Question 1

A) Explain what the term "earnings quality" means.
B) Differentiate between high quality earnings and low quality earnings.
C) Explain how the estimates used in accrual accounting and operating decisions made by management can affect earnings quality.Give one example of each.

Accepted Answer

The answer of A) Explain what the term "earnings quality"...

Question 2

Which of the following choices by a manager would increase net income, total assets and the return on assets ratio?
A)An increase in the allowance for doubtful accounts.
B)The increase in the life of an asset.
C)A decrease in the estimate for warranty expense.
D)The classification of the damage from a flood as an extraordinary item.

Accepted Answer

Increasing the life of an asset decreases the amount of depreciation expense, which increases net income and total assets. Additionally, the return on assets ratio (net income/total assets) would also increase as a result. The other choices would have the opposite effect on these measures.

Question 3

The following items were taken from the financial statements of Gannon Inc, over a three-year period: $$\begin{array} { l r r r } 
& \underline { 2016 } & \underline { 2015 } & \underline { 2014 } \
\text { Net sales } & \$ 340,000 & \$ 330,000 & \$ 300,000 \
\text { Cost of goods sold } & 209,000 & 201,000 & 186,000 \
\text { Gross profit } & 131,000 & 129,000 & 114,000 \
\text { Net income } & 32,400 & 31,500 & 30,000
\end{array}$$ Required:
A) Using horizontal analysis and 2014 as the base year, calculate the trend percentages for the items provided.Explain whether the trends are favourable or unfavourable for each item.

Accepted Answer

The answer of The following items were taken from the...

Question 4

Two companies made similar acquisitions of fixed assets during the past year, yet one company consistently reports a lower amortization expense.This is an example of which of the following limitations of financial ratios?
A)Financial statements are historical.
B)Managers prepare financial statements.
C)Accounting policies and estimates affect ratios.
D)Financial statements are not the only source of information.

Accepted Answer

This scenario highlights how accounting policies can affect ratios. Different companies may use different methods or estimates when it comes to calculating amortization expenses, which can impact the accuracy and comparability of financial ratios.

Question 5

Cross Lake Ltd.is a widely held public company.When trying to decide what dividends to pay, all of the following would be factors, except:
A)shareholders' cash needs.
B)effect on the company's debt-to-equity ratio.
C)effect on the share price.
D)cash requirements of the entity.

Accepted Answer

The company typically does not consider individual shareholders' cash needs when deciding on dividend payments. Decisions are more likely based on factors like the company's financial health, debt-to-equity ratio, effect on share price, and its own cash requirements.

Question 6

Indicate whether the following items would be reported as an operating cost or an unusual item in Kelly Corporation's income statement.If it is not unusual, state how the item should be recorded in the income statement.
A) Loss attributable to labour strike.B) Loss on sale of mining equipment.
C) Gain on the disposition of the company's retail operations.D) Loss from sale of FVTOCI securities.
E) Expropriation of property by a foreign government.

Accepted Answer

The answer of Indicate whether the following items would be...

Question 7

A company's price-to-earnings (P/E) ratio reflects the market's perception of future growth prospects and risk.What does a high P/E ratio indicate with respect to each of those factors? $\begin{array}{ll}\text { Future }\\text { Growth} & \text { Risk }\
\text { A) High } & \text { High } \
\text { B) High } & \text { Low } \
\text { C) Low } & \text { High } \
\text { D) Low } & \text { High }
\end{array}$
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

A high P/E ratio indicates that the market expects high future growth and low risk.

Question 8

Bennett Company operates a large tour company in Atlantic Canada.Selected data from Bennett
Company for the year ended December 31, 2013, are presented below: $$\begin{array} { l r } 
\text { Total assets } & \$ 1,600,000 \
\text { Average total assets } & 1,750,000 \
\text { Average common shareholders' equity } & 280,000 \
\text { Net Sales } & 1,400,000 \
\text { Net earnings (including } \$ 70,000 \text { interest expense) } & 206,400 \
\text { Tax rate } & 35 \%
\end{array}$$ Required:
A) Calculate the return on assets, by calculating its components, profit margin and asset turnover, for Bennett
Company for the year ended December 31, 2013.
B) Comment on the ratios you prepared in part A, assuming the following averages for the charter industry: $$\begin{array} { l l } 
\text { Profit margin } & 8 \% \
\text { Return on Assets } & 14 \% \
\text { Asset turnover } & 1.75 \text { times }
\end{array}$$

Accepted Answer

The answer of Bennett Company operates a large tour company...

Question 9

A) What kind of information would you expect to find in the Management Discussion and Analysis
(MD&A)?
B) Who should read the MD&A?
C) What is the intent of the MD&A?
D) What types of companies prepare a MD&A?
E) How reliable is the information in the MD&A?

Accepted Answer

The answer of A) What kind of information would you...

Question 10

All of the following are examples of accounting policies that can be used to manage earnings, except:
A)inventory valuation.
B)amortization method.
C)lease capitalization.
D)warranty provision.
Warranty provision is an accounting estimate, not a policy.

Accepted Answer

Warranty provision is an accounting estimate, not a policy. The other options (inventory valuation, amortization method, and lease capitalization) are accounting policies that can be used to manage earnings.

Question 11

Integrated Corporation manufactures and sells cotton clothing: T-shirts, sweatshirts and socks.They manufacture the products in their two facilities in Quebec and then sell them in their own retail outlets, "Cotton Plus," or to other retailers.They also have the facilities to print designs and logos on the shirts.During
2013 they decided to close both manufacturing facilities and source the products from China.They will still continue to print the shirts and sell to other retailers and in their own stores.
A) Explain how their decision to close the manufacturing facilities will affect the 2013 financial statements.B) How does the presentation you described in A) assist users of the financial statements?
C) Assume the facilities are successfully closed in 2014.What is the impact on the 2014 financial statements?

Accepted Answer

The answer of Integrated Corporation manufactures and sells cotton clothing:...

Question 12

Which ratio gives an indication of how the market values an entity's earnings?
A)Return on equity
B)Price-to-earnings ratio
C)Dividend earnings ratio
D)Earnings per share

Accepted Answer

The price-to-earnings ratio (P/E ratio) is a financial ratio used to measure the relative value of an entity's earnings. It is calculated by dividing the current market price per share by the earnings per share. A high P/E ratio indicates that the market is willing to pay a higher price for the entity's earnings, and vice versa. Therefore, the P/E ratio can give an indication of how the market values an entity's earnings.

Question 13

An analyst is trying to value an advertising agency.The company recently announced the hiring of three well-known accounts managers from a rival agency.Which of the following limitations of financial ratios will hinder the valuation of the agency the most?
A)Financial statements are historical.
B)Managers prepare financial statements.
C)Financial statements are not comprehensive.
D)Financial statements are not the only source of information.

Accepted Answer

The answer of An analyst is trying to value an...

Question 14

Hartney Company has just hired a new president to help the company recover after two years of declining sales and profits.The president has announced that they will be writing down $100 million in assets and increasing the allowance for doubtful accounts for the year, to clear out some old amounts.When preparing a ratio analysis of this company, the user should be aware of which of the following limitations of financial ratios?
A)Financial statements are historical.
B)Managers prepare financial statements.
C)Accounting policies and estimates affect ratios.
D)Financial statements are not the only source of information.

Accepted Answer

The answer of Hartney Company has just hired a new...

Question 15

What is the problem with the current ratio and quick ratio as measures of liquidity? What other financial statement amounts would be useful in assessing liquidity?

Accepted Answer

The answer of What is the problem with the current...

Question 16

Grandview Company reported net earnings of $425,000 for 2014.Their retained earnings were $1,125,000 on January 1, 2014, and on $1,425,000 on December 31, 2014.Grandview had 50,000 common shares outstanding throughout the year with a recorded value of $200,000.What were their dividend payout ratio and book value per share for 2014? $\begin{array}{lr}\text { Dividend } & \text { Book Value } \
\text { Pavout Ratio } & \text { per Share }\
\text { A) } 0 & \$ 4.00 \
\text { B) } 0 & \$ 32.50 \
\text { C) } 29.4 \% & \$ 4.00 \
\text { D) } 29.4 \% & \$ 32.50
\end{array}$
A)Option A
B)Option B
C)Option C
D)Option D
Dividends paid = Net income minus the change in retained earnings = $425,000 -$300,000 = $125,000, payout ratio = $125,000/$425,000 = 29.4 %, book value per share = ($200,000 + $1,425,000)/ 50,000 = $32.50

Accepted Answer

Dividends paid = Net income minus the change in retained earnings = $425,000 -$300,000 = $125,000, payout ratio = $125,000/$425,000 = 29.4 %, book value per share = ($200,000 + $1,425,000)/ 50,000 = $32.50.

Question 17

During the past year, a company had some land expropriated by the local government when the city was widening a road.Management included the gain in operating income as an offset to losses incurred on the sale of some other assets, as they decided that both events were related to fixed assets.This decision by management could be interpreted as earnings management for which of the following reasons?
A)It violates the principles of revenue recognition.
B)It involves management manipulation regarding the timing of the write-down of an asset.
C)It is an example of a big bath.
D)It does not disclose the information on the income statement as per the accounting principles and standards.

Accepted Answer

The answer of During the past year, a company had...

Question 18

Cartwright Ltd.is a private company owned and operated by the Thatcher family.When trying to decide what dividends to pay, all of the following would be factors, except:
A)tax issues.
B)personal cash needs.
C)effect on the share price.
D)cash requirements of the entity.

Accepted Answer

All of the factors mentioned, except for the effect on the share price, would likely be considered by the Thatcher family in deciding what dividends to pay. However, the effect on the share price is not under their direct control and may be influenced by a variety of external factors, such as market conditions and investor sentiment.

Question 19

Grandview Company reported net earnings of $425,000 for 2014.Their retained earnings were $1,125,000 on January 1, 2014, and $1,425,000 on December 31, 2014.Grandview had 50,000 common shares outstanding throughout the year with a recorded value of $200,000.What were their earnings per share (EPS) and dividends per share (DPS) for 2014?
$\quad $ $\underline{\text { EPS }} \quad \underline{\text { DPS }}$
A. $ \$ 2.125 \quad \$ 0 $
B. $ \$ 2.125 \quad \$ 2.50 $
C. $ \$ 8.50 \quad \$ 0 $
D. $ \$ 8.50 \quad \$ 2.50 $
A)Option A
B)Option B
C)Option C
D)Option D
EPS = $425,000/50,000 = $8.50, Dividends paid = Net income minus the change in retained earnings =

Accepted Answer

EPS = $425,000 / 50,000 = $8.50. Dividends paid = Net income minus the change in retained earnings = $425,000 - ($1,425,000 - $1,125,000) = $125,000. DPS = $125,000 / 50,000 = $2.50.

Question 20

Which of the following actions by a manager could be undertaken with the objective of ensuring that the company continues to meet its debt-to-equity debt covenant?
A)An increase in the allowance for doubtful accounts.
B)The recording of deposits received in advance as revenue.
C)The accrual of warranty liabilities at the time of sale.
D)The classification of the current portion of a long-term liability as a current liability.

Accepted Answer

The answer of Which of the following actions by a...

Quiz 12: Analyzing and Interpreting Financial Statements

A) Explain what the term "earnings quality" means. B) Differentiate between high quality earnings and low quality earnings. C) Explain how the estimates used in accrual accounting and operating decisions made by management can affect earnings quality.Give one example of each.

Which of the following choices by a manager would increase net income, total assets and the return on assets ratio?

Two companies made similar acquisitions of fixed assets during the past year, yet one company consistently reports a lower amortization expense.This is an example of which of the following limitations of financial ratios?

Cross Lake Ltd.is a widely held public company.When trying to decide what dividends to pay, all of the following would be factors, except:

A) What kind of information would you expect to find in the Management Discussion and Analysis (MD&A)? B) Who should read the MD&A? C) What is the intent of the MD&A? D) What types of companies prepare a MD&A? E) How reliable is the information in the MD&A?

All of the following are examples of accounting policies that can be used to manage earnings, except:

Which ratio gives an indication of how the market values an entity's earnings?

An analyst is trying to value an advertising agency.The company recently announced the hiring of three well-known accounts managers from a rival agency.Which of the following limitations of financial ratios will hinder the valuation of the agency the most?

What is the problem with the current ratio and quick ratio as measures of liquidity? What other financial statement amounts would be useful in assessing liquidity?

Cartwright Ltd.is a private company owned and operated by the Thatcher family.When trying to decide what dividends to pay, all of the following would be factors, except:

Which of the following actions by a manager could be undertaken with the objective of ensuring that the company continues to meet its debt-to-equity debt covenant?