CFIN UPDATED EXAM SCRIPT QUESTIONS AND
SOLUTIONS RATED A+
✔✔debt management - ✔✔give an indication of how well the firm is servicing its current
debt and whether the firm can take on more debt
✔✔profitability ratios - ✔✔shows the combined effects of liquidity management, asset
management, and debt management on operating results
✔✔market value ratios - ✔✔give an indication of what stockholders think of the firms
future prospects based on its past performance
✔✔Two general types of analyses should be completed when examining ratios: -
✔✔comparative and trend analysis
✔✔Comparative analysis - ✔✔a comparison of how the firms current financial position
compares to that of its peers
✔✔Trend Analysis - ✔✔an examination of the firms financial position during the most
recent 3 to 5 years to determine whether its financial position is likely to improve or
deteriorate in the future
✔✔Potential problems that are associated with ratio analysis - ✔✔1. many large firms
operate a number of divisions in very different industries which make it difficult to
develop a meaningful set of industry average for comparative purposes
2. most firms want to be better than average, so merely attaining average performance
is not necessarily good
3. because many values on a balance sheet are historical inflation might history the
figures
4. seasonal factors can distort ratio analysis
5. firms can emily window dressing to make their financial statements look stronger that
they really are
6. use of different accounting practices can distort comparisons among firms
7. at times it is difficult to generalize about whether a particular ratio is good or bad
8/ a firm might have some ratios that look good and other that might look bad making it
difficult to tell whether the company is strong or weak
✔✔annual report - ✔✔a report issued by a corporation to its stockholders that contain
basic financial statements
✔✔balance sheet - ✔✔ta statement that shows the firms financial positions - assets,
liabilities, and equity - at a specific point in time
✔✔common stockholders equity (net worth) - ✔✔the funds provided by common
stockholders - common stock, paid in capital and retained earnings
, ✔✔common size balance sheet - ✔✔dollar amounts on the balance sheet are stated as
a percent of total assets
✔✔retained earnings - ✔✔the portions of the firms earning that has been reinvested in
the firm rather than paid of as dividends
✔✔book values - ✔✔amounts reported in financial statements - accounting numbers
✔✔market values - ✔✔values of items - assets, liability, and equity, in the marketplace
outside the firm
✔✔income statement - ✔✔a statement summarizing the firms revenues and expenses
of an accounting period
✔✔operating cash flows - ✔✔those cash flows hat arise from normal operations the
difference between cash collections and cash expenses associated with the
manufacture and sale of inventory
✔✔accounting profits - ✔✔a firms net income as reported on tis income statment
✔✔statement of cash flows - ✔✔a statement that reports the effects of a firms operating
investing and financing activities on cash flows over an accounting period
✔✔statement of retained earning - ✔✔a statement reporting the change in the firms
retained earning s a result of the income generated and retained during the year. The
balance sheet figure for retained earning is the sumner of the earnings retained for each
year that the firm has been in business.
✔✔liquid asset - ✔✔an asset that can be easily converted to cash without significant
loss of the amount originally invested
✔✔liquidity ratios - ✔✔ratios that show the relationship of a firms cash and other current
assets to its current liabilitys they provide an indication of the firms ability to meet its
current obligations
✔✔financial leverage - ✔✔the use of debt financing
✔✔trend analysis - ✔✔an evaluation of changes in a firms financial position over a
period of time
✔✔window-dressing technique - ✔✔techniques employed by firms to make their
financial statements look better than they actually are
SOLUTIONS RATED A+
✔✔debt management - ✔✔give an indication of how well the firm is servicing its current
debt and whether the firm can take on more debt
✔✔profitability ratios - ✔✔shows the combined effects of liquidity management, asset
management, and debt management on operating results
✔✔market value ratios - ✔✔give an indication of what stockholders think of the firms
future prospects based on its past performance
✔✔Two general types of analyses should be completed when examining ratios: -
✔✔comparative and trend analysis
✔✔Comparative analysis - ✔✔a comparison of how the firms current financial position
compares to that of its peers
✔✔Trend Analysis - ✔✔an examination of the firms financial position during the most
recent 3 to 5 years to determine whether its financial position is likely to improve or
deteriorate in the future
✔✔Potential problems that are associated with ratio analysis - ✔✔1. many large firms
operate a number of divisions in very different industries which make it difficult to
develop a meaningful set of industry average for comparative purposes
2. most firms want to be better than average, so merely attaining average performance
is not necessarily good
3. because many values on a balance sheet are historical inflation might history the
figures
4. seasonal factors can distort ratio analysis
5. firms can emily window dressing to make their financial statements look stronger that
they really are
6. use of different accounting practices can distort comparisons among firms
7. at times it is difficult to generalize about whether a particular ratio is good or bad
8/ a firm might have some ratios that look good and other that might look bad making it
difficult to tell whether the company is strong or weak
✔✔annual report - ✔✔a report issued by a corporation to its stockholders that contain
basic financial statements
✔✔balance sheet - ✔✔ta statement that shows the firms financial positions - assets,
liabilities, and equity - at a specific point in time
✔✔common stockholders equity (net worth) - ✔✔the funds provided by common
stockholders - common stock, paid in capital and retained earnings
, ✔✔common size balance sheet - ✔✔dollar amounts on the balance sheet are stated as
a percent of total assets
✔✔retained earnings - ✔✔the portions of the firms earning that has been reinvested in
the firm rather than paid of as dividends
✔✔book values - ✔✔amounts reported in financial statements - accounting numbers
✔✔market values - ✔✔values of items - assets, liability, and equity, in the marketplace
outside the firm
✔✔income statement - ✔✔a statement summarizing the firms revenues and expenses
of an accounting period
✔✔operating cash flows - ✔✔those cash flows hat arise from normal operations the
difference between cash collections and cash expenses associated with the
manufacture and sale of inventory
✔✔accounting profits - ✔✔a firms net income as reported on tis income statment
✔✔statement of cash flows - ✔✔a statement that reports the effects of a firms operating
investing and financing activities on cash flows over an accounting period
✔✔statement of retained earning - ✔✔a statement reporting the change in the firms
retained earning s a result of the income generated and retained during the year. The
balance sheet figure for retained earning is the sumner of the earnings retained for each
year that the firm has been in business.
✔✔liquid asset - ✔✔an asset that can be easily converted to cash without significant
loss of the amount originally invested
✔✔liquidity ratios - ✔✔ratios that show the relationship of a firms cash and other current
assets to its current liabilitys they provide an indication of the firms ability to meet its
current obligations
✔✔financial leverage - ✔✔the use of debt financing
✔✔trend analysis - ✔✔an evaluation of changes in a firms financial position over a
period of time
✔✔window-dressing technique - ✔✔techniques employed by firms to make their
financial statements look better than they actually are
