Deck 2: Introduction to Financial Statement Analysis

Question 1

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

Answer 1

assets and liabilities; net value

Question 2

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

Answer 2

Key points:
1.To ensure that the annual financial statements are prepared accurately.
2.To ensure that the annual financial statements are prepared according to the Canadian GAAP.
3.To verify that the information used in preparing the annual financial statements is reliable.

Question 3

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

Answer 3

$12 million

Question 4

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

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

Question 5

A 30 year mortgage loan is a

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

Question 6

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 Comprehensive Income
C) Balance Sheet
D) Statement of Changes in Equity

Question 7

Use the table for the question(s) below.
Consider the following balance sheet:

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 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

Cash is a

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

Question 10

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

Question 11

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 12

Use the table for the question(s) below.
Consider the following balance sheet:

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 13

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

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

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; receives

Question 15

Goodwill captures the value of other ________ that the firm acquired through 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

Question 16

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 17

As of January 1,2011,Canadian publicly accountable companies must follow IFRS in their financial statements. IFRS rules are expected to be adopted in the US for fiscal years beginning ________.

A) January 1st, 2014
B) January 1st, 2017
C) January 1st, 2015
D) January 1st, 2016

Question 18

Accounts payable is a

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

Question 19

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 20

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.

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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 40

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 41

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

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

If Luther's accounts receivable were $55.5 million in 2006,then calculate Luther's accounts receivable days for 2006.

Question 60

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 61

In 2002,the United States Congress passed ________ that requires,among other things,that CEO's and CFOs certify the accuracy and appropriateness of their firm's financial statements and increase the penalties against them if the financial statements later prove to be fraudulent.

A) the Sarbanes-Oxley Act
B) new American GAAP
C) the IFRS
D) revised GAAP

Question 62

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 63

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 64

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.

Question 65

Off-balance sheet transactions are required to be disclosed

A) in the management discussion and analysis.
B) in the auditor's report.
C) in the Provincial Securities Commission's commentary.
D) in the statement of stockholders' equity.

Question 66

Details of acquisitions,spin-offs,leases,taxes,and risk management activities are given

A) in the management discussion and analysis.
B) in the Provincial Securities Commission's commentary.
C) in the auditor's report.
D) in the notes to the financial statements.

Question 67

Management is also required to disclose any ________,which are transactions or arrangements that can have a material impact on the firms future performance yet to do not appear on the ________.

A) earnings per share; income statement
B) investment decision; statement of cash flows
C) financing decision; statement of cash flows
D) off-balance sheet transactions; balance sheet

Question 68

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

Question 69

In WorldCom's case,the fraud was to reclassify $3.85 billion in ________ as ________.

A) capital budgeting; short-term investment
B) operating expenses; long-term investment
C) operating expenses; short-term investment
D) capital budgeting; long-term investment

Question 70

Following the Sarbanes-Oxley Act in United States,Canadian regulators adopted similar measures that came into effect in ________.

A) 2001
B) 2003
C) 2005
D) 2007

Question 71

As the Bernard Madoff's Ponzi Scheme makes clear,when making an investment decision,it is important not only to review the firm's ________,but also to consider ________ who prepare the statement in the first place.

A) balance sheet; the reliability and reputation of the auditors
B) Financial Statements; the reliability and reputation of the government offices
C) Financial Statements; the reliability and reputation of the auditors
D) Financial Statements; the reliability and reputation of the bookkeepers

Question 72

Why does a firm's net income not correspond to cash generated?

Question 73

What information do the notes to financial statements provide?

Question 74

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.