Financial Statement Analysis Chapter 1

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Chapter 1: Overview of Financial Statement Analysis

Sample Multiple Choice Questions

1.Which of the following is likely to be the most informative source if you were interested in a company's business plan or strategy?
A)auditor's letter
B)management discussion and analysis
C)proxy statement
D)Footnotes

Answer: B

2.Which of the following would not be considered a source of financing?
A)notes receivable
B)common stockholders' equity
C)retained earnings
D)capital lease obligations

Answer: A

3.Wilco Company reports the following:
20052004
Retained Earnings$2,000,000$ 1,300,000
Common Stock$ 500,000$ 500,000
Paid-in Capital$3,000,000$ 3,000,000
Net Income for year$ 900,000$ 400,000

Dividend payout ratio for 2005 was:
A)27%
B)12%
C)22.2%
D)Not determinable

Answer: C

4.If a company receives an unqualified audit opinion it means the auditors:
A)did not complete a full audit and therefore do not feel qualified to give and opinion on financial statements
B)are providing assurance that the company will remain financially viable for at least the next year
C)are providing assurance that the company's financial statements fairly present company's financial performance and position
D)are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance

Answer: C

5.The Management Discussion and Analysis Section of the annual report:
A)is required by the SEC
B)is optional but normally included in the annual report
C)is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company
D)is required by the SEC only if they have a qualified audit opinion

Answer: A

Use the following to answer questions 6-7:

You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900K and book value at the end of 2005 was $371,700K. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000K shares outstanding.

6.What is your estimate of price per share using the dividend discount model at 12/31/05?
A)$20.62
B)$21.65
C)$23.56
D)$24.74

Answer: D

7.What is your estimate of price using the residual income valuation model at 12/31/05?
A)$20.62
B)$21.65
C)$23.56
D)$24.72

Answer: D

8.Which of the following is not a common tool used in financial statement analysis?
A)random walk analysis
B)ratio analysis
C)common size statement analysis
D)trend series analysis

Answer: A

9.A common size income statement would typically be prepared by dividing:
A)All items on income statement in Year t by their corresponding value in Year t-1
B)All items on income statement in Year t by their corresponding balance sheet account in Year t
C)All items on income statement in Year t by net income in Year t-1
D)All items on income statement in Year t by sales in Year t

Answer: D

10.You are examining the common size income statements of two companies, A and B, for 2005. This data is most likely to help you answer which of the following questions?
A)Which company had the largest net income
B)Which company utilized its assets most efficiently
C)Which company had the highest gross margin
D)Which company had the biggest increase in sales from the prior year

Answer: C

11.When conducting comparative analysis by reviewing consecutive balance sheets:
A)All items on the balance sheet in Year t must be divided by their corresponding value in Year t-1 and subtract 1
B)All items on balance sheet in Year t-1 must be subtracted from...
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