Question 1

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.

Accepted Answer

The financial statements of Eastern European companies had been used for government planning rather than for private investors, which made it difficult to evaluate them from a private investor's perspective.

Question 2

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)varying business traditions
D)mathematical degrees of magnitude

Accepted Answer

Varying business traditions can lead to differences in accounting practices and financial reporting standards, making it difficult to compare financial statement ratios across countries.

Question 3

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

Accepted Answer

Morgan Stanley Dean Witter's "Apples to Apples" system for financial statement analysis is based on adjustments needed to compare international companies within specific industries. This system adjusts for differences in accounting standards, currencies, and tax rates to enable a more accurate comparison of financial data across companies and countries within the same industry.

Question 4

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

Accepted Answer

In the United States, the term "inventory" has been commonly used in financial statements to refer to the goods held for sale or used in the production of goods to be sold. Similarly, in the United Kingdom, the term "stocks" was used for the same purpose prior to the adoption of IFRS in 2005. Therefore, choice C is the best option as it is a direct equivalent to "inventories" in the UK financial statements. Choices A, B, and D are not accurate as they do not specifically refer to goods held for sale or used in production.

Question 5

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.

Accepted Answer

The lack of information about accounting methods used, operating segments, and interim financial results is a problem of disclosure, as this information should be disclosed in the financial statements to provide transparency and assist users in making informed decisions.

Question 6

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

Accepted Answer

The reconciliation of net income and stockholders' equity to U.S. GAAP allows us to calculate the return on equity (ROE) ratio, which is a measure of how efficiently the company is using its equity to generate profits. The other ratios, such as operating profit margin, asset turnover, and current ratio, require additional financial information beyond the reconciliation.

Question 7

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

Accepted Answer

All of the above factors can affect an analyst's ability to make meaningful comparisons of financial statement ratios for companies in different countries. Accounting diversity refers to differences in accounting principles and practices, which can make it difficult to compare financial statements. Varying business traditions can include differences in the way companies are structured or in the types of industries they operate in, which can affect how ratios are interpreted. Unique terminology can make it difficult to understand or compare financial statements if companies use different terms to describe the same thing.

Question 8

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)¥0.75
B)133%
C)75%
D)6)25%

Accepted Answer

Debt ratio = total liabilities / total assets

Using the current exchange rate:
total liabilities = ¥9,000,000 / ¥120 = $75,000
total assets = ¥12,000,000 / ¥120 = $100,000

Debt ratio = $75,000 / $100,000 = 0.75 or 75%

Question 9

Which of the following statements is true about convenience translations?
A)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.

Accepted Answer

Convenience translations typically involve converting the language of financial statements but not necessarily reconciling to U.S. GAAP or converting currency.

Question 10

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 may be important factors for evaluation.
D)It cannot be converted from a foreign currency to a domestic currency.

Accepted Answer

The major limitation of using EBITDA for analyzing foreign financial statements is that the excluded items may be important factors for evaluation. In different countries, there may be different norms for accounting and reporting, and certain items may be excluded from or included in the calculation of EBITDA. Therefore, it may not give an accurate picture of the company's financial performance.

Question 11

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.

Accepted Answer

The answer of How would a company decide which foreign...

Question 12

Why should financial analysts endorse the adoption of IFRS worldwide?
A)It would eliminate differences in the financial statements of international companies.
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.

Accepted Answer

Adopting IFRS worldwide would increase the comparability of financial statements across countries, making it easier for analysts and investors to evaluate and compare the financial health and performance of companies globally.

Question 13

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

Accepted Answer

Financial analysts have adopted a diversification strategy within a foreign country to address accounting diversity. This involves investing in a variety of companies and industries within a single country to reduce the risk associated with investing in a single company or industry.

Question 14

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

Accepted Answer

Footnote disclosures in foreign financial statements serve multiple purposes including overcoming differences in statement format among countries, reconciling statements from one country's GAAP to another country's GAAP, and providing relevant information not required to be presented in the accounts. Therefore, all of the choices are correct.

Question 15

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.

Accepted Answer

The intent of using EBITDA for analyzing foreign financial statements is to add back interest, taxes, depreciation, and amortization to net income, which takes out elements of earnings that are greatly affected by accounting diversity. This allows for a more accurate comparison between companies and countries that have different accounting standards. Option B and C are incorrect as they do not accurately describe the main intent of using EBITDA.

Question 16

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.

Accepted Answer

The answer of What would be a logical first step...

Question 17

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

Accepted Answer

By presenting multiple sets of financial statements under various GAAP, selecting a widely used set of accounting standards for their financial reporting, and providing adequate disclosure in notes to the financial statements to allow analysts to make conversions to another country's GAAP, foreign corporations can alleviate the accounting diversity problem related to comparing foreign financial statements. Therefore, all of the above options are the best choices.

Question 18

Imperial Chemical Industries,a U.K.corporation,recorded interest incurred in constructing fixed assets as an expense of £128,000,000. When reconciling ICI's 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)£128,000,000 should be deducted from retained earnings.
D)This amount should be charged to accumulated depreciation.

Accepted Answer

According to U.S. GAAP, interest incurred during the construction of fixed assets is capitalized as part of the cost of the asset, rather than expensed. Therefore, the interest should be added to the fixed asset account balance to reflect the full cost of the asset.

Question 19

Because 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.

Accepted Answer

An analyst should learn more about the business environment in relevant countries to understand the context and nuances affecting financial ratios, enabling more accurate cross-country comparisons.

Question 20

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

Accepted Answer

"Monetary Position Loss" is a term associated with hyperinflationary economies, and Mexico has experienced such conditions in the past, making it more likely to use this term in financial reporting.

Quiz 10: Analysis of Foreign Financial Statements

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:

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?

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

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?

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

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?

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?

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?

Which of the following statements is true about convenience translations?

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

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

Why should financial analysts endorse the adoption of IFRS worldwide?

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

Footnote disclosures in foreign financial statements are particularly helpful in:

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

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?

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

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

Because differences in business traditions and practices could make cross-country ratio analysis difficult,what should an analyst do to overcome this problem?

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