Deck 10: Analysis of Foreign Financial Statements

Question 1

What U.S.term was equivalent to "inventories" as it was used in financial statements of companies located in the United Kingdom, prior to adoption of IFRS in 2005?

A)Operating assets
B)Consumables
C)Stocks
D)Merchandise

Answer 1

C

Question 2

What language will be used for the quarterly reports submitted by foreign companies to the U.S.Securities and Exchange Commission?

A)The quarterly reports may be in the company's local language
B)English or German
C)English or one of the languages of the European Union
D)English only

Answer 2

A

Question 3

During the 1990's, a major problem in evaluating the financial statements of Eastern European companies that had been under the control of the Soviet Union was:

A)that the statements had been used for government planning rather than for private investors.
B)that few people spoke the languages in which the financial statements were written.
C)that East European currencies had been greatly devalued relative to the U.S.dollar.
D)that financial reporting had not been done since the Bolshevik Revolution.

Answer 3

A

Question 4

Which of the following is most likely to affect an analyst's ability to make meaningful comparisons of financial statement ratios for companies in different countries?

A)Differences in currency
B)Language differences
C)Diversity of accounting principles and practices
D)Mathematical degrees of magnitude

Question 5

Which is NOT one of the basic steps in financial statement analysis?

A)Prospective analysis
B)Accounting analysis
C)Translation analysis
D)Financial analysis

Question 6

Evaluating liquidity and solvency to assess a company's ability to meet its obligations is an example of:

A)cash flow analysis.
B)risk analysis.
C)ROI analysis.
D)accounting analysis.

Question 7

Some European companies do not report cost of goods sold as a separate expense item.What affect does this have on financial statement analysis?

A)It would not be possible to determine the company's total expenses.
B)Any measure that relies on knowing gross profit cannot be calculated.
C)Net income cannot be accurately calculated.
D)There is inadequate aggregation of financial information.

Question 8

Investing in several corporate stocks that have different characteristics is referred to as:

A)diversification.
B)portfolio consolidation.
C)asset translation.
D)income determination.

Question 9

Which of the following is a potential problem in analyzing foreign financial statements?

A)Language
B)Data accessibility
C)Terminology
D)All of the above pose potential problems.

Question 10

Lack of information about accounting methods used, operating segments, and interim financial results is a problem of:

A)disclosure.
B)relevance.
C)comparability.
D)format.

Question 11

If an analyst saw a "Monetary position loss" in a company's annual report, where would that company be located?

A)The Netherlands
B)Mexico
C)China
D)Sweden

Question 12

Which is NOT one of the common sources of distortions in financial statements?

A)Accounting standards that are inconsistent with economic reality
B)Estimation errors made by managers in applying accounting standards
C)Miscalculation of foreign currency translation
D)Management of earnings

Question 13

Which of the following statements is true relative to accounting for leases internationally?

A)Operating lease disclosure for IFRS and U.S.GAAP is identical.
B)Some analysts believe that all leases must be restated as if they were operating leases.
C)Current rules under IFRS, U.S.GAAP, and other national accounting standards require leases to be capitalized under certain circumstances.
D)U.S.GAAP requires that future minimum lease payment disclosures be made for each of the next ten years and for all years thereafter.

Question 14

Which of the following is a reason for analyzing the financial statements of foreign corporations?

A)Making credit decisions about foreign customers
B)Evaluating international business combinations
C)Diversifying an investment portfolio
D)All of the above are reasons for analyzing foreign financial statements.

Question 15

Foreign companies listed on U.S.stock exchanges must reconcile their net income and stockholders' equity to U.S.GAAP.Which ratios can be calculated with the information provided in this reconciliation?

A)Operating profit margin
B)Asset turnover
C)Return on equity
D)Current ratio

Question 16

Which of the following is likely to affect an analyst's ability to make meaningful comparisons of financial statement ratios for companies in different countries?

A)Accounting diversity
B)Varying business traditions
C)Unique terminology
D)All of the above

Question 17

Which of the following is true about financial statement disclosure?

A)When account balances are aggregated, the analyst has the greatest amount of information.
B)The amount and types of financial statement disclosure vary widely from one country to another.
C)The concept of full disclosure has been universally adopted around the world.
D)An analyst can always disaggregate financial statement disclosures to obtain needed information.

Question 18

Timeliness of financial statements varies across nations.Which of the following countries has financial statements issued closest to year-end (on average)?

A)Japan
B)Germany
C)Canada
D)Italy

Question 19

Why is investing in foreign companies an effective way to diversify an individual's investment portfolio?

A)Foreign economies are stronger than the U.S.economy.
B)Foreign stocks are less risky than the stocks of U.S.corporations.
C)Stock returns of companies in foreign companies are highly correlated with stock returns of U.S.companies.
D)Returns on foreign company stocks do not always change in the same direction as returns on U.S.stocks.

Question 20

Which of the following statements is NOT true concerning reasons for analyzing foreign financial statements?

A)It is important to determine the financial stability of foreign suppliers.
B)The stock returns of foreign corporations are nearly perfectly correlated with returns on U.S.stocks.
C)In a global economy, managers may use foreign competitors as benchmarks for evaluating performance.
D)Managers should determine the financial health of foreign customers before extending credit.

Question 21

How can foreign corporations alleviate the accounting diversity problem related to comparing foreign financial statements?

A)Presenting multiple sets of financial statements under various GAAP
B)Selecting a widely used set of accounting standards for their financial reporting
C)Providing adequate disclosure in notes to the financial statements to allow analysts to make conversions to another country's GAAP
D)All of the above

Question 22

Which of the following is a limitation of using commercial databases to access foreign company financial statements?

A)Information may be lost when a standard financial statement format is imposed on foreign statements.
B)Errors may occur during data entry.
C)Notes to the financial statements may not be included, or only partially included.
D)All of the above are limitations.

Question 23

What steps can be taken by an analyst to alleviate the timeliness problem encountered in comparing financial statements between countries that have different time frames for reporting?

A)Use interim financial statements instead of annual reports.
B)Convert all financial statement items to a common year using current exchange rates.
C)Request financial statements from foreign corporations as soon as they are available.
D)Nothing can be done by the analyst do deal with this challenge.

Question 24

What is the best short-term solution to alleviate problems of financial statement analysis arising from international differences in accounting terminology?

A)Require all countries to conform to IASB standards.
B)Create standard financial statement terminology for all companies around the world.
C)Analysts should carefully read the notes to financial statements and learn about the business environments of countries they analyze.
D)Convert all financial statements into English.

Question 25

What is an advantage of using ratio analysis in comparing financial statements from different countries?

A)Ratios are expressed as percentages, making currency differences irrelevant to the analysis.
B)Ratios highlight the holding gains or losses related to currency translation.
C)Purchasing power gains and losses from currency translation show up clearly in ratio analysis.
D)Comparing business ratios across countries removes the effect of economic conditions and business culture.

Question 26

What is EDGAR?

A)It is a database provided by the London, England stock exchange that provides financial statement information on U.K.companies.
B)It is a database created by the U.S.Securities and Exchange Commission that provides reports of all corporations listed on the U.S.stock exchanges.
C)It is a database of reports filed electronically with the U.S.Securities and Exchange Commission.
D)It is a database that links users to U.S.company websites much like CAROL does in the U.K.

Question 27

Which of the following has the least frequent reporting requirements for publicly traded corporations?

A)United States of America
B)United Kingdom
C)European Union directives
D)Canada

Question 28

As one of the sources of accounting distortions, the intentional overstatement of an accrued restructuring charge is often referred to as a practice of:

A)earnings management.
B)capital adjustment.
C)asset management.
D)risk management.

Question 29

Which of the following statements is true about convenience translations of financial statements?

A)International Business Machines (IBM) is the only corporation in the U.S.that currently provides convenience translation of its financial statements into a foreign language.
B)Few U.S.-based companies translate their financial statements into another language.
C)Convenience translation means that a company will translate its financial statements into English.
D)All of the above statements are true.

Question 30

What is the probable reason that many foreign countries provide convenience translations of their financial statements into English?

A)U.S.GAAP is the most widely used set of financial accounting standards.
B)Globalization of capital markets has increased the demand for English language financial statements.
C)England is the home of more multinational corporations than any other country.
D)The Securities and Exchange Commission requires all foreign companies doing business in the U.S.to provide English translations.

Question 31

Translating foreign financial statements into a convenience language:

A)eliminates all readability problems for a financial analyst.
B)does not always clarify accounting terminology unique to a particular country.
C)is easily and inexpensively done when the convenience language is English.
D)is required for all multinational corporations.

Question 32

The debt ratio of Dynasty Industries, a Japanese corporation, is 62%.Why might this be difficult to compare to the debt ratio of a U.S.manufacturing corporation?

A)U.S.companies generally have debt ratios greater than 62%.
B)U.S.companies generally have debt ratios less than 62%.
C)Japanese financing preferences may be different from American preferences.
D)Japanese companies report assets and liabilities in yen, whereas U.S.companies report in dollars.

Question 33

How should currency translation be done in order to conveniently compare a financial statement presented in Japanese yen to a financial statement presented in Chinese yuan?

A)The temporal method should be used.
B)The historical exchange rates should be used to convert financial statement amounts.
C)All amounts should be converted at the current exchange rate.
D)Current year statements should be converted at the current exchange rate, and prior year statements should be converted at prior year exchange rate.

Question 34

According to European Union directives, how frequently must its publicly traded corporations publish financial reports?

A)Annually
B)Semiannually
C)Quarterly
D)Monthly

Question 35

How would a company decide which foreign languages will be used to present its financial statements?

A)Determine which language is closest to the local language so that translation is less costly.
B)Choose the language based on which countries provide the greatest potential source of funds.
C)Follow the language requirements of its local accounting regulatory agency.
D)Select the language of the most populous country in its region of the world.

Question 36

What information would most likely NOT be available on the EDGAR system?

A)Form 10-K for a U.S.corporation listed on the New York Stock Exchange (NYSE)
B)Quarterly financial statements for a foreign corporation listed on the American Stock Exchange (AMEX)
C)The annual report for a corporation listed only on the London and Tokyo stock exchanges
D)The notes to the financial statements of a foreign corporation listed on the NYSE

Question 37

While conducting trend analysis, financial statement amounts should be translated using:

A)current exchange rate to avoid translation adjustment.
B)historical exchange rate to ensure compliance with IFRS.
C)average exchange rate avoid translation adjustment.
D)current rate at the end of each year.

Question 38

For which of the following purposes are cookie jar reserves primarily used?

A)Increasing reserves in less profitable years
B)Increasing profits in less profitable years
C)Decreasing expenses in profitable years
D)Decreasing the risk of non-payment of receivables

Question 39

Differences in business traditions and practices could make cross-country ratio analysis difficult.What should an analyst do to overcome this problem?

A)Learn more about the business environment in relevant countries.
B)Make all decisions using nominal monetary differences rather than ratios.
C)Translate all ratios to a common currency.
D)Avoid recommending investments in foreign companies.

Question 40

Which of the following is true about the format of financial reports?

A)All multinational corporations report Sales Revenue on their income statements.
B)Gross margin is a standard line item on income statements throughout the world.
C)Notes to financial statements may clarify international differences in statement formats.
D)In all countries, total assets are shown on the left side of the balance sheet and liabilities and owners' equity are shown on the right side.

Question 41

Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.The current exchange rate is ¥120 = $1.What is Dynasty Industries' debt ratio?

A)¥1.33
B)133%
C)75%
D)6.25%

Question 42

Which exchange rates should be used in order to appropriately analyze the trends in foreign financial statement data?

A)Historical exchange rates
B)Beginning of year exchange rates
C)Current exchange rates
D)Average exchange rates

Question 43

Dynasty Industries reported total liabilities of ¥9,000,000 and total assets of ¥12,000,000.If the exchange rate changes to ¥110 = $1, what will be the change in the debt ratio assuming the account balances remain constant?

A)Decrease by 8.3%
B)Increase by 8.3%
C)Decrease by 9.1%
D)No change

Question 44

Imperial Chemical Industries, a U.K.corporation, recorded interest incurred in constructing fixed assets as an expense of £128,000,000.When reconciling its financial statements to U.S.GAAP, what should be done with this interest?

A)It should be subtracted from the fixed asset account balance.
B)It should be added to the fixed asset account balance.
C)It should be deducted from retained earnings.
D)This amount should be charged to accumulated depreciation.

Question 45

What would be a logical first step that should be taken to restate foreign financial statements to conform to U.S.GAAP, assuming a four-column worksheet will be used to post debit and credit adjustments and reclassifications to arrive at U.S.GAAP statements?

A)Convert the foreign currency amounts to U.S.dollars.
B)Restate historical costs to current cost basis.
C)Re-order foreign financial statements to U.S.format.
D)Determine the amount of foreign exchange gains or losses.

Question 46

What is the intent of using EBITDA for analyzing foreign financial statements?

A)Adding back interest, taxes, depreciation, and amortization to net income takes out elements of earnings that are greatly affected by accounting diversity.
B)It makes foreign GAAP conform to local GAAP.
C)EBITDA brings foreign net income in line with net income under U.S.GAAP.
D)All of the above

Question 47

British companies whose shares are publicly traded on exchanges in the United Kingdom have how long after year-end to file financial statements with regulators in the U.K.?

A)6 months
B)90 days
C)60 days
D)30 days

Question 48

Footnote disclosures in foreign financial statements are particularly helpful in:

A)overcoming differences in statement format among countries.
B)reconciling statements from one country's GAAP to another country's GAAP.
C)learning relevant information not required to be presented in the accounts.
D)All of the above

Question 49

What is the advantage of Morgan Stanley Dean Witter's "Apples to Apples" approach to comparing international financial statement data?

A)It provides complete conversion of foreign financial statements to U.S.GAAP, which may not be available from the reporting entities themselves.
B)It focuses only on the industry-specific factors MSDW believes are most important to stock valuation, which eliminates the need for converting complete financial statements.
C)It is not affected by differences in GAAP across countries.
D)The same measures are used for all industries in all countries, which eliminate comparability issues.

Question 50

Which of the following statements is true about convenience translations?

A)Convenience translation eliminates the problems associated with comparing financial statements in the same language.
B)Convenience translation means that a company converts both the language and the currency of its financial statements for the convenience of potential investors.
C)Convenience translations require reconciliation to U.S.GAAP, U.S.format, as well as conversion to English.
D)None of the above statements is true.

Question 51

Which of the following is true about reconciling foreign financial statements to U.S.GAAP?

A)A 10% increase in income when converting to U.S.GAAP means that stockholder's equity will increase by 10% after converting to U.S.GAAP.
B)A 10% increase in income when converting to U.S.GAAP means that stockholder's equity will increase by 20% after converting to U.S.GAAP.
C)A 10% increase in income when converting to U.S.GAAP means that stockholder's equity will decrease by 10% after converting to U.S.GAAP.
D)None of the above statements is true.

Question 52

Which of the following is the major limitation of using EBITDA for analyzing foreign financial statements?

A)It is nearly impossible for most financial analysts to calculate this number.
B)Few analysts understand what this earnings number represents.
C)The excluded items with this approach may have implications for determining the value of firms under evaluation.
D)It cannot be converted from a foreign currency to a domestic currency.

Question 53

On what SEC form must foreign corporations with shares listed on U.S.stock exchanges present a reconciliation of net income and stockholders' equity to U.S.GAAP?

A)Form 10-Q
B)Form 10-K
C)Form 20-F
D)Form 8-Q

Question 54

What is OIBD?

A)This is the Organization of International Boards of Directors, which is attempting to harmonize accounting standards.
B)It stands for "operating income before depreciation," which some analysts recommend to remove the effect of international accounting standard diversity.
C)It is the Organization of International Bond Dealers, whose financial analysts developed EBITDA.
D)None of the above

Question 55

For U.S.companies whose shares are publicly traded on U.S.stock exchanges, how long after year-end must annual reports be filed with the Securities and Exchange Commission (SEC)?

A)6 months
B)90 days
C)60 days
D)30 days

Question 56

What is the basis for Morgan Stanley Dean Witter's "Apples to Apples" system for financial statement analysis?

A)Adjustments needed to compare companies within a single country
B)Adjustments needed to compare international companies within specific industries
C)Adjustments needed to compare companies in specific countries to U.S.companies
D)Adjustments needed to compare the performance of international brokerage firms

Question 57

The Morgan Stanley Dean Witter "Apples to Apples" analysis relies on:

A)converting financial statements to U.S.GAAP to compare international investment opportunities.
B)identifying the most significant factors affecting stock value and considering the effect of accounting diversity on these factors.
C)the superiority of U.S.GAAP for determining the true value of international capital investments.
D)converting all the accounts in foreign financial statements to a common set of accounting standards.

Question 58

Why should financial analysts endorse the adoption of IFRS worldwide?

A)It would eliminate the time lag between the end of the year and the publication of financial statements that varies considerably across countries.
B)It would increase the comparability of financial statements across countries.
C)It would increase the demand for the services of international financial analysts.
D)The services of financial analysts would become more valuable to investors.

Question 59

Excellent Corp., a foreign company, is listed in the U.S.stock exchange.It follows Local GAAP.The income statement of Excellent Corp.reported £165 as indirect costs related to inventory.The Local GAAP treats these as operating expense.When reconciling Excellent Corp's financial statements to U.S.GAAP, how should be these indirect costs treated?

A)These should be treated as operating expenses in the period in which they are incurred.
B)These costs are treated as product costs and are expensed as cost of goods sold when inventory is sold.
C)The entire amount will be shown on the liability side of the balance sheet.
D)This amount should be adjusted through the revaluation of inventories.

Question 60

In order to address accounting diversity, financial analysts have adopted which of the following strategies?

A)Limiting the geographic spread of their investments
B)Taking a diversification strategy within a foreign country
C)Investing only in foreign government bonds
D)All of the above