Deck 1: Overview of Financial Reporting, Financial Statement Analysis, and Valuation

Question 1

Which of the following is a question an analyst would ask when assessing the quality of a firm's financial statements?

A) Are the company's products designed to meet a specific market segment?
B) Has the firm integrated forward into retailing to final consumers?
C) Is the firm diversified across several geographical markets?
D) Do earnings include nonrecurring gains or losses?

Answer 1

D

Question 2

When assessing buyer power using Porter's five forces, which of the following is not consistent with low buyer power?

A) Brand loyalty
B) Control of distribution channel
C) Large number of suppliers
D) Low price

Answer 2

C

Question 3

Which of the following is not one of Porter's five forces?

A) Buyer Power
B) Supplier Power
C) Threat of Regulation
D) Threat of Substitutes

Answer 3

C

Question 4

When attempting to identify the economic characteristics of the industry in which a particular firm participates an analyst might ask which of the following questions?

A) Does technological change play an important role in the firm maintaining a competitive advantage?
B) Has the firm diversified across several geographic markets?
C) Has the firm recognized revenues at the proper time?
D) Has the firm structured transactions to make it look more profitable than economic conditions suggest?

Question 5

The accrual basis method of accounting can be best described as:

A) The recording of transactions and adjustments so that debits equal credits.
B) The method that equates assets with liabilities and owners' equity.
C) The method that recognizes revenue when money is received.
D) The method that matches incurred expenses with related revenues when they are earned.

Question 6

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

Question 7

A value chain for an industry sets forth

A) the layers of management the needed to be successful
B) sequence of activities involved in the creation, manufacture and distribution of its products.
C) Sequence of activities involved in a firm's research and development activities.
D) Whether the industry is horizontally or vertically integrated.

Question 8

Which of the following would not appear as a liability on the balance sheet?

A) a labor contract
B) a note due to a bank
C) salary due employees at year-end
D) accounts payable

Question 9

Which of the following economic characteristics is consistent with a grocery store chain?

A) minimal competition
B) extensive competition
C) high net income to sales
D) differentiated product

Question 10

Which of the following economic characteristics is consistent with a pharmaceutical company?

A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margins.
D) Low business risk.

Question 11

Which of the following economic characteristics is consistent with a grocery store chain?

A) Low barriers to entry.
B) High levels of research and development.
C) High profit margins.
D) Low capital intensity.

Question 12

Which of the following is not an activity reported in the cash flows financial statement?

A) operating
B) investing
C) manufacturing
D) financing

Question 13

The third step in financial statement analysis is to assess the quality of the firm's financial statements. Which of the following is a question an analyst should ask when performing this step?

A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Question 14

Which of the following economic characteristics is consistent with a commercial bank?

A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margin on lending activities.
D) Low profit margin on fee-based financial services, such as merger consulting.

Question 15

The second step in financial statement analysis is to identify the company strategy. Which of the following is a question an analyst should ask when performing a strategy analysis?

A) Are industry sales growing rapidly or slowly?
B) Do earnings include revenues that appear mismatched with the business model employed by the firm?
C) Does the industry include a large number of firms selling similar products?
D) What is the company's degree of geographical diversification?

Question 16

On a common size basis, which of the following assets is normally largest for a commercial bank?

A) Accounts and Notes Receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Question 17

An example of an intangible asset is

A) a patent
B) land
C) investment in another company
D) raw material inventory

Question 18

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
D) revenue when contracts are signed

Question 19

The tools for studying industry economics do not include

A) Value chain analysis
B) Classification using Porter's five forces
C) Classification of cash flows
D) Economic attributes framework

Question 20

On a common size basis, which of the following assets is normally largest for a electric utility?

A) Accounts receivable
B) Inventory
C) Property, Plant and Equipment
D) Cash and Marketable Securities

Question 21

Which forces typically represent horizontal competition in a value chain?

A) rivalry among existing firms and supplier power.
B) potential entry and buyer power.
C) substitutes and potential entry.
D) buyer power and supplier power.

Question 22

Current assets are defined as

A) cash and cash equivalents.
B) all assets expected to be quickly used by the firm.
C) cash and other assets that the firm expects to sell or consume during the normal operating cycle of a business, usually one year.
D) cash and other assets that the firm expects maintain for a period including the normal operating cycle of a business, usually one year.

Question 23

Which of the following activities reported in the Statement of Cash Flows is not a financing activity?

A) Repayment of outstanding debt.
B) Investing in equity securities of other companies.
C) Payment of dividends.
D) Issuing debt.

Question 24

Which of the following is not a characteristic of an extraordinary item?

A) Material in amount.
B) Nonrecurring.
C) Unusual given the nature of the firm's activities.
D) Requires a cash outflow.

Question 25

Which of the following is not an expense of a business?

A) Depreciation
B) Dividends
C) Salaries
D) Advertising

Question 26

Which of these is not an intangible asset?

A) trademark
B) patent
C) equipment
D) goodwill

Question 27

Which of the following is an independent entity comprising 15 members and a full-time professional staff that specifies acceptable accounting principles known as the IFRS?

A) FASB
B) IASB
C) SEC
D) GAAP

Question 28

All of the following are the building blocks for financial statement analysis except:

A) Targeting growth opportunities that diversify exchange rates, risk exposure, and political uncertainty.
B) Describing strategies that a firm pursues to differentiate itself from competitors in order to evaluate competitive advantages, sustainability of the firm's earnings, and its risks.
C) Evaluating the financial statements, including the accounting concepts and methods that underlie them and the quality of the information they provide.
D) Identification of the economic characteristics of the industries and the relation of those economic characteristics to the various financial statement ratios.

Question 29

When a firm attempting to create unique products or services for particular market niches, in order to achieve relatively high profit margins, this is best known as

A) a quality strategy
B) a low-cost leadership strategy
C) a vertical integration strategy
D) a product differentiation strategy

Question 30

Opinions on the effectiveness of the internal control system and the fairness of the amounts reported in the financial statements are known as:

A) Management Discussion and Analysis.
B) Assurance Opinions.
C) Notes to the Financial Statements
D) Management Assessments.

Question 31

Extraordinary gains and losses arise from events that have all the following characteristics except:

A) they are unusual given the nature of the firm's activity.
B) they are nonrecurring.
C) they are material in amount.
D) they result from terminated involvement in a line of business.

Question 32

Which forces typically represent vertical competition in a value chain?

A) potential entry and substitutes.
B) buyer power and rivalry among existing firms
C) supplier power and potential entry.
D) buyer power and supplier power

Question 33

All of the following are reasons that pharmaceutical companies have higher barriers for entry than grocery stores except:

A) There is lengthy government testing and approval required.
B) Research and development is a lengthy and uncertain process.
C) Patent protection is needed for exclusive rights.
D) The largest asset is typically capital intensive Property, Plant and Equipment.

Question 34

The following steps make up the steps in financial statement analysis.
1) Identify the strategies the firm pursues to gain and sustain a competitive advantage.
2) Analyze the current profitability and risk of the firm using information in the
Financial statements.
3) Value the firm.
4) Identify the economic characteristics and competitive dynamics of the industry in
Which a particular firm participates.
5) Assess the quality of the firm's financial statements and, if necessary, adjust them for
Such desirable characteristics as sustainability or comparability.
6) Prepare forecasted financial statements.
Which of the following is the proper order for these interrelated sequential steps?

A) 4,1,5,2,6,3
B) 1,2,3,4,5,6
C) 1,4,2,5,6,3
D) 1,4,2,5,3,6

Question 35

Which of the following would not inhibit new entrants into a market?

A) Existing technological expertise.
B) Large required capital investment.
C) Lack of rivalry among current participants.
D) Existing patented technology.

Question 36

What is the principal activity of security analysts?

A) to assign credit ratings.
B) to apply IFRS adjustments.
C) to value firms.
D) to assess the need for audits.

Question 37

Which SEC form may be the best place to start learning about the economics of an industry and the particular strategy a firm has selected for competing in the industry?

A) Form 8-K
B) Form 10-K
C) Form MD&A
D) Form FSAP

Question 38

Which financial statement would you look at to determine whether a company will be able to pay for the goods when payment is due in 30 days?

A) statement of cash flows.
B) statement of stockholders' equity.
C) income statement.
D) balance sheet.

Question 39

The primary purpose of the balance sheet is to:

A) report the current value of the business.
B) measure the net income of a business up to a particular point in time.
C) report the difference between cash inflows and cash outflows for the period.
D) report the financial position of the reporting entity at a particular point in time.

Question 40

Which two organizations are working together to harmonize financial reporting worldwide?

A) FASB and IASB
B) GAAP and FASB
C) SEC and FASB
D) EU and SEC

Question 41

The five economic attributes that are normally studied are demand, supply, manufacturing, ____________________, and investing and financing.

Question 42

Accounts receivable represent:

A) amounts which are due to stockholders.
B) amounts which have been borrowed to finance operations.
C) amounts which are owed to the company by its customers resulting from credit sales.
D) amounts which are owed by the company to its suppliers for past purchases.

Question 43

The two categories of shareholders' equity usually found on the balance sheet of a corporation are

A) contributed capital and property, plant, and equipment.
B) retained earnings and notes payable.
C) common stock and retained earnings.
D) contributed capital and equity securities.

Question 44

The first step in financial statement analysis is to identify the __________________________________________________ of the industry in which a firm participates.

Question 45

Net income is equal to:

A) Assets minus Liabilities
B) Revenues and Gains minus Expenses and Losses
C) Shareholders' Equity minus Assets
D) Revenues and Assets minus Expenses and Liabilities

Question 46

Another important step in financial statement analysis is to assess the quality of a firm's ________________________________________ and if necessary adjust them for such characteristics as sustainability or comparability.

Question 47

Which of the following is not considered to be a liability?

A) wages payable.
B) accounts payable.
C) notes payable.
D) cost of goods sold.

Question 48

Assets for a particular business might include

A) cash, retained earnings, and accounts payable.
B) cash, common shareholders' equity, and accounts receivable.
C) cash, property, plant, and equipment, and accumulated other comprehensive income.
D) cash, inventories, and goodwill.

Question 49

All of the following are principal provisions of the Sarbanes-Oxley Act of 2002 except:

A) At least one member of the audit committee of the board of directors must be a "financial expert."
B) The lead audit or coordinating partner and the reviewing partner of the public accounting firm must rotate, or change, every five years.
C) The firm's chief executive officer and the chief financial officer must issue a statement along with the audit report stating that the financial statements and notes fairly present the operations and financial position of the firm.
D) The FASB has oversight and enforcement authority over the SEC.

Question 50

When identifying the strategies that a particular firm pursues to gain a competitive advantage it is important to determine if its products are designed to meet the needs of a specific market segment or are they intended for a _____________________________________________.

Question 51

On the statement of cash flows, an amount paid for utilities would be classified as

A) a financing activity.
B) an operating activity.
C) an investing activity.
D) a noncash activity.

Question 52

The fourth step in financial statement analysis is using the financial statements to analyze the current ____________________ and ____________________ of the firm.

Question 53

The tools of effective financial statement analysis are also useful for assessing whether to extend ____________________ to a firm, either for a short-term or for a long-term.

Question 54

Which financial statement for a business would you look at to determine the company's earnings performance during an accounting period?

A) balance sheet.
B) income statement.
C) statement of cash flows.
D) the Management Assessment.

Question 55

Normally, intense rivalries have a tendency to reduce ____________________.

Question 56

Which form does the balance sheet equation take in the United Kingdom?

A) Noncurrent Assets + Noncurrent Liabilities = Shareholders' Equity
B) Revenues - Expenses = Shareholders' Equity
C) Noncurrent Assets + [Current assets - Current Liabilities] - Noncurrent Liabilities = Shareholders' Equity
D) Noncurrent Assets - Current assets = Noncurrent Liabilities - Current Liabilities + Shareholders' Equity

Question 57

The ______________________________ sets forth the sequence of activities involved in the creation, manufacture and distribution of its products and services.

Question 58

Why is the operating activities section of the statement of cash flows often believed to be the most important part of the statement?

A) Because it shows the dividends that have been paid to stockholders.
B) Because it indicates a company's ability to generate cash from sales to meet current cash payments for goods or services.
C) Because shows the net increase or decrease in cash during the period.
D) Because it gives the most information about how operations have been financed.

Question 59

The higher the value added from any activity, the higher should be the ____________________ from engaging in that activity.

Question 60

The threat of new entrants is measured by whether there are entry barriers, such as capital investment, ________________________________________, patents, or regulation that inhibit new entrants.

Question 61

The residual interest in a company is referred to as ______________________________.

Question 62

___________________________________ financial statements are helpful in highlighting the relative magnitude of changes in financial statement data from year to year.

Question 63

Firms intending to issue new bonds or capital stock file a ____________________ with the SEC that describes the offering.

Question 64

Labor contracts and purchase order commitments are examples of ____________________ contracts.

Question 65

The _____________________________________________ defines more clearly the explicit responsibility of managers for financial statements, the relation between the independent auditor and the firm audited and the kinds of services permitted and not permitted.

Question 66

Resources that have the potential for providing a firm with future economic benefits are called ____________________.

Question 67

______________________________ relates to the relative number of buyers and sellers in a particular industry.

Question 68

Obtaining a competitive advantage by being the first company to introduce new concepts or ideas is referred to as ________________________________________.

Question 69

Assets that do not represent a claim to a fixed amount of cash are called ____________________ assets.

Question 70

Under the Sarbanes-Oxley Act ____________________ assumes responsibility for establishing and maintaining adequate internal control structure and procedures.

Question 71

Basic EPS is calculated as net income minus _____________________________________________ divided by the weighted average number of shares outstanding.

Question 72

Under the ____________________ basis of accounting, a firm recognizes revenue when it performs all or a substantial portion, of the services it expects to perform and receives either cash or a receivable.

Question 73

___________________________________ equals net income for a period plus or minus the changes in shareholders' equity accounts other than from net income and transactions with owners.

Question 74

Nonmonetary assets include assets that are ____________________, such as inventories, and assets that are ____________________ such as brand names.

Question 75

Most financial statement analysis aims to assess a firm's ____________________ and ____________________.
or

Question 76

Statements that express all items in a particular financial statement as a percentage of some common base are called _________________________ statements.

Question 77

A firm obtains cash from short and long-term ____________________ and from issuing preferred and _________________________.

Question 78

How easily can customers switch to substitute products is a question one might ask when assessing the ___________________________________.

Question 79

How easily can new firms enter a market is a question one might ask when assessing _____________________________________________.

Question 80

____________________ assets include the rights established by law or contract to the future use of property.