Financial Analysis Exam #3 (FINAL)

Selected information from Gerrard, Inc. financial activities in the year 2004 was as follows: Net income was $330,000, the tax rate was 40%, 700,000 shares of common stock were outstanding on Jan. 1, the average market price per share was $6 in 2006, dividends were paid in 2006, 2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of 200 common shares for each preferred share, were issued in 2005, and 200,000 shares of common stock were issued on March 1. Gerrard, Inc.'s diluted earnings per share (diluted EPS) was closest to: a. $0.261 b. $0.197 c. $0.289

a. $0.261 Basic EPS= (NI-Preferred dividends) / weighted average common shares outstanding Weighted average= (700,000 + (200,000 x (10/12)= 866,667. Basic EPS= (330,000 - (2,000 x 500 x 0.08))/866,667 = $0.289 If the convertible preferred shares were converted to CS as of Jan. 1 (2,000 x 200)= 400,000 additional CS would have been issues and the PS would not have been paid. Diluted EPS was (330,000 / (866,667 = 400,000)= $0.261

Purple Fleur S.A., a retailer of floral products, reported cost of goods sold of $75 million. Total assets increased $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: a. $67 million b. $79 million c. $83 million

a. $67 million (75,000,000 - 6,000,000 - 2,000,000 = 67,000,000)

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? a. $90 million b. $100 million c. $110 million

a. $90 million ($100 million (total revenues) - $10 million (accounts receivable))= $90 million cash received

Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to: a. +$0.41 million b. -$0.41 million c. -$1.22 million

a. +$0.41 million (Average accounts receivable most recent fiscal year= ((300,000/365) x 19)= 15.62 million) (Average accounts receivable desired= ((390,000/365) x 15)= 16.03 million) (The difference between 15.62 million and 16.03 million equals an increase of 0.41 million)

In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firm's weighted average number of shares outstanding? a. 250,000 b. 1,000,000 c. 420,000

a. 250,000 The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by 1,000,000 x (56-42)/56 or 250,000 shares.

Equity equals: a. Assets - Liabilities b. Liabilities - Assets c. Assets + Liabilities

a. Assets - liabities

The Hall Corp. had 100,000 shares of common stock outstanding at the beginning of the year. Hall issued 30,000 shares of common stock on May 1. On July 1, the company issued a 10% stock dividend. On September 1, Hall issued 1,000, 10% bonds, each convertible into 21 shares of common stock. What is the weighted average number of shares to be used in computing basic and diluted EPS, assuming the convertible bonds are dilutive? a. Basic- $132,000; Dilutive- $139,000 b. Basic- $132,000; Dilutive- $146,000 c. Basic- $139,000; Dilutive- $146,000

a. Basic- $132,000; Dilutive- $139,000 The new stock is weighted 8/12. The bonds are weighted 4/12 and are not affected by the stock dividend. Basic shares= ((100,000 x (12/12))+((30,000 x (8/12)) x (1 + 0.1)= 132,000 Diluted shares= 132,000 + (21,000 x (4/12))= 139,000

Which ratio would a company most likely use to measure its ability to meet short-term obligations? a. Current ratio b. Payables turnover c. Gross profit margin

a. Current ratio

Which of the following is least likely a limitation of financial ratios? a. Data on comparable firms are difficult to acquire. b. Determining the target or comparison value for a ratio requires judgment. c. Different accounting treatments require the analyst to adjust the data before comparing ratios

a. Data on comparable firms are difficult to acquire.

Which of the following transactions affects owners' equity but does not affect net income? a. Foreign currency translation gain b. Repaying the face amount on a bond issued at par c. Dividends received from available-for-sale securities

a. Foreign currency translation gain

Changing an accounting estimate: a. Is reported prospectively b. Requires restatement of all prior-period statements c. Is reported by adjusting the beginning balance of retained earnings for the cumulative effect

a. Is reported prospectively

Which of the following statements regarding basic and diluted EPS is most accurate? a. Neither basic nor diluted EPS considers anti-dilutive securities in its computation. b. To calculate diluted EPS, use net income less preferred dividends in the numerator. c. If diluted EPS is less than basic EPS then the convertible securities are said to be anti-dilutive.

a. Neither basic nor diluted EPS considers anti-dilutive securities in its computation. To calculate diluted EPS, dividends on convertible preferred stock and other after tax interest on convertible debt need to be added to net income in the numerator. If diluted EPS are more than basic EPS, the convertible securities are anti-dilutive and should NOT be used in computing diluted EPS.

Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? a. Net income b. Cash paid to suppliers c. Cash received from customers

a. Net income

A company's quick ratio is 1.2. If inventory were purchased for cash, the: a. Numerator would decrease more than the denominator, resulting in a lower quick ratio. b. Denominator would decrease more than the numerator, resulting in a higher current ratio. c. Numerator and denominator would decrease proportionally, leaving the current ratio unchanged.

a. Numerator would decrease more than the denominator, resulting in a lower quick ratio. Quick ratio = (Cash + AR)/AP If cash decreases the quick ratio will also decrease.

Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and U.S. GAAP? a. Operating b. Investing c. FInancing

a. Operating

AAA has a contract to build a building for $100,000 with an estimated time to completion of 3 years. A reliable cost estimate for the project is $60,000. In the first year of the project, AAA incurred costs totaling $24,000. How much profit should AAA report at the end of the first year under the percentage-of-completion method and the completed contract method? a. POC = $16,000; CC = $0 b. POC = $16,000; CC = $40,000 c. POC= $40,000; CC = $0

a. POC = $16,000; CC = $0 24,000/60,000= 40% of the project completed 40% of 100,000 = 40,000 in revenue 40,000 (revenue)- 24,000 (cost)= $16,000 profit for the period. No profit would be reported in the first year using the completed contract method.

An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes 14 months to build one jet, and the government pays for them in installments over the 14-month period. Which revenue recognition method should be used? a. Percentage-of-completion b. Installment sales c. Completed contract

a. Percentage-of-completion

Which of the following items would increase the total equity balance reported on the statement of changes in stockholders' equity for a given reporting period? a. Positive net income b. Issuance of long-term debt c. Repurchasing treasury stock

a. Positive net income Positive net income for a reporting period would increase retained earnings, which is part of total equity.

Common size income statements express all income statement items as a percentage of: a. Sales b. Net income c. Assets

a. Sales

What does P/E ratio measure? a. The "multiple" that the stock market places on a company's EPS. b. The relationship between dividends and market prices. c. The earnings for one common share of stock.

a. The "multiple" that the stock market places on a company's EPS.

Which of the following statements correctly describes the financial statement element reported on the balance sheet of a company? a. The asset and liability values reported on the balance sheet do not necessarily reflect the fair market value of these items. b. The equity capital reported on the balance sheet represents the fair market value of a company. c. According to the accounting identity, the total assets of a company are equal to its total liabilities.

a. The asset and liability values reported on the balance sheet do not necessarily reflect the fair market value of these items.

For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders' equity? a. They are not recognized. b. They flow through retained earnings. c. They are a component of accumulated other comprehensive income.

a. They are not recognized.

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? a. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. b. This ratio is an effective ratio, measuring the amount of a company's operating cash flow used for taxes and indicating a company's efficiency in tax management. c. This ratio is an operating profitability ratio, measuring the operating cash flow generated accounting for taxes and interest indicating a company's liquidity.

a. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency.

At the beginning of the year, Company P purchased 1,000 shares of Company S for $80 per share. During the year, Company S paid a dividend of $4 per share. At the end of the year, Company S's share price was $75. What amount should company P report on its balance sheet at year-end if the investment in Company S is considered a trading security, and what amount should be reported if the investment is considered an available-for-sale security? a. Trading- $75,000; Available for sale- $75,000 b. Trading- $75,000; Available for sale- $80,000 c. Trading- $80,000; Available for sale- $80,000

a. Trading- $75,000; Available for sale- $75,000 Both trading securities and available-for-sale securities are reported on the balance sheet at their fair values. At year-end, the fair value is $75,000 ($75 per share x 1,000 shares)

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. a classified balance sheet b. an unclassified balance sheet c. a liquidity-based balance sheet

a. a classified balance sheet

The initial measurement of goodwill is most likely affected by: a. an acquisitions purchase price b. the acquired company's book value c. the fair value of the acquirer's assets and liabilities

a. an acquisitions purchase price

The most stringent test of a company's liquidity is its: a. cash ratio b. quick ratio c. current ratio

a. cash ratio

Debt due within one year is considered: a. current b. preferred c. convertible

a. current

An investor concerned whether a company can meet its near-term obligations is most likely to calculate the: a. current ratio b. return on total capital c. financial leverage ratio

a. current ratio

An analyst gathered the following information about a company: 100,000 common shares outstanding from the beginning of the year, earnings of $125,000, 1,000 7% $1,000 par bonds convertible into 25 shares each, outstanding as of the beginning of the year, and a tax rate of 40%. The company's diluted EPS is closest to: a. $1.22 b. $1.25 c. $1.34

b. $1.25 Basic EPS= 125,000/100,000= $1.25 Next check if the convertible bonds are dilutive: Numerator impact= (1,000 x 1,000 x 0.07) x (1 - 0.4)= $42,000 Denominator impact= $42,000/25,000 shares= $1.68 Since $1.68 is greater than the basic EPS of $1.25, the bonds are anti-dilutive. This, diluted EPS = $1.25

The Better Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, BB had costs of $30 million. The Better Building Company's reported profit for the first year of the contract, using the percentage-of-completion method, is: a. $0 b. $10 million c. $20 million

b. $10 million = (30,000,000 / 75,000,000) x (100,000,000 - 75,000,000)

JME Construction always uses the percentage-of-completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available: Cost incurred to date= $2.2 million, Billings to date= $2 million, Cash collected= $1.75 million, and total cost of project= $8.8 million. How much gross profit should JME recognize for 2004? a. -$200,000 b. $300,000 c. -$450,000

b. $300,000 Stage of completion = (2.2 / 8.8) = 25% Revenue to be recognized = 0.25 x 10,000,000 = 2.5 million Gross profit = 2.5 million - 2.2 million = $300,000

Project cost estimate = $10 million; contract totals $12 million; $2 million of costs occur in years 1 and 2; invoiced amounts $4 million in year 1 and $3 million in year 2; $1 million in cash collected each year. Year 2 net income under percentage-of-completion is: a. $1 million b. $400,000 c. $1 million loss

b. $400,000 (2,000,000 / 10,000,000) x (12,000,000 - 10,000,000)

At the beginning of the year, Parent Company purchased all 500,000 shares of Sub INc. for $15 per share. Just before the acquisition date, Sub's balance sheet reported net assets of $6 million. Parent determined the fair value of Sub's property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of Sub? a. $0 b. $500,000 c. $1,500,000

b. $500,000 Purchase price= ($15 per share x 500,000 shares)= 7,500,000 Fair value of net assets= (6,000,000 book value + 1,000,000 increase in property and equipment)= 7,000,000 7,500,000-7,000,000=500,000 goodwill

The following data is from Delta's common size financial statement: Earnings after taxes- 18%, equity- 40%, current assets-60%, current liabilities- 30%, sales- $300, and total assets- $1,400. What is Delta's total-debt-to-equity ratio? a. 1.0 b. 1.5 c. 2.0

b. 1.5 Equity is 40% so debt is 60%, 60/40= 1.5

An analyst has gathered the following information about a company: 50,000 common shares outstanding from the beginning of the year, warrants outstanding all year on 50,000 shares, exercisable at $20 per share, stock is selling at year end for $25, and the average price of the company's stock for the year was $15. How many shares should be used in calculating the company's diluted EPS? a. 16,667 b. 50,000 c. 66,667

b. 50,000 The warrants in this case are anti-dilutive. The average price per share is less than the exercise price of $20. The year-end price per share is not relevant. The denominator consists of only the common stock for basic EPS.

If a company recognizes revenue faster than justified, which of the following describes the likely effects on accounts receivable and retained earnings? a. AR- overstated; RE- understated b. AR- overstated; RE- overstated c. AR- understated; RE- overstated

b. AR- overstated; RE- overstated

Which of the following is an appropriate method of computing free cash flow to the firm? a. Add operating cash flows to capital expenditures and deduct after-tax interest payments. b. Add operating cash flows to after-tax interest payments and deduct capital expenditures. c. Deduct both after-tax interest payments and capital expenditures from operating cash flows.

b. Add operating cash flows to after-tax interest payments and deduct capital expenditures.

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? a. An increase or decrease in sales. b. An increase or decrease in financial leverage. c. A more efficient or less efficient use of assets.

b. An increase or decrease in financial leverage.

A creditor most likely would consider a decrease in which of the following ratios to be positive news? a. Interest coverage (times interest earned) b. Debt-to-total assets c. Return on assets

b. Debt-to-total assets

Which of the following would best explain an increase in receivables turnover? a. The company adopted new credit policies last year and began offering credit to customers with weak credit histories. b. 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. c. 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.

b. 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.

The sale of a building for cash would be classified as what type of activity on the cash flow statement? a. Operating b. Investing c. Financing

b. Investing

To study trends in a firm's cost of goods sold (COGS), the analyst should standardize the cost of goods sold numbers to a common-sized basis by dividing COGS by: a. Assets b. Sales c. Net income

b. Sales With vertical common-size income statement, all income statement accounts are divided by sales.

Which of the following is least likely a routinely used operating profitability ratio? a. Net income / Net sales b. Sales / Total assets c. Gross profit / Net sales

b. Sales / Total assets Total asset turnover is a measure of operating efficiency, not operating profitability.

Which is an appropriate method of preparing a common-size cash flow statement? a. Show each item of revenue and expense as a percentage of net revenue. b. Show each line item on the cash flow statement as a percentage of net revenue. c. Show each line item on the cash flow statement as a percentage of total cash outflows.

b. Show each line item on the cash flow statement as a percentage of net revenue.

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? a. They are not recognized. b. They flow through income into retained earnings. c. They are a component of accumulated other comprehensive income.

b. They flow through income into retained earnings.

Which of the following best reflects the balance sheet carrying values for investments in marketable debt securities classified as indicated? a. Trading securities= fair value; held-to-maturity= fair value b. Trading securities= fair value; held-to-maturity= amortized cost c. Trading securities= amortized cost; held-to-maturity= amortized cost

b. Trading securities= fair value; held-to-maturity= amortized cost Under both IFRS and U.S. GAAP investments in marketable securities classified as trading securities are reported on the balance sheet based on their current fair values. Investments in marketable debt securities that are classified as held-to-maturity are carried at amortized cost.

At the beginning of the year, Company P purchased 1,000 shares of Company S for $80 per share. During the year, Company S paid a dividend of $4 per share. At the end of the year, Company S's share price was $75. What amount should Company P report in its income statement at year-end if the investment in Company S is considered a trading security, and what amount should be reported if the investment is considered an available-for-sale security? a. Trading- ($1,000); Available for sale- ($1,000) b. Trading- ($1,000); Available for sale- $4,000 c. Trading- ($5,000); available for sale- $4,000

b. Trading- ($1,000); Available for sale- $4,000 A loss of $1,000 is recognized if the securities are considered trading securities ($4 dividend x 1,000 shares)-*$5 unrealized loss x 1,000 shares). Income is $4,000 if the investment in Company S is considered available-for-sale($4 dividend x $1,000).

Money received from customers for products to be delivered in the future is recorded as: a. revenue and an asset b. an asset and a liability c. revenue and a liability

b. an asset and a liability

Resources controlled by a company as a result of past events are: a. equity b. assets c. liabilities

b. assets

When a company buys shares of its own stock to be held in treasury, it records a reduction in: a. both assets and liabilities b. both assets and shareholders' equity c. assets and an increase in shareholders' equity

b. both assets and shareholders' equity

All of the following are current assets except: a. cash b. goodwill c. inventories

b. goodwill

The three major classifications of activities in a cash flow statement are: a. inflows, outflows, and net flows b. operating, investing, and financing c. revenues, expenses, and net income

b. operating, investing, and financing

The controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet: a. as a long-term liability b. separately, but as part of shareholders' equity c. as a mezzanine item between liabilities and shareholders' equity.

b. separately, but as part of shareholders' equity

When developing forecasts, analysts should most likely: a. develop possibilities relying exclusively on the results of financial analysis. b. use the results of financial analysis, analysis of other information, and judgment. c. aim to develop extremely precise forecasts using the results of financial analysis.

b. use the results of financial analysis, analysis of other information, and judgment.

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? a. $22 million for interest and $10 million for taxes b. $16 million for interest and $2 million for taxes c. $16 million for interest and $10 million for taxes

c. $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, and tax expense of $6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.)

Suppose that JPK Inc. paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on Jan. 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm's basic earnings per share (EPS) for 2004? a. $2.71 b. $2.91 c. $2.64

c. $2.64 1/1/04: 22,000 shares (adjusted for 10% stock dividend) x 12 months = 264,000 6/1/04: 7,700 shares (adjusted for 10% stock dividend) x 7 months = 53,900 Total share month = 317,900 Average shares = 317,900 / 12 = 26,492 Basic EPS = (150,000-80,000)/26,492= 2.64

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? a. $18 million b. $21 million c. $22 million

c. $22 million

Ludwig company had the following financial highlights for the year ended Sep. 30, 2012; net income of $20 million; current assets of $60 million; PP&E of $75 million; goodwill of $20 million; current liabilities of $50 million; long-term debt of $40 million; and deferred tax liabilities of $15 million. The company's equity capital (Shareholders' equity) on Sep. 30, 2012 is: a. $20 million b. $30 million c. $50 million

c. $50 million Total assets (in millions)= 60+75+20= $155 Total liabilities (in millions)= 50+40+15= $105 Shareholders' equity= assets-liabilities, so 155 million - 105 million = $50 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: a. $73 million b. $77 million c. $83 million

c. $83 million ( $80,000,000 + $5,000,000 - $2,000,000 = $83,000,000)

Return on equity using the traditional DuPont formula equals: a. (net profit margin)(interest component)(solvency ratio) b. (net profit margin)(total asset turnover)(tax retention rate) c. (net profit margin)(total asset turnover)(financial leverage multiplier)

c. (net profit margin)(total asset turnover)(financial leverage multiplier)

Which of the following securities would least likely be found in a simple capital structure? a. 6%, $5,000 par value putable bond b. 7%, $100 par value non-convertible preferred c. 3%, $100 par value convertible preferred

c. 3%, $100 par value convertible preferred A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock

Given the following information, how many shares should be used in computing diluted EPS? 300,000 shares outstanding, 100,000 warrants exercisable at $50 per share, average share price of $55, and year-end share price of $60. a. 9,091 b. 90,909 c. 309,091

c. 309,091 Since the exercise price of the warrants is less than the average share price, the warrants are dilutive. Using the treasury stock method to determine the denominator impact: (55-50)/55 x 100,000 shares = 9,091 shares. Thus the denominator will increase by 9,091 shares. The question asks for the total so that = 309,091

Assuming no changes in other variables, which of the following would decrease ROA? a. A decrease in the effective tax rate. b. A decrease in interest expense. c. An increase in average assets.

c. An increase in average assets.

Which of the following would least likely increase pretax income? a. Decreasing the bad debt expense estimate b. Increasing the useful life of an intangible asset c. Decreasing the residual value of a depreciable tangible asset

c. Decreasing the residual value of a depreciable tangible asset

Which of the following is least likely to be included when calculating comprehensive income? a. Unrealized loss from cash flow hedging derivatives b. Unrealized gain from available-for-sale securities c. Dividends paid to common shareholders

c. Dividends paid to common shareholders Comprehensive income includes all changes in equity except transactions with shareholders.

Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments? a. ROA b. Total asset turnover c. Fixed charge coverage

c. Fixed charge coverage

Accrued liabilities are disclosed on the financial statements by? a. An appropriation of retained earnings. b. A footnote to the financial statements. c. Including them as a liability on the balance sheet.

c. Including them as a liability on the balance sheet.

Which principle requires that cost of goods sold be recognized in the same period in which the sale of the related inventory is recorded? a. Going concern b. Certainty c. Matching

c. Matching

Which of the following is an example of a financing activity on the cash flow statement under U.S. GAAP? a. Payment of interest b. Receipt of dividends c. Payment of dividends

c. Payment of dividends

Which of the following correctly describes items on the balance sheet? a. Items on the balance sheet are primarily based on market values. b. Items represent actual amounts, not judgments and/or estimates. c. Some items that are of financial value are not included.

c. Some items that are of financial value are not included. (These items include things like off-balance sheet items such as operating leases, accounts receivable sales, and defined benefit pension obligations.)

An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? a. The company installed a new inventory management system, allowing more efficient inventory management. b. Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period. c. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

c. The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.

For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? a. They are not recognized. b. They flow through retained earnings. c. They are a component of accumulated other comprehensive income.

c. They are a component of accumulated other comprehensive income.

Interest paid is classified as an operating cash flow under: a. U.S. GAAP but may be classified as either operating or investing cash flows under IFRS. b. IFRS but may be classified as either operating or investing cash flows under IFRS. c. U.S. GAAP but may be classified as either operating or financing cash flows under IFRS.

c. U.S. GAAP but may be classified as either operating or financing cash flows under IFRS.

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line of the balance sheet is expressed as a percentage of ending total assets. Statement #3 - Each line item is expressed as a percentage of the prior year's amount. a. Vertical- Statement #1; Horizontal- Statement #2 b. Vertical- Statement #2; Horizontal- Statement #3 c. Vertical- Statement #2; Horizontal- Statement #1

c. Vertical- Statement #2; Horizontal- Statement #1 Horizontal common-size analysis involves expressing each line item as a percentage of the base-year figure. Vertical common-size analysis involves expressing each line item of the income statement as a percentage of revenue and each line item of the balance sheet as a percentage of ending total assets.

Cash flows from taxes on income must be separately disclosed under: a. IFRS only b. U.S. GAAP only c. both IFRS and U.S. GAAP

c. both IFRS and U.S. GAAP

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: a. the debt-to-equity ratio but not the total asset turnover b. the total asset turnover but not the debt-to-equity ratio c. both the debt-to-equity ratio and the total asset turnover

c. both the debt-to-equity ratio and the total asset turnover

Comparison of a company's financial results to other peer companies for the same time period is called: a. technical analysis b. time-series analysis c. cross-sectional analysis

c. cross-sectional analysis

An investor worried about a company's long-term solvency would most likely examine its: a. current ratio b. return on equity c. debt-to-equity ratio

c. debt-to-equity ratio

Accrued expenses (accrued liabilities) are: a. expenses that have been paid b. created when another liability is reduced c. expenses that have been reported on the income statement but not yet paid.

c. expenses that have been reported on the income statement but not yet paid.

The first step in cash flow statement analysis should be to: a. evaluate consistency of cash flows b. determine operating cash flow drivers c. identify the major sources and uses of cash

c. identify the major sources and uses of cash

When a company pays its rent in advance, its balance sheet will reflect a reduction in: a. assets and liabilities b. assets and shareholders' equity c. one category of assets and an increase in another

c. one category of assets and an increase in another

A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: a. reported as a $1 million investing cash inflow and outflow. b. reported as a $1 million financing cash outflow and inflow. c. reported as supplementary information to the cash flow statement.

c. reported as supplementary information to the cash flow statement.

The item "retained earnings" is a component of: a. assets b. liabilities c. shareholders' equity

c. shareholders' equity

In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: a. activity ratios b. liquidity ratios c. solvency ratios

c. solvency ratios

The carrying value of inventories reflects: a. their historical cost b. their current value c. the lower of historical cost or net realizable value

c. the lower of historical cost or net realizable value