Financial Statement Analysis Module 1 Test

Topics: Generally Accepted Accounting Principles, Revenue, Balance sheet Pages: 44 (5751 words) Published: March 16, 2014
Module 1

Framework for Analysis and Valuation

Learning Objectives – coverage by question

Multiple Choice
Essay Questions

LO1 Identify and discuss the users and suppliers of financial statement information.


LO2 Identify and explain the four financial statements, and define the accounting equation.


LO3 Explain and apply the basics of profitability analysis.


LO4 Describe business analysis within the context of a competitive environment.


LO5 Describe the accounting principles and regulations that frame financial statements.


Module 1: Framework for Analysis and Valuation

Multiple Choice

Topic: Users of Financial Statement Information
LO: 1
1. Which of the following groups would likely not be interested in the financial statements of a large public company such as Berkshire Hathaway? a. Shareholders
b. Employees
c. Competitors
d. Taxing agencies
e. None of the above

Answer: e
Rationale: All of these parties would use the financial statements, albeit in different ways and for different purposes.

Topic: Users of Financial Statement Information
LO: 1
2. The SEC adopted Regulation FD, to curb public companies practice of: a. Routinely filing extensions for annual reports (Form 10-k) b. Selectively disclosing information
c. Reporting pro forma (non-GAAP) numbers
d. Hiring auditors for non-audit services such as consulting engagements e. None of the above

Answer: b
Rationale: Reg FD reads as follows: “Whenever an issuer discloses any material nonpublic information regarding that issuer, the issuer shall make public disclosure of that information . . . simultaneously, in the case of an intentional disclosure; and . . . promptly, in the case of a non-intentional disclosure.”

Topic: Components of the Balance Sheet
LO: 2
3. A list of assets, liabilities and equity can be found on which of the following? a. Balance Sheet
b. Income Statement
c. Statement of Assets and Liabilities
d. Statement of Cash Flows
e. Statement of Stockholders’ Equity

Answer: a
Rationale: A balance sheet lists amounts for assets, liabilities and equity at a point in time.

Topic: Balance Sheet
LO: 2
4. Which of the following items would not be found on a balance sheet? (Select all that apply) a. Stockholders’ Equity
b. Property, plant and equipment
c. Nonowner financing
d. Sales
e. Cost of Goods Sold

Answer: d and e
Rationale: The balance sheet reports assets (including property, plant and equipment), liabilities (including nonowner financing) and equity. Sales and Cost of Goods Sold appear on the income statement.

Topic: Profit and Cash Flow
LO: 2
5. A company’s net cash flow will equal its net income: … a. Almost always
b. Rarely
c. Occasionally
d. Only when the company has no investing cash flow for the period e. Only when the company has no investing or financing cash flow for the period

Answer: b
Rationale: Net income reflects the company’s revenue minus expenses for the given period. Net cash flow represents the amount of money received (spent) on operating, investing and financing activities for the given period. These values are rarely the same.

Topic: Financial Statement Information
LO: 2
6. Which of the following statements are correct (select all that apply): a. A balance sheet reports on investing and financing activities. b. An income statement reports on financing activities.

c. The statement of equity reports on changes in the accounts that make up equity. d. The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time. e. A balance sheet reports on a company’s assets and liabilities over a period of time.

Answer: a, c, and d
Rationale: Statement (b) is incorrect – the statement of cash flows reports on financing...
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