D366 - Financial Statement Analysis

Question 1: A company reports the following: 1) decreasing profits, 2) declining operations cash flows, 3) low investment cash flows, and 4) negative financing cash flows. Which stage of the product life cycle is this company in?

Introduction

Growth

Maturity

Decline

Question 2: Which transaction will increase the current ratio when it is already above 1.0?

Accruing wages earned but not yet paid

Prepaying the next six month's rent

Using cash to pay down accounts payable

Purchasing inventory on account

Question 3: Which statement represents the effect of dilutive securities on basic earnings per share (EPS) calculations when computing diluted earnings per share?

Convertible debt is assumed to be dilutive on EPS as of the maturity date of the debt

When the strike price on a stock option is above market value, no dilutive effect occurs on EPS

The existence of dilutive securities will result in dilutive EPS being higher than basic EPS

When no dividends are declared, there is no dilutive effect on EPS from convertible preferred stock

Question 4: Which change, with other factors remaining equal, would result in an increase in the return on assets (ROA)?

An increase in property, plant, and equipment

An increase in non-controlling interest in earnings

An increase in advertising expense

An increase in the tax rate

Question 5: Which is a correct statement regarding profitability measures?

If ROA (return on assets) is positive, then (RI) residual income will also be positive

ROCE (return on common equity) will exceed ROA (return on assets) whenever ROA exceeds the cost of capital provided by creditors and preferred shareholders

ROCE (return on common equity) eliminates the effect of financing costs by adding back the after-tax interest to net income

ROA (return on assets) and RI (residual income) will lead to the same performance ranking order for subunits of an organization

Question 6: Which type of risk is classified as a firm-specific risk?

Labor wages and supply of labor

Dependence on one or a few suppliers

Shifts in consumer preference

Availability and price of raw materials

Question 7: Which link does the extent to which market prices fully reflect the implications of accounting information depend on?

Firm accountants maintaining their independence of management manipulation

Accountants reporting accounting information as quickly as possible

Investors mapping accounting fundamentals into expectations of future earnings

Auditors' thoroughness in examining the financial statements

Question 8: Which statement regarding the economic attributes of a company is correct?

A product that is promoted to other businesses places a high value on advertising

When there is a high level of technological obsolescence a firm can carry high levels of debt financing

A company that is growing rapidly has a large need for outside capital financing from issuing stocks and bonds

When demand moves with economic cycles, production can be steady in the long term

Question 9: Which business activity is a firm most likely to see cash inflows when it is in the introductory stage of its life cycle?

Investing activities

Financing activities

Accrual activities

Operating activities

Question 10: Which of the interrelated sequential steps in financial statement analysis should an investigator begin with?

Obtain all of the information available from a firm's financial statements and assess the quality of that information

Examine the firm's industry to identify economic features and competitive aspects

Use information from the financial statement to analyze the firm's profitability, growth, and risk

Prepare forecasted financial statements and use them to determine the enterprise value of the firm

Question 11: Which category requires no adjustment between net income and cash flows from operations?

Purchase of equipment with a note payable

Stock-based compensation

Deferred tax expense

Equity method income

Question 12: What is the impact of repurchasing shares on a company's equity?

It increases equity

It decreases equity

It has no effect on equity

It increases liabilities

Question 13: How does a company treat depreciation when calculating free cash flows to the company?

It adds depreciation expense to earnings before interest and taxes on the income statement

It subtracts accumulated depreciation from the fixed assets section of the balance sheet since it is not a cash flow

It ignores depreciation expense on the income statement since it is not a cash flow

It adds accumulated depreciation to the asset section of the balance sheet to negate its effect

Question 14: Which of the following is an example of an income-increasing accrual?

Recording the completion of work for which a firm has previously been paid

Increasing the value of a stock investment whose market price has risen

Reducing the use of supplies that a firm has previously paid for

Recording a warranty obligation

Question 15: Which accounting treatment would justify the presumption that MB and VB are equal?

Trading securities are recorded at fair value

Fixed assets are recorded at historical costs

Research and development costs are expensed on the income statement

Inventory is recorded at lower-of-cost-or-net-realizable-value

Question 16: A firm has current earnings of $235. The earnings are expected to grow (g) by 4% annually. The cost of equity capital (R(E)) is 13%. What is the value of the firm (rounded to the nearest dollar)?

$2,716

$2,824

$1,880

$2,611

Question 17: Which is a correct statement regarding leverage?

A firm with a higher financial leverage is riskier than a firm with a higher operating leverage

A firm with a higher operating leverage has proportionally more fixed costs than a firm with a lower operating leverage

Operating leverage is a multiplier on ROA (return on assets) to get a firm's ROCE (return on common equity)

Financial leverage measures a firm's pre-tax profit reaction to a change in sales revenue

Question 18: Which statement reflects a correct insight that comes from disaggregating return on common equity (ROCE) into various components?

ROCE will increase when there is more risk in the capital structure of the firm

Increasing average total assets, keeping all other factors equal, will increase the ROCE

Strong asset turnover and capital structure leverage can overcome a net loss, allowing ROCE to remain positive

Increasing sales revenues, keeping all other factors equal, will increase the ROCE

Question 19: Which step in the financial forecasting process is last?

Projecting the statement of cash flows

Projecting the balance sheet

Projecting operating assets and liabilities

Projecting non-recurring gains and losses

Question 20: How does the inclusion of working capital adjustments and other non-cash components of income adjustments in the statement of cash flows affect financial performance?

It reflects timing differences between income recognition and cash flow realization

It distorts financial performance by overstating cash flow

It has no impact on financial performance

It ensures all cash and non-cash activities are perfectly aligned

D366 Financial Statement Analysis - Set 1 - Part 1