Deck 2: Introduction to Financial Statement Analysis

Question 1

What are the five financial statements that all public companies are required to produce by IFRS?

Answer 1

1.The Balance Sheet
2.The Income Statement
3.The Statement of Cash Flows
4.The Statement of Shareholders' Equity
5.The Statement of Comprehensive Income

Question 2

Which of the following statements regarding the balance sheet is incorrect?

A) The balance sheet provides a snapshot of the firm's financial position at a given point in time.
B) The balance sheet lists the firm's assets and liabilities.
C) The balance sheet reports stockholders' equity on the right hand side.
D) The balance sheet reports liabilities on the left hand side.

Answer 2

The balance sheet reports liabilities on the left hand side.

Question 3

Goodwill captures the value of other ________ that the firm acquired through the acquisition.If the value of these ________ assets declines over time,the amount of goodwill listed on the balance sheet will be ________ by a write-down that captures the change in value of the acquired assets.

A) "tangibles", tangible, reduced
B) "tangibles", tangible, raised
C) "intangibles", intangible, raised
D) "intangibles", intangible, reduced

Answer 3

"intangibles", intangible, reduced

Question 4

What is the role of an auditor in financial statement analysis?

Question 5

Shareholders' equity,the difference between the firm's ________,is an accounting measure of the firm's ________.

A) assets and liabilities, net value
B) assets and liabilities, book value
C) short-term liabilities and long-term liabilities, net value
D) short-term liabilities and long-term liabilities, book value

Question 6

Use the table for the question(s) below.
Consider the following balance sheet:
Luther's current ratio for 2006 is closest to:

A) 0.84
B) 0.87
C) 1.15
D) 1.19

Question 7

Cash is a

A) long-term asset.
B) current asset.
C) current liability.
D) long-term liability.

Question 8

Which of the following balance sheet equations is incorrect?

A) Assets - Liabilities = Shareholders' Equity
B) Assets = Liabilities + Shareholders' Equity
C) Assets - Current Liabilities = Long Term Liabilities
D) Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity

Question 9

Accounts payable is a

A) long-term liability.
B) current asset.
C) long-term asset.
D) current liability.

Question 10

Which of the following is NOT a financial statement that every public company is required by IFRS to produce?

A) Income Statement
B) Statement of Sources and Uses of Cash
C) Balance Sheet
D) Statement of Shareholders' Equity

Question 11

Use the table for the question(s) below.
Consider the following balance sheet:
What is Luther's net working capital in 2005?

A) $12 million
B) $27 million
C) $39 million
D) $63.6 million

Question 12

Canadian public companies are required to file their interim financial statements and annual financial statements with which one of the following authorities?

A) Provincial Security Commissions
B) Federal Security Commissions
C) Provincial Finance Ministry
D) Federal Finance Ministry

Question 13

Use the table for the question(s) below.
Consider the following balance sheet:
If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then Luther's market-to-book ratio would be closest to:

A) 0.39
B) 0.76
C) 1.29
D) 2.57

Question 14

Depreciation is ________ that the firm ________.

A) an actual cash expense, pays
B) not an actual cash expense, receives
C) not an actual cash expense, pays
D) an actual cash expense, pays.

Question 15

Under IFRS,every public company is required to produce ________ financial statements.

A) four
B) five
C) six
D) seven

Question 16

Use the table for the question(s) below.
Consider the following balance sheet:
When using the book value of equity,the debt to equity ratio for Luther in 2006 is closest to:

A) 2.21
B) 2.29
C) 2.98
D) 3.03

Question 17

Canadian publicly accountable companies must follow IFRS in their financial statements for fiscal years beginning ________.

A) January 1st, 2010
B) January 1st, 2005
C) January 1st, 2016
D) January 1st, 2011

Question 18

The third party who checks annual financial statements to ensure that they are prepared according to Canadian GAAP and verifies that the information reported is reliable is the

A) Toronto Stock Exchange Board.
B) Accounting Standards Board.
C) Provincial Securities Commission.
D) Auditor.

Question 19

A 30 year mortgage loan is a

A) long-term liability.
B) current liability.
C) current asset.
D) long-term asset.

Question 20

Use the table for the question(s) below.
Consider the following balance sheet:
Luther's quick ratio for 2005 is closest to:

A) 0.77
B) 1.31
C) 1.09
D) 0.92

Question 21

Gross profit is calculated as:

A) Total sales - cost of sales - selling, general and administrative expenses - depreciation and amortization
B) Total sales - cost of sales - selling, general and administrative expenses
C) Total sales - cost of sales
D) None of the above

Question 22

Use the table for the question(s) below.
Consider the following income statement and other information:
For the year ending December 31,2006 Luther's earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.58
D) $4.04

Question 23

________ is the difference between total asset value minus total liability value.

A) Market value
B) Residual value
C) Liquidity value
D) Discounted value

Question 24

P/B ratio is ________.

A) price-to-book ratio
B) profit-to-book ratio
C) property-to-book ratio
D) price-to-benefit ratio

Question 25

Which of the following is NOT an operating expense?

A) Interest expense
B) Depreciation and amortization
C) Selling, general and administrative expenses
D) Research and development

Question 26

Use the table for the question(s) below.
Consider the following balance sheet:
If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then what is Luther's Enterprise Value?

A) -$63.3 million
B) $353.1 million
C) $389.7 million
D) $516.9 million

Question 27

Use the table for the question(s) below.
Consider the following balance sheet:
The change in Luther's quick ratio from 2005 to 2006 is closest to:

A) a decrease of .10
B) an increase of .10
C) a decrease of .15
D) an increase of .15

Question 28

The debt-to-equity ratio is calculated by dividing the ________ by ________.

A) total debt, total shareholders' equity
B) short-term debt, retained earnings
C) long-term debt, total equity
D) long-term debt, preferred equity

Question 29

Use the table for the question(s) below.
Consider the following balance sheet:
If on December 31,2005 Luther has 8 million shares outstanding trading at $15 per share,then what is Luther's enterprise value?

Question 30

Creditors often compare a firm's ________ and ________ to assess whether the firm has sufficient working capital to meet its short-term needs.

A) total assets, total liabilities
B) current assets, current liabilities
C) total assets, current liabilities
D) current assets, total liabilities

Question 31

By comparing a firm's current assets and current liabilities,one can assess whether the firm has sufficient ________ to meet its ________ needs.

A) long-term capital, short-term
B) working capital, short-term
C) working capital, long-term
D) marketable securities, long-term

Question 32

Market-to-Book-Ratio is a ratio between ________.

A) market value of asset and book value of asset
B) market value of inventory and book value of inventory
C) market value of liabilities and book value of liabilities
D) market value of equity and book value of equity

Question 33

Use the table for the question(s) below.
Consider the following balance sheet:
If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then using the market value of equity,the debt to equity ratio for Luther in 2006 is closest to:

A) 1.71
B) 1.78
C) 2.31
D) 2.35

Question 34

Enterprise Value is equal to ________.

A) market value of equity plus debt minus current assets
B) market value of current assets plus current liabilities minus inventory
C) market value of assets plus debt minus equity
D) market value of equity plus debt minus cash

Question 35

Market-to-book-ratio is also called the ________.

A) price-to-debt ratio
B) price-to-book ratio
C) price-to-asset ratio
D) price-to-equity ratio

Question 36

Use the table for the question(s) below.
Consider the following balance sheet:
If on December 31,2005 Luther has 8 million shares outstanding trading at $15 per share,then what is Luther's market-to-book ratio?

Question 37

Firms disclose the potential for the dilution from options they have awarded by reporting ________.

A) diluted total earnings before interest and taxes
B) diluted earnings per share
C) diluted dividend payment
D) diluted total earnings

Question 38

The debt-equity ratio is a common ratio used to assess a firm's ________.

A) liquidity
B) return on equity
C) leverage
D) retained earnings

Question 39

Which of the following statements regarding the income statement is incorrect?

A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C) The last or "bottom" line of the income statement shows the firm's net income.
D) The first line of an income statement lists the revenues from the sales of products or services.

Question 40

A higher ________ implies less risk of the firm experiencing a cash shortfall in the near future.

A) return on asset ratio
B) market-to-book ratio
C) current ratio
D) return on equity ratio

Question 41

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's return on assets (ROA)for the year ending December 31,2006 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%

Question 42

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's Operating Margin for the year ending December 31,2005 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%

Question 43

The income statement lists the firm's ________.

A) assets and equities over a period of time
B) assets and liabilities over a period of time
C) variable costs and fixed costs at the end of the fiscal year
D) revenues and expenses over a period of time

Question 44

Gross profit is calculated as:

A) total sales - cost of sales - selling, general and administrative expenses - depreciation and amortization
B) total sales - cost of sales - selling, general and administrative expenses
C) total sales - cost of sales
D) none of the above

Question 45

Use the table for the question(s) below.
Consider the following income statement and other information:
For the year ending December 31,2006 Luther's earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.58
D) $4.04

Question 46

Which of the following statements regarding the income statement is incorrect?

A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C) The last or "bottom" line of the income statement shows the firm's net income.
D) The first line of an income statement lists the revenues from the sales of products or services.

Question 47

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's Net Profit Margin for the year ending December 31,2005 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%

Question 48

Use the table for the question(s) below.
Consider the following income statement and other information:
Calculate Luther's return of equity (ROE),return of assets (ROA),and price-to-earnings ratio (P/E)for the year ending December 31,2005.

Question 49

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's Operating Margin for the year ending December 31,2005 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%

Question 50

The P/E ratio is not useful when the firm's ________ are negative.In this case,it is common to look at the firm's ________ relative to sales.

A) operating earnings, enterprise value
B) net earnings, enterprise value
C) operating earnings, market value
D) net earnings, market value

Question 51

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's earnings before interest,taxes,depreciation,and amortization (EBITDA)for the year ending December 31,2006 are closest to:

A) 19.7 million
B) 37.6 million
C) 41.2 million
D) 44.8 million

Question 52

DuPont Identity expresses the ROE in terms of the firm's ________.

A) profitability, asset efficiency, and leverage
B) current assets, current liabilities, long-term debts
C) profitability, interest expense, and net income
D) total assets, total liabilities, and total equity

Question 53

Use the table for the question(s) below.
Consider the following income statement and other information:
If Luther's accounts receivable were $55.5 million in 2006,then calculate Luther's accounts receivable days for 2006.

Question 54

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's return on equity (ROE)for the year ending December 31,2006 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%

Question 55

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's price - earnings ratio (P/E)for the year ending December 31,2006 is closest to:

A) 7.9
B) 10.1
C) 15.4
D) 16.0

Question 56

The balance sheet shows the ________ of a firm ________.The income statement shows the flow of ________ generated by them ________.

A) assets and liabilities, between two dates, revenues and expenses, at a given point in time
B) revenues and expenses, between two dates, assets and liabilities, at a given point in time
C) assets and liabilities, at a given point in time, revenues and expenses, between two dates
D) revenues and expenses, at a given point in time, assets and liabilities, between two dates

Question 57

Which of the following is NOT an operating expense?

A) Interest expense
B) Depreciation and amortization
C) Selling, general and administrative expenses
D) Research and development

Question 58

Use the table for the question(s) below.
Consider the following income statement and other information:
Assuming that Luther has no convertible bonds outstanding,then for the year ending December 31,2006 Luther's diluted earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.53
D) $3.92

Question 59

Use the table for the question(s) below.
Consider the following income statement and other information:
Assuming that Luther has no convertible bonds outstanding,then for the year ending December 31,2006 Luther's diluted earnings per share are closest to:

A) $1.01
B) $1.04
C) $1.53
D) $3.92

Question 60

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's Net Profit Margin for the year ending December 31,2005 is closest to:

A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%

Question 61

Why is the firm's statement of cash flows very important?

Question 62

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's price - earnings ratio (P/E)for the year ending December 31,2006 is closest to:

A) 7.9
B) 10.1
C) 15.4
D) 16.0

Question 63

Use the table for the question(s) below.
Consider the following income statement and other information:
Calculate Luther's return of equity (ROE),return of assets (ROA),and price-to-earnings ratio (P/E)for the year ending December 31,2005.

Question 64

Which of the following adjustments is NOT correct if you are trying to calculate cash flow from financing activities?

A) Add dividends paid.
B) Add any increase in long-term borrowing.
C) Add any increase in short-term borrowing.
D) Add proceeds from the sale of stock.

Question 65

Use the tables for the question(s) below.
Consider the following financial information:
Calculate Luther's cash flow from operating activities for the year ending December 31,2006.

Question 66

According to the IFRS,in addition to the balance sheet,income statement,and the statement of cash flows,a firm's complete financial statements will include all of the following EXCEPT:

A) Management discussion and analysis
B) Notes to the financial statements
C) Securities Commission's commentary
D) A statement of shareholders' equity

Question 67

The statement of cash flows is divided into three sections: ________.

A) operating leverage, investment leverage, and financing leverage
B) cash inflows, cash outflows, and cash flow cycle
C) cash-in-use, cash-in-resource, and cash conversion cycle
D) operating activity, investment activity, and financing activity

Question 68

Use the table for the question(s) below.
Consider the following income statement and other information:
If Luther's accounts receivable were $55.5 million in 2006,then calculate Luther's accounts receivable days for 2006.

Question 69

Use the tables for the question(s) below.
Consider the following financial information:
Why does a firm's net income not correspond to cash generated?

Question 70

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's return on equity (ROE)for the year ending December 31,2006 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%

Question 71

Which of the following statements regarding net income transferred to retained earnings is correct?

A) Net income = net income transferred to retained earnings - dividends
B) Net income transferred to retained earnings = net income + dividends
C) Net income = net income transferred to retained earnings + dividends
D) Net income transferred to retained earnings - net income = dividends

Question 72

In the IFRS,in addition to the five financial statements,companies provide ________ with further details on the information provided in the statements.

A) pro forma statements
B) statements of cash used and sources
C) extensive notes
D) ratio analysis

Question 73

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's earnings before interest,taxes,depreciation,and amortization (EBITDA)for the year ending December 31,2006 are closest to:

A) $19.7 million
B) $37.6 million
C) $41.2 million
D) $44.8 million

Question 74

Which of the following is NOT a section on the cash flow statement?

A) Income generating activities
B) Investing activities
C) Operating activities
D) Financing activities

Question 75

How many reasons are there that net income does not correspond to cash earned?

Question 76

In response to corporate scandals such as Enron and WorldCom,in 2002 the U.S.Congress passed a law that requires,among other things,that CEOs and CFOs certify the accuracy and appropriateness of their firm's financial statements and increases the penalties against them if the financial statements later prove to be fraudulent.The name of this act is

A) the Glass-Steagall Act.
B) the Sarbanes-Oxley Act.
C) the Accuracy in Accounting Act.
D) the McCain-Feingold Act.

Question 77

Use the table for the question(s) below.
Consider the following income statement and other information:
Luther's return on assets (ROA)for the year ending December 31,2006 is closest to:

A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%

Question 78

Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities?

A) Add increases in accounts payable.
B) Add back depreciation.
C) Add increases in accounts receivable.
D) Deduct increases in inventory.

Question 79

Which of the following is NOT a reason why cash flow may not equal net income?

A) Amortization is added in when calculating net income.
B) Changes in inventory will change cash flows but not income.
C) Capital expenditures are not recorded on the income statement.
D) Depreciation is deducted when calculating net income.

Question 80

Use the tables for the question(s) below.
Consider the following financial information:
Calculate Luther's cash flow from financing activities for the year ending December 31,2006.