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WorksheetsFinancial Analysis_Chapter 1+2
Total questions: 66
Worksheet time: 33mins
Name
Class
Date
1.
Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?
a)
A. Auditor's letter
b)
B. Management discussion and analysis
c)
C. Proxy statement
d)
D. Footnotes
2.
Which of the following would not be considered a source of financing?
a)
A. Notes receivable
b)
B. Common stockholders' equity
c)
C. Retained earnings
d)
D. Debentures
3.
If a company receives an unqualified audit opinion it means the auditors:
a)
A. did not complete a full audit and therefore do not feel qualified to give an opinion on financial statements.
b)
B. are providing assurance that the company will remain financially viable for at least the next year.
c)
C. are providing assurance that the company's financial statements fairly present company's financial performance and position.
d)
D. are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.
4.
The Management Discussion and Analysis Section of the annual report:
a)
A. is required by the SEC.
b)
B. is optional but normally included in the annual report.
c)
C. is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company.
d)
D. is required by the SEC only if they have a qualified audit opinion.
5.
Which of the following is not a common tool used in financial statement analysis?
a)
A. Random walk analysis
b)
B. Ratio analysis
c)
C. Common size statement analysis
d)
D. Trend series analysis
6.
A common size income statement would typically be prepared by dividing:
a)
A. all items on income statement in Year t by their corresponding value in Year t-1.
b)
B. all items on income statement in Year t by their corresponding balance sheet accounts in Year t.
c)
C. all items on income statement in Year t by net income in Year t-1.
d)
D. all items on income statement in Year t by sales in Year t.
7.
When conducting comparative analysis by reviewing consecutive balance sheets,
a)
A. all items on the balance sheet in Year t must be divided by their corresponding value
in Year t-1 and subtract 1.
b)
B. all items on the balance sheet in Year t-1 must be subtracted from their corresponding
value in Year t.
c)
C. all items on the balance sheet in Year t must be divided by net income in Year t-1.
d)
D. Both A and B are correct.
8.
While determining the most profitable company from the given number of
companies, which of the following would be the best indicator of relative profitability?
a)
A. Highest net income
b)
B. Highest retained earnings
c)
C. Highest return on equity
d)
D. Highest operating margin
9.
Which of the following statements concerning financial ratios is incorrect?
a)
A. Accounting principles and methods used by a company will not affect
financial ratios.
b)
B. The informational value of a ratio in isolation is limited.
c)
C. A ratio is one number expressed as a percentage or fraction of another number.
d)
D. Calculation of financial ratios is not sufficient for a complete financial analysis of a
company.
10.
Which of the following ratios is not generally considered to be helpful in assessing
short-term liquidity?
a)
A. Acid test ratio
b)
B. Current ratio
c)
C. Days to collect receivables
d)
D. Days goodwill held
11.
Liquidity of a company is generally defined as a measure of:
a)
A. the ability of a company to pay its employees in a timely manner.
b)
B. the ability to pay interest and principal on all debt.
c)
C. the ability to pay dividends.
d)
D. the ability to pay current liabilities.
12.
Which of the following statements is correct?
a)
A. The more efficiently a company utilizes its assets, the greater its
return on investment, all other things being equal.
b)
B. If return on equity increases, the return on assets must have also increased.
c)
C. If the number of days inventory is held increases, the return on assets will increase,
all other things being equal.
d)
D. If the gross margin decreases, the inventory turnover must have increased, all other
things being equal.
13.
Which of the following statistics would be the most useful in determining the
efficiency of a car rental company?
a)
A. Inventory turnover
b)
B. Number of employees per car rental
c)
C. Average length of car rental
d)
D. Number of days cars are rented as a percentage of number of days available for
rent
14.
Which of the following ratios does not relate to market price of a company under
analysis?
a)
A. Price-to-earnings
b)
B. Earnings yield
c)
C. Price-to-book
d)
D. Return on common equity
15.
The semistrong efficiency of market implies that:
a)
A. stock prices fully reflect all inside information.
b)
B. stock prices do not reflect information contained in past trading volume.
c)
C. stock prices fully reflect all information found in 10-K filing.
d)
D. stock prices fully reflect all information about future price changes.
16.
Which of the following statements is incorrect?
a)
A. It is possible for some markets to be more efficient than others.
b)
B. It is possible for markets to be efficient with respect to some information and
inefficient with respect to other information.
c)
C. The market is likely to be more efficient with respect to companies where there is greater analyst following.
d)
D. The market is totally efficient with respect to companies providing regular
dividends to investors.
17.
Which of the following ratios would be considered useful in assessing operating
profitability?
a)
A. Debt/Equity ratio
b)
B. Acid test ratio
c)
C. Gross profit margin
d)
D. Return on equity
18.
How much would you be prepared to pay for a $500 bond which comes due in 5
years and pays $80 interest annually assuming your required rate of return is 8% (pick
closest answer)?
a)
A. $740
b)
B. $660
c)
C. $608
d)
D. $500
19.
Which of the following statements regarding the intrinsic value of a company is
correct?
a)
A. It can be calculated as book value plus the present value of future expected dividends,
discounted at the cost of equity capital.
b)
B. It can be calculated as present value of future expected dividends, discounted at the
cost of debt.
c)
C. It can be calculated as present value of future expected residual income, discounted at
the cost of equity capital.
d)
D. It can be calculated as book value plus the present value of future expected
residual income, discounted at the cost of equity capital
20.
Two otherwise equal companies have significantly different dividend payout ratios.
Which of the following statements is most likely to be correct? The company with
higher the dividend payout ratio:
a)
A. will have a higher inventory turnover ratio.
b)
B. will have a lower inventory turnover ratio.
c)
C. will have higher earnings growth.
d)
D. will have lower earnings growth.
21.
On January 1, 2005, Systil Corporation issues $50M 10 year bonds with a coupon
rate of 10%. Interest is payable annually at the end of the year. If the required return on
bonds of similar risk at January 1, 2006 is 8%, what will be the price of the bonds be at
this date?
a)
A. $56.71M
b)
B. $56.25M
c)
C. $44.24M
d)
D. $43.86M
22.
Which of the following statements is most correct?
a)
A. Technical analysis concerns itself with determining the intrinsic value of a stock.
b)
B. Active investing is defined as buying and selling stock within six months.
c)
C. Fundamental analysis attempts to value a company by examining the past prices patterns of a company's stock.
d)
D. Individuals who engage in technical analysis by definition do not subscribe to the weak form of the efficient market hypothesis.
23.
Which of the following statements is incorrect?
a)
A. Current assets are expected to be converted into cash sooner than noncurrent assets.
b)
B. Equity investors have unlimited downside exposure if the company
declares bankruptcy.
c)
C. Paid-in capital of company is not affected by the payment of dividends.
d)
D. Retained earnings at the inception of a company equals zero.
24.
A company issues 12%, 10-year $1,000 bonds paying interest semi-annually.
Required return for bonds of this risk is 15%. At what price will the bond be sold (pick
closest answer)?
a)
A. $663
b)
B. $849
c)
C. $ 847
d)
D. $ 894
25.
You wish to compare the performance of two companies. Which of the following
statements is most likely to be incorrect?
a)
A. If the companies operate in different industries, this will hinder comparability.
b)
B. The use of different accounting methods will hinder comparability.
c)
C. If the companies are of significantly different sizes, this will hinder comparability.
d)
D. If companies have different auditors, this will hinder comparability.
26.
As of December 31, 2005, two otherwise identical companies in the same industry,
East Co. and West Co., have dividend payouts of 20% and 40%, respectively. Looking
forward one year, which outcomes are least likely?
I. East Co. requires debt financing.
II. West Co. increases its dividend payout.
III. West Co.'s share price is twice that of East Co.
IV. East Co. repurchases outstanding shares.
a)
A. I and II
b)
B. II and IV
c)
C. I, II and III
d)
D. II, III and IV
27.
Which of the following, if increased by 10%, results in a 10% higher stock price?
a)
A. Dividend yield
b)
B. Earnings yield
c)
C. Net profit margin
d)
D. None of the above
28.
Which of the following is not an equity valuation model?
a)
A. Residual income model
b)
B. Dividend discount model
c)
C. Free cash flow to equity model
d)
D. Terminal value model
29.
Which would be issued by auditors where there is a history of significant losses
coupled with uncertain prospects?
a)
A. An "except for" qualification
b)
B. An adverse opinion
c)
C. A disclaimer of opinion
d)
D. An audit warning
30.
Which of the following would require the filing of Form 8-K?
I. Major acquisition
II. Audited financial statements
III. Bankruptcy
IV. Change in management control
a)
A. I and III
b)
B. II and IV
c)
C. I, III and IV
d)
D. I, II, III and IV
31.
Which of the following is not considered part of GAAP?
a)
A. Statements of Financial Accounting Standards (SFAS)
b)
B. International Accounting Standards (IAS)
c)
C. Accounting Research Bulletins (ARB).
d)
D. Accounting Principles Board Opinions (APB).
32.
Which of the following is not considered a monitoring mechanism?
a)
A. The Securities and Exchange Commission (SEC)
b)
B. Top level management
c)
C. The board of director's audit committee
d)
D. The external auditors
33.
Which of the following statements about directors of a company is true?
a)
A. Directors are elected by management of a company.
b)
B. Directors only get paid if the company increases its profitability that year.
c)
C. Directors are shareholders' representatives.
d)
D. All directors of a company are senior managers in that company.
34.
Which of the following statements about accruals and cash flows is true?
a)
A. All cash flows are value relevant.
b)
B. Cash flows cannot be manipulated.
c)
C. Cash flows are more reliable than accruals.
d)
D. All accrual accounting adjustments are value irrelevant.
35.
Which of the following statements about accruals and cash flows is false?
a)
A. Company value can be determined by using accrual accounting numbers.
b)
B. Accrual accounting numbers are subject to accounting distortions.
c)
C. Cash flows are more reliable than accruals.
d)
D. Cash flows cannot be manipulated.
36.
The two primary qualities of accounting information to make it useful for decision
making are:
a)
A. reliability and comparability.
b)
B. relevance and reliability.
c)
C. materiality and comparability.
d)
D. full disclosure and relevance.
37.
Financial accounting data has some inherent limitations. Which of the following are
limitations?
I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.
a)
A. I, II and III
b)
B. I, III and IV
c)
C. II, III and IV
d)
D. I, II, III and IV
38.
Audit risk represents a danger to users of audited financial statements. The
following are attributes pointing to potential areas of vulnerability except
a)
A. company in financial distress requiring financing.
b)
B. management dominated by one or more strong-willed individuals.
c)
C. deterioration in liquidity or solvency.
d)
D. company earning high profits consistently over a number of years.
39.
If a company fails to record a material amount of depreciation in a previous year,
this is considered:
a)
A. a change in accounting principle.
b)
B. an unusual item.
c)
C. an accounting error.
d)
D. a change in estimate.
40.
Which of the following are examples of judgments made in the accounting reporting
process?
I. Useful life of machinery
II. Allowance for doubtful accounts
III. Obsolescence of assets
IV. Interest payment on bonds
a)
A. I, II, III and IV
b)
B. I, II and III
c)
C. II and III
d)
D. I and III
41.
Which of the following would affect the comparability of accounting information
for a given company from one accounting period to the next?
I. Change in accounting principles
II. Disposition of segment of business
III. Restructuring expenses
IV. Change in auditors
a)
A. I and II
b)
B. I and III
c)
C. I, II and III
d)
D. I, III and IV
42.
Which of the following would affect the comparison of financial statements across
two different firms?
I. Different accounting principles
II. Different sizes of the companies
III. Different reporting periods
IV. Different industries
a)
A. I, III and IV
b)
B. I and IV
c)
C. I and II
d)
D. I, II, III and IV
43.
10-K reports are:
a)
A. the quarterly reports to stockholders.
b)
B. quarterly filings made by a company with the SEC.
c)
C. annual filings made by a company with SEC.
d)
D. filings made by a company with SEC when a company changes auditors.
44.
The management of Finner Company believes that "the statement of cash flows is
not a very useful statement" and does not include it with the company's financial
statements. As a result the auditor's opinion should be:
a)
A. qualified.
b)
B. unqualified.
c)
C. adverse.
d)
D. disclaimed.
45.
Which of the following statements is incorrect?
a)
A. Under GAAP, statements are prepared using accrual accounting.
b)
B. Under GAAP, all assets are marked to market each accounting period.
c)
C. Under GAAP, it is necessary to make certain estimates.
d)
D. Annual statements submitted to the SEC (10-K) must be prepared using GAAP.
46.
When analyzing financial statements it is important to recognize that accounting
distortions can arise. Accounting distortions are those things that cause deviations in
accounting information from the underlying economics. Which of the following
statements is not correct? Accounting distortions:
a)
A. can arise as management may deliberately manipulate financial statements.
b)
B. arise often through application of (correct) accounting principles.
c)
C. can affect the quality of earnings.
d)
D. arise if the stock market is not efficient.
47.
Which of the following is a change in an accounting estimate?
I. A change from straight line depreciation to an accelerated depreciation method.
II. A change in estimated salvage value of depreciable asset.
III. A change in estimated useful life of an asset.
IV. Recording depreciation for the first time on machinery purchased five years ago.
a)
A. I, II, III and IV
b)
B. II, III and IV
c)
C. I, III and IV
d)
D. II and III
48.
Which of the following are changes in accounting principle?
I. A change from LIFO to FIFO.
II. A change in estimated salvage value of depreciable asset.
III. A change from an accelerated depreciation method to straight line depreciation.
IV. Recording depreciation for the first time on machinery purchased five years ago.
a)
A. I, II, III and IV
b)
B. I, II and III
c)
C. I, III and IV
d)
D. I and III
49.
Which of the following is not a source of industry information?
a)
A. SEC manuals
b)
B. Standard and Poor's
c)
C. Trade journals
d)
D. Robert Morris Associates
50.
Which of the following information would not be filed with the SEC by a publicly
traded company?
a)
A. 10-K report
b)
B. Prospectus
c)
C. Proxy statement
d)
D. Tax return
51.
Accounting Standards are best described as:
a)
A. the result of a political process among groups with diverse interests.
b)
B. presentation standards mandated by the Securities and Exchange Commission.
c)
C. the state-of-the-art presentation of the science of accounting.
d)
D. measuring the quality of safeguarding assets.
52.
The matching principle requires that:
a)
A. revenues earned and expenses incurred in generating those revenues
should be reported in the same income statement.
b)
B. non-operating gains and losses should be netted against each other.
c)
C. a proportion of each dollar collected will be assumed to be a recovery of cost.
d)
D. assets will be matched to the liabilities incurred to purchase them.
53.
If a company changes auditors, it is required to file the following with the SEC:
a)
A. 10-K report
b)
B. 10-Q
c)
C. 8-K
d)
D. S-1
54.
The primary responsibility for fair and accurate financial reporting rests with the:
a)
A. board of directors.
b)
B. SEC.
c)
C. management.
d)
D. auditors.
55.
Which of the following is incorrect? When using the 10-Q, the analyst should be
aware that the usefulness of the quarterly financial statements might be affected by:
a)
A. seasonality.
b)
B. adjustments made in the final quarter of the year.
c)
C. the use of cash accounting.
d)
D. the increased use of estimates.
56.
Voluntary disclosure by managers is becoming an increasingly important source of
information. Which of the following is least likely to be a reason for this increased
disclosure?
a)
A. Protection under Safe Harbor Rules.
b)
B. To manage investors' expectations.
c)
C. To signal information to investors.
d)
D. To respond to increased demands by labor unions.
57.
The two secondary qualities of accounting information to make it useful for decision
making are:
a)
A. consistency and comparability.
b)
B. relevance and reliability.
c)
C. materiality and comparability.
d)
D. full disclosure and relevance.
58.
Economic income measures change in:
a)
A. asset value.
b)
B. liability value.
c)
C. shareholder value.
d)
D. net cash flows.
59.
Which one of the following is not an example of a red flag, used to evaluate earnings
quality?
a)
A. Qualified audit report
b)
B. Net income this year is higher then net income last year
c)
C. Poor financial performance
d)
D. Frequent or unexplained changes in accounting policies
60.
Economic income includes:
a)
A. recurring components only.
b)
B. nonrecurring components only.
c)
C. both recurring and nonrecurring components.
d)
D. neither recurring nor nonrecurring components.
61.
For a going concern, company value can be expressed by:
a)
A. dividing permanent income by the cost of capital.
b)
B. multiplying permanent income by the cost of capital.
c)
C. dividing permanent income by the market value per share.
d)
D. multiplying permanent income by the market value per share.
62.
Accounting income consists of all the following components except:
a)
A. permanent component.
b)
B. transitory component.
c)
C. value irrelevant component.
d)
D. temporary component.
63.
To determine a company's sustainable earning power, an analyst needs to first
determine the recurring component of the current period's accounting income by
excluding nonrecurring components of accounting income. Such adjusted earnings are
often referred to as:
a)
A. core earnings.
b)
B. permanent earnings.
c)
C. basic earnings.
d)
D. operating earnings.
64.
SFAS 157 defines fair value as the:
a)
A. market price.
b)
B. exchange price.
c)
C. net asset value.
d)
D. real value.
65.
SFAS prescribes that information about the level of inputs used for determining fair
values must be reported in the:
a)
A. balance sheet.
b)
B. director's letter.
c)
C. footnotes.
d)
D. MD&A.
66.
All of the following are basic approaches to valuation except:
a)
A. market approach.
b)
B. asset approach.
c)
C. income approach.
d)
D. cost approach.
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