Question 1

Use the table for the question(s) below.
$\begin{array} { l  }
 \text { Balance Sheet  }\
\begin{array} { l  }
 \text { Assets}& \text {  Liabilities}\
\begin{array}{l}
\text { Current Assets }\\hline
\text { Cash } & 50 \
\text { Accounts receivable } & 22 \
\text { Inventories } & 17 \
\text { Total current assets } & 89\
\end{array}&\begin{array}{l}
\text { Current Liabilities }\\hline
\text { Accounts payable } & 42 \
\text { Notes pavable/short-term debt } & 7\\
\text { Total current liabilities }&49\
\end{array}\\
\begin{array}{ll}
\text {Long-Term Assets }\\hline
\text {Net property, plant, }\\text { and equipment } & 121 \ \text { Total long-term assets } & 121\\\\text { Total Assets }&210\\\end{array}&\begin{array}{ll}
\text { Long-Term Liabilities }\\hline\
\text { Long-term debt } & 128 \
\text { Total long-term liabilities } & 128 \
\text { Total Liabilities } & \mathbf{1 7 7} \
\text { Shareholders' Equity } & 33 \
\text { Total Liabilities and } & 210 \
\text { Shareholders' Equity } &
\end{array}
\end{array}
\end{array}$

-The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital?

Accepted Answer

D

Question 2

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

Accepted Answer

A patent for a drug held by the company would be considered a long-term asset as it represents a future economic benefit to the company and is expected to provide revenue for an extended period of time. The inventory of chemicals used to produce the drugs would be considered a current asset, as it is expected to be used up or sold off within the next year. The cash reserves and commercial paper held by the company would also be considered current assets, as they are readily available for use in the near future.

Question 3

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

Accepted Answer

Following the GAAP ensures that financial statements are created using a consistent format, making it easier for investors and stakeholders to compare the financial results of different companies. Additionally, adhering to the GAAP standards helps to ensure that important information is not omitted and unnecessary information is not included. However, the GAAP does not apply to private companies as their financial information is not required to be disclosed to the public.

Question 4

Which of the following is likely to have contributed to the failure of HIH Insurance?

Accepted Answer

All of the above factors (unsupervised delegated authority, rapid expansion, and fraudulent reporting) played a role in the eventual failure of HIH Insurance. Employees were given too much authority without adequate supervision, leading to poor decision making and risky investments. The company also expanded rapidly, taking on more than it could handle and neglecting necessary risk management protocols. Lastly, there were instances of fraudulent reporting, where financial reports were manipulated to make the company appear more financially stable than it actually was. These factors combined led to the collapse of HIH Insurance.

Question 5

$\begin{array} { l  }
 \text { Balance Sheet  }\
\begin{array} { l  }
 \text { Assets}& \text {  Liabilities}\
\begin{array}{l}
\text { Current Assets }\\hline
\text { Cash } & 50 \
\text { Accounts receivable } & 22 \
\text { Inventories } & 17 \
\text { Total current assets } & 89\
\end{array}&\begin{array}{l}
\text { Current Liabilities }\\hline
\text { Accounts payable } & 42 \
\text { Notes pavable/short-term debt } & 7\\
\text { Total current liabilities }&49\
\end{array}\\
\begin{array}{ll}
\text {Long-Term Assets }\\hline
\text {Net property, plant, }\\text { and equipment } & 121 \ \text { Total long-term assets } & 121\\\\text { Total Assets }&210\\\end{array}&\begin{array}{ll}
\text { Long-Term Liabilities }\\hline\
\text { Long-term debt } & 128 \
\text { Total long-term liabilities } & 128 \
\text { Total Liabilities } & \mathbf{1 7 7} \
\text { Shareholders' Equity } & 33 \
\text { Total Liabilities and } & 210 \
\text { Shareholders' Equity } &
\end{array}
\end{array}
\end{array}$

-A 30-year mortgage loan is a

Accepted Answer

A 30-year mortgage loan is a long-term liability because it is a debt that is not due within the current year.

Question 6

The International Financial Reporting Standards set out by the International Accounting Standards Board are NOT accepted by the exchanges in which of the following countries or regions?

Accepted Answer

The International Financial Reporting Standards are not accepted by the exchanges in the United States, which has its own generally accepted accounting principles (GAAP). Germany, France, and the United Kingdom all accept and use the IFRS.

Question 7

Use the table for the question(s) below
$\begin{array}{l}
\text { Income Statement for CharmCorp: }\
\begin{array} { l r r } 
& 2011 & 2012 \
\text { Total sales } & 600 & 540 \
\text { Cost of sales } & - 532 & - 488 \
\hline \text { Gross Profit } & 68 & 52 \
\text { Selling, general, } & & \
\text { and administrative expenses } & - 36 & - 21 \
\text { Research and development } & - 4 & - 5 \
\text { Depreciation and amortisation } & - 5 & - 5 \
\hline \text { Operating Income } & 23 & 21 \
\text { Other income } & 1 & 5 \
\hline \text { Earnings before interest } & & \
\text { and taxes (EBIT) } & 24 & 26 \
\text { Interest income (expense) } & - 7 & - 7 \
\hline \text { Pretax income } & 14 & 19 \
\text { Taxes } & - 4 & - 5 \
\hline \text { Net Income } & 10 & 14
\end{array}
\end{array}$
-Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares, what is its diluted EPS in 2012?

Accepted Answer

The answer of Use the table for the question(s) below
\(\begin{array}{l}
\text...

Question 8

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

Accepted Answer

The market value of the company ($80 million) is less than its book value ($128 million), indicating that investors may believe the company's assets are not likely to be profitable.

Question 9

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

Accepted Answer

A medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals is likely to have high profitability due to the specialized nature of their products and high demand from their target market. As a result, they would be expected to have a high return on equity (ROE).

Question 10

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

Accepted Answer

The debt-equity or equity multiplier ratio is the best ratio to measure a firm's financial health by assessing its leverage. This ratio compares the amount of debt and equity a firm has used to finance its assets. A high ratio indicates that the firm has a high level of leverage, which can be risky but can also lead to higher returns. Therefore, this ratio is crucial in evaluating a company's solvency and financial stability.

Question 11

A manufacturer of plastic bottles for the medical trade purchases a new compression blow moulder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?

Accepted Answer

The cost of the new compression blow moulder will be recorded as a capital expenditure on the statement of cash flows and will be depreciated over time on the income statement. This is because the purchase of the equipment is a capital expenditure and not a regular operating expense. Depreciation is used to spread out the cost of the equipment over its useful life, which allows the company to record the cost of the equipment over time instead of all at once. This choice is the most accurate way to reflect the financial impact of the equipment purchase on the company's financial statements.

Question 12

The notes to the financial statements would be LEAST likely to be used for which of the following purposes?

Accepted Answer

The answer of The notes to the financial statements would...

Question 13

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency?

Accepted Answer

A high operating efficiency, as indicated by high turnover, means that a firm is able to generate more revenue from its assets. In the case of a grocery store chain that sells many multiples of their assets per year, this would suggest that the firm is able to generate high levels of revenue relative to its asset base, leading to a high ROE.

Question 14

Use the table for the question(s) below.
\(\begin{array} { c  }
 \text {Luther Corporation }\ \text {  Consolidated Balance Sheet }\ \text { June 30, 2011 and 2012 (in \$ millions)}\
\hline\begin{array} { l  }
 \text {Assets }&2012&2011&\begin{array} { l  }
 \text {Liabilities and }\ \text {Shareholders' Equity }\
\end{array}&2012&2011\\hline
\text { Current Assets } & &&{\text { Current Liabilities }} \
\hline \text { Cash } & 63.6 & 58.5 & \text { Accounts payable } & 87.6&73 .5\
\hline \text { Accounts receivable }&55.5&39.6&\begin{array} { l  }
 \text {Notes payable / }\ \text { short-term debt}\
\end{array}&10.5&9 .6\
\hline \text { Inventories }&45.9&42.9&\begin{array} { l  }
 \text {Current maturities of  }\ \text { long-term debt}\
\end{array}&39.9&36.9\
\hline \text { Other current assets } & 6.0 & 3.0 & \text { Other current liabilities } & 6.01&2 .0 \
\hline \text { Total current assets } & 171.0 & 144.0 & \text { Total current liabilities } & 144.0&132 .0 \\hline\
\hline\text { Long-Term Assets } &&& \text { Long-Term Liabilities }\
\hline \text { Land } & 66.6 & 62.1 & \text { Long-term debt } & 239.7&168 .9 \
\hline \text { Buildings } & 109.5 & 91.5 & \text { Capital lease obligations } & -----& ----- \
\hline \text { Equipment } & 119.1 & 99.6 & \text { Total Debt } & 239.7&168 .9 \
\hline\begin{array} { l  }
 \text { Less accumulated}\ \text { depreciation }\
\end{array}&(56.1) & (52.5) & \text { Deferred taxes } & 22.8&22 .2\
\hline\begin{array} { l  }
 \text { Net property, plant, and}\ \text {  equipment}\
\end{array}&239.1 & 200.7 &\text { Other long-term liabilities }&---&---\
\hline \text { Goodwill } & 60.0 & -- & \text { Total long-term liabilities } & 262.5&191 .1 \
\hline \text { Other long-term assets } & 63.0 & 42.0 & \text { Total liabilities } & 406.5&323 .1 \
\hline \text { Total long-term assets } & 362.1 & 242.7 & \text { Shareholders' Equity } & 126.6&63 .6 \
\hline\
\hline\text { Total Assets }&533.1 & 386.7&\begin{array} { l  }
 \text {Total liabilities and }\ \text {  Shareholders' Equity}\
\end{array}&533.1&386.7\
\end{array}
\end{array}\)

-Refer to the balance sheet above. Luther's quick ratio for 2011 is closest to:

Accepted Answer

The answer of Use the table for the question(s) below.
\(\begin{array}...

Question 15

Use the table for the question(s) below.
$\begin{array} { l  }
 \text { Balance Sheet  }\
\begin{array} { l  }
 \text { Assets}& \text {  Liabilities}\
\begin{array}{l}
\text { Current Assets }\\hline
\text { Cash } & 50 \
\text { Accounts receivable } & 22 \
\text { Inventories } & 17 \
\text { Total current assets } & 89\
\end{array}&\begin{array}{l}
\text { Current Liabilities }\\hline
\text { Accounts payable } & 42 \
\text { Notes pavable/short-term debt } & 7\\
\text { Total current liabilities }&49\
\end{array}\\
\begin{array}{ll}
\text {Long-Term Assets }\\hline
\text {Net property, plant, }\\text { and equipment } & 121 \ \text { Total long-term assets } & 121\\\\text { Total Assets }&210\\\end{array}&\begin{array}{ll}
\text { Long-Term Liabilities }\\hline\
\text { Long-term debt } & 128 \
\text { Total long-term liabilities } & 128 \
\text { Total Liabilities } & \mathbf{1 7 7} \
\text { Shareholders' Equity } & 33 \
\text { Total Liabilities and } & 210 \
\text { Shareholders' Equity } &
\end{array}
\end{array}
\end{array}$

-The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 4 million shares outstanding, and these shares are trading at a price of $8.24 per share, what does this tell you about how investors view this firm's book value?

Accepted Answer

The answer of Use the table for the question(s) below.
\(\begin{array}...

Question 16

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)?

Accepted Answer

The answer of A firm whose primary business is in...

Question 17

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company are most likely to be true?

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. In this case, the net working capital is -$5,000, indicating that the company does not have enough current assets to cover its current liabilities. This raises concerns about the company's ability to meet its short-term obligations. Option A is incorrect because the high net working capital doesn't indicate that the company will have little difficulty meeting its obligations. Option B is incorrect because net working capital being nearly zero doesn't indicate that the company is well-run and can attract more investors. Option D is incorrect because although net working capital is high, it doesn't indicate that the company will have ample money to invest after meeting its obligations.

Question 18

Use the table for the question(s) below.
\(\begin{array} { c }
 \text { Luther Corporation }\ \text { Consolidated Income Statement }\ \text { Year ended June 30 (in \$ millions)}\
\begin{array} { lll  }
&2012&2011\
\hline \text { Total sales } & 610.1 & 578.3 \
\hline \text { Cost of sales } & (500.2) & (481.9) \
\hline \text { Gross profit } & 109.9 & 96.4 \
\hline \text { Selling, general, and } & \
\text { administrative expenses } & (40.5) & (39.0) \
\hline \text { Research and development } & (24.6) & (22.8) \
\hline \text { Depreciation and amortisation } & (3.6) & (3.3) \
\hline \text { Operating income } & 41.2 & 31.3 \
\hline \text { Other income } & --- & -- \
\hline \text { Earnings before interest and taxes (EBIT) } & 41.2 & 31.3 \
\hline \text { Interest income (expense) } & (25.1) & (15.8) \
\hline \text { Pretax income } & 16.1 & 15.5 \
\hline \text { Taxes } & (5.5) & (5.3) \
\hline \text { Net income } & 10.6 & 10.2 \
\hline\
\hline \text { Price per share } & \$ 16 & \$ 15 \
\hline \text { Shares outstanding (millions) } & 10.2 & 8.0 \
\hline \text { Share options outstanding (millions) } & 0.3 & 0.2 \
\hline\
\hline \text { Shareholders' Equity } & 126.6 & 63.6 \
\hline \text { Total Liabilities and Shareholders' Equity } & 533.1 & 386.7 \
\hline
\end{array}
\end{array}\)

-Refer to the income statement above. For the year ending 30 June 2012, Luther's earnings per share are closest to:

Accepted Answer

The answer of Use the table for the question(s) below.
\(\begin{array}...

Question 19

Allen Company bought a new copy machine to be depreciated straight line for three years. Where would this purchase be reflected on the Statement of Cash Flows?

Accepted Answer

The purchase of the copy machine is considered a capital expenditure and an addition to the company's property, plant, and equipment. As such, it would be reflected as an investing activity on the Statement of Cash Flows.

Question 20

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

Accepted Answer

The income statement shows the flow of earnings and expenses generated by the firm between two dates. This statement is for a period of time, not a given point in time. Therefore, statement C is incorrect.

Quiz 2: Introduction to Financial Statement Analysis

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

Which of the following is likely to have contributed to the failure of HIH Insurance?

The International Financial Reporting Standards set out by the International Accounting Standards Board are NOT accepted by the exchanges in which of the following countries or regions?

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

A manufacturer of plastic bottles for the medical trade purchases a new compression blow moulder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?

The notes to the financial statements would be LEAST likely to be used for which of the following purposes?

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency?

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A) ?

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company are most likely to be true?

Allen Company bought a new copy machine to be depreciated straight line for three years. Where would this purchase be reflected on the Statement of Cash Flows?

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