Deck 5: Financial Statements Analysis Reading Between the Lines

Question 1

Methods of financial statements analysis are most effectively applied together in a reiterative (rather than sequential)process.

Answer 1

True

Question 2

Financial ratios represent effects,not causes.

Answer 2

True

Question 3

Which of the following is a difference between conservatism principle and materiality principle?

A) Conservatism requires that financial reporting should neither disproportionately overstate nor understate a situation, whereas materiality holds that strict adherence to accounting principles is not required for items of little significance.
B) Conservatism is listed as a constraint in the conceptual framework determined by the American financial community, whereas materiality is no longer listed as a constraint in the conceptual framework.
C) Conservatism holds that strict adherence to accounting principles is not required for items of little significance, whereas materiality requires that financial reporting should neither disproportionately overstate nor understate a situation.
D) Conservatism requires that revenues be measured within the specific reporting period, whereas materiality requires that costs be deducted from the reported revenues to determine the period's net income.

Answer 3

A

Question 4

Internal and external comparisons,made during financial statement analysis,can reveal unexpected relationships or the absence of expected relationships.

Question 5

Amounts shown on financial statements reflect current values.

Question 6

Which of the following is true of the cost principle?

A) It highlights the proposition that value is not the focus of accounting and is not represented in financial statements.
B) Using this principle results in the subjectivity of value assessments.
C) Under this, costs are measured subjectively on actual basis.
D) It results in reflecting the current values of assets, liabilities, equity, revenues, and expenses shown on the financial statements.

Question 7

Which of the following accountants use a conservative reporting strategy?

A) Imogene reported a higher inventory than actual.
B) Malik understated the expense incurred during the year.
C) Lia capitalized the general maintenance expenses.
D) Yuriko used a higher depreciation rate for the assets.

Question 8

Financial statements rarely,if ever,represent economic reality.

Question 9

Which of the following is true of reviewed financial statements?

A) These represent the most basic level of financial statements.
B) These have a broader scope as compared to audited financial statements.
C) These provide assurance to the user of the financial statements.
D) These have a limited implication of assurance.

Question 10

Since 2002,the FASB and the International Accounting Standards Board (IASB)have been working to merge U.S.GAAP with international financial reporting standards (IFRS).Which of the following terms is used to describe this process?

A) merger
B) integration
C) convergence
D) unification

Question 11

Which of the following best defines the term earnings management?

A) It is the intervention by the management in the internal financial reporting process, with the intent of boosting the earnings of an organization.
B) It is the purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.
C) It is the legitimate alteration of internal reports by the management to influence contractual outcomes that depend on reported accounting numbers.
D) It is a systematic management of earnings of an organization by its external shareholders, with the intent of increasing future profits.

Question 12

Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Question 13

Which of the following is a fundamental accounting principle?

A) price principle
B) objectivity principle
C) subjectivity principle
D) conformity principle

Question 14

The income statement explains all changes in the assets,liabilities,and equity of a company between two consecutive balance sheet dates.

Question 15

Which of the following is an accounting choice that violates GAAP?

A) recording sales after they are realized, not before it
B) recording intangible assets
C) recording fictitious inventory
D) using estimates to determine provisions for bad debts

Question 16

Operational freedom and reporting freedom are held in check by the principle of materiality.

Question 17

Which of the following is a difference between audits and compilations?

A) The auditor's objective is to obtain reasonable assurance that the financial statements are free of material misstatements, whereas the objective of a compilation is to assist management in presenting financial information without obtaining any level of assurance.
B) Audits do not require an understanding of the entity's internal controls and an assessment of fraud risk, whereas compilations require an understanding of the entity's internal controls and an assessment of fraud risk.
C) Audits have a narrower scope as compared to reviews, whereas compilations have a broader scope as compared to reviews.
D) Audits provide a reasonable level of assurance to the users of the financial statements, whereas compilations provide a limited level of assurance to the users of the financial statements.

Question 18

In which of the following aspects does audit differ from compilation or review?

A) An audit gives reasonable level of assurance to the users, whereas a compilation or review does not give any level of assurance to the users.
B) An audit requires an understanding of the entity's internal controls and assessment of fraud risk, whereas a compilation or review does not require such understanding or assessment.
C) An audit requires an auditor or accountant to perform inquiry and analytical procedures, whereas a compilation or review does not require such procedures.
D) An audit is performed to obtain limited assurance that there are no material modifications that should be made to the financial statements, whereas a compilation or review is performed without obtaining any level of assurance.

Question 19

Content analysis is a quantitative method of determining characteristics of interest.

Question 20

As per the research conducted by Churyk and Clinton,significantly fewer colons in the management discussion and analysis section of annual reports are an indication of financial statement deception.

Question 21

Which of the following is Altman's conventional Z-score model for publicly traded manufacturing firms?

A) Z = 0.717(X1) + 0.847(X2) + 3.107(X3) + 0.420(X4) + 0.998(X5)
B) Z = 1.4(X1) + 0.847(X2) + 3.3(X3) + 1.05(X4) + 0.998(X5)
C) Z = 6.65(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4)
D) Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 0.999(X5)

Question 22

Which of the following is true of a balance sheet?

A) It summarizes the performance of the organization over a specific period of time.
B) It supplements information provided by the income statement.
C) It shows the financial position of an organization on a specific date.
D) It explains some changes in the assets and liabilities of a company between two consecutive periods.

Question 23

The journal entry testing prescribed by SAS No.99 identifies several common characteristics of fraudulent entries.Which of the following is one such characteristic?

A) an entry for credit sales to a buyer who does not pay his dues on time
B) an entry for repairs and maintenance of plant made every period
C) an entry for creating provisions for bad debts
D) an entry for asset made by the managing director of the company

Question 24

Which of the following the correct formula for calculating acid test ratio?

A) Acid test ratio = (Current assets - Inventory) / Current liabilities
B) Acid test ratio = (Current assets - Interest expense) / Current liabilities
C) Acid test ratio = (Current assets - Current liabilities) / Current liabilities
D) Acid test ratio = Current assets / Current liabilities

Question 25

Which of the following does a discrepancy in cash flow reconciliation indicate?

A) The cash outflow is greater than the cash inflow.
B) The cash flow statement reflects entries for intercompany cash flows and transactions.
C) Certain cash transactions are not accurately reflected in the income statement and balance sheet.
D) There was an unexpected surge of cash flow during the period.

Question 26

Which of the following is a difference between internal comparison and external comparison with regard to financial statement analysis?

A) An internal comparison reveals unexpected relationships within a company, whereas an external comparison reveals the absence of expected relationships outside a company.
B) An internal comparison involves comparing a company with the industry as a whole, whereas an external comparison involves comparing a company's current performance with its past experience.
C) An internal comparison is done by an accountant or auditor, whereas an external comparison is done by a forensic accountant.
D) An internal comparison allows the examination of changes within a company over time, whereas an external comparison reveals the company's relative performance and financial standing.

Question 27

Which of the following is the correct formula for calculating sustainable growth rate?

A) Sustainable growth rate = Return on sales × Return on equity
B) Sustainable growth rate = Retention ratio × Return on equity
C) Sustainable growth rate = Retention ratio × Return on assets
D) Sustainable growth rate = Return on sales × Return on assets

Question 28

Judith Corp.has current assets worth $50,000 and current liabilities worth $75,000.Current assets include inventory of $10,000.Calculate acid test ratio.

A) 1.500
B) 0.533
C) 0.625
D) 0.667

Question 29

Which of the following is true of Altman's Z-Score Boundaries?

A) If a publicly traded non-manufacturing firm has a Z-score of 1.81, it predicts bankruptcy.
B) If a publicly traded manufacturing firm has a Z-score of 2.60, it indicates non-bankruptcy.
C) If a publicly traded manufacturing firm has a Z-score of 1.42, the firm is in the zone of ignorance.
D) The zone of ignorance for privately held manufacturing firms is 1.23 to 2.90.

Question 30

Which of the following is a profitability ratio?

A) return on assets
B) earnings per share
C) price to earnings
D) dividend yield

Question 31

Which of the following is true of the application of ratio analysis?

A) These are as reliable as the source data.
B) Analysts should use simple rules of thumb when applying these.
C) These represent causes, not effects.
D) Accounting estimates in the data do not impact ratios.

Question 32

Which of the following is a limitation of computer-assisted audit tools?

A) These tools cannot replace skilled forensic accountants, but rather allow them to focus their efforts on the highest-risk journal entries.
B) These tools cannot analyze 100% of the data, but rather can choose and analyze samples from the journal entry database.
C) The conclusions arrived at using these tools cannot be supported with substantial quantitative data.
D) The forensic accountant will have to manually review the general ledger even after using these tools.

Question 33

Which of the following is the correct formula for calculating dividend yield?

A) Dividend yield = Book value per share / Dividends per share
B) Dividend yield = Dividends per share / Book value per share
C) Dividend yield = Dividends per share / Market value per share
D) Dividend yield = Market value per share / Dividends per share

Question 34

Blue Angel,Inc.generated sales of $420,000 in the year 2014.The accountant provided the following additional information: $$\begin{array} { l r } \text { Net profit margin } & 3 \% \\\text { Total Shareholder's equity } & \$ 112,000 \\\text { Total assets } & \$ 280,000\end{array}$$ Using the DuPont model,calculate the return on equity of the company.

A) 1.8%
B) 5%
C) 11.25%
D) 0.8%

Question 35

Which of the following is true of the compound annual growth rate?

A) It reflects average annual growth over a period of multiple years.
B) It reflects total annual growth over a period of multiple years.
C) It reflects average annual growth for a year as compared to the previous year.
D) It reflects total annual growth for a year as compared to the previous year.

Question 36

Arcket,Inc.is a publicly traded nonmanufacturing company.The following information is available from its financial statements: $$\begin{array} { l r } \text { Net working capital } & \$ 200,000 \\\text { Retained earnings } & \$ 125,000 \\\text { Eamings before Interest and taxes } & \$ 375,000 \\\text { Market value of equity } & \$ 1,015,000 \\\text { Book value of total debt } & \$ 1,750,000 \\\text { Total assets } & \$ 2,500,000 \\\text { Sales } & \$ 1,500,000\end{array}$$ Calculate and interpret the Altman's Z-score for Arcket,Inc.

A) 1.6084; Bankrupt
B) 2.312; Zone of ignorance
C) 1.40816; Zone of ignorance
D) 2.9108; Non-bankrupt

Question 37

Which of the following is one of Michael Porter's five competitive forces?

A) the bargaining power of suppliers
B) the bargaining power of the government
C) the threat of industrial slowdown
D) the threat of technological obsolescence

Question 38

Which of the following is a difference between a forensic accountant and an accountant or auditor?

A) A forensic accountant works with complete information, whereas an accountant or auditor works with incomplete information.
B) A forensic accountant commonly works backward, whereas an accountant or auditor typically works forward.
C) A forensic accountant works with financial ratios, whereas an accountant or auditor works with internal reports.
D) A forensic accountant uses professional skepticism while conducting the analysis, whereas an accountant or auditor has a more open mindset.

Question 39

Judith Corp.has current assets worth $50,000 and current liabilities worth $75,000.Current assets include inventory of $10,000.Calculate current ratio.

A) 1.500
B) 0.533
C) 0.625
D) 0.667

Question 40

Peaches Corp.has current assets worth $90,000 and current liabilities worth $75,000.Current assets include inventory of $10,000.Calculate the net working capital of the company.

A) $80,000
B) $65,000
C) $15,000
D) $5,000

Question 41

Which of the following is a difference between personal financial statements and business financial statements?

A) Personal financial statements follow the cost principle, whereas business financial statements do not follow the cost principle.
B) Personal financial statements should present assets at estimated current values, whereas business financial statements should present assets at historical cost.
C) Personal financial statements are not governed by GAAP, whereas business financial statements are governed by GAAP.
D) Personal financial statements are prepared for a specific period of time, whereas business financial statements are prepared for a general period.

Question 42

Which of the following is true of a personal balance sheet?

A) It provides a snapshot of an individual's financial condition at a specific point in time.
B) It reflects the historical cost of assets and the estimated current amounts of liabilities.
C) It is prepared by the manager for the personal use of the company.
D) It is prepared by a company for individual investors to reflect the data required by them.

Question 43

Research conducted by Churyk and Clinton (2008)identified certain "tells" or communication characteristics in the context of the management discussion and analysis section of annual reports,related to financial statement deception.Which of the following characteristics is an indicator of such deception?

A) fewer words per sentences
B) fewer past-tense words
C) more optimistic words
D) more self-references

Question 44

What is content analysis?

Question 45

Which of the following is true of financial statements?

A) They represent historical data.
B) They are prepared for management purposes.
C) They represent future estimates of the firm.
D) They provide a reasonable level of assurance to their users.

Question 46

List the common disclosures that are to accompany a personal financial statement.

Question 47

Which of the following is a systematic technique for categorizing words into content categories using special coding rules?

A) DuPont analysis
B) content analysis
C) Altman's Z-score
D) content coding

Question 48

Give examples and explain techniques of cash flow manipulations which may not constitute GAAP violations.

Question 49

List and explain the three basic financial statements.

Question 50

Explain the matching principle.