Question 1

Which of the following statements regarding the balance sheet is INCORRECT?

Accepted Answer

A)  The balance sheet provides a snapshot of a firm's financial position at a given point in time. 
B)  The balance sheet lists a 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 2

Which of the following firms would be expected to have a high ROE?

Accepted Answer

A)  a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals 
B)  a high-end fashion retailer that has a very high mark-up on all items it sells 
C)  a brokerage firm that has high levels of leverage 
D)  a grocery store chain that has very high turnover, selling many multiples of its assets per year

Question 3

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

Accepted Answer

A)  10-A 
B)  10-K 
C)  10-Q 
D)  10-SEC

Question 4

Which of the following best describes why the left and right sides of a balance sheet are equal?

Accepted Answer

A)  In a properly run business, the value of liabilities will not exceed the assets held by the company. 
B)  By definition, the assets plus the liabilities will be the same as the stockholders' equity. 
C)  The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities. 
D)  By accounting convention, the assets of a company must be equal to the liabilities of that company.

Question 5

Price-earnings ratios tend to be high for fast-growing firms.

Accepted Answer

A) True 
 B)False

Question 6

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

Accepted Answer

A) True 
 B)False

Question 7

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

Accepted Answer

The answer of What will be the effect on the...

Question 8

How can we cross check the statement of cash flows?

Accepted Answer

The answer of How can we cross check the statement...

Question 9

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

Accepted Answer

A)  It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. 
B)  It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. 
C)  It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. 
D)  It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.

Question 10

Which of the following is NOT considered to be an operating expense on the income statement?

Accepted Answer

A)  administrative expenses and overhead 
B)  corporate taxes 
C)  salaries 
D)  depreciation and amortization

Question 11

According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

Accepted Answer

The answer of According to the text, did Enron and...

Question 12

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

A)  that a large number of funds were allocated to advertising to increase awareness of the firm's brand in new areas it had expanded into this year 
B)  that some senior members of the management team have retired in this financial year 
C)  that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages 
D)  that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers

Question 13

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following amounts would be included on the right side of a balance sheet?

Accepted Answer

A)  the value of government bonds held by the company 
B)  the cash held by the company 
C)  the amount of deferred tax liability held by the company 
D)  the amount of money owed to the company by customers who have not yet paid for goods and services they have received

Question 15

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

Accepted Answer

A)  It includes entries for the depreciation of assets. 
B)  It does not include entries for expenditures on inventory. 
C)  It does not include entries for collection of money from account receivables. 
D)  It includes cash inflows from services rendered.

Question 17

The major components of stockholders' equity are ________.

Accepted Answer

A)  cash, common stock, and paid-in surplus 
B)  common stock, paid-in surplus, and net income 
C)  common stock, paid-in surplus, and retained earnings 
D)  common stock, liabilities, and retained earnings

Question 18

What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

Accepted Answer

The answer of What role does Generally Accepted Accounting Principles...

Question 19

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

A)  It ensures that the market value of assets and debt are reported accurately. 
B)  It ensures that information on the performance of public companies is reported on cash-basis accounting. 
C)  It ensures that important budgetary information is not omitted. 
D)  It makes it easier to compare the financial results of different firms.

Question 20

Use the table for the question(s) below.
Balance Sheet
   Net property, plant,
 
-If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008?

Accepted Answer

A)  The company has experienced a very significant decrease in its leverage. 
B)  The company has experienced a significant decrease in its leverage. 
C)  The company has experienced no significant change in its leverage. 
D)  The company has experienced a significant increase in its leverage.

Exam 2: Introduction to Financial Statement Analysis

Which of the following statements regarding the balance sheet is INCORRECT?

Which of the following firms would be expected to have a high ROE?

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

Which of the following best describes why the left and right sides of a balance sheet are equal?

Price-earnings ratios tend to be high for fast-growing firms.

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

How can we cross check the statement of cash flows?

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

Which of the following is NOT considered to be an operating expense on the income statement?

According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

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) ?

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

Which of the following amounts would be included on the right side of a balance sheet?

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

The major components of stockholders' equity are ________.

What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

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?

Use the table for the question(s) below. Balance Sheet Net property, plant, -If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008?