FINANCIAL STATEMENT ANALYSIS
D366 – PA EXAM CORRECT LATEST
UPDATE
, A financial analyst is required to analyze the financial statements of Alliah Company.
While analyzing, the analyst discovered that the company does not have adequate
current assets to meet its total current liabilities. Thus, the company might face
difficulties in meeting its upcoming payments toward its current liabilities. Which method
did the financial analyst use to make this analysis? - ANSWERSThe financial analyst
calculated various short-term liquidity ratios.
A financial analyst who was analyzing Company P's financial statements concluded that
this year, the company's revenue increased by 20%, gross income by 16%, and net
income by 10%. Last year, the same items increased by 12%, 6%, and 4%,
respectively. Which financial statement analysis tool did the financial analyst use to
conclude? - ANSWERSPercentage change financial statements
A company evaluates the industry's economic conditions using Porter's five forces
model. Using the analysis, the company wishes to identify the vertical competition in the
value chain and its impact on its performance. Which one of Porter's five forces should
the company refer to? - ANSWERSBuyer power
Corollary Marketing has prepared the common-size balance sheet for the current year
and has determined the following percentages:
Cash and equivalents: 15%
Receivables: 20%
Property, plant, and equipment: 12%
Accumulated depreciation: (5%)
Accounts payable: 9%
How does Corollary Marketing calculate these percentages? - ANSWERSAll items are
a percentage of total assets.
Orange Zest Company specializes in household goods and appliances. In recent years,
the market has become increasingly competitive with the emergence of new entrants. In
light of this, the business decided to continue selling its nondifferentiated items while
taking a smaller profit margin in exchange for increased market share and sales
volume. Which strategy did the company choose to compete in its industry? -
ANSWERSLow-cost leadership strategy
A company's financial analyst identified that the cost of goods sold in a common-size
income statement was 18% in the previous year. However, it changed to 21% in the
current year. What does this analysis indicate? - ANSWERSThe cost of goods sold as a
percentage of sales has increased.
A company's financial analyst analyzes the current year's income statement and
balance sheet. The analyst has already calculated some of the profitability and risk
,ratios. The company wants the analyst to determine what a reasonable price for the
company's common shares is. Which ratio will help the analyst in fulfilling the
requirement? - ANSWERSPrice-earnings ratio
A start-up's chief executive officer (CEO) plans to expand the business by acquisition of
a mature company. The CEO is particularly interested in companies that exhibit superior
sales volume and market share and is willing to accept low profit margins. Which
company meets the CEO's investment criteria based on the framework for strategic
analysis? - ANSWERSA company that sells nondifferentiated products
A firm's management team is examining the income statement and is concerned that
while revenues are growing, gross profit is declining. Which financial activity caused the
decline? - ANSWERSAn increase in cost of sales
A hardware manufacturing firm has high expenditures on property, plant, and equipment
(PPE).Where in the statement of cash flows are the net additions reflected? -
ANSWERSInvesting
A financial analyst analyzes a company's recently published annual report to estimate
the company's future earnings. While adjusting the company's net income to estimate
the company's future profitability, the company excluded the income on investment
securities deemed available for sale. Why did the analyst exclude the income on
investment securities deemed available for sale? - ANSWERSBecause the income is
treated as transitory
A financial analyst is assessing a tech company's financial statement and has noted the
following findings:
The company's net income is $1,950,000 for this year.
The company has reported $80,000 toward a gain on the sale of buildings.
The company has reported a gain of $50,000 from the sale of old laptops used by
employees. The company has been selling a batch of old laptops every year for the last
four years.
The company has recorded a fair value income of $120,000 on securities that are
deemed available for sale.
Which net income will the financial analyst consider for future earnings prediction for the
company? (Ignore income tax for this problem.) - ANSWERS$1,750,000
A financial analyst is analyzing Sparkit's financial statement. The analyst noticed that
the company uses special purpose entities (SPE) to meet its short-term needs and
treats this transaction as a collateralized loan. What should the analyst consider while
analyzing Sparkit's liabilities? - ANSWERSSparkit enjoys the benefits and takes the
economic risks of the receivables.
A financial analyst excluded other comprehensive items reported in the income
statement while estimating the company's future earnings. Why did the analyst exclude
, this item from the analysis? - ANSWERSAs these are considered transitory income or
loss
While analyzing the financial statements of a company, a financial analyst noticed a
contingent liability of $2 million reported on its balance sheet. This contingent liability is
related to a lawsuit filed by one of the customers for the damage caused by the
malfunction of the company's product. Which interpretation should the financial analyst
make for this item? - ANSWERSThe company expects to probably lose the lawsuit and
has reasonably estimated the loss to be $2 million.
Which two factors can affect the accounting quality in the case of reporting inventory? -
ANSWERSThe accounting choice and management judgment
A financial analyst has extracted the data from the current year regarding a consumer
durable firm's financial statement. The analyst has computed the accrual component of
current earnings for analysis as follows:
Net income: $4,500,000
Cash inflows from operations: $2,800,000
Average total assets: $5,000,000
Accrual component of current earnings: 0.34
Which judgment can the analyst make about the accruals and earnings quality of the
firm? - ANSWERSThe firm has reported income-increasing accruals and low earnings
quality.
A financial analyst analyzing a company's financial statements has decided to include
the gain on the sale of equipment to assess the current period profitability of the
company. What can be a possible reason for the analyst to do so? - ANSWERSThe
analyst noticed that gains and losses from the sale of equipment is a corporate strategy
for the company.
How will a company's gross margin percentage index (GMI) change if its gross margin
decreases in the current year compared to last year? - ANSWERSThe company's GMI
will be greater than one.
In which case does a high sales growth index (SGI) indicate the possibility of
management engaging in the manipulation of earnings? - ANSWERSWhen a growing
company is able to secure low-cost external debt
Two years ago, a brokerage services company purchased an electric vehicle with a list
price of $100,000. During the purchase, the company paid money to get the title to the
vehicle. The company also paid the license fee for operating the vehicle in the first year
and property and liability insurance for its first year of operation. How should the electric
vehicle be valued in financial statements, and how will it impact the financial results? -
ANSWERSIt should be valued at the adjusted historical cost, and the financial results
might be inaccurate as it relates to uncertain future amounts.
D366 – PA EXAM CORRECT LATEST
UPDATE
, A financial analyst is required to analyze the financial statements of Alliah Company.
While analyzing, the analyst discovered that the company does not have adequate
current assets to meet its total current liabilities. Thus, the company might face
difficulties in meeting its upcoming payments toward its current liabilities. Which method
did the financial analyst use to make this analysis? - ANSWERSThe financial analyst
calculated various short-term liquidity ratios.
A financial analyst who was analyzing Company P's financial statements concluded that
this year, the company's revenue increased by 20%, gross income by 16%, and net
income by 10%. Last year, the same items increased by 12%, 6%, and 4%,
respectively. Which financial statement analysis tool did the financial analyst use to
conclude? - ANSWERSPercentage change financial statements
A company evaluates the industry's economic conditions using Porter's five forces
model. Using the analysis, the company wishes to identify the vertical competition in the
value chain and its impact on its performance. Which one of Porter's five forces should
the company refer to? - ANSWERSBuyer power
Corollary Marketing has prepared the common-size balance sheet for the current year
and has determined the following percentages:
Cash and equivalents: 15%
Receivables: 20%
Property, plant, and equipment: 12%
Accumulated depreciation: (5%)
Accounts payable: 9%
How does Corollary Marketing calculate these percentages? - ANSWERSAll items are
a percentage of total assets.
Orange Zest Company specializes in household goods and appliances. In recent years,
the market has become increasingly competitive with the emergence of new entrants. In
light of this, the business decided to continue selling its nondifferentiated items while
taking a smaller profit margin in exchange for increased market share and sales
volume. Which strategy did the company choose to compete in its industry? -
ANSWERSLow-cost leadership strategy
A company's financial analyst identified that the cost of goods sold in a common-size
income statement was 18% in the previous year. However, it changed to 21% in the
current year. What does this analysis indicate? - ANSWERSThe cost of goods sold as a
percentage of sales has increased.
A company's financial analyst analyzes the current year's income statement and
balance sheet. The analyst has already calculated some of the profitability and risk
,ratios. The company wants the analyst to determine what a reasonable price for the
company's common shares is. Which ratio will help the analyst in fulfilling the
requirement? - ANSWERSPrice-earnings ratio
A start-up's chief executive officer (CEO) plans to expand the business by acquisition of
a mature company. The CEO is particularly interested in companies that exhibit superior
sales volume and market share and is willing to accept low profit margins. Which
company meets the CEO's investment criteria based on the framework for strategic
analysis? - ANSWERSA company that sells nondifferentiated products
A firm's management team is examining the income statement and is concerned that
while revenues are growing, gross profit is declining. Which financial activity caused the
decline? - ANSWERSAn increase in cost of sales
A hardware manufacturing firm has high expenditures on property, plant, and equipment
(PPE).Where in the statement of cash flows are the net additions reflected? -
ANSWERSInvesting
A financial analyst analyzes a company's recently published annual report to estimate
the company's future earnings. While adjusting the company's net income to estimate
the company's future profitability, the company excluded the income on investment
securities deemed available for sale. Why did the analyst exclude the income on
investment securities deemed available for sale? - ANSWERSBecause the income is
treated as transitory
A financial analyst is assessing a tech company's financial statement and has noted the
following findings:
The company's net income is $1,950,000 for this year.
The company has reported $80,000 toward a gain on the sale of buildings.
The company has reported a gain of $50,000 from the sale of old laptops used by
employees. The company has been selling a batch of old laptops every year for the last
four years.
The company has recorded a fair value income of $120,000 on securities that are
deemed available for sale.
Which net income will the financial analyst consider for future earnings prediction for the
company? (Ignore income tax for this problem.) - ANSWERS$1,750,000
A financial analyst is analyzing Sparkit's financial statement. The analyst noticed that
the company uses special purpose entities (SPE) to meet its short-term needs and
treats this transaction as a collateralized loan. What should the analyst consider while
analyzing Sparkit's liabilities? - ANSWERSSparkit enjoys the benefits and takes the
economic risks of the receivables.
A financial analyst excluded other comprehensive items reported in the income
statement while estimating the company's future earnings. Why did the analyst exclude
, this item from the analysis? - ANSWERSAs these are considered transitory income or
loss
While analyzing the financial statements of a company, a financial analyst noticed a
contingent liability of $2 million reported on its balance sheet. This contingent liability is
related to a lawsuit filed by one of the customers for the damage caused by the
malfunction of the company's product. Which interpretation should the financial analyst
make for this item? - ANSWERSThe company expects to probably lose the lawsuit and
has reasonably estimated the loss to be $2 million.
Which two factors can affect the accounting quality in the case of reporting inventory? -
ANSWERSThe accounting choice and management judgment
A financial analyst has extracted the data from the current year regarding a consumer
durable firm's financial statement. The analyst has computed the accrual component of
current earnings for analysis as follows:
Net income: $4,500,000
Cash inflows from operations: $2,800,000
Average total assets: $5,000,000
Accrual component of current earnings: 0.34
Which judgment can the analyst make about the accruals and earnings quality of the
firm? - ANSWERSThe firm has reported income-increasing accruals and low earnings
quality.
A financial analyst analyzing a company's financial statements has decided to include
the gain on the sale of equipment to assess the current period profitability of the
company. What can be a possible reason for the analyst to do so? - ANSWERSThe
analyst noticed that gains and losses from the sale of equipment is a corporate strategy
for the company.
How will a company's gross margin percentage index (GMI) change if its gross margin
decreases in the current year compared to last year? - ANSWERSThe company's GMI
will be greater than one.
In which case does a high sales growth index (SGI) indicate the possibility of
management engaging in the manipulation of earnings? - ANSWERSWhen a growing
company is able to secure low-cost external debt
Two years ago, a brokerage services company purchased an electric vehicle with a list
price of $100,000. During the purchase, the company paid money to get the title to the
vehicle. The company also paid the license fee for operating the vehicle in the first year
and property and liability insurance for its first year of operation. How should the electric
vehicle be valued in financial statements, and how will it impact the financial results? -
ANSWERSIt should be valued at the adjusted historical cost, and the financial results
might be inaccurate as it relates to uncertain future amounts.
