to suppliers + Cash paid to employees + Cash paid for other operating expenses + Cash paid for interest + Cash paid for income taxes) Cash received from customers = Revenue + Decrease in accounts receivable = $37 + $3 = $40 million Cash paid to suppliers = Cost of goods sold + Increase in inventory + Decrease in accounts payable = $16 + $4 + $2 = $22 million Therefore, the company's operating cash flow = $40 − $22 - Cash paid for salaries - Cash paid for interest - Cash paid for taxes = $40 − $22 − $6 − $2 − $4 = $6 million.
Using the same information as in Question 11, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? $60,000. $110,000. $120,000.
$120,000.
Golden Cumulus Corp., a commodities trading company, reported interest expense of $19 million and taxes of $6 million. Interest payable increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? $22 million for interest and $10 million for taxes. $16 million for interest and $2 million for taxes. $16 million for interest and $10 million for taxes.
$16 million for interest and $10 million for taxes. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.
The following information for the current year is available for a company that prepares its financial statements in accordance with US GAAP. $ thousands Revenue 7,000 Cost of goods sold 4,200 Other operating expenses 500 Restructuring costs 250 Interest expense 200 The company's operating profit (in thousands) is closest to: $2,050. $2,300. $1,850.
$2,050.
White Flag, a women's clothing manufacturer, reported salaries expense of $20 million. The beginning balance of salaries payable was $3 million, and the ending balance of salaries payable was $1 million. How much cash did the company pay in salaries? $18 million. $21 million. $22 million.
$22 million.
For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is closest to: $5.33. $5.54. $5.94.
$5.54. Diluted EPS = (Net income - Preferred dividends)/[Weighted average number of shares outstanding + (New shares that would have been issued at option exercise - Shares that could have been purchased with cash received upon exercise) × (Proportion of year during which the financial instruments were outstanding)
At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes? $55,000. $60,000. $65,000.
$55,000.
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of $75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: $67 million. $79 million. $83 million.
$67 million. Cost of goods sold of $75 million less the decrease in inventory of $6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million).
Mabel Corporation (MC) reported accounts receivable of $66 million at the end of its second fiscal quarter. MC had revenues of $72 million for its third fiscal quarter and reported accounts receivable of $55 million at the end of its third fiscal quarter. Based on this information, the amount of cash MC collected from customers during the third fiscal quarter is: $61 million. $72 million. $83 million.
$83 million.
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of $80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of $2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: $73 million. $77 million. $83 million.
$83 million. Cost of goods sold of $80 million plus the increase in inventory of $5 million equals purchases from suppliers of $85 million. The increase in accounts payable of $2 million means that the company paid $83 million in cash ($85 million minus $2 million) to its suppliers.
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of $80 million, and net income of $20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? $90 million. $100 million. $110 million.
$90 million.
Fairplay had the following information related to the sale of its products during 2009, which was its first year of business: Revenue$1,000,000 Returns of goods sold$100,000 Cash collected$800,000 Cost of goods sold$700,000 Q. Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? $200,000. $900,000. $1,000,000
$900,000. Net revenue is revenue for goods sold during the period less any returns and allowances
Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? 1,003,333. 1,006,667. 1,010,000.
1,003,333. Shares outstanding 1,000,000 Options exercises 10,000 Treasury shares purchased(6,667) Denominator 1,003,333
A company has total liabilities of £35 million and total stockholders' equity of £55 million. Total liabilities are represented on a vertical common-size balance sheet by a percentage closest to: 35%. 39%. 64%.
39%.
An analyst gathered the following information from a company's 2018 financial statements (in $ millions): Balances as of Year Ended 31 December 2017 2018 Retained earnings 120 145 Accounts receivable 38 43 Inventory 45 48 Accounts payable 36 29 Q. In 2018, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company considers dividends paid a financing activity. The company's 2018 cash flow from operations (in $ millions) was closest to 25. 45. 75.
45. All dollar amounts are in millions. Net income (NI) for 2018 is $35. This amount is the increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted from net income because they are uses of cash. The decrease in accounts payable is also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations is $25 + $10 + $25 − $5 − $3 − $7 = $45.
When preparing an income statement, which of the following items would most likely be classified as other comprehensive income? A foreign currency translation adjustment An unrealized gain on a security held for trading purposes A realized gain on a derivative contract not accounted for as a hedge
A foreign currency translation adjustment
According to the Conceptual Framework for Financial Reporting, which of the following is not an enhancing qualitative characteristic of information in financial statements? Accuracy. Timeliness. Comparability
Accuracy.
Which of the following is an appropriate method of computing free cash flow to the firm? Add operating cash flows to capital expenditures and deduct after-tax interest payments. Add operating cash flows to after-tax interest payments and deduct capital expenditures. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
Add operating cash flows to after-tax interest payments and deduct capital expenditures.
Assuming no changes in other variables, which of the following would decrease ROA? A decrease in the effective tax rate. A decrease in interest expense. An increase in average assets.
An increase in average assets.
Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods? An increase or decrease in sales. An increase or decrease in financial leverage. A more efficient or less efficient use of assets.
An increase or decrease in financial leverage.
Ratios are an input into which step in the financial statement analysis framework? Process data. Collect input data. Analyze/interpret the processed data.
Analyze/interpret the processed data.
Which of the following reports is least likely to be filed with the US SEC? Annual report Form 10-K Proxy statement
Annual report
Equity equals: Assets - Liabilities. Liabilities - Assets. Assets + Liabilities.
Assets - Liabilities.
Information about management and director compensation are least likely to be found in the: auditor's report. proxy statement. notes to the financial statements.
Auditors Report
A company's financial position would best be evaluated using the: balance sheet. income statement. statement of cash flows.
Balance sheet
The financial statement that presents a shareholder's residual claim on assets is the: balance sheet. income statement. cash flow statement.
Balance sheet
An analyst gathered the following information from a company's 2018 financial statements (in $ millions): Year ended 31 December 2017 2018 Net sales 245.8 254.6 Cost of goods sold 168.3 175.9 Accounts receivable 73.2 68.3 I nventory 39.0 47.8 Accounts payable 20.3 22.9 Q. Based only on the information above, the company's 2018 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to A 249.7 169.7 B 259.5 174.5 C 259.5 182.1
C. Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5. Cash paid to suppliers = Cost of goods sold + Increase in inventory - Increase in accounts payable = 175.9 + 8.8 − 2.6 = 182.1.
Which of the following suggestions is best aligned with CFA Institute advocacy for financial reporting that reflects economic reality? Cash flow statements prepared using the direct format for cash flow from operations (CFO) Conservatism in revenue recognition policies Detailed cost information for long-lived assets
Cash flow statements prepared using the direct format for cash flow from operations (CFO)
Under International Financial Reporting Standards (IFRS), which of the following is most likely one of the general features underlying the preparation of financial statements? Understandability Timeliness Consistency
Consistency
Which ratio would a company most likely use to measure its ability to meet short-term obligations? Current ratio. Payables turnover. Gross profit margin.
Current ratio.
A creditor most likely would consider a decrease in which of the following ratios to be positive news? Interest coverage (times interest earned). Debt-to-total assets. Return on assets.
Debt-to-total assets.
Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? Straight-line depreciation with a short useful life. Declining balance depreciation with a long useful life. Declining balance depreciation with a short useful life.
Declining balance depreciation with a short useful life.
For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to: $3.52. $3.65. $3.70.
Diluted EPS = (Net income)/(Weighted average number of shares outstanding + New common shares that would have been issued at conversion) = $200,000,000/[50,000,000 + (2,000,000 × 2)] = $3.70
Which of the following would best explain an increase in receivables turnover? The company adopted new credit policies last year and began offering credit to customers with weak credit histories. Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. To match the terms offered by its closest competitor, the company adopted new payment terms now requiring net payment within 30 days rather than 15 days, which had been its previous requirement.
Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables. A write off of receivables would decrease the average amount of accounts receivable (the denominator of the receivables turnover ratio), thus increasing this ratio.
After a two-for-one stock split, which of the following will most likely change relative to its pre-split value? Earnings per share (EPS) Price-to-earnings ratio (P/E Dividend payout ratio
Earnings per share (EPS). A two-for-one stock split will double the number of shares, thus reducing the EPS to half of its pre-split value. P/E will remain unchanged because the price also reduces by half and exactly cancels out the effect of the reduced EPS. The dividend payout ratio remains unchanged because the same proportion of earnings will still be used after the split.
Which of the following elements of financial statements is most closely related to measurement of financial position? Equity. Income. Expenses.
Equity.
Which of the following elements of financial statements is most closely related to measurement of performance? Assets. Expenses. Liabilities.
Expenses.
Neutrality of information in the financial statements most closely contributes to which qualitative characteristic? Relevance. Understandability. Faithful representation.
Faithful representation.
Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of: auditing. financial reporting. financial statement analysis.
Financial Reporting
Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments? ROA. Total asset turnover. Fixed charge coverage.
Fixed charge coverage.
Which phase in the financial statement analysis framework is most likely to involve producing updated reports and recommendations? Follow-up Analyze/interpret the processed data Develop and communicate conclusions and recommendations
Follow-up
Valuing assets at the amount of cash or equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition most closely describes which measurement of financial statement elements? Current cost. Historical cost. Realizable value.
Historical cost.
Which of the following statements is least accurate? IFRS Foundation trustees appoint members of the IASB. The IASB is monitored by a board that includes the US SEC. IFRS Foundation trustees oversee the policy decisions of the FASB.
IFRS Foundation trustees oversee the policy decisions of the FASB.
A company's profitability for a period would best be evaluated using the: balance sheet. income statement. statement of cash flows
Income Statement
A company's profitability over a period of time is best evaluated using the: balance sheet. income statement. cash flow statement.
Income Statement
Laurelli Builders (LB) reported the following financial data for year-end 31 December: Common shares outstanding, 1 January 2,020,000 Common shares issued as stock dividend, 1 June 380,000 Warrants outstanding, 1 January 500,000 Net income $3,350,000 Preferred stock dividends paid $430,000 Common stock dividends paid $240,000 Q. Which statement about the calculation of LB's EPS is most accurate? LB's basic EPS is $1.12. LB's diluted EPS is equal to or less than its basic EPS. The weighted average number of shares outstanding is 2,210,000.
LB's diluted EPS is equal to or less than its basic EPS. LB's basic EPS is $1.22 [= ($3,350,000 − $430,000)/2,400,000]
Which inventory method is least likely to be used under IFRS? First in, first out (FIFO). Last in, first out (LIFO). Weighted average
Last in, first out (LIFO).
Which of the following is least likely to be a general feature underlying the preparation of financial statements within the International Financial Reporting Standards (IFRS) Conceptual Framework? Matching Accrual basis Materiality
Matching
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? Net income. Cash paid to suppliers. Cash received from customers.
Net income.
Which of the following most likely results in an increase of owners' equity? Share repurchase Cash dividend New equity issuance (DAVID WAITE)
New equity issuance
Accounting policies, methods, and estimates used in preparing financial statements are most likely to be found in the: auditor's report. management commentary. notes to the financial statements.
Notes to financial statements
Under which section of a manufacturing company's cash flow statement are the following activities reported? Item 1: Purchases of securities held for trading Item 2: Purchases of securities held for investment Both items are investing activities. Only Item 1 is an operating activity. Only Item 2 is an operating activity.
Only Item 1 is an operating activity.
The sale of a building for cash would be classified as what type of activity on the cash flow statement? Operating. Investing. Financing.
Operating.
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? Operating. Investing. Financing.
Operating.
Which of the following best describes a component of the income statement? Amounts that a company owes its vendors for purchases of goods and services Outflows or depletions of assets in the course of a business's activities Obligations from past events that are expected to result in an outflow of economic benefits
Outflows or depletions of assets in the course of a business's activities
Which of the following best describes a responsibility of the SEC? Overseeing the Public Companies Accounting Oversight Board (PCAOB) Prosecuting analysts who disseminate conclusions based on non-material non-public information Promoting the adoption of global financial reporting standards
Overseeing the Public Companies Accounting Oversight Board (PCAOB)
Which of the following is an example of a financing activity on the cash flow statement under US GAAP? Payment of interest. Receipt of dividends. Payment of dividends.
Payment of dividends.
Which of the following is most likely classified as a current liability? Payment received for a product due to be delivered at least one year after the balance sheet date Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle Payment on debt due in six months for which the company has the unconditional right to defer settlement for at least one year after the balance sheet date
Payments for merchandise due at least one year after the balance sheet date but still within a normal operating cycle
Which of the following sources of information used by analysts is found outside a company's annual report? Auditor's report Peer company analysis Management's discussion and analysis
Peer company analysis
Common-size financial statements are most likely a component of which step in the financial analysis framework? Collect data Analyze/interpret data Process data
Process data
Which is an appropriate method of preparing a common-size cash flow statement? Show each item of revenue and expense as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of net revenue. Show each line item on the cash flow statement as a percentage of total cash outflows.
Show each line item on the cash flow statement as a percentage of net revenue.
Which of the following statements is most accurate with respect to the jurisdiction underlying financial reporting? The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of standard-setting bodies. Regulatory authorities are typically private sector, self-regulated organizations. Standard-setting bodies have authority because they are recognized by regulatory authorities.
Standard-setting bodies have authority because they are recognized by regulatory authorities.
Which of the following is not a required financial statement according to IAS No. 1? Statement of financial position. Statement of changes in income. Statement of comprehensive income.
Statement of changes in income.
When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders? Stock options Convertible debt that is dilutive Convertible preferred stock that is dilutive
Stock options
What does the P/E ratio measure? The "multiple" that the stock market places on a company's EPS. The relationship between dividends and market prices. The earnings for one common share of stock.
The "multiple" that the stock market places on a company's EPS.
US generally accepted accounting principles are currently developed by which entity? The Securities and Exchange Commission. The Financial Accounting Standards Board. The Public Company Accounting Oversight Board.
The Financial Accounting Standards Board.
International financial reporting standards are currently developed by which entity? The IFRS Foundation. The International Accounting Standards Board. The International Organization of Securities Commissions.
The International Accounting Standards Board.
For a company issuing securities in the United States to meet its obligations under the Sarbanes-Oxley Act, which of the following is management required to attest to? The suitability of management and director compensation agreements The adequacy of internal control over financial reporting The accuracy of estimates and assumptions used in preparing the financial statements
The adequacy of internal control over financial reporting
An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? The company installed a new inventory management system, allowing more efficient inventory management. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.
The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.
Which of the following disclosures regarding new accounting standards provides the most meaningful information to an analyst? The impact of adoption is discussed. The standard will have no material impact. Management is still evaluating the impact.
The impact of adoption is discussed.
For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through retained earnings. They are a component of accumulated other comprehensive income.
They are a component of accumulated other comprehensive income.
For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through retained earnings. They are a component of accumulated other comprehensive income.
They are not recognized.
For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? They are not recognized. They flow through income into retained earnings. They are a component of accumulated other comprehensive income
They flow through income into retained earnings.
An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest. What is this ratio, what does it measure, and what does it indicate? This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest and indicating a company's liquidity.
This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency.
Which of the following best describes the role of financial statement analysis? To provide information about a company's performance To provide information about a company's changes in financial position To form expectations about a company's future performance and financial position
To form expectations about a company's future performance and financial position
Which of the following is most likely not an objective of financial statements? To provide information about the performance of an entity. To provide information about the financial position of an entity. To provide information about the users of an entity's financial statements.
To provide information about the users of an entity's financial statements.
Interest paid is classified as an operating cash flow under: US GAAP but may be classified as either operating or investing cash flows under IFRS. IFRS but may be classified as either operating or investing cash flows under US GAAP. US GAAP but may be classified as either operating or financing cash flows under IFRS.
US GAAP but may be classified as either operating or financing cash flows under IFRS.
Which of the following is not a constraint on the financial statements according to the Conceptual Framework? Understandability. Benefit versus cost. Balancing of qualitative characteristics.
Understandability.
What type of audit opinion is preferred when analyzing financial statements? Qualified. Adverse. Unqualified.
Unqualified.
Distinguishing between current and non-current items on the balance sheet and presenting a subtotal for current assets and liabilities is referred to as: a classified balance sheet. an unclassified balance sheet. a liquidity-based balance sheet.
a classified balance sheet.
The assumption that the effects of transactions and other events are recognized when they occur, not when the cash flows occur, is called: relevance. accrual basis. going concern.
accrual basis.
An example of a contra asset account is: depreciation expense. sales returns and allowances. allowance for doubtful accounts.
allowance for doubtful accounts.
Which statement is most accurate? A common size income statement: restates each line item of the income statement as a percentage of net income. allows an analyst to conduct cross-sectional analysis by removing the effect of company size. standardizes each line item of the income statement but fails to help an analyst identify differences in companies' strategies.
allows an analyst to conduct cross-sectional analysis by removing the effect of company size.
The initial measurement of goodwill is most likely affected by: an acquisition's purchase price. the acquired company's book value. the fair value of the acquirer's assets and liabilities.
an acquisition's purchase price.
Money received from customers for products to be delivered in the future is recorded as: revenue and an asset. an asset and a liability. revenue and a liability.
an asset and a liability.
Resources controlled by a company as a result of past events are: equity. assets. liabilities.
assets.
The most likely company to use a liquidity-based balance sheet presentation is a: bank. computer manufacturer holding inventories. software company with trade receivables and payables.
bank.
A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company's: basic EPS equals its diluted EPS. capital structure is considered complex at year-end. basic EPS is calculated by using a simple average number of shares outstanding.
basic EPS equals its diluted EPS.
Cash flows from taxes on income must be separately disclosed under: IFRS only. US GAAP only. both IFRS and US GAAP.
both IFRS and US GAAP.
When a company buys shares of its own stock to be held in treasury, it records a reduction in: both assets and liabilities. both assets and shareholders' equity. assets and an increase in shareholders' equity.
both assets and shareholders' equity.
Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likely result in an increase for that company in: the debt-to-equity ratio but not the total asset turnover. the total asset turnover but not the debt-to-equity ratio. both the debt-to-equity ratio and the total asset turnover.
both the debt-to-equity ratio and the total asset turnover. Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.
The most stringent test of a company's liquidity is its: cash ratio. quick ratio. current ratio.
cash ratio.
Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: continuing operations. discontinued operations. other comprehensive income.
continuing operations.
An example of an expense classification by function is: tax expense. interest expense. cost of goods sold.
cost of goods sold.
Comparison of a company's financial results to other peer companies for the same time period is called: technical analysis. time-series analysis. cross-sectional analysis.
cross-sectional analysis.
An investor concerned whether a company can meet its near-term obligations is most likely to calculate the: current ratio. return on total capital. financial leverage ratio.
current ratio.
Debt due within one year is considered: current. preferred. convertible.
current.
An investor worried about a company's long-term solvency would most likely examine its: current ratio. return on equity. debt-to-equity ratio.
debt-to-equity ratio.
The most likely costs included in both the cost of inventory and property, plant, and equipment are: selling costs. storage costs. delivery costs.
delivery costs.
A company recently engaged in a non-cash transaction that significantly affected its property, plant, and equipment. The transaction is: reported under the investing section of the cash flow statement. reported differently in cash flow from operations under the direct and indirect methods. disclosed as a separate note or in a supplementary schedule to the cash flow statement.
disclosed as a separate note or in a supplementary schedule to the cash flow statement.
Expenses on the income statement may be grouped by: nature, but not by function. function, but not by nature. either function or nature.
either function or nature.
Under IFRS, income includes increases in economic benefits from: increases in liabilities not related to owners' contributions. enhancements of assets not related to owners' contributions. increases in owners' equity related to owners' contributions.
enhancements of assets not related to owners' contributions.
A core objective of the International Organization of Securities Commissions is to: eliminate systemic risk. protect users of financial statements. ensure that markets are fair, efficient, and transparent.
ensure that markets are fair, efficient, and transparent.
The role of financial statement analysis is best described as: providing information useful for making investment decisions. evaluating a company for the purpose of making economic decisions. using financial reports prepared by analysts to make economic decisions.
evaluating a company for the purpose of making economic decisions.
Accrued expenses (accrued liabilities) are: expenses that have been paid. created when another liability is reduced. expenses that have been reported on the income statement but not yet paid.
expenses that have been reported on the income statement but not yet paid.
The objective of general purpose financial reporting is best described as: providing information about financial performance to a wide range of users. facilitating resource allocation decisions by current and potential investors and creditors. reporting an entity's economic resources and claims, and changes therein, to shareholders.
facilitating resource allocation decisions by current and potential investors and creditors.
Along with relevance, the most critical qualitative characteristic of financial information is: faithful representation. comparability. understandability.
faithful representation.
Providing information about the performance of a company, its financial position, and changes in financial position that is useful to a wide range of users is most accurately described as the role of: financial reporting. the audit report. financial statement analysis.
financial reporting.
The income statement is best used to evaluate a company's: financial position. sources of cash flow. financial results from business activities
financial results from business activities
To evaluate the potential effect of an innovative and unique type of business transaction on financial statements, an analyst's best approach is to: monitor the actions of standard setters and regulators. gain an understanding of the transaction's economic purpose. consider the approach taken for "new" transactions that arose in the past.
gain an understanding of the transaction's economic purpose.
The assumption that an entity will continue to operate for the foreseeable future is called: accrual basis. comparability. going concern.
going concern.
All of the following are current assets except: cash. goodwill. inventories.
goodwill.
A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company's profitability initially appear: lower. unchanged. higher.
higher. Under the converged accounting standards, the incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be capitalized. If a company expensed these incremental costs in the years prior to adopting the converged standards, all else being equal, its profitability will appear higher under the converged standards.
The first step in cash flow statement analysis should be to: evaluate consistency of cash flows. determine operating cash flow drivers. identify the major sources and uses of cash.
identify the major sources and uses of cash.
Selected year-end financial statement data for Workhard are shown below. Beginning shareholders' equity 475 Ending shareholders' equity 493 Unrealized gain on available-for-sale securities 5 Unrealized loss on derivatives accounted for as hedges −3 Foreign currency translation gain on consolidation 2 Dividends paid 1 Net income15 Q. Workhard's comprehensive income for the year: is $18 million. is increased by the derivatives accounted for as hedges. includes $4 million in other comprehensive income.
includes $4 million in other comprehensive income.
Updated information on a company's performance and financial position since the last annual report is most likely found in: management discussion and analysis. proxy statements. interim reports.
interim reports.
Metric£ thousands Comprehensive income 246,000 Dividends paid 60,000 Ending retained earnings 821,000 Opening retained earnings 580,000 The company will most likely report other comprehensive income (OCI) (in £ thousand) as a: loss of 55,000. gain of 186,000. gain of 301,000.
loss of 55,000. OCI = Comprehensive income - net income
When computing net cash flow from operating activities using the indirect method, an addition to net income is most likely to occur when there is a: gain on the sale of an asset. loss on the retirement of debt. decrease in deferred tax liability. (DAVID WAITE)
loss on the retirement of debt.
Information about a company's objectives, strategies, and significant risks are most likely to be found in the: auditor's report. management commentary. notes to the financial statements
management commentary
Analysts can best address the challenges of comparing financial statements prepared under US GAAP with those prepared under International Financial Reporting Standards (IFRS) by: referring to the reconciliation from IFRS to US GAAP provided in the notes. assuming differences are minor given US GAAP and IFRS convergence. monitoring changes in both sets of standards and interpreting cautiously.
monitoring changes in both sets of standards and interpreting cautiously.
An analyst compiles the following data for a company: FY13 FY14 FY15 ROE 19.8% 20.0% 22.0% Return on total assets 8.1% 8.0% 7.9% Total asset turnover 2.0 2.0 2.1 Q. Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company's: net profit margin and financial leverage have decreased. net profit margin and financial leverage have increased. net profit margin has decreased but its financial leverage has increased.
net profit margin has decreased but its financial leverage has increased. ROE = Return on assets × Financial leverage. ROE increased over the period despite the drop in ROA; therefore, financial leverage must have increased.
When a company pays its rent in advance, its balance sheet will reflect a reduction in: assets and liabilities. assets and shareholders' equity. one category of assets and an increase in another.
one category of assets and an increase in another.
The three major classifications of activities in a cash flow statement are: inflows, outflows, and net flows. operating, investing, and financing. revenues, expenses, and net income.
operating, investing, and financing.
A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for: all prior periods. current and future periods. prior periods shown in a report.
prior periods shown in a report.
The role of the International Organization of Securities Commissions (IOSCO) is best described as: promoting cross-border cooperation and uniformity in securities regulation. enforcing financial reporting requirements for entities participating in capital markets. promoting the use of International Financial Reporting Standards (IFRS) and the convergence of national accounting standards.
promoting cross-border cooperation and uniformity in securities regulation.
Which of the following best describes why the notes that accompany the financial statements are required? The notes: permit flexibility in statement preparation. standardize financial reporting across companies. provide information necessary to understand the financial statements.
provide information necessary to understand the financial statements.
A benefit of using the direct method rather than the indirect method when reporting operating cash flows is that the direct method: mirrors a forecasting approach. is easier and less costly. provides specific information on the sources of operating cash flows.
provides specific information on the sources of operating cash flows.
An auditor determines that a company's financial statements are prepared in accordance with applicable accounting standards except with respect to inventory reporting. This exception is most likely to result in an audit opinion that is: adverse. qualified. unqualified
qualified.
The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is: current cost. present value. realizable value.
realizable value.
An independent audit report is most likely to provide: absolute assurance about the accuracy of the financial statements. reasonable assurance that the financial statements are fairly presented. a qualified opinion with respect to the transparency of the financial statements.
reasonable assurance that the financial statements are fairly presented.
According to the International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting, the two fundamental qualitative characteristics that make financial information useful are best described as: understandability and verifiability. relevance and faithful representation. timeliness and accrual accounting.
relevance and faithful representation.
A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: reported as a $1 million investing cash inflow and outflow. reported as a $1 million financing cash outflow and inflow. reported as supplementary information to the cash flow statement.
reported as supplementary information to the cash flow statement.
The non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet: as a long-term liability. separately, but as a part of shareholders' equity. as a mezzanine item between liabilities and shareholders' equity.
separately, but as a part of shareholders' equity.
In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: activity ratios. liquidity ratios. solvency ratios.
solvency ratios.
Shareholders' equity reported on the balance sheet is most likely to differ from the market value of shareholders' equity because: historical cost basis is used for all assets and liabilities. some factors that affect the generation of future cash flows are excluded. shareholders' equity reported on the balance sheet is updated continuously.
some factors that affect the generation of future cash flows are excluded.
Notes to financial statements most likely include: a discussion of significant trends, events, and uncertainties that affect the operating results. an auditor's opinion as to the fair presentation of the financial statements. supplementary information about accounting policies, methods, and estimates.
supplementary information about accounting policies, methods, and estimates.
The information provided by a balance sheet item is limited because of uncertainty regarding: measurement of its cost or value with reliability. the change in current value following the end of the reporting period. the probability that any future economic benefit will flow to or from the entity.
the change in current value following the end of the reporting period.
The carrying value of inventories reflects: their historical cost. their current value. the lower of historical cost or net realizable value.
the lower of historical cost or net realizable value.
Other comprehensive income is least likely to include gains or losses on: the sale or disposal of discontinued operations. derivative contracts accounted for as hedges. the translation of foreign currency-denominated subsidiary financial statements.
the sale or disposal of discontinued operations.
Interim financial reports released by a company are most likely to be: monthly. unaudited. unqualified.
unaudited.
When developing forecasts, analysts should most likely: develop possibilities relying exclusively on the results of financial analysis. use the results of financial analysis, analysis of other information, and judgment. aim to develop extremely precise forecasts using the results of financial analysis.
use the results of financial analysis, analysis of other information, and judgment.
Under the International Accounting Standards Board's (IASB's) Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as: understandability. verifiability. comparability.
verifiability.
Net revenue most likely refers to revenue minus: revenues attributable to non-controlling interests. estimates of warranty expense. volume discounts and estimated returns.
volume discounts and estimated returns.
During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009? ₤120,000. ₤122,000. ₤124,000.
₤122,000.
Using the same information as in Question 8, what would Accent's cost of goods sold be under the weighted average cost method? ₤120,000. ₤122,000. ₤124,000.
₤124,000.
Apex Consignment sells items over the internet for individuals on a consignment basis. Apex receives the items from the owner, lists them for sale on the internet, and receives a 25 percent commission for any items sold. Apex collects the full amount from the buyer and pays the net amount after commission to the owner. Unsold items are returned to the owner after 90 days. During 2009, Apex had the following information: Total sales price of items sold during 2009 on consignment was €2,000,000. Total commissions retained by Apex during 2009 for these items was €500,000. Q. How much revenue should Apex report on its 2009 income statement? €500,000. €2,000,000. €1,500,000.
€500,000. Apex is not the owner of the goods and should only report its net commission as revenue.
