2024 UNDERSTANDING
FINANCIAL STATEMENTS
COMPLETE QUESTIONS WITH
ANSWERS (VERIFIED BY
EXPERTS) ALREADY GRADED A+
What is the first step in an analysis of financial statements? - CORRECT
ANSWER>>>>Specify the objectives of the analysis.
What is a creditor's objective in performing an analysis of financial statements? -
CORRECT ANSWER>>>>To decide whether the borrower has the ability to repay
interest and principal on borrowed funds.
What is an investor's objective in financial statement analysis? - CORRECT
ANSWER>>>>To determine whether an investment is warranted by estimating a
company's future earnings stream.
What information does the auditor's report contain? - CORRECT ANSWER>>>>An
opinion as to the fairness of the financial statements.
Which of the following would be helpful to an analyst evaluating the performance of a
firm? - CORRECT ANSWER>>>>-Understanding the economic and political
environment in which the company operates
-Reviewing the annual reports of a company's suppliers, customers, and competitors.
-Preparing common-size financial statements and calculating key financial ratios for the
company being evaluated
(all of the above)
Which of the following is not required to be discussed in the Management Discussion
and Analysis of the Financial Condition and Results of Operations? - CORRECT
ANSWER>>>>Earnings projections
What type of information found in supplementary schedules is required for inclusion in
an annual report? - CORRECT ANSWER>>>>Segmental Data
What is Form 10-K? - CORRECT ANSWER>>>>A document filed with the SEC by
companies selling securities to the public, containing much of the same
information as the annual report as wall as additional detail.
,What information can be gained from sources such as Industry Norms and Key
Business Rations, Annual Statement Studies, Analyst's handbook, and Industry
Surveys? - CORRECT ANSWER>>>>A company's relative position within its
industry.
Which of the following is not a tool or technique used by a financial statement analyst? -
CORRECT ANSWER>>>>Random sampling analysis
What do liquidity ratios measure? - CORRECT ANSWER>>>>A firm's ability to meet
cash needs as they arise.
Which category of ratios is useful in assessing the capital structure and long-term
solvency of a firm? - CORRECT ANSWER>>>>Leverage ratios
What is a serious limitation of financial ratios? - CORRECT ANSWER>>>>Ratios are
not predicitve
What is the most widely used liquidity ratio? - CORRECT ANSWER>>>>Current ratio
What is a limitation common to both the current and the quick ratio? - CORRECT
ANSWER>>>>Accounts receivable may not be truly liquid
Why is the quick ratio a more rigorous test of short-run solvency that the current ratio? -
CORRECT ANSWER>>>>The quick ratio eliminates inventories from the
numerator.
What does an increasing collection period for accounts receivable suggest about a
firm's credit policy? - CORRECT ANSWER>>>>The credit policy may be too lenient.
Which of the following statements about inventory turnover is false? - CORRECT
ANSWER>>>>Inventory turnover is calculated with cost of goods sold in the
numerator.
Which of the following items would cause the cash conversion cycle to decrease? -
CORRECT ANSWER>>>>Increasing days payable outstanding
What do the asset turnover ratios measure? - CORRECT
ANSWER>>>>Management's effectiveness in generating sales from investments
in assets.
Which of the following ratios would not be used to measure the extent of a firm's debt
financing? - CORRECT ANSWER>>>>Times interest earned
Why is the amount of debt in a Company's capital structure important to the financial
analysyt - CORRECT ANSWER>>>>Debt implies risk
,Why is the fixed charge coverage ratio broader measure of a firm's coverage
capabilities than the times interest earned ratio? - CORRECT ANSWER>>>>The fixed
charge ratio includes lease payments as well as interest payments
Which profit margin measures the overall operating efficiency of the firm? - CORRECT
ANSWER>>>>Operating profit margin
Which ratio or ratios measure the overall efficiency of the firm in managing its
investment in assets and in generating return to shareholders? - CORRECT
ANSWER>>>>Return on Investment and return on equity
What does a financial leverage index greater than on indicate about a firm? -
CORRECT ANSWER>>>>Operating returns more than sufficient to cover interest
payments on borrowed funds.
What does the price to earnings ratio measure? - CORRECT ANSWER>>>>The
'multiple' that the stock market places on a firm's earning
What information can be found in a proxy statement? - CORRECT ANSWER>>>>'All
of the above'
Information on voting procedures.
Information on executive compensation.
Information on the breakdown of audit and non audit fees paid to the audit firm.
Which of the following statements is true? - CORRECT ANSWER>>>>Public relations
material should be used cautiously.
What subject(s) should the management discussion and analysis section discuss? -
CORRECT ANSWER>>>>'All of the above'
Liquidity
Commitments for capital expenditures
A breakdown of sales increases into price and volume components
What does section 404 of the Sarbanes-Oxley Act of 2002 require? - CORRECT
ANSWER>>>>A statement by the company regarding the effectiveness of internal
controls and a disclosure of any material weaknesses in a firm's internal control
system.
Which of the following statements is false? - CORRECT ANSWER>>>>The Sarbanes-
Oxley Act of 2002 was the cause of the demise of Enron.
What does an unqualified auditor's report indicate? - CORRECT ANSWER>>>>The
financial statements present fairly the financial position, the results of operations,
and the changes in cash flows for the company.
, What items are included in the note to the financial statements? - CORRECT
ANSWER>>>>'All of the above;
Summary of accounting policies.
Changes in accounting policies, if any.
Detail about particular accounts.
What are the basic financial statements provided in an annual report? - CORRECT
ANSWER>>>>Balance sheet, income statement, statement of cash flows, and
statement of stockholders' equity
What is the goal of the IASB? - CORRECT ANSWER>>>>To have worldwide
acceptance of a set of international financial reporting standards.
Which of the following organizations write accounting rules? - CORRECT
ANSWER>>>>FASB, SEC, and IASB
Why should an individual learn to read and interpret financial statements? - CORRECT
ANSWER>>>>Individuals can not necessarily rely on auditors and management
of firms to offer honest information about the financial well-being of firms.
Which information is hard to find or missing from the financial statements? - CORRECT
ANSWER>>>>Reputation of the firm with its customers.
What is accrual basis of accounting? - CORRECT ANSWER>>>>'Both A and C'
Recognition of revenue in the accounting period when the sale is made rather
than when cash is received.
Matching expenses with revenue in the appropriate accounting period.
Which of the following are methods by which management can manipulate earning and
possibly lower the quality of reported earnings? - CORRECT ANSWER>>>>'All of the
above'
Changing an accounting policy to increase earnings.
Refusing to take a loss on inventory in an accounting period when the inventory
in known to be obsolete.
Decreasing discretionary expenses.
What is the balancing equation for the balance sheet? - CORRECT
ANSWER>>>>Assets=liabilities + Stockholder's equity
FINANCIAL STATEMENTS
COMPLETE QUESTIONS WITH
ANSWERS (VERIFIED BY
EXPERTS) ALREADY GRADED A+
What is the first step in an analysis of financial statements? - CORRECT
ANSWER>>>>Specify the objectives of the analysis.
What is a creditor's objective in performing an analysis of financial statements? -
CORRECT ANSWER>>>>To decide whether the borrower has the ability to repay
interest and principal on borrowed funds.
What is an investor's objective in financial statement analysis? - CORRECT
ANSWER>>>>To determine whether an investment is warranted by estimating a
company's future earnings stream.
What information does the auditor's report contain? - CORRECT ANSWER>>>>An
opinion as to the fairness of the financial statements.
Which of the following would be helpful to an analyst evaluating the performance of a
firm? - CORRECT ANSWER>>>>-Understanding the economic and political
environment in which the company operates
-Reviewing the annual reports of a company's suppliers, customers, and competitors.
-Preparing common-size financial statements and calculating key financial ratios for the
company being evaluated
(all of the above)
Which of the following is not required to be discussed in the Management Discussion
and Analysis of the Financial Condition and Results of Operations? - CORRECT
ANSWER>>>>Earnings projections
What type of information found in supplementary schedules is required for inclusion in
an annual report? - CORRECT ANSWER>>>>Segmental Data
What is Form 10-K? - CORRECT ANSWER>>>>A document filed with the SEC by
companies selling securities to the public, containing much of the same
information as the annual report as wall as additional detail.
,What information can be gained from sources such as Industry Norms and Key
Business Rations, Annual Statement Studies, Analyst's handbook, and Industry
Surveys? - CORRECT ANSWER>>>>A company's relative position within its
industry.
Which of the following is not a tool or technique used by a financial statement analyst? -
CORRECT ANSWER>>>>Random sampling analysis
What do liquidity ratios measure? - CORRECT ANSWER>>>>A firm's ability to meet
cash needs as they arise.
Which category of ratios is useful in assessing the capital structure and long-term
solvency of a firm? - CORRECT ANSWER>>>>Leverage ratios
What is a serious limitation of financial ratios? - CORRECT ANSWER>>>>Ratios are
not predicitve
What is the most widely used liquidity ratio? - CORRECT ANSWER>>>>Current ratio
What is a limitation common to both the current and the quick ratio? - CORRECT
ANSWER>>>>Accounts receivable may not be truly liquid
Why is the quick ratio a more rigorous test of short-run solvency that the current ratio? -
CORRECT ANSWER>>>>The quick ratio eliminates inventories from the
numerator.
What does an increasing collection period for accounts receivable suggest about a
firm's credit policy? - CORRECT ANSWER>>>>The credit policy may be too lenient.
Which of the following statements about inventory turnover is false? - CORRECT
ANSWER>>>>Inventory turnover is calculated with cost of goods sold in the
numerator.
Which of the following items would cause the cash conversion cycle to decrease? -
CORRECT ANSWER>>>>Increasing days payable outstanding
What do the asset turnover ratios measure? - CORRECT
ANSWER>>>>Management's effectiveness in generating sales from investments
in assets.
Which of the following ratios would not be used to measure the extent of a firm's debt
financing? - CORRECT ANSWER>>>>Times interest earned
Why is the amount of debt in a Company's capital structure important to the financial
analysyt - CORRECT ANSWER>>>>Debt implies risk
,Why is the fixed charge coverage ratio broader measure of a firm's coverage
capabilities than the times interest earned ratio? - CORRECT ANSWER>>>>The fixed
charge ratio includes lease payments as well as interest payments
Which profit margin measures the overall operating efficiency of the firm? - CORRECT
ANSWER>>>>Operating profit margin
Which ratio or ratios measure the overall efficiency of the firm in managing its
investment in assets and in generating return to shareholders? - CORRECT
ANSWER>>>>Return on Investment and return on equity
What does a financial leverage index greater than on indicate about a firm? -
CORRECT ANSWER>>>>Operating returns more than sufficient to cover interest
payments on borrowed funds.
What does the price to earnings ratio measure? - CORRECT ANSWER>>>>The
'multiple' that the stock market places on a firm's earning
What information can be found in a proxy statement? - CORRECT ANSWER>>>>'All
of the above'
Information on voting procedures.
Information on executive compensation.
Information on the breakdown of audit and non audit fees paid to the audit firm.
Which of the following statements is true? - CORRECT ANSWER>>>>Public relations
material should be used cautiously.
What subject(s) should the management discussion and analysis section discuss? -
CORRECT ANSWER>>>>'All of the above'
Liquidity
Commitments for capital expenditures
A breakdown of sales increases into price and volume components
What does section 404 of the Sarbanes-Oxley Act of 2002 require? - CORRECT
ANSWER>>>>A statement by the company regarding the effectiveness of internal
controls and a disclosure of any material weaknesses in a firm's internal control
system.
Which of the following statements is false? - CORRECT ANSWER>>>>The Sarbanes-
Oxley Act of 2002 was the cause of the demise of Enron.
What does an unqualified auditor's report indicate? - CORRECT ANSWER>>>>The
financial statements present fairly the financial position, the results of operations,
and the changes in cash flows for the company.
, What items are included in the note to the financial statements? - CORRECT
ANSWER>>>>'All of the above;
Summary of accounting policies.
Changes in accounting policies, if any.
Detail about particular accounts.
What are the basic financial statements provided in an annual report? - CORRECT
ANSWER>>>>Balance sheet, income statement, statement of cash flows, and
statement of stockholders' equity
What is the goal of the IASB? - CORRECT ANSWER>>>>To have worldwide
acceptance of a set of international financial reporting standards.
Which of the following organizations write accounting rules? - CORRECT
ANSWER>>>>FASB, SEC, and IASB
Why should an individual learn to read and interpret financial statements? - CORRECT
ANSWER>>>>Individuals can not necessarily rely on auditors and management
of firms to offer honest information about the financial well-being of firms.
Which information is hard to find or missing from the financial statements? - CORRECT
ANSWER>>>>Reputation of the firm with its customers.
What is accrual basis of accounting? - CORRECT ANSWER>>>>'Both A and C'
Recognition of revenue in the accounting period when the sale is made rather
than when cash is received.
Matching expenses with revenue in the appropriate accounting period.
Which of the following are methods by which management can manipulate earning and
possibly lower the quality of reported earnings? - CORRECT ANSWER>>>>'All of the
above'
Changing an accounting policy to increase earnings.
Refusing to take a loss on inventory in an accounting period when the inventory
in known to be obsolete.
Decreasing discretionary expenses.
What is the balancing equation for the balance sheet? - CORRECT
ANSWER>>>>Assets=liabilities + Stockholder's equity
