Financial Statement Analysis and Security Valuations | Practice Exam with Detailed Q&A |, Exams of Financial Statement Analysis

Download Financial Statement Analysis and Security Valuations | Practice Exam with Detailed Q&A | and more Exams Financial Statement Analysis in PDF only on Docsity!

Financial Statement Analysis and

Security Valuations.

BRIAN PETER

"Which financial statement reports elements that describe changes in assets and liabilities? BS IS A. Yes Yes B. Yes No C. No No D. No Yes a. A b. C c. D d. B - CORRECT ANSWER c. D" "Which of the following statements about the mixed attribute model is true? a. Relevance receives the primary emphasis. b. Representational faithfulness receives the primary emphasis. c. Obtaining an optimal mix of relevance and representational faithfulness is the primary objective. d. None of these statements are true. - CORRECT ANSWER c. Obtaining an optimal mix of relevance and representational faithfulness is the primary objective." "Financial accounting numbers are a function of several concepts that affect observed accounting numbers. Which of the following is not one of those concepts? a. Relevance b. Economics c. Bias d. Measurement error - CORRECT ANSWER a. Relevance" "Removing management discretion in accounting choice is more likely to maximize Rep faith Relevance a. Yes Yes b. No No c. No Yes d. Yes No a. C b. D c. A d. B - CORRECT ANSWER b. D" "Present value is most likely to be used as a valuation basis for a. property, plant, and equipment. b. inventory. c. long-term debt. d. accounts receivable. - CORRECT ANSWER d. accounts receivable."

b. Approach 2 c. Approach 3 d. Approaches 1 and 3 - CORRECT ANSWER b. Approach 2" "Which of the approaches matches historical cost accounting on the income statement (not to be confused with the statement of comprehensive income)? a. Approach 1 b. Approach 2 c. Approach 3 d. Approaches 1 and 3 - CORRECT ANSWER d. Approaches 1 and 3" "Which of the approaches is the strongest on relevance while not ignoring the importance of representational faithfulness? a. Approach 1 b. Approach 2 c. Approach 3 d. Approaches 1 and 2 - CORRECT ANSWER c. Approach 3" The text presents a six-step analysis and valuation framework. Place these steps in the most appropriate chronological order: A. Identify the strategies the firm pursues to gain and sustain a competitive advantage. B. Analyze the current profitability and risk of the firm. C. Value the firm. D. Identify the economic characteristics and competitive dynamics of the industry in which the firm participates. E. Assess the quality of the firm's financial statements and, if necessary, adjust them to more faithfully represent the underlying economics of the firm. F. Prepare forecasted financial statements. A. D, A, E, B, F, C B. A, B, C, D, E, F C. A, D, B, E, F, C D. A, D, B, E, C, F - CORRECT ANSWER A. D, A, E, B, F, C" "Porter's five forces framework suggests analyzing competition within an industry by focusing on the following five forces: a. demand, supply, manufacturing, marketing, investing, and financing. b. rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power. c. demand, supply, government regulations, barriers to entry, and switching costs. d. demand, supply, cyclicality, seasonality, and growth. - CORRECT ANSWER b. rivalry, threat of entrants, threat of substitutes, supplier power, and buyer power." "To be considered high quality, accounting information should a. be a fair and complete representation of the firm's economic performance, financial position, and risk. b. provide relevant information to forecast the firm's expected future earnings and cash flows.

c. both be a fair and complete representation of the firm's economic performance, financial position, and risk; and provide relevant information to forecast the firm's expected future earnings and cash flows. d. None of these answer choices are correct. - CORRECT ANSWER c. both be a fair and complete representation of the firm's economic performance, financial position, and risk; and provide relevant information to forecast the firm's expected future earnings and cash flows." "What is the effect on total assets of classifying "restricted cash" as "cash" on the balance sheet? a. Understated b. No effect c. Overstated - CORRECT ANSWER b. No effect" "What is the effect on total assets of recognizing an accounts receivable from a sale and also removing inventory from the books before the sale was completed and title to the inventory passed to the customer? a. Understated b. No effect c. Overstated - CORRECT ANSWER c. Overstated" "What is the effect on total assets of choosing too short of a useful life for building depreciation? a. No effect b. Understated c. Overstated - CORRECT ANSWER b. Understated" "On a common size basis, which of the following assets is normally largest for commerical bank? A. accounts and notes receivable B. Inventroy C. Property, plant, and equipment D. Cash and Marketable securities - CORRECT ANSWER A. accounts and notes receivable" "Which of the following assets would appear on the balance sheet at an amount greatly below its fair market value? A. Inventory B. Marketable Securities C. Equipment D. Brand Name - CORRECT ANSWER D. Brand name" "The accrual basis of accounting recognizes: A. Revenue when cash is received from customers B. Expenses when paid C. Revenue when all or a substantial portion is performed

a. discontinued operations b. extraordinary items c. other comprehensive income d. common stock - CORRECT ANSWER d. common stock" "what level are inputs for estimating fair values based on a firm's own assumptions about the fair value of an asset or a liability, such as using various data to estimate present values? A. level 1 b. level 2 c. level 3 d. none of these - CORRECT ANSWER c. level 3" "which of the following is NOT one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows? a. non-cash items, such as depreciation and amortizations b. changes in working capital accounts c. gains and losses related to the sale of plant, property and equipment d. sale or repurchase of capital stock - CORRECT ANSWER d. sale or repurchase of capital stock" "Which of the following asset and liability measurement methods is not acceptable under U.S. GAAP or IFRS? a. Present value of future cash flows b. Historical cost c. Fair value based on current market value d. Whatever feels right - CORRECT ANSWER d. Whatever feels right" "GAAP and IFRS allow various treatments for revenue recognition. Which of the following correctly describes acceptable revenue recognition principles? a. Whenever cash is realized in a transaction with a customer (such as when a firm sells an asset to a customer) b. When value changes occur over time but are realized in a market transaction c. When the firm has completed all or substantially all of the revenue-generating processes by delivering goods or services to customers, and it is reasonable that it has generated an asset or satisfied a liability d. All of these answer choices are correct, depending on the circumstance. - CORRECT ANSWER c. When the firm has completed all or substantially all of the revenue- generating processes by delivering goods or services to customers, and it is reasonable that it has generated an asset or satisfied a liability" "Complete the following statement correctly. Cash flow a. always follows income. b. can arise from operating, investing, and financing activities. c. always precedes income.

d. always equals income. - CORRECT ANSWER b. can arise from operating, investing, and financing activities" "The accrual method of accounting can be best described as a. the method that aligns revenues and expenses with the appropriate period in which resources are generated and consumed. b. the recording of transactions and events so that debits equal credits. c. the method that recognizes revenue when money is received. d. the method that equates assets with liabilities and owners' equity. - CORRECT ANSWER a. the method that aligns revenues and expenses with the appropriate period in which resources are generated and consumed." "Common-size financial statements are useful tools for a. analyzing profit margins. b. revealing relations between amounts for specific items in a financial statement and the relevant total for that statement. c. showing the proportion of debt and equity financing used to finance the total assets of the firm. d. All of these answer choices are correct - CORRECT ANSWER d. All of these answer choices are correct" "Percentage change financial statements are useful tools for a. left-handed analysts. b. highlighting relative growth rates in financial statement amounts from one period to the next. c. measuring profit margins. d. All of these answer choices are correct. - CORRECT ANSWER b. highlighting relative growth rates in financial statement amounts from one period to the next." "Empirical results in Nichols and Wahlen's 2004 study showed that a. an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead. b. analysts' forecasts of future earnings are optimistically biased. c. unexpected changes in earnings have a strong positive association with abnormal stock returns. d. the capital markets are inefficient with respect to earnings information because investors overreact to earnings surprises. - CORRECT ANSWER c. unexpected changes in earnings have a strong positive association with abnormal stock returns." "Income tax expense increases when: A. Income tax payable increases, deferred tax assets increases, deferred tax liabilities increases and cash increases B. Income tax payable increases, deferred tax assets decrease, deferred tax liabilities increases and cash decreases. C. Income tax payable decreases, deferred tax assets increases, deferred tax liabilities decreases and cash increases

d. Long-lived assets are frequently financed with borrowings, which are a financing activity. - CORRECT ANSWER a. Depreciation expense reduces net income, the starting point of the statement of cash flows, but does not require a cash outflow." "A company has accounts receivable of $4,200 at the beginning of the year and $5, at the end of the year. Which of the following best describes the adjustment for accounts receivable that would appear in the indirect statement of cash flows? a. The adjustment would be for $800, indicating a source of cash. b. The adjustment would be for $800, indicating a use of cash. c. The adjustment would be for $(800), indicating a source of cash. d. The adjustment would be for $(800), indicating a use of cash - CORRECT ANSWER d. The adjustment would be for $(800), indicating a use of cash" "A company has accounts payable of $315,000 at the beginning of the year and $618,000 at the end of the year. Which of the following best describes the adjustment for accounts payable that would appear in the indirect statement of cash flows? a. The adjustment would be for $303,000, indicating a use of cash. b. The adjustment would be for $(303,000), indicating a source of cash. c. The adjustment would be for $303,000, indicating a source of cash. d. The adjustment would be for $(303,000), indicating a use of cash. - CORRECT ANSWER c. The adjustment would be for $303,000, indicating a source of cash." "A company overstates revenues by €1.2 million by overstating accounts receivable. The best characterization of the effect of this misstatement is a. overstated net income and no effect on operating cash flows. b. overstated net income and understated operating cash flows. c. no effect on the statement of cash flows. d. overstated net income and overstated operating cash flows. - CORRECT ANSWER a. overstated net income and no effect on operating cash flows" "Which of the following accurately describes the difference between basic and diluted EPS? a. Preferred stock dividends reduce the numerator of the EPS calculation for diluted EPS, but not basic EPS. b. Diluted EPS is always less than basic EPS. c. Diluted EPS reflects EPS under an extreme scenario where all convertible securities are assumed to have been converted as of the beginning of the year. d. Diluted EPS is not meaningful if a firm reports a net loss. - CORRECT ANSWER c. Diluted EPS reflects EPS under an extreme scenario where all convertible securities are assumed to have been converted as of the beginning of the year." "Which of the following is false regarding common-size analysis? a. Common-size analysis enables comparisons across firms and across time. b. On a common-size income statement, the net income line reflects the net profit margin.

c. Common-size analysis is more useful when you understand a firm's economic environment and strategy. d. All numbers on the income statement and balance sheet are divided by total assets. - CORRECT ANSWER d. All numbers on the income statement and balance sheet are divided by total assets." "Which of the following best describes the relation between ROA and ROCE? a. ROA is susceptible to product life cycles, whereas ROCE is not. b. ROA measures the overall profitability of a firm, whereas ROCE measures the profitability of the firm after considering strategic use of nonequity financing. c. ROA can be negatively affected by changing interest rates, whereas ROCE is immune from financing costs. d. ROA measures asset productivity, whereas ROCE measures profitability. - CORRECT ANSWER b. ROA measures the overall profitability of a firm, whereas ROCE measures the profitability of the firm after considering strategic use of nonequity financing." "Total assets turnover can be better understood if a. you separately analyze receivables, inventory, and fixed assets turnovers. b. you prepare separate decomposition of ROA and ROCE. c. you prepare common-size and percentage change financial statements. d. you adjust net income for unusual or nonrecurring items. - CORRECT ANSWER a. you separately analyze receivables, inventory, and fixed assets turnovers." "Bianchi Inc. has ROA of 3.0% and ROCE of 11.2%. What must be true? a. Capital structure leverage is high. b. Profit margin for ROA is less than profit margin for ROCE. c. More information is required to know why ROA is less than ROCE. d. Total assets turnover is high. - CORRECT ANSWER a. Capital structure leverage is high." "Which of the following are limitations of profitability analysis? a. Acquisitions can trigger noncomparability across time. b. Different business strategies make direct comparisons between firms challenging. c. Unusual and nonrecurring items included within profitability can obscure comparisons across time. d. All of the answer choices are limitations - CORRECT ANSWER d. All of the answer choices are limitations" "Which of the following are typical sources of risk disclosures required in Item 1A in U.S. filings with the SEC? a. Firm-specific risks b. Industry risks c. Domestic risks d. All of the answer choices are correct - CORRECT ANSWER d. All of the answer choices are correct"

"Which of the following is not an important factor in assessing a firm's credit risk? a. Cash flows b. Current debt levels c. Contingent claims d. All the answer choices are important. - CORRECT ANSWER d. All the answer choices are important." "Credit risk analysis relies primarily on quantitative inputs from the financial statements, as opposed to qualitative assessments. a. True b. False - CORRECT ANSWER b. False" "Bankruptcy prediction a. is a combination of financial statement analysis and statistical modeling. b. is not relevant for firms reporting losses because such firms are already performing poorly. c. is used by creditors to minimize losses from loans, but it is not useful to equity investors. d. is not relevant for firms reporting profits because there is no risk of bankruptcy. - CORRECT ANSWER a. is a combination of financial statement analysis and statistical modeling." "The beta coefficient measuring systematic risk indicates the covariability of a firm's common stock return and a. bottom-line accounting earnings. b. long-term debt to total capital ratios. c. cash flows from operations. d. the market portfolio in excess of the risk-free rate. - CORRECT ANSWER d. the market portfolio in excess of the risk-free rate." "Which of the following statements about accounting quality is false? a. Accounting information should be conservative. b. Accounting information should be a fair and complete representation of the firms' financial position and risk. c. Accounting information should be a fair and complete representation of the firms' financial performance. d. Accounting information should provide relevant information to forecast payoffs such as earnings, cash flows, and dividends. - CORRECT ANSWER a. Accounting information should be conservative." "Which of the following elements of accounting information reflects the highest accounting quality? a. Measurement error b. Favoring certain political or economic parties c. Bias

d. Economics - CORRECT ANSWER d. Economics" "Which of the following best describes the concept of noise in accounting information? a. Noise represents the tendency for an accounting number to systematically fall below the true number as indicated by economic reality. b. Noise represents the tendency for an accounting number to systematically fall above or below the true number as indicated by economic reality. c. Noise represents the tendency for an accounting number to deviate from the true number as indicated by economic reality. d. Noise represents the tendency for an accounting number to systematically fall above the true number as indicated by economic reality. - CORRECT ANSWER c. Noise represents the tendency for an accounting number to deviate from the true number as indicated by economic reality." "Which of the following best describes the concept of bias in accounting information? a. Bias represents the tendency for an accounting number to systematically fall above or systematically fall below the true number as indicated by economic reality. b. Bias represents the tendency for an accounting number to systematically fall below the true number as indicated by economic reality. c. Bias represents the tendency for an accounting number to systematically fall above the true number as indicated by economic reality. d. Bias represents the tendency for an accounting number to deviate from the true number as indicated by economic reality. - CORRECT ANSWER a. Bias represents the tendency for an accounting number to systematically fall above or systematically fall below the true number as indicated by economic reality." "Which statement best describes the relation between bias and conservatism? a. All biased accounting is conservative accounting. b. All conservative accounting is biased accounting. c. Neither statement best describes the relation between bias and conservatism. d. Both statements best describe the relation between bias and conservatism. - CORRECT ANSWER b. All conservative accounting is biased accounting." "Which of the following is an example of when earnings are informative about neither current performance nor future performance? a. Increase in cost of sales from raw materials price increases due to a weather-related event b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Fraudulent one-time omission of depreciation expense d. Increase in sales revenue from introduction of a new product - CORRECT ANSWER c. Fraudulent one-time omission of depreciation expense" "Which of the following is not a benefit of the statement of cash flows? a. It is logically organized into three intuitive sections: operating, investing and financing. b. It reconciles the change in cash from the balance sheet.

"For early-stage businesses, a. cash flows from financing activities tend to be close to zero. b. cash flows from financing activities depend on whether capital comes from banks versus equity investors. c. cash flows from financing activities tend to be positive. d. cash flows from financing activities tend to be negative. - CORRECT ANSWER c. cash flows from financing activities tend to be positive." "For very mature businesses, a. cash flows from operating and financing activities tend to be negative. b. cash flows from operating and financing activities tend to be positive. c. cash flows from operating activities tend to be negative, and cash flows from financing activities tend to be positive. d. cash flows from operating activities tend to be positive, and cash flows from financing activities tend to be negative. - CORRECT ANSWER d. cash flows from operating activities tend to be positive, and cash flows from financing activities tend to be negative." "Which of the following is an example of when earnings are informative about current performance but not informative about future performance? a. Increase in sales revenue from introduction of a new product b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Increase in cost of sales from raw materials price increases due to a weather-related event d. Fraudulent one-time omission of depreciation expense - CORRECT ANSWER c. Increase in cost of sales from raw materials price increases due to a weather-related event" "Which of the following is an example of when earnings are very informative about current performance and tell you that current performance will persist? a. Increase in sales revenue from introduction of a new product b. Current period expenses of a one-time special marketing program that increases subscriptions to a service that will generate future sales revenues. The company discloses the subscriber increase in the MD&A. c. Fraudulent one-time omission of depreciation expense d. Increase in cost of sales from raw materials price increases due to a weather-related event - CORRECT ANSWER a. Increase in sales revenue from introduction of a new product" "A firm's EPS last year was $1, and it issues an earnings release conveying a current year's EPS of $5. Which of the following do you expect will result in the highest positive price change for the firm's common stock? a. Expected EPS was $4, and the current year EPS is expected to persist.

b. Expected EPS was $5, and the current year EPS is not expected to persist. c. Expected EPS was $4, and the current year EPS is not expected to persist. d. Expected EPS was $5, and the current year EPS is expected to persist. - CORRECT ANSWER a. Expected EPS was $4, and the current year EPS is expected to persist." "A firm's EPS last year was $5, and it issues an earnings release conveying a current year's EPS of $4. Which of the following do you expect will result in the least negative price change for the firm's common stock (choose from among the set of answers that would result in a price decline)? a. Expected EPS was $5, and the current year EPS is expected to persist. b. Expected EPS was $4, and the current year EPS is not expected to persist. c. Expected EPS was $4, and the current year EPS is expected to persist. d. Expected EPS was $5, and the current year EPS is not expected to persist. - CORRECT ANSWER d. Expected EPS was $5, and the current year EPS is not expected to persist." "Healy and Wahlen (1999) state that "earnings management occurs when managers use judgment in financial reporting and structuring transactions to alter financial reports" for the purpose of misleading stakeholders. Which of the following is not an example of earnings management? a. Underreporting of a bad debt provision to increase a manager's bonus b. Delay of required maintenance to increase reported income c. Taking accelerated depreciation on property, plant, and equipment to obtain favorable terms in a labor negotiation when straight-line is more appropriate d. Misclassification of a current liability as long term to increase the current ratio - CORRECT ANSWER d. Misclassification of a current liability as long term to increase the current ratio" "Which of the following is an example of real earnings management? a. Overstating interest expense b. Prepaying for an insurance policy c. Accelerating a purchase of land to the current period d. Using heavy discounts to generate sales to meet a quarterly sales goal - CORRECT ANSWER d. Using heavy discounts to generate sales to meet a quarterly sales goal" "Which of the following is a disincentive to engage in earnings management? a. Trading on public exchanges and being subject to SEC scrutiny b. Having a compensation contract based on earnings c. Engaging in insider trading d. Becoming a target in a takeover attempt - CORRECT ANSWER a. Trading on public exchanges and being subject to SEC scrutiny" "Which of the following is an incentive to engage in earnings management? a. Being a bank subject to capital requirements b. Desiring a reputation for being honest and trustworthy c. Having informed, outside members of the board of directors